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Icts International NV · 20-F/A · For 12/31/03

Filed On 7/22/04, 10:10am ET   ·   Accession Number 1012118-4-20   ·   SEC File 0-28542

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 7/22/04  Icts International NV             20-F/A     12/31/03    2:257K                                   McLaughlin & Ste..LLP/FA

Amendment to Annual Report of a Foreign Private Issuer   —   Form 20-F
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F/A      Amendment to Annual Report of a Foreign Private       99    551K 
                          Issuer                                                 
 2: EX-99.906   Miscellaneous Exhibit                                  2      7K 


20-F/A   —   Amendment to Annual Report of a Foreign Private Issuer
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
2Item 17 [ ]. Item 18 [X]
4Item 1. Identity of Directors, Senior Management and Advisers
"Item 2. Offer Statistics and Expected Timetable
"Item 3. Key information
7Risk Factors
11Item 4. Information on the Company
19Item 5. Operating and Financial Review and Prospects
28Item 6. Directors, Senior Management and Employees
33Item 7. Major Shareholders and Related Party Transactions
36Item 8
37Item 9. The Offer and Listing
38Item 10. Additional Information Memorandum and Articles of Association
46Item 11. Quantitative and Qualitative Disclosure About Market Risk
"Item 12. Description of Securities Other than Equity Securities
"Item 13. Defaults, Dividend Arrearages and Delinquencies
"Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
"Item 15. Controls and Procedures
47Item 16C. Principal Accountant Fees and Services
"Item 19. Exhibits 1. Articles of Association of the Company.*
72Inksure
"Ramasso
73Nas
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F/A [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO --------- COMMISSION FILE NUMBER 0-28542 ---------------- ICTS INTERNATIONAL N.V. ------------------------------------------------- ------------------------ (Exact Name of Registrant as specified in its charter) Not Applicable (Translation of Registrant's name into English) The Netherlands (Jurisdiction of incorporation or organization) Biesbosch 225, 1181 JC Amstelveen, The Netherlands (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each Class: Name of each exchange on which registered: None None Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Shares, par value .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
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Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of December 31, 2003: 6,672,980 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 [ ] Item 18 [X] When used in this Form 20-F, the words "may", "will", "expect", "anticipate", "continue", "estimates", "project", "intend" and similar expressions are intended to identify Forward-Looking Statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any Forward-Looking Statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the Forward-Looking Statements as a result of various factors.
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Table of Contents Part I Item 1 Identity of Directors, Senior Management and Advisers Item 2 Offer Statistics and Expected Timetable Item 3 Key Information Item 4 Information on the Company Item 5 Operating and Financial Review and Prospects Item 6 Directors, Officers and Employees Item 7 Major Shareholders and Related Party Transactions Item 8 Financial Information Item 9 The Offering and Listing Item 10 Additional Information Item 11 Quantitative and Qualitative Disclosures about Market Risk Item 12 Description of Securities other than Equity Securities Part II Item 13 Defaults, Dividend Arrearages and Delinquencies Item 14 Material Modifications to the Rights of Security Holders and the Use of Proceed Item 15 Controls and Procedures Part III Item 17 Financial Statements Item 18 Financial Statements Item 19 Exhibits Exhibits Exhibit 8 Subsidiaries (included herein) Exhibit 10.1 Consolidated Financial Statements (included herein) Exhibit 10.2 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 (included herein) Exhibit 10.3 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 (included herein)
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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. [Enlarge/Download Table] ICTS INTERNATIONAL N.V. CONSOLIDATED BALANCE SHEETS (US $ in thousands, except share data) December 31, 2003 2002 A s s e t s CURRENT ASSETS: Cash and cash equivalents (note 2c) $7,660 $32,465 Restricted cash and short term investments (note 3) 3,114 13,083 Accounts receivable - trade 13,798 15,628 Short-term loan to a related party (note 19c) 3,738 Prepaid expenses 1,323 1,108 Deferred income taxes (note 16b) 385 5,409 Other current assets 4,583 1,804 _______ _______ T o t a l current assets 30,863 73,235 _______ _______ INVESTMENTS: Investments in associated companies (note 5) 5,308 9,919 Other investments (note 6) 16,287 9,558 Deferred income taxes (note 16) 33 28 ________ ______ 21,628 19,505 PROPERTY AND EQUIPMENT (note 7): Cost 30,629 32,408 Less - accumulated depreciation and amortization 6,666 2,991 _______ _______ 23,963 29,417 _______ _______ GOODWILL (note 8) 314 1,167 _______ _______ OTHER ASSETS , net of accumulated amortization (note 9) 7,732 2,120 _______ _______ T o t a l assets $84,500 $125,444 _______ _______
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December 31, 2003 2002 Liabilities and shareholders' equity CURRENT LIABILITIES: Short-term bank credit (note 10) $4,387 $8,651 Current maturities of long-term liabilities (note 12) 2,752 2,097 Accounts payable - trade 964 975 Liabilities for losses of associated companies (note 5) 2,130 Accrued expenses and other liabilities (note 11) 17,865 46,585 _______ _______ Total current liabilities 28,098 58,308 _______ _______ LONG-TERM LIABILITIES: Accrued severance pay (note 13) 90 78 Deferred income taxes (note 16b) 19 Long-term liabilities, net of current maturities (note 12) 9,332 5,680 _______ _______ T o t a l long-term liabilities 9,441 5,758 _______ _______ COMMITMENTS AND CONTINGENT LIABILITIES (note 14) _______ _______ T o t a l liabilities 37,539 64,066 _______ _______ SHAREHOLDERS' EQUITY: Share capital - shares of common stock, par value 0.45 Euro, December 31, 2003 and 2002: Authorized - 17,000,000 shares; issued and outstanding - 6,672,980 shares. 3,605 3,605 Additional paid-in capital 19,670 19,670 Retained earnings 30,612 49,516 Accumulated other comprehensive loss (5,947) (10,434) _______ _______ 47,940 62,357 Treasury stock at cost - December 31, 2003 and 2002-159,880 shares (979) (979) _______ _______ Total shareholders' equity 46,961 61,378 _______ _______ Total liabilities and shareholders' equity $84,500 $125,444 _______ _______
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Selected Financial Data The following table summarizes certain statement of operations data for ICTS for the years ended December 31, 2001, 2002 and 2003: [Enlarge/Download Table] Year ended December 31, 2003 2002 2001 REVENUES $71,571 $279,931 $212,137 COST OF REVENUES 57,562 214,054 189,925 ------- ------- ------- GROSS PROFIT 14,009 65,877 22,212 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,216 25,636 19,461 IMPAIRMENT OF ASSETS AND GOODWILL 14,352 9,156 CONTRACT SETTLEMENT EXPENSES 5,266 ------- ------- ------- OPERATING INCOME (LOSS) (9,559) 31,085 2,751 INTEREST INCOME 2,248 2,072 1,649 INTEREST EXPENSE (1,222) (1,678) (1,637) EXCHANGE DIFFERENCES (242) 2,356 1,965 OTHER INCOME (EXPENSES), net (353) 41,229 29,520 ------- ------- ------- INCOME (LOSS) BEFORE TAXES ON INCOME (9,128) 75,064 34,248 TAXES ON INCOME 3,115 16,442 4,919 ------- ------- ------- INCOME (LOSS) FROM OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES (12,243) 58,622 29,329 SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (6,661) (1,807) (395) MINORITY INTERESTS IN PROFITS OF SUBSIDIARIES - net (2,736) ------- ------- ------- NET INCOME (LOSS) FOR THE YEAR $(18,904) $56,815 $26,198 ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS): Translation adjustments 3,456 710 (1,811) Unrealized gains (losses) on marketable securities 794 731 (345) Reclassification adjustment for losses for available for sale securities included in net income 237 (771) 368 ------- ------- ------- 4,487 670 (1,788) ------- ------- ------- TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR $(14,417) $57,485 $24,410 ======= ======= ======= EARNINGS (LOSSES) PER SHARE: Basic $(2.90) $8.85 $4.18 ======= ======= ======= Diluted $(2.90) $8.80 $4.09 ======= ======= =======
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Risk Factors. You should carefully consider the risks described below regarding the business and the ownership of our shares. If any of the risks actually occur, our business, financial condition or results of operations could be adversely affected, and the price of our common stock could decline significantly. Developments that have had a significant impact on our operations. Two major events in 2001 and early 2002 significantly changed our business operations: (i) the sale of substantially all of our European operations and (ii) the passage of the Aviation and Transportation Security Act (the "Security Act") by the United States Congress in response to the terrorist attacks on September 11, 2001 pursuant to which the Federal government through the Transportation Security Administration (the "TSA) took over aviation security services in the U.S. in November 2002. As a result of these events, we have limited aviation security operations in Europe and in the U.S. We previously derived most of our revenues from the provision of aviation security services and we have developed substantial experience and expertise in that field. If we are unable to increase revenues from aviation security services, our financial condition and results of operations will be adversely affected. If we are unsuccessful in resolving our disagreements with the TSA there may be a significant material adverse effect on our financial condition. In February 2002, we entered into an aviation security services contract with the TSA to continue to provide aviation security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport by airport basis to the U.S. Federal Government or November 2002. In connection with payments made by the TSA to Huntleigh USA, a wholly owned subsidiary of the Company, for aviation security services provided in 2002, the Defense Contract Management Agency has indicated that it believes that Huntleigh should not have been paid on a fixed cost basis as believed by Huntleigh, but on an actual costs plus what the TSA would consider a reasonable profit. On that later basis Huntleigh may be required to repay to the TSA the difference between such amount and the actual amounts paid to it. Huntleigh however has various claims for additional amounts it considers are due to it for the services provided to the TSA. The Company estimates that if the TSA will claim such difference from Huntleigh and will prevail in all of its contentions, and none of Huntleigh's claims will be recognized, then the Company may suffer a net loss in an amount of about $27 Million. The Company's above estimate assumes, that under USA tax rules it will able to carry-back the losses (if any) that will result from the above claims of the TSA. No provisions have been made by the Company with respect to the above potential claims. Claim for Loss of Business The Security Act provides that all aviation security services in the U.S. will be handled by the federal government through the TSA. As a result of the passage of the Security Act the TSA took over aviation security in the U.S. For the year ended December 31, 2002, the TSA accounted for 73% of our revenues and for the year ended December 31, 2003 the TSA accounted for -0-% of our revenues. Our failure to be able to meet the TSA's requirements or to secure contracts from the TSA will have a material adverse affect on our business. Huntleigh's main business was providing airport security services to airlines and airports as a result of the creation of the TSA and the requirement that the TSA take over airport security Huntleigh has lost its principal business. Huntleigh has commenced legal action against the U.S.
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Government for the "Taking"of its business and to protect its rights under the Fifth Amendment of the U.S. Constitution. Huntleigh seeks to recover the going concern value of the lost business. The suit was brought in the U.S. Court of Claim and is in the early stages. There can be no assurance as to the ultimate outcome of such claim and whether or not Huntleigh will be successful in prosecuting the same. We face significant potential liability claims. As a result of the September 11th terrorists attacks numerous lawsuits have been commenced against us and our U.S. subsidiary. The cases arise out of airport security services provided for United Flight 175 out of Logan Airport in Boston, Massachusetts which crashed into the World Trade Center. In addition, to the present claims additional claims may be asserted. The outcome of these or additional cases is uncertain. If there is an adverse outcome with respect to any of these claims which is not covered by insurance, then there may be a significant adverse impact on us. We are dependent on our key personnel. Our success will largely depend on the services of our senior management and executive personnel. The loss of the services of one or more of such key personnel could have a material adverse impact on our operations. Our success will also be dependent upon our ability to hire and retain additional qualified executive personnel. We cannot assure you that we will be able to attract, assimilate and retain personnel with the attributes necessary to execute our strategy. We cannot assure you that one or more of our executives will not leave our employment and either work for a competitor or otherwise compete with us. We will be dependent on major customers. If our relationship with our major customers is impaired, then there may be a material adverse affect on our results of operations and financial condition. Our major customers consist of the major airlines servicing the United States. If such airlines encounter financial difficulty this may have a material adverse impact on our business. Our success will be dependent upon our ability to change our business strategy. Under our new business strategy we intend to develop technological solutions and systems for the aviation security industry, develop or acquire security activities other than aviation security, invest in security related and non-security related businesses, such as entertainment projects and seek other revenue producing businesses and business opportunities. We cannot assure you that we will be able to develop new systems or develop systems that are commercially viable. Our success in developing and marketing our systems will also depend on our ability to adapt to rapid technology changes in the industry and to integrate such changes into our systems. We cannot assure you that we will be successful in our attempts to change or implement our business strategy. We may not have the expertise to be successful in developing our business in areas that are not related to the security industry. Our failure to change our business strategy or implement it successfully will have a material adverse affect on our financial condition and results of operations. We compete in a highly competitive industry and our competitors, who may have many more resources than us, may be more successful in developing new technology and achieving market acceptance of their products. 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
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that our competitors will develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance of our systems because our competitors have greater financial and marketing resources. The aviation security industry is subject to extensive government regulation, the impact of which is difficult to predict. The Security Act has had a significant negative impact on our aviation security business. In addition, our ability to successfully market new systems will be dependent upon government regulations over which we have no control. Any existing or new regulation may cause us to incur increased expenses or impose substantial liability upon us. The likelihood of such new legislation is difficult to predict. The markets for our products and services may be adversely affected by legislation designed to protect privacy rights. From time to time, personal identity data bases and technologies utilizing such data bases have been the focus of organizations and individuals seeking to curtail or eliminate the use of personal identity information technologies on the grounds that personal information and these technologies may be used to diminish personal privacy rights. In the event that such initiatives result in restrictive legislation, the market for our products may be adversely affected. Our operations are dependent upon obtaining required licenses. A license to operate is required from the airport authority in the airports in which we currently operate. Our licenses are usually issued for a period of 12 months and are renewable. The loss of, or failure to obtain, a license to operate in one or more of such airports could result in the loss of or the inability to compete for contracts in the airports in which we have licenses. Our contracts with airports or airlines may be canceled. Our services are typically provided pursuant to contracts, which are cancelable on short notice at any time, with or without cause. We cannot assure you that an existing client will decide not to terminate us or fail to renew a contract. Any such termination or failure to renew a contract with us could have a material adverse effect on our results of operations or financial condition. Our financial condition is subject to currency risk. Part of our income is derived in foreign countries. We generally retain our income in local currency at the location the funds are received. Since our financial statements are presented in United States dollars, any significant fluctuation in the currency exchange rate between such currency and the United States dollar would affect our results of operations and our financial condition. The market price of our common stock may be volatile, which may make it more difficult for you to resell your shares when you want at prices you find attractive. The market price of our common stock may from time to time be significantly affected by a large number of factors, including, among others, variations in our operating results, the depth and liquidity of the trading market for our shares, and differences between actual results of operations and the results anticipated by investors and securities analysts. Many of the factors which affect the market price of our common stock are outside of our control and may not even be directly related to us.
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Certain shareholders own approximately 59% of our shares; their interests could conflict with yours; significant sales of shares held by them could have a negative effect on our stock price. Mr. Menachem Atzmon, a director of the Company, as a representative of the Atzmon Family Trust and The Estate of Ezra Harel, collectively own or control 59% of our issued and outstanding common stock. As a result of their ownership, and or control, the Atzmon Family Trust and the Estate of Ezra Harel are able to significantly influence all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration may also have the effect of delaying or preventing a change in control. In addition, sales of significant amounts of shares controled by the Atzmon Family Trust or held by the Estate of Ezra Harel or the prospect of these sales, could adversely affect the market price of our common stock. We cannot assure you that we will continue to pay dividends. Although we have paid cash dividends in the past, we cannot assure you that any future dividends will be declared or paid. We are subject to the laws of the Netherlands. As a Netherlands "Naamloze Vennootschap" (N.V.) public limited company, we are subject to certain requirements not generally applicable to corporations organized under the laws of jurisdictions within the United States. Among other things, the authority to issue shares is vested in the general meeting of shareholders, except to the extent such authority to issue shares has been delegated by the shareholders or by the Articles of Association to another corporate body for a period not exceeding five years. The issuance of the common shares is generally subject to shareholder preemptive rights, except to the extent that such preemptive rights have been excluded or limited by the general meeting of shareholders (subject to a qualified majority of two-thirds of the votes if less than 50% of the outstanding share capital is present or represented) or by the corporate body designated to do so by the general meeting of shareholders or the Articles of Association. Such a designation may only take place if such corporate body has also been designated to issue shares. In this regard, the general meeting of shareholders has authorized our Supervisory Board to issue any authorized and unissued shares at any time up to five years from June 26, 2001 the date of such authorization and has authorized the Supervisory Board to exclude or limit shareholder preemptive rights with respect to any issuance of common shares prior to such date. Such authorizations may be renewed by the general meeting of shareholders from time to time, for up to five years at a time. This authorization would also permit the issuance of shares in an acquisition, provided that shareholder approval is required in connection with a statutory merger (except that, in certain limited circumstances, the board of directors of a surviving company may resolve to legally merge the company). Shareholders do not have preemptive rights with respect to shares which are issued against payment other than in cash. Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in The Netherlands. Our public shareholders may have more difficulty in protecting their interests in the face of actions by the Supervisory Board or the Management Board, or their members, or controlling shareholders, than they would as shareholders of a company incorporated in the United States. Under our Articles of Association, adoption of our annual accounts by the shareholders discharges the Supervisory Board, the Management Board and their members from liability in respect of the exercise of their duties for the particular financial year, unless an explicit reservation is made by the shareholders and without prejudice to the provisions of Netherlands law, including provisions relating to liability of members of supervisory boards and management boards upon the bankruptcy of a company pursuant to the relevant provisions of The Netherlands Civil Code. However, the discharge of the Supervisory Board and the Management Board and their members by the shareholders is not absolute and will not be effective as to matters
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misrepresented or not disclosed to the shareholders. An individual member of the Supervisory Board or the Management Board who can prove that he is not at fault for such an omission or misrepresentation would not be liable. A U.S. judgment may not be enforceable in The Netherlands. A significant number of our assets are located outside the United States. In addition, members of the Management and Supervisory Boards [and certain experts named herein are residents of countries other than the United States ]. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against such persons judgments of courts of the United States predicated upon civil liabilities under the United States federal securities laws. There is no treaty between the United States and The Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would not be directly enforceable in The Netherlands. In order to enforce any United States judgment obtained against us, proceedings must be initiated before a court of competent jurisdiction in The Netherlands. A court in The Netherlands will, under current practice, normally issue a judgment incorporating the judgment rendered by the United States court if it finds that (i) the United States court had jurisdiction over the original proceeding, (ii) the judgment was obtained in compliance with principles of due process, (iii) the judgment is final and conclusive and (iv) the judgment does not contravene the public policy or public order of The Netherlands. We cannot assure you that that United States investors will be able to enforce any judgments in civil and commercial matters, including judgments under the federal securities laws against us or members of the Management or Supervisory Board [or certain experts named herein] who are residents of The Netherlands or countries other than the United States. In addition, a court in The Netherlands might not impose civil liability on us or on the members of the Management or Supervisory Boards in an original action predicated solely upon the federal securities laws of the United States brought in a court of competent jurisdiction in The Netherlands.  Item 4. Information on the Company History and Development of the Company. Unless the context indicates otherwise, all references herein to the "Company" include ICTS International N.V. ("ICTS" or the "Company"), its consolidated subsidiaries, Demco Consultants, Ltd. ("Demco"), an Israeli affiliate, Procheck International B.V. ("PI", an affiliate in The Netherlands) and Ramasso Holdings B.V. ("Ramasso", an affiliate in The Netherlands) and Huntleigh USA Corp. ("Huntleigh"). ICTS is a public limited liability company organized under the laws of The Netherlands in 1992. ICTS's offices are located at Biesboch 225, 1181 JC Amstelveen, The Netherlands and its telephone number is +31-20-347-1077. The Company's predecessor, International Consultants on Targeted Security Holland B.V. ("ICTS Holland"), was founded in The Netherlands in 1987. Until 1994, subsidiaries and affiliates of ICTS Holland conducted similar business in which the Company is currently engaged. As of January 1, 1994, ICTS Holland's interest in its subsidiaries (other than three minor subsidiaries) was transferred to ICTS International B.V. ("ICTS International"). Thereafter, ICTS International purchased from a third party all of the outstanding shares of ICTS, incorporated in The Netherlands in 1992 without any operations prior to its acquisition by ICTS International. As of January 1, 1996, the Company acquired all of the assets and assumed all of the liabilities of ICTS International.
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As of January 1, 1999 the Company acquired 80% of the issued and outstanding capital stock of Huntleigh and in January 2001 the Company exercised its option to acquire the remaining 20% at an agreed upon price formula making Huntleigh a wholly owned subsidiary. Huntleigh is a provider of aviation services in the United States. In 2001 and 2002 ICTS sold substantially all of its European operations in two stages, for an aggregate purchase price of $103 million. As a result of the sale, ICTS has fully divested itself from its European operations, except for its operations in The Netherlands and Russia. In the wake of the events which occurred on September 11, 2001, the federal government of the United States, in November, 2001, enacted the Aviation and Transportation Security Act (the "Security Act") Public Law 107-71. Under the Security Act, entities may provide aviation security services in the United States only if they are owned and controlled at least 75% by U.S. citizens. As a company organized under the laws of The Netherlands ICTS may be unable to comply with the ownership requirements under the Security Act. The Security Act is administered through the Transportation Security Administration (the "TSA"). In the fourth quarter of 2002, pursuant to the Security Act the Federal government through the TSA took over substantially all of the aviation security operations in U.S. airports. As a result, ICTS through its wholly-owned subsidiary Huntleigh, provides limited aviation security services in the United States. On December 23, 2003 the Company through wholly owned subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA") certain assets owned by ITA and used by it in the development, establishment and operation of motion-based entertainment theaters. The assets purchased consist primarily of intangible property and certain equipment. ITA is a company in which a principal shareholder of the Company owned in the aggregate in excess of 50% of the shares. The purchase price for the assets purchased was $5,429,151.00. The purchase price was paid by set-off against certain debts owed by ITA to the Company, cash and notes. As a part of the transaction, certain agreements made between the Company and ITA in 2001 were terminated, with the result that the Company is no longer committed to involve ITA in its existing and future entertainment projects. Prior to entering into the transaction the Company obtained a fairness opinion as to the fairness of the consideration and the transaction to the Company. Shortly after the Baltimore facility was opened and based on its performances, the Company's management revaluated these two investments and determined that the forecasted cash flows from these projects will not cover the investments thereof, including amounts required to complete the development of the facility in Atlantic City estimated as of December 31, 2003 in an amount of $5 million. Based on the fair value using discounted cash flows model, the Company had recognized an impairment loss of $2,002 in respect of its investment in Baltimore, and wrote off of its investment in Atlantic City an amount of $5,511. The Company currently operates a fully owned motion-based entertainment theater in Baltimore, MD and is establishing a new fully-owned multi-experience motion-based entertainment theater in Atlantic City, NJ scheduled to open by mid-2004. The Company is also a partner in a movie-based entertainment facility in Niagara Falls, NY. Business Overview General ICTS had specialized until 2002 in the provision of aviation security services. Following the sale of its European operations in 2002 and the taking of its aviation security business in the United States by the TSA in 2002, ICTS engages primarily in non-security related activities. These
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activities consist of non-security aviation security services, operation of entertainment related projects and the development of technological services. In addition, ICTS provides non-security related aviation services and develops technological systems and solutions for the security market. ICTS also engages in certain other activities, including constructing and developing entertainment related projects. Business Strategy ICTS is currently pursuing the following business strategy. Developing Security Related Technology. ICTS is focusing on developing security systems and technology for the aviation security and non-aviation security markets. ICTS is using the know-how and expertise it has acquired in the provision of enhanced aviation security services to develop such security systems and technology. Developing Entertainment Projects. ICTS is developing entertainment projects know as "Time Elevators". Time Elevators are educational tourist attractions which combine motion based platforms with synchronized movies and sound effects. ICTS has opened a Time Elevator project in Baltimore, Maryland and Niagara Falls, New York in 2003 and in Atlantic City, New Jersey in 2004. Aviation Security Operations in The Netherlands. ICTS is engaged in aviation security operations in The Netherlands. In 2002 ICTS increased its stake in its Dutch affiliate, ProCheck International to 100%. ICTS also formed a partnership with ICTS Europe through which it further expanded its aviation security operations in The Netherlands. ICTS Europe was sold by ICTS in 2002 to an unaffiliated third party. U.S. Operations. ICTS continues to provide limited security services and non-security aviation services in the U.S. Other Investments. ICTS is making investments in companies and properties which management believes have long term benefits. It is anticipated that such investments will be in diverse industries and instruments. Services Services Offered in Europe. Prior to the sale of its European operations, ICTS primarily provided aviation security services, operated airport checkpoints, verified travel documents, provided baggage reconciliation services, operated electronic equipment, such as x-ray screening devices, and operated manual devices. Following the sale, ICTS primarily provides advanced passenger screening services in The Netherlands and Russia. Services Offered in the United States. Prior to the enactment of the Security Act, Huntleigh was one of the leading providers of non-security aviation services in the United States. Immediately following the enactment of the Security Act, but prior to the TSA taking over aviation security services in the United States, in November 2002, Huntleigh experienced a substantial increase in its aviation security services.
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Huntleigh currently provides limited aviation security services and nine other separate services at approximately 37 airports in 29 states which were not affected by the enactment of the Security Act. Each of the non-aviation security services involves one of the following specific job classifications: Agent Services. Agent services include: Passenger Service, Baggage Service, Priority Parcel, and Cargo. Although an agent is a Huntleigh employee, the employee is considered a representative of specific airlines. Guard Services. Guard services involve guarding secured areas, including aircraft. Janitorial Services. Huntleigh provides cleaning services for aircraft cabins and portions of airports. Maintenance. Huntleigh provides workers to maintain equipment in one airport. Aircraft Search. Search of entire aircraft of international flights to detect dangerous objects. Ramp Services. Ramp services include: . directing aircraft into the arrival gate and from the departure gate . cleaning the aircraft . conducting cabin searches . stocking supplies . de-icing the aircraft and . moving luggage from one airplane to another. Shuttle Service. Huntleigh shuttles airline crews from their hotels to the aircraft in one airport. Skycap Services Provider. A skycap assists passengers with their luggage. Located at the curbside of the check-in at airports, a skycap checks in passengers' luggage and meets security requirements established by the TSA to screen passengers. A skycap also assists arriving passengers with transporting luggage from the baggage carousel to ground transportation or other designated areas. A skycap also may operate electric carts for transporting passengers through the airport and transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring the baggage carousel to ensure that passengers do not remove luggage not belonging to them. In many airports, a skycap at the baggage claim area checks to see if the passengers' luggage tags match those on the specific luggage to ensure that a passenger is only removing his or her own luggage from the claim area.
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Wheelchair attendants. Wheelchair attendants transport passengers through the airport in airline and/or Company owned wheelchairs. Working closely with the attendants are dispatch agents who monitor requests and assignments for wheelchairs and dispatch the attendants as needed. Aviation Security Services ICTS provides pre-departure screening services at airports in The Netherlands and Russia. Prior to the enactment of the Security Act, Huntleigh provided such services in the U.S. Such services are designed to prevent or deter the carriage of any explosive, incendiary device, weapon or other dangerous objects into the sterile area of an airport concourse and aboard the aircraft. In 2002 Huntleigh provided such services in the United States exclusively to the TSA. Technological Systems and Solutions The accumulated know-how and expertise of ICTS in the implementation of processors for advanced passanger screening enabled ICTS to develop its APS technology and system. The APS system is an automated computerized system that enables the pre-departure analysis of passenger information and is designed to screen airline passengers in a faster and more efficient manner. The APS system is currently being operated by ICTS under contract for services provided by ICTS Europe, an unaffiliated third party, to major United States airlines on flights from Europe to the United States. New Technology Initiatives. IP@SS. ICTS launched in 2003 a trial phase of its IP@SS project. IP@SS consists of a computerized platform integrating various technologies, including document readers, biometrics identification systems and a smart-card. The system is modular and may be used on a stand alone basis or integrated into an existing check-in system. The system has been designed to protect passenger privacy. The system is designed to speed up and simplify the processes of identification and security checks of passengers at airports. The system enhances customer service provided by airlines and airports to outbound passengers. The project is being developed by ICTS and is performed in cooperation with various partners. The pilot program is being tested at Schiphol Airport in Amsterdam, The Netherlands and at Newark Liberty International Airport, and is planned to be expanded in the near term to other European airports as well as other North American airports. TravelDoc ICTS has designed and developed the TravelDoc system for airlines to quickly scan travel documents, to verify their accuracy and authenticity and to ensure that they fulfill the requirements of the country of destination. The TravelDoc system utilizes a full page scanner, a small computer and an operator screen or can be installed on an existing workstation to meet immigration requirements and reduce fines imposed on the carrier. APIS ICTS has designed and developed a system to assist airlines to meet the requirements of the U.S. Customs Advance Passenger Information System Program. The Security Act requires that all international carriers transmit data to U.S. Customs about passengers and crew members on inbound flights prior to their arrival in the U.S. at high levels of accuracy. ICTS has developed advanced algorithms for scanning passports and visas that extracts the information required by U.S. Customs. The system utilizes a full page scanner, a small computer and an operator screen or can be installed on an existing workstation.
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Consulting, Auditing and Training ICTS provides consulting services to airlines and airports. ICTS recommends the adoption of specified security procedures, develops recruitment and training programs for clients to hire necessary security personnel and works with airport authorities to ensure that they comply with applicable local requirements. ICTS trains airline employees to screen passengers and to perform other security measures through extensive courses and written training manuals. ICTS provides these services in The Netherlands and Russia, but does not expect to derive significant revenues from these services. Airline and Airport Customers In 2002, the TSA accounted for 73% of ICTS's total revenues. In 2003 ICTS had over 400 clients of which four clients accounted for over 40% of ICTS's revenue, in over 50 locations world-wide. Entertainment Projects ICTS develops tourist attractions combining motion based platforms and synchronized movies and sound effects ("Time Elevators"). On December 23, 2003 the Company through wholly owned subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA") certain assets owned by ITA and used by it in the development, establishment and operation of motion-based entertainment theaters. The assets purchased consist primarily of intangible property and certain equipment. ITA is a company in which a principal shareholder of the Company owned in the aggregate in excess of 50% of the shares. The purchase price for the assets purchased was $5,429,151.00. The purchase price was paid by set-off against certain debts owed by ITA to the Company, cash and notes. As a part of the transaction, certain agreements made between the Company and ITA in 2001 were terminated, with the result that the Company is no longer committed to involve ITA in its existing and future entertainment projects. Prior to entering into the transaction the Company obtained a fairness opinion as to the fairness of the consideration and the transaction to the Company. The Company currently operates fully owned motion-based entertainment theaters in Baltimore, MD and in Atlantic City, NJ. The Company is also a partner in a movie-based entertainment facility in Niagara Falls, NY. Marketing and Sales Marketing and Sales in the U.S. In 2002, substantially all of the revenues of ICTS were derived in the U.S. ICTS derived most of its revenues through contracts which were secured by ICTS as a result of competitive bidding. Marketing and Sales in The Netherlands. Contracts for aviation security services in The Netherlands are obtained through competitive bids that are issued by the applicable airport authorities or agencies. Marketing of Security Systems and Technology. ICTS intends to market its new technology systems and technologies by establishing pilot projects with airports and airlines. Upon the demonstration of the viability of the systems or technology ICTS intends to develop a marketing plan to distribute the systems and technology. Marketing of Entertainment Activities. ICTS seeks to locate its entertainment sites in areas that enjoy concentrated flows of tourists. It intends to market its sites through advertising and establishing long term relationships with tour and bus operators.
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Leasing Operation In June 2002 ICTS purchased equipment for an aggregate purchase price of $23.5 million. The purchase price payable was $14.5 million in cash and the balance subject to an $8.5 million self amortizing non-recourse promissory note payable over five years. Pursuant to an operating lease, the equipment was leased to an unaffiliated private Dutch company. The lease provides for annual lease payments in the amount of $2.6 million and an option to purchase the equipment after five or seven years based upon the then fair market value. In the event that the lessee does not exercise the option to purchase the equipment upon the expiration of the lease term, then ICTS will be obligated to pay license fees in connection with intellectual property associated with the equipment in an amount equal to 5% of the revenue derived from the use of the equipment if ICTS exercises its option to operate the equipment. In 2003, ICTS determined that the future cash flows from the leased equipment (including the estimated proceeds from exercise of the option) will not recover its investment, and as a result recorded an impairment loss of $6,042. The value of the equipment at the option exercise date was based on an external assessment. The Company leases premises under long-term operating leases, in most cases with renewal options. Lease expenses for the years ended December 31, 2003, 2002 and 2001 were $1,166, $928 and $1,739 respectively. Future minimum lease payments under long-term leases are as follows: December 31, 2003 2004 $1,208 2005 1,110 2006 1,012 2007 946 2008 and afterwards 10,027 _________ $14,303 ======== Competition Competition in the aviation security industry as well as in the non-security related aviation services industry is intense. Many of our competitors have greater financial, technical and marketing resources. We expect that our competitors will develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance of our systems because our competitors have greater financial and marketing resources. Restrictions on Competition In connection with the sale of the European operations ICTS is restricted from conducting business in Europe, (except for The Netherlands and Russia) any of the activities in which ICTS Europe was engaged prior to the sale. This restriction is effective through February 2005.
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Pursuant to an agreement dated as of July 1, 1995 with ICTS Global Security (1995) Ltd. ICTS may not provide non-aviation security services in Latin America, Turkey or Russia. ICTS Global Security is partially owned by Lior Zouker and the Estate of Ezra Harel, the former Chief Executive Officer and the former Chairman of Supervisory Board of ICTS and a principal shareholder, respectively. Aviation Security Regulatory Matters ICTS aviation security activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction in the serviced area. ICTS on behalf of its clients was responsible for adherence to such regulations relating to certain security aspects of their activities. ICTS is also responsible to prevent passengers without proper travel documentation from boarding a flight, thereby avoiding fines otherwise imposed on its clients by immigration authorities. ICTS is subject to random periodic tests by government authorities with regard to the professional level of its services and training. Any failure to pass such a test may result in the loss of a contract or a license to perform services or a fine or both. In the airports in which ICTS operates in The Netherlands and Russia, a license to operate is required from the respective airport authority. ICTS currently holds the licenses required to operate in such locations. Prior to the enactment of the Security Act, the FAA regulated the activities of Huntleigh with respect to security services offered at U.S. airports. Presently such activities are regulated by the FAA and the TSA. In order for ICTS to engage in aviation activities in the U.S. it may be necessary for ICTS to demonstrate that it meets the TSA requirement of being at least 75% owned and controlled by U.S. citizens. Organizational Structure. The following are the significant subsidiaries of ICTS: ICTS USA, Inc., New York - 100% (a) Huntleigh USA Corporation. (Missouri - 100%) (b) Explore USA, Inc. (Delaware - 100%) (i) Explore Atlantic City, LLC (Delaware - 100%) (ii) Explore Baltimore, LLC (Delaware - 100%) (iii) Explore Niagara, LLC (New York - 100%) ICTS Technologies B.V. (The Netherlands - 100%) (a) ICTS Technologies USA, Inc. (Delaware - 100%) ICTS Leasing BV (The Netherlands - 100%) Procheck International B.V. (The Netherlands - 100%) Property, Plant and Equipment. The Company leases premises under long-term operating leases, in most cases with renewal options. Lease expenses for the years ended December 31, 2003, 2002 and 2001 were $1,166, $928 and $1,739 respectively.
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Future minimum lease payments under long-term leases are as follows: December 31, 2003 2004 $1,208 2005 1,110 2006 1,012 2007 946 2008 and afterwards 10,027 --------- $14,303 =========  Item 5. Operating and Financial Review and Prospects Operating Results General This section contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning ICTS's business, operations and financial condition. All statements other than statements of historical facts included in this annual report on Form 20-F regarding ICTS's strategy, future operations, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report on Form 20-F the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Risk Factors" and elsewhere in this annual report on Form 20-F. ICTS cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 20-F represent management's expectations as of the date of this annual report on Form 20-F and should not be relied upon as representing ICTS's expectations as of any other date. Subsequent events and developments will cause management's expectations to change. However, while ICTS may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to do so, even if its expectations change. ICTS had specialized until 2002 in the provision of aviation security services. Following the sale of its European operations in 2002 and the taking of its aviation security business in the United States by the TSA in 2002, ICTS engages primarily in non-security related activities. These activities consist of non-security aviation security services, operation of entertainment related projects and the development of technological services. In addition, ICTS provides non-security related aviation services and develops technological systems and solutions for the security market. ICTS also engages in certain other activities, including constructing and developing entertainment related projects. In 2001 and 2002 ICTS sold substantially all of its European operations in two stages, for an aggregate purchase price of $103 million. As a result of the sale, ICTS has fully divested itself from its European operations, except for its operations in The Netherlands and Russia. In the fourth quarter of 2002, pursuant to the Security Act the Federal government through the TSA took over substantially all of the
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aviation security operations in U.S. airports. As a result, ICTS through its wholly-owned subsidiary Huntleigh USA Corp. ("Huntleigh"), provides limited aviation security services in the United States. Critical Accounting Policies The preparation of ICTS's consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of ICTS's business activities, described below are certain ICTS accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management s subjective judgments. ICTS bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 2 to ICTS's consolidated financial statements included in this Annual Report on Form 20-F for the year ended December 31, 2003 for a summary of all of ICTS's significant accounting policies. The Company considers its most significant accounting policies to be those discussed below. Contract with the TSA In February 2002, we entered into an aviation security services contract with the TSA to continue to provide aviation security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport by airport basis to the U.S. Federal Government or November 2002. In connection with payments made by the TSA to Huntleigh USA, a wholly owned subsidiary of the Company, for aviation security services provided in 2002, the Defense Contract Management Agency has indicated that it believes that Huntleigh should not have been paid on a fixed cost basis as believed by Huntleigh, but on an actual costs plus what the TSA would consider a reasonable profit. On that later basis Huntleigh may be required to repay to the TSA the difference between such amount and the actual amounts paid to it. Huntleigh however has various claims for additional amounts it considers are due to it for the services provided to the TSA. The Company estimates that if the TSA will claim such difference from Huntleigh and will prevail in all of its contentions, and none of Huntleigh's claims will be recognized, then the Company may suffer a net loss in an amount of about $27 Million. The Company's above estimate assumes, that under USA tax rules it will able to carry-back the losses (if any) that will result from the above claims of the TSA. No provisions have been made by the Company with respect to the above potential claims. Labor Department Issue In a letter dated November 21, 2003, the US Department of Labor ("DOL") advised Huntleigh that it had failed to comply with a clause included in its contract with the TSA under which Huntleigh had supposedly been required to pay its employees certain minimum wages. The DOL claims that under this clause Huntleigh owes such employees an amount of approximately MM $ 7.5 and has requested that Huntleigh makes such payment forthwith. On any amount so due, Huntleigh will also be required to pay certain employment taxes of approximately 20%. Huntleigh believes that it has valid defenses to the DOL claim. These issues are under discussion with the DOL and no assurance can be given as to the ultimate outcome or success to Huntleigh with the position it is taking. The Company has made a provision in its financial statements in an amount the Company deemed sufficient to account for its exposure for the above claim.
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Goodwill As from January 1, 2002, pursuant to Statement of Financial Accounting Standard ( FAS) No.142 of the Financial Accounting Standards Board of the United States (the FASB ), "Goodwill and Other Intangible Assets" , goodwill is no longer amortized but rather is tested for impairment annually. During 2002, the Company identified its various reporting units, which consist of its operating segments. The Company has utilized expected future discounted cash flows to determine the fair value of the reporting units and whether any impairment of goodwill existed as of the date of adoption of FAS 142. As a result of the application of the transitional impairment test, the Company does not have to record a cumulative effect of accounting change for the estimated impairment of goodwill. The Company has designated December 31 of each year as the date on which it will perform its annual goodwill impairment test. On December 31, 2003, an impairment test was conducted on the unamortized goodwill pursuant to which it was determined that, as of the date of the impairment test, an impairment existed concerning Demco of $797,000. (see Notes 2(g) and 4(b) to the financial statements). Changes in the fair value of the reporting units following material changes in the assumptions as to the future cash flows and/or discount rates could result in an unexpected impairment charge to goodwill. In 2002, as a result of the enactment of the Security Act (as described above), ICTS performed quarterly interim impairment tests, taking into account the expected future cash flows from the TSA contract through November 2002, and subsequently wrote off, as of September 30, 2002 the balance of the goodwill attributable to the U.S. aviation security operations in the amount of $8.5 million. Functional and reporting currency As of January 1, 2002, subsequent to the sale of ICTS's interest in ICTS Europe, the functional currency of ICTS and its U.S. operations is the U.S. dollar because substanitally all of the revenues and operating costs are in dollars. Prior to January 1, 2002 the functional currency was primarily the euro .. The financial statements of subsidiaries whose functional currency is not the dollar are translated into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("FAS") No. 52 of the Financial Accounting Standards Board of the USA ("FASB"). Assets and liabilities are translated from the local currencies to dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Revenue recognition Revenue is recognized when services are rendered to customers, which are performed based on terms contracted in a contractual arrangement provided the fee is fixed and determinable, the services have been rendered and collection of the related receivable is probable. Revenue from leased equipment is recognized ratably over the year. Impairment in value of long-lived assets ICTS has adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective January 1, 2002. FAS 144 requires that long-lived assets, held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be written down to their estimated fair values. On December 31, 2003 an impairment test was conducted on the carrying value of long-lived assets of the Company pursuant to which it was determined that, as of the date of the impairment test, the impairment existed in connection with equipment at Explore's facilities in Baltimore, Maryland and Atlantic City, New Jersey in the amount of $9,108,675and leased equipment of $6,042,000. An amount of $1,595 was booked as liability concerning future development costs. (see Notes 1(b) and 7(e) to the financial statements).
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Discussion and Analysis of Results of Operations The following table summarizes certain statement of operations data for ICTS for the years ended December 31, 2001, 2002 and 2003: [Enlarge/Download Table] Year ended December 31, 2003 2002 2001 ---------------------------------------------------- ------------------ -------------- -------------- REVENUES $ 71,571 $279,931 $212,137 ---------------------------------------------------- ------------------ -------------- -------------- COST OF REVENUES 57,562 214,054 189,925 ------- ------- ---------------------------------------------------- ------------------ -------------- -------------- GROSS PROFIT 14,009 65,877 22,212 ---------------------------------------------------- ------------------ -------------- -------------- IMPAIRMENT OF ASSETS 14,352 9,156 ---------------------------------------------------- ------------------ -------------- -------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,216 25,636 19,461 ------ ------ ---------------------------------------------------- ------------------ -------------- -------------- OPERATING INCOME ( 9,559) 31,085 2,751 ---------------------------------------------------- ------------------ -------------- -------------- INTEREST INCOME 2,248 2,072 1,649 ---------------------------------------------------- ------------------ -------------- -------------- INTEREST EXPENSE (1,222) (1,678) (1,637) ---------------------------------------------------- ------------------ -------------- -------------- EXCHANGE DIFFERENCES (242) 2,356 1,965 ---------------------------------------------------- ------------------ -------------- -------------- OTHER INCOME (EXPENSES) (353) 41,229 29,520 ------ ------ ---------------------------------------------------- ------------------ -------------- -------------- INCOME BEFORE TAXES ON INCOME ( 9,120) 75,064 34,248 ---------------------------------------------------- ------------------ -------------- -------------- TAXES ON INCOME 3,115 16,442 4,919 ---------------------------------------------------- ------------------ -------------- -------------- INCOME FROM OPERATIONS OF THE COMPANY AND ITS SUBSIDIAIRIES (12,243) 58,622 29,329 ---------------------------------------------------- ------------------ -------------- -------------- SHARE IN PROFITS (LOSSES) OF ASSOCIATED COMPANIES (6,661) (1,807) (395) ---------------------------------------------------- ------------------ -------------- -------------- MINORITY INTERESTS IN LOSSES (PROFITS) OF - SUBSIDIARIES _______ (2,736) ---------------------------------------------------- ------------------ -------------- -------------- NET INCOME FOR THE YEAR $(15,904) $56,815 $26,198 ---------------------------------------------------- ------------------ -------------- -------------- OTHER COMPREHENSIVE INCOME (LOSS): ---------------------------------------------------- ------------------ -------------- -------------- Translation adjustments 3,456 710 (1,811) Unrealized gains (losses) on marketable securities 794 731 (345) Reclassification adjustment for losses for available for sale securities included in net income 237 (771) 368 ----- --- ---------------------------------------------------- ------------------ -------------- -------------- 4,487 670 (1,788) --- ------- ---------------------------------------------------- ------------------ -------------- -------------- TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR $57,485 $24,410 $ 14,417 ====== ====== ---------------------------------------------------- ------------------ -------------- -------------- EARNINGS PER SHARE: Basic $(2.90) $8.85 $4.18 ====== ===== ==== Diluted $(2.90) $8.80 $4.09 ======= ==== ==== ---------------------------------------------------- ------------------ -------------- --------------
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The following table sets forth, for the annual periods indicated, certain statement of operations data as a percentage of revenues: [Download Table] Year Ended December 31, 2003 2002 2001 Revenues..................... 100% 100% 100% Cost of revenues............. 80.4% 76.5% 89.5% Gross profit................ 19.6% 23.5% 10.5% Selling, general and administrative expenses..... 12.9% 9.2% 9.2% Operating income ............. (13.4%) 11.1% 1.3% Net income ................... (26.4%) 20.3% 12.4% The statements of income for the year 2001 include the activities of ICTS Europe, which was sold in February 2002. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues. Revenues for the year ended December 31, 2003 were $71.6 million (2002: $279.9 million), and consisted of $59.1 million (2002: $274 million) from U.S. operations, and $12.4 million (2002: $5.9 million) from other operations. The decrease in revenues from U.S. operations is primarily the result of decreased sales of aviation security services pursuant to contracts with the TSA following the September 11th events. Revenues derived from such services in 2002 were $205.7 million (73% of ICTS's total revenues in that year). As a result of the Security Act since November 2002, ICTS provides limited aviation security services within the United States. Therefore, in 2003 the Company did not generate any revenues pursuant to a contract with the TSA. Almost all revenues in the U.S. ($59.1 million), are derived from other than aviation security services, compared with $39.0 million for 2002. Such increase is primarily attributable to an increase in sales to existing airline customers through expanding ICTS's location base and the offering of new services. Gross Profit. Gross profit is defined as revenues less costs directly related to such revenues as well as certain indirect expenses such as airport offices, airport fees, local training and other direct labor related expenses such as uniforms and transportation. Gross profit was positively impacted by a non-recurring contribution of $8.6 million in the third quarter. The non-recurring contribution is primarily the result of a reversal of an accrual made in 2002 to account for potential liabilities to former employees of the Company in its USA aviation security business, net of certain new accruals booked primarily to account for other estimated potential liabilities to such employees. Gross profit for the year ended December 31, 2003 was $14.0 million, 19.6%, as a percentage of revenue (2002: $65.9 million, 23.5% as a percentage of revenue). Management believes that the decrease in gross profit as a percentage of revenues is primarily attributable to the decrease in aviation security services as per the TSA contract. Impairment of Assets. For the year ended December 31, 2003, ICTS incurred expenses of $14.3 million (2002: 9.2 million) attributable to impairment of assets. The expense is primarily attributable to the impairment of equipment related to the Companies' entertainment business in the U.S.A. In addition, the Company recorded an impairment loss in amount of $6,042 related to lease equipment in The Netherlands and goodwill impairment related to Demco, an Israeli subsidiary.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses were $9.2 million for the year ended December 31, 2003, 12.9% as a percentage of revenues, as compared to $25.6 million, 9.2% as a percentage of revenues for the year ended December 31, 2002. The decrease in selling, general and administrative expenses is primarily attributable to the decrease in aviation security services. Operating Profit. Operating loss for the year ended December 31, 2003 was $16.4 million as compared to an operating profit of $31.1 million for the year ended December 31, 2002. Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense), and adjustments due to the impact of exchange rate fluctuations. The interest and financial income increased due the sale of certain traded shares during 2003. Other Income (Expense), Net. Other income for the year ended December 31, 2003 was $353 thousand negative as compared to $41.2 million for the year ended December 31, 2002. Other expenses during 2003 included mainly accounting provisions related to the Companies' investments in Artlink. Other income for the year ended December 31, 2002 includes the profit on the sale of 55% interest in ICTS Europe which resulted in gross proceeds, in the amount of $41.2 million. Income Taxes. Although the company incurred a loss from operations before taxes on a consolidated basis, it still incurred taxes in its USA subsidiary, Huntleigh. The reason being that Huntleigh is a separate entity for tax purposes and as such incurs taxes on its profits. Share in Profits and (Losses) of Associated Companies. The share in losses of associated companies which includes amortization of intangible assets for the year ended December 31, 2003 was $6.7 million. Net income. As a result of the foregoing, ICTS's net loss totaled approximately $18.9 million in the year ended December 31, 2003, as compared to approximately $56.8 million profit for the year ended December 31, 2002. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues. Revenues for the year ended December 31, 2002 were $279.9 million (2001: $212.1 million), and consisted of $274.0 million (2001: $96.7 million) from U.S. operations, no revenues (2001: $113.1 million) from ICTS Europe and $5.9 million (2001: $2.3 million) from other operations. The lack of revenue from ICTS Europe in 2002 is the result of the sale of ICTS's 55% interest in ICTS Europe in February 2002. The increase in revenues from U.S. operations is primarily the result of increased sales of aviation security services pursuant to contracts with the TSA following the September 11th events. Revenues derived from such services were $205.7 million (73% of ICTS's total revenues). For the first month and one-half for 2002 the Company provided aviation security services to its airline clients generating revenues of approximately $30 million. As a result of the Security Act since November 2002, ICTS does not provide aviation security services within the United States. Revenues derived in the U.S., other than from aviation security services, were $39.0 million (2001: $27.7 million). Such increase is primarily attributable to an increase in sales to existing airline customers through expanding ICTS's location base and the offering of new services. Gross Profit. Gross profit is defined as revenues less costs directly related to such revenues as well as certain indirect expenses such as airport offices, airport fees, local training and other direct labor related expenses such as uniforms and transportation. Gross profit for the year ended December 31, 2002 was $65.9 million, 23.5%, as a percentage of revenue (2001: $22.2 million, 10.5% as a percentage of
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revenue). Management believes that the increase in gross profit as a percentage of revenues is primarily attributable to the increase in the provision of aviation security services. Impairment of Intangible Assets. For the year ended December 31, 2002, ICTS incurred expenses of $9.2 million attributable to impairment of intangible assets. The expense is primarily attributable to the impairment of goodwill in the U.S. subsidiaries as a result of the TSA taking over aviation security activities in the U.S. in November 2002. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $25.6 million for the year ended December 31, 2002, 9.2% as a percentage of revenues, as compared to $19.4 million, 9.2% as a percentage of revenues for the year ended December 31, 2001. The increase in selling, general and administrative expenses is primarily attributable to increases in provisions for bad debts in the amount of $5 million, legal and insurance costs in the amount of $2.6 million, payroll expenses in the amount of $700,000 and offset by the reduction of selling, general and administrative expenses attributable to ICTS Europe in the amount of $4.8 million. Operating Profit. Operating profit for the year ended December 31, 2002 was $31.1 million as compared to $2.8 million for the year ended December 31, 2001. Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense), and adjustments due to the impact of exchange rate fluctuations. The interest income increased due to the stronger cash position of ICTS, despite the decrease in interest rates on time deposits over the course of 2002. Interest expenses increased compared to 2001, as a result of additional credit facilities that were at ICTS's disposal during 2002. Other Income (Expense), Net. Other income for the year ended December 31, 2002 was $41.2 million as compared to $29.0 million for the year ended December 31, 2001. Other income for the year ended December 31, 2002 includes the profit on the sale of 55% interest in ICTS Europe which resulted in gross proceeds, in the amount of $41.2 million. Income Taxes. ICTS's effective income tax rate for the year ended December 31, 2002 was 21.9% as compared to 14.4% in the year ended December 31, 2001. The increase in the effective tax rate is primarily attributable to an increase in non-deductible expenses for the year ended December 31, 2002 as well as a decrease in non-taxable capital gains in The Netherlands as a percentage of total income. Share in Profits and (Losses) of Associated Companies. The share in profits (losses) of associated companies which includes amortization of intangible assets for the year ended December 31, 2002 was $1.8 million. Net income. As a result of the foregoing, ICTS's net income increased by approximately $30.6 million in the year ended December 31, 2002, to $56.8 million, as compared to approximately $26.2 million for the year ended December 31, 2001. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenues. Revenues for the year ended December 31, 2001 were approximately $212.1 million (2000: $147.4 million), and consisted of $113.1 million (2000: $77.7 million) from ICTS Europe, $96.7 million (2000: $66.6 million) from U.S. operations, and $2.3 million (2000: $3.1 million) from other operations. The increase in revenues for both ICTS Europe and U.S. operations was primarily attributable to internal growth of ICTS's operations due to newly added locations together with price increases in the U.S. effective in October 2001. The addition of new locations and the price increases outweighed the negative impact of the cancellation of flights as a result of the September 11 events. For the year ended December 31, 2001, revenues derived from aviation security services in the U.S. were $68.9 million (71% of U.S. revenues).
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Revenues derived from services, other than aviation security services in the United States, for the year ended December 31, 2001 were $30.1 million as compared to $27.1 million for the year ended December 31, 2000. Gross Profit. Gross profit for the year ended December 31, 2001 was $22.2 million 10.5% as a percentage of revenues (2000: $15.8 million, 10.7% as a percentage of revenues) consisted primarily of a profit of $13.2 million (2000: $10.4 million) from ICTS Europe and a profit of $9.2 million (2000: $5.3 million) from U.S. operations. This increase in gross profit is due primarily to the increase in revenue. The decrease in gross profit as a percentage of revenue is due primarily to start-up costs of approximately $1.4 million resulting from new airport locations in Europe, which was partially offset by an increase in gross profit as a percentage of revenues from U.S. operations. Selling, General and Administrative Expenses. Selling, general and administrative expenses was $19.4 million, 9.2% as a percentage of revenues, for the year ended December 31, 2001, as compared to $11.6 million, 7.9% as a percentage of revenues for the year ended Decemver 31, 2000. This increase is primarily due to $4.9 million related to the sale of ICTS Europe, and expenses related to the expansion of the headquarters of ICTS Europe. Operating Profit. Operating profit for the year ended December 31, 2001 was $2.7 million and included $8.4 million (2000: $6.6 million) of operating profits of ICTS Europe. Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense), and adjustments due to the impact of exchange rate fluctuations. Interest Income increased due to the stronger cash position of ICTS, as a result of the receipt of the proceeds for the sale of the 45% interest in ICTS Europe in early 2001, despite the decrease in interest rates on time deposits over the course of 2001. Interest expenses decreased, as a result of partial repayment of outstanding lines of credit. Other Income (Expense), Net. Other income for the year ended December 31, 2001 was $29.3 million. Other income was primarily attributable to the profit on the sale of a 45% interest in ICTS Europe, in the amount of $34.3 million, which was partially offset by a loss of approximately $4.5 million related to a write-off of ICTS's investments in several technology start-up companies due to their financial condition and ICTS's assessment of their future prospects. Income Taxes. ICTS's effective income tax rate for the year ended December 31, 2001 was 14.4% as compared to 47.4% in the year ended December 31, 2000. The decrease in the effective tax rate was primarily attributable to non-taxable capital gains in The Netherlands derived by ICTS from the sale of a 45% interest in ICTS Europe. Minority Interest. This item reflects primarily the 45% interest of ICTS Europe owned by an unaffiliated party effective January 2001. Share in losses of associated companies. Share in losses of associated companies was $395,000 for the year ended December 31, 2001. Net income. As a result of the foregoing ICTS's net income increased by $25.2 million for the year ended December 31, 2001, to $26.2 million, as compared to $870,000 for the year ended December 31, 2000. Liquidity and Capital Resources ICTS's principal cash requirement for its operations is the payment of wages. Working capital is financed primarily by cash from operating activities and by short-term borrowings. As of December 31, 2003, we had cash and cash equivalents of $7.7 million, and restricted cash and short term investments of $3.1 million. Net cash used by operating activities for the year ended December 31, 2003 was $19.1 million as compared to net cash provided by operating activities $61.6 million for the year ended December 31, 2002 and net cash provided by operating
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activities of $987 for the year ended December 31, 2001. The decrease in cash for the year ended December 31, 2003 was primarily attributable to net loss of $25.8 million offset by non-cash expenses such as shares in losses of associated companies of $6.7 million and changes in operating assets and liabilities of $28.8 million,. The changes in operating assets and liabilities were primarily attributable to $2.1 million decrease in accounts receivable and an decrease of $28.9 million in accrued expenses and other liabilities, which was primarily related to severance pay and employee's claims of $19 million in connection with the reduction of ICTS's aviation security activities. Net cash used in investing activities was $3.2 million for the year ended December 31, 2003 as compared to net cash used in investing activities of $324 for the year ended December 31, 2002 and net cash provided by investing activities of $23.5 million for the year ended December 31, 2001. Net cash used in investing activities was primarily attributable to the purchase of equipment of $7.9 million, $5.2 million for other investments. This was partly offeset by proceeds from sale of marketable securities at $3.7 million, repayment of loans granted to related parties at $3.7 million, and decrease in time deposits and restricted cash at $4.7 million. Net cash used in financing activities was $2.4 million and $46.1 million for the years ended December 31, 2003 and December 31, 2002, respectively and net cash used in financing activities was $10.5 million for the year ended December 31, 2001. In June 2002 ICTS purchased equipment for an aggregate purchase price of $23.5 million. The purchase price was payable $14.5 million in cash and the balance subject to an $8.5 million self amortizing non-recourse promissory note payable over five years. Pursuant to an operating lease, the equipment was leased to a private Dutch company. The lease provides for annual lease payments in the amount of E 2.9 million and an option to purchase the equipment after five or seven years based upon the then fair market value. In the event that the lessee does not exercise the option to purchase the equipment upon the expiration of the lease term, then ICTS will be obligated to pay license fees in connection with intellectual property associated with the equipment in an amount equal to 5% of the revenue derived from the use of the equipment if ICTS exercises its option to operate the equipment. On February 17, 2002, ICTS entered into an aviation security services contract with the TSA to continue to provide aviation security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport by airport basis to the U.S. Federal Government or November 2, 2002. In accordance with the contract, the U.S. Federal Government provided ICTS with a non-interest bearing partial payment of $26 million to be repaid at the rate of $1.3 million a month commencing April 2002. As of December 31, 2003, $11.7 million of the $26 million had been repaid. The TSA in accordance with standard practices is in the process of auditing ICTS's billings to the TSA pursuant to the contract with the TSA for the provision of aviation security services. In the event that the TSA has a significant claim against ICTS and is successful, then there may be a material adverse effect on ICTS's financial condition. As a result of the September 11th terrorists attacks numerous lawsuits have been commenced against ICTS and its U.S. subsidiary. The cases arise out of airport security services provided for United Flight 175 out of Logan Airport in Boston, Massachusetts which crashed into the World Trade Center. In addition, to the present claims additional claims may be asserted. The outcome of these or additional cases is uncertain. If there is an adverse outcome with respect to any of these claims which is not covered by insurance, then there may be a significant adverse impact on us. The following table summarizes ICTS's obligations to make future payments under contracts: Contractual Obligations Due by Period at December 31, 2003. The Company leases premises under long-term operating leases, in most cases with renewal options. Lease expenses for the years ended December 31, 2003, 2002 and 2001 were $1,166, $____ and $______ respectively.
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Future minimum lease payments under long-term leases are as follows: December 31, 2003 --------------- 2004 $1,208 2005 1,110 2006 1,012 2007 946 2008 and afterwards 10,027 ------ $14,303 ====== The following table summarizes ICTS's guarantees and their expiration dates: The Company has outstanding a guaranty to ABN Amro for rent in the amount of $13 which is outstanding during the term of this lease. The Company, in addition, has an outstanding guaranty to Bilu Investments, Ltd. in the amount of $2,515. In January 2002, IMA entered into a loan facility agreement with a German bank. As of December 31, 2003 the company and ITA, collectively and individually, guaranteed the loan in full to the bank. The guarantee is a continuing guarantee for the obligations of IMA. As of December 31, 2003 IMA's net obligations to the bank amounted to $1,683. Taking into account the deferred note to ITA of $546 (which serves as a security to this guarantee the company recorded a liability of $1,137 in respect of this guarantee. Our future capital requirements, the timing and amount of expenditures will depend on our success in developing and implementing our new business strategy. Based on our current plans, we believe that our existing cash balances, cash flows from operating and available borrowing will be sufficient to satisfy our capital requirements for at least the next 12 months. Research and development, patents and licenses, etc. ICTS has recently launched a trial phase of its IP@SS project. IP@SS consists of a computerized platform integrating various technologies, including document readers, biometrics identification systems and a smart-card. The system is modular and may be used on a stand alone basis or integrated into an existing check-in system. The system has been designed to protect passenger privacy. The system is designed to speed up and simplify the processes of identification and security checks of passengers at airports. The system enhances customer service provided by airlines and airports to outbound passengers. The project is being developed by ICTS and is performed in cooperation with various partners. The pilot program is being testedat Schiphol Airport in Amsterdam, The Netherlands and at Newark Liberty International Airport, New Jersey in the United States and is planned to be expanded in the near term to other European airports as well as other North American airports. Trend information Labor market conditions at a particular airport location may require the Company to increase its prices. Cost of labor is the most important variable in determining any cost increases.  Item 6. Directors, Senior Management and Employees The following table lists the directors and executive officers of ICTS. [Download Table] Age Position Boaz Harel 40 Chairman of the Supervisory Board Menachem Atzmon 59 Member of the Supervisory Board M. Albert Nissim 70 Member of the Supervisory Board, Secretary Elie Housman 64 Member of the Supervisory Board Moshe Winer 54 Member of the Supervisiory Board David W. Sass 68 Member of the Supervisory Board Philip M. Getter 67 Member of the Supervisory Board and Chairman of the Audit Committee Lynda Davey 49 Member of the Supervisory Board Michael Barnea 48 Managing Director and CEO Stefan Vermeulen 33 Chief Financial Officer
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Boaz Harel has been the Managing Director of Leedan between 1993 and December 31, 1997. Mr. Harel became Chairman of the Company in January 2004. Mr. Boaz Harel is the Director of Pioneer Commercial Funding Corp. ("Pioneer"), a publicly-traded company, which has no business at this time, serving in such capacity since November 1996. Pioneer is an affiliate of Harmony. Mr. Boaz Harel is the brother of the late Mr. Ezra Harel, the former Chairman of the Supervisory Board of the Company. Menachem J. Atzmon is a Chartered accountant (Isr). Mr. Atzmon is a controlling shareholder of Harmony Ventures B.V. Since 1996 he has been the managing director of Albermale Investment Ltd. and Kent Investment Holding Ltd., both investment companies. Since January 1998 he has served as CEO of Seehafen Rostock. He has been a member of the Supervisory Board of ICTS since 1999. Mr. Atzmon has been investigated by the Israeli Securities and Exchange Commission as a part of an investigation conducted by such agency for suspected criminal acts under Israeli law, in connection with his past involvement with Rogosin Enterprises, Ltd., an Israeli company, as a third party. M. Albert Nissim has served as Secretary of ICTS since January 1994 and became a member of the Supervisory Board in 2002. Mr. Nissim also serves as President of ICTS - USA, Inc. From 1994 to 1995, he worked as the managing director of ICTS and from 1990 to the present, he has been Vice-President and a director of Tuffy Associates. Mr. Nissim has been the President of Pioneer Commercial Funding Corp. ("Pioneer") since January 1997 and also serves as the Chairman. Elie Housman has served as Chairman of Inksure Technologies, Inc. since February 2002. Mr. Housman was a principal at Charterhouse Group International, a privately held merchant bank, from 1989 until June 2001. At Charterhouse, Mr. Housman was involved in the acquisition of a number of companies with total sales of several hundred million dollars. Mr. Housman was the Chairman of Novo Plc. in London, a leading company in the broadcast storage and services industry. 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. Moshe Winer became a member of the Supervisory Board of ICTS in 2002. For the past ten years has been the principal of several businesses in the automotive services field. David W. Sass for the past 43 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 was also a director of BarPoint.com, Inc, an online and wireless product information and shopping service provider.. He is also corporate secretary and a director of Pioneer Commercial Funding Corp. Mr. Sass became a director of Inksure Technologies, Inc. in 2003, a company which develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products and to meet the growing demand for protection from counterfeiting and diversion. He is also a director of several privately held corporations. Philip M. Getter, since 2000 he is a partner of DAMG Capital, LLC Investment Bankers. Prior thereto he was most recently head of Investment Banking and a member of the board of directors of Prime Charter, Ltd. He has more than thirty years of corporate finance experience. Having served as Administrative Assistant to the Director of United States Atomic Energy Commission from 1958 to 1959, he began his Wall Street career as an analyst at Bache & Co. in 1959. He was a partner with Shearson, Hammill & Company from 1961 to 1969 and a Senior Partner of Devon Securities, an international investment banking and research boutique from 1969 to 1975. Mr. Getter was a member of the New York Society of Security Analysts. From 1975 to 1983 he was President and CEO of Generics Corporation of America, a public company that was one of the largest generic drug manufacturers in the United States. As Chairman and CEO of Wolins Pharmacal from 1977 to 1983 he led the reorganization and restructuring one of the oldest and largest direct to the profession distributors of pharmaceuticals. He has been a member of the League of American Theatres and Producers, Advisory Board of the American Theatre Wing, Trustee of The Kurt Weill Foundation for Music, a member of the Tony Administration Committee and has produced for Broadway, television and film. He writes frequently concerning the communications, education and entertainment industries. Mr. Getter received his B.S. in Industrial Relations from Cornell University. He is a member of several industry organizations and serves on various boards of
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both public and private organizations and is Chairman of the Audit Committees of EVCI Career Colleges, Inksure Technologies, Inc. as well as the Company. Lynda Davey is Chief Executive Officer of Avalon Group, Ltd. a private investment banking firm she co-founded in 1992. She also serves as Chairperson of Avalon Securities, Inc., an NASD member broker-dealer, and NY Venture Space, LLC, a provider of interim office space. From 1988 throughout 1991, Ms. Davey was Managing Director of The Tribeca Corporation, a New York based buyout firm. Prior to 1988, Ms. Davey was Vice President in the corporate finance department of Salomon Brothers Inc. She is a director of Tuffy Associates Corp. Ms. Davey also serves on the Advisory Council of the Center for Women's Business Research and Retail Finance Group of Wells Fargo Bank. She became a member of the Supervisory Board of ICTS in 2002. Michael Barnea has been employed by the Company since 2002. Mr. Barnea has also been a member of the supervisory board of ICTS between 1996-2000 and has been actively involved with mergers and acquisitions as well as other activities of ICTS. Mr. Barnea is a graduate of the Tel Aviv School of Law. Mr. Barnea has been investigated by the Israeli Securities and Exchange Commission as a part of an investigation conducted by such agency for suspected criminal acts under Israeli law, in connection with his past involvement with Rogosin Enterprises, Ltd., an Israeli company. Stefan Vermeulen is a chartered accountant (the Netherlands). Mr. Vermeulen has been the Chief Financial Officer of ICTS since 2001. Before joining ICTS, Mr. Vermeulen worked as an internal auditor for Sara Lee/Douwe Egberts in the Netherlands from 1999 until 2001. Prior to that he worked as an internal auditor for Intergraph for two years. Previously Mr. Vermeulen worked as an external auditor with Deloitte & Touche in the Netherlands for seven years. Mr.Vermeulen holds a masters degree in information management. Compensation Effective as of January 1, 2004, ICTS entered into a two year agreement with Mr. Boaz Harel providing for the following: base compensation in the amount of $20,400 per month, per annum after taking a 30% pay reduction. Mr. Barnea is employed under a four (4) year Employment Agreement commencing January 1, 2004 at an annual compensation rate of $140,000 per year. The total cost of his employment for 2004 is approximately $330,000 and approximately $320,000 for any year thereafter. Each member of the Supervisory Board who is not an employee of the Company receives an annual fee of $10,000 and a fee for each Board or committee meeting attended of $1,000 and the Chairman of the Audit Committee receives an additional $10,000 per year. Board practices ICTS has a Supervisory Board and a Management Board. The Supervisory Board has the primary responsibility for supervising the policies of the Management Board and the general course of corporate affairs and recommending the adoption of the annual financial statements of ICTS by its shareholders. The Management Board is responsible for the day-to-day operations of ICTS. Members of the Supervisory Board and the Management Board are appointed by the shareholders for a term of one year. Non-executive officers are appointed by and serve at the pleasure of the Management Board. The members of the Supervisory Board and their period of service on the Supervisory Board are as follows: Boaz Harel (2004), Menachem Atzmon (1999), M. Albert Nissim (2003), Elie Housman (2002), Moshe Winer (2002), David W. Sass (2002), Philip M. Getter (2003) and Lynda Davey (2003). The Audit Committee consists of Philip M. Getter, Chairman, Lynda Davey and Moshe Winer, all of whom are independant and 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 financial statements and confers with the auditors and the officers. The Audit Committee has an Operating Charter as well. ICTS's compensation committee consists of Boaz Harel, Chairman, Mr. Nissim and Ms. Davey. The compensation committee determines salaries, incentives
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and other forms of compensation for ICTS's executive officers and administrators stock plans and employee benefit plans. The Supervisory Board of the Company has adopted a Code of Ethics for principal Executive Officers and Senior financial Officers. The Articles of Association of ICTS require at least one member for both the Management Board and the Supervisory Board, but do not specify a maximum number of members for such boards. The general meeting of shareholders determines the exact number of members of both the Management Board and the Supervisory Board. Under the laws of the Netherlands and the Articles of Association, each member of the Supervisory Board and Management Board holds office until such member's resignation, death or removal, with or without cause, by the shareholders or, in the case of members of the Supervisory Board, upon reaching the mandatory retirement age of 72. Employees Prior to the sale of its European operations, ICTS employed approximately 5,000 people in Europe on a regular basis. After the sale of the European operations, the number of employees in Europe is approximately 470. In the United States, prior to the enactment of the Security Act ICTS employed approximately 5,000 people, of which approximately 1,300 were unionized. Subsequent to the enactment of the Security Act, but prior to November 2002 ICTS employed approximately 11,000 people, of which approximately 1,300 were unionized. Most of the unionized employees are skycaps and screeners. ICTS believes that its relationships with employees are generally good. As a result of the TSA taking over airport security ICTS currently employs approximately 3,000 persons.
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Share ownership. The following table sets forth the number of shares of common stock, directly and indirectly, owned by all directors and executives of the Company as of May 31, 2003. [Download Table] Number of Shares Beneficially Owned Percentage Boaz Harel - - Atzmon Family Trust(1) 3,948,500 59% M. Albert Nissim - - Moshe Winer 7,000 * David W. Sass - - Philip M. Getter - - Lynda Davey - - Michael Barnea - - Eli Hausmann - - Estate of Ezra Harel(1) 3,948,500 59% All Executive Officers and Directors as a Group 9 persons 3,955,500 59.2% * Less than 1% 1. Harmony Ventures BV, owns directly and indirectly approximately 59% of the issued and outstanding Common Shares. A family trust for the benefit of the family of Mr. Menachem J. Atzmon (the "Atzmon Family Trust") and the Estate of Ezra Harel own 100% of the outstanding shares of Harmony Ventures BV and may be deemed to control Harmony Ventures BV. Mr. Atzmon disclaims any beneficial interest in the Atzmon Family Trust. Harmony Ventures BV, the Atzmon Family Trust and the Estate of Ezra Harel may be able to appoint all the directors of ICTS and control the affairs of ICTS. Options to Purchase Securities. On June 22, 1999 shareholders adopted the 1999 Equity Incentive Plan (the "Plan"). The Plan provides a means whereby employees, officers, directors, and certain consultants and independent contractors of the Company ("Qualified Grantees") may acquire the Common Shares of the Company pursuant to grants of (I) Incentive Stock Options ("ISO") and (ii) "non-qualified stock options". A summary of the significant provisions of the Plan is set forth below. The following description of the Plan is qualified in its entirety by reference to the Plan itself. The purpose of the Plan is to further the long-term stability, continuing growth and financial success of the Company by attracting and retaining key employees, directors and selected advisors through the use of stock incentives, while stimulating the efforts of these individuals upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business. The Company believes that the Plan will strengthen these individuals' desire to remain with the Company and will further the identification of their interests with those of the Company's shareholders. The Plan provides that options to purchase up to 600,000 Common Shares of the Company may be issued to the employees and outside directors. All present and future employees shall be eligible to receive incentive awards under the Plan, and all present and future non-employee directors shall be eligible to receive non-statutory options under the Plan. An eligible employee or non-employee director shall be notified in writing, stating the number of shares for which options are granted, the option price per share, and conditions surrounding the grant and exercise of the options. The exercise price of shares of Company Stock covered by an ISO shall not be less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO is granted to an employee who, at the time of the grant, is a 10% shareholder, then the exercise price of the shares covered by the incentive stock option shall not be less than 110% of the fair market value of such shares on the date of the grant. The exercise price of shares covered by a non-qualified stock option shall be not less than 85% of the fair market value of such shares on the date of the grant. The Plan shall be administered by the Compensation Committee.
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As of May 31, 2004 ICTS has granted options to purchase 212,500 Common Shares, all of which have been granted to directors and executive officers of the Company as a group, at exercise prices ranging from $4.50 to $8.50 per share under the Plan. These options vest over various terms, ranging from immediately to five years. Outstanding options expire at various times, but not later than January 2007.  Item 7. Major Shareholders and Related Party Transactions Major Shareholders. The following table sets forth certain information regarding the beneficial ownership of the Common Shares of ICTS, as of May 31, 2004, by each person, other than officers and directors, who is known by ICTS to own beneficially more than 5% of the outstanding Common Shares: Number of Shares Beneficially Owned Percentage Estate of Ezra Harel(1) 3,948,500 59% Atzmon Family Trust(1) 3,948,500 59% M. Albert Nissim - - Moshe Winer 7,000 * David W. Sass - - Philip M. Getter - - Lynda Davey - - Michael Barnea - - Eli Housman - - Boaz Harel - - All Executive Officers and 3,855,500 59.2% Directors as a Group 10 persons --------------------------- * Less than 1% 1. Harmony Ventures BV, owns directly and indirectly approximately 59% of the issued and outstanding Common Shares. The Atzmon Family Trust and the Estate of Ezra Harel own 100% of the outstanding shares of Harmony Ventures BV and may be deemed to control Harmony Ventures BV. Mr. Atzmon disclaims any beneficial interest in the Atzmon Family Trust. Harmony Ventures BV, the Atzmon Family Trust and the Estate of Ezra Harel may be able to appoint all the directors of ICTS and control the affairs of ICTS.
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Related Party Transactions. In 2001 and 2002, as part of the sale of its European operations, ICTS in exchange for services rendered by the members of the Supervisory Board and certain executives paid out the following bonuses: [Enlarge/Download Table] ------------------------------------ --------------------- ----------------------------- Name 2001 2002 ---- ---- ---- Ezra Harel $ 1,800,000 (1) $ 2,451,000(1) Boaz Harel $ 169,000 (2) $ 71,000 Savinoam Avivi $ 18,000 $ 23,000 Michael Barnea $ 225,000 (3) $ 293,000(3) Gerald Gitner $ 118,000 $ 24,000 Menachem Atzmon $ 412,000 (4) $ 541,000(4) Amos Lapidot $ 18,000 $ 23,000 Lior Zouker $ 1,080,000 (5) $ 1,499,000(5) Albert Nissim $ 30,000 $ 36,000 Stefan Vermeulen 0 $ 45,000 Eli Talmor $ 0 0 Doron Zicher $ 21,000 $ 146,000 Leedan $ 163,000 (6) $ 1,208,000 $ 1,000,000 (1) This amount was due to Mr. Harel pursuant to his employment agreement and was designated by him to be paid to Leedan, on behalf of Harmony. (2) Mr. Harel resigned as a member of the Supervisory Board on November 12, 2001. In exchange for this cash payment Mr. Harel also surrendered 16,667 stock options. (3) In consideration for services provided by Pinkhill Business Ltd. (4) Was assigned to Harmony BV in favor of the shareholder and was paid to Leedan. (5) This amount was paid pursuant to Mr. Zouker's employment agreement. (6) In exchange for part of this cash payment Mr. Zicher surrendered 6,667 of stock options. In August 1997, ICTS, as part of a group consisting of Leedan Systems and Properties Enterprises (1993) Ltd. and Rogosin Development and Holdings Ltd. ("Rogosin"), each at the time, an affiliate of Leedan, invested in a joint venture, Bilu Investments Ltd. ("Bilu"). Bilu is engaged in the financing of real estate projects in Israel, primarily in the residential market. In consideration for a 9.3% equity interest in Bilu, ICTS contributed $259,000 and has guaranteed $2,915,000 of debt obligations of Bilu. In 2000 Bilu issued 25% of its shares to an unaffiliated party in consideration for an equity investment of US $2,000,000 and the provision of guarantees for debt obligations of Bilu in an amount of US $3,800,000. As a result , ICTS's equity interest in Bilu has been diluted to 7% and ICTS's guarantee was reduced to $2,515,000 of which $700,000 is on behalf of each of Leedan and Rogosin, respectively. Rogosin became an unaffiliated party in 2002. (See Note 6(e) to the financial statements). In connection with release of certain guarantees of various debt obligations of a third party procured by ICTS in 1997, in 2000 ICTS purchased from unaffiliated
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parties a $1,000,000 debenture bearing interest at 10% per annum, due November 26, 2004, issued by Pioneer. This debenture is guaranteed by Leedan, an affiliate of the Estate of Ezra Harel and Mr. Atzmon. In July 2000, each of ICTS and ICTS Tourist Attractions Ltd. ("ITA"), purchased 16 common shares for $16,000 each of Ramasso from Leedan, representing 40% each of the outstanding share capital of Ramasso. The remaining 20% shares in Ramasso are held by a company controlled by Leedan. ICTS provided loans to Ramasso from time to time aggregating approximately $3,000,000 bearing an annual interest rate of 4.25% which has no fixed repayment. Ramasso owns and operates, a Time Elevator in Rome, Italy. In April, 2003 the Company provided a financial institution that financed the Time Elevator in Rome, with a guaranty securing the repayment of such financing. At the time the guaranty was provided the amount of the financing provided by such financial institution to Time Elevator in Rome has been net 1,838,390 Euro's. (See Note 5(b) to the financial statements). In December 2000, ICTS exercised an option to purchase 100 common shares of ITA for $600,000, representing 10% of the outstanding share capital of ITA. On October 14, 2001, ICTS agreed to increase its investment in ITA under the following principal terms: (a) ICTS provided ITA with a $3,000,000 loan [which released a $1,000,000 bank guaranty previously provided by ICTS in favor of ITA]; (b) ICTS was granted with a warrant to purchase 12% of ITA shares exercisable during a period of three years, at an exercise price that shall be determined according to an evaluation of ITA to be made by an independent consultant; (C)) ICTS was granted [a right of first refusal] to establish and own, on its own account, any Time Elevator project to be initiated by ITA in the United States [and Europe]; (d) ITA will supervise and manage the establishment of such projects for a fee that shall be equal to 20% of the projects costs; (e) ICTS has the option to acquire from ITA 20% of ITA's stake in each Time Elevator project of ITA in Europe for a period of two years from the start of such project; and (f) ITA has the option to acquire from ICTS 20% of ICTS's stake in each Time Elevator project of ICTS for a period of two years from the start of such project. The first project for which ICTS exercise its right of first refusal is in Atlantic City, New Jersey where ICTS is currently engaged in the establishment of the Time Elevator project. The second project in which ICTS exercised its right of first refusal, is in Baltimore, Maryland where ICTS is currently establishing a Time Elevator project. As of May 31, 2004, ICTS has invested $9,000,000 in the Atlantic City project and $4,400,000 in the Baltimore, Maryland project. ITA is entitled to receive a management fee of 20% for the services they provide in the development and construction of each of these projects. On December 23, 2003 the Company through wholly owned subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA") certain assets owned by ITA and used by it in the development, establishment and operation of motion-based entertainment theaters. The assets purchased consist primarily of intangible property and certain equipment. ITA is a company in which principal shareholder of the Company owed in the aggregate in excess of 50% of the shares. The purchase price for the assets purchased was $5,429,151.00. The purchase price was paid by set-off against certain debts owed by ITA to the Company, cash and notes. As a part of the transaction, certain agreements made between the Company and ITA in 2001 were terminated, with the result that the Company is no longer committed to involve ITA in its existing and future entertainment projects. Prior to entering into the transaction the Company obtained a fairness opinion as to the fairness of the consideration and the transaction to the Company. The Company currently operates a fully owned motion-based entertainment theater in Baltimore, MD and is establishing a new fully-owned multi-experience motion-based entertainment theater in Atlantic City, NJ scheduled to open by mid-2004. The Company is also a partner in a movie-based entertainment facility in Niagara Falls, NY. ITA is an Israeli based private company established in 1994 which has been engaged in the business of developing Time Elevators. Mr. Ezra Harel and the Azmon Family Trust were the principal shareholders of ITA.
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On July 24, 2001, ICTS, through an assignment from Noaz Management Company, invested $400,000 in Artlink Inc, a company with expertise in curating and producing art exhibits, servicing and representing young artists. Mr. Ezra Harel was a principal shareholder of Noaz Management Company. During 2001 and 2002 ICTS provided loans to Leedan aggregating approximately $3.6 million bearing interest at libor plus 3%. The loans were repaid in the first half of 2003. During the period from April to September 2002, ICTS purchased 4,106,895 shares of Inksure Technologies Inc. ("Inksure"), which represents 34.3% of Inksure's outstanding shares for a purchase price of $5,986,000. In October 2002, Mr. Elie Housman, the Chairman of the Board of Inksure, was appointed to the ICTS Supervisory Board. Mr. Getter and Mr. Sass, members of the ICTS Supervisory Board and our directors were elected to the Board of Inksure. Messrs. Housman, Getter and Sass, as well as an entity assoicated with the Atzmon Family Trust, own shares and warrants in Inksure. In addition, Messrs. Housman, Getter and Sass hold options to purchase Inksure securities. Inksure develops, markets and sells customized authentications systems designed to enhance the security of documents and branded products and to meet the growing demand for protection from counterfeiting and diversion. In March 2004 the Company participated in Inksure's private placement purchasing 544,118 additional shares at an aggregate purchase price of $370,000. The Company owns approximately 36% of the outstanding shares of Inksure. During 1998, ICTS purchased 150,000 shares of common stock of Pioneer from Leedan for a purchase price of $5.00 per share. Pioneer is a sister corporation through common ownership through Harmony. ICTS purchased 29,000 additional shares on October 10, 2001 at $2.25 per share. In addition, on February 1, 2002, ICTS subscribed for an additional 260,000 shares at $2.00 per share. In January 2003, ICTS purchased 235,300 shares of common stock of Pioneer Commercial Funding Corp. at a purchase price of $0.90 per share in a private placement. Mr. Albert Nissim, the secretary and member of the ICTS Supervisory Board is the president and a Chairman of Pioneer, Lynda Davey, a member of the ICTS Supervisory Board was a director of Pioneer and David W. Sass, a member of the ICTS Supervisory Board is secretary of Pioneer and currently a director of that company along with Mr. Boaz Hreal and M. Albert Nissim. The Estate of Ezra Harel and the Atzmon Family Trust are also principal shareholders of Pioneer.  Item 8. Financial Information Consolidated Statements and Other Financial Information. See pages F-1 through F- 49 incorporated herein by reference. Legal Proceedings As a result of the September 11th terrorists attacks numerous lawsuits have commenced against Huntleigh and ICTS. Huntleigh has been named in 51 lawsuits and ICTS in 51 lawsuits All of the cases were filed in the United States District Court, Southern District of New York. The cases arise out of Huntleigh's airport security service for United Flight 175 out of Logan Airport in Boston, Massachusetts. All of the cases involve wrongful death except one which involves property damage. The cases are in their early stages. Although these are the only claims brought against Huntleigh and ICTS with respect to the terrorist attacks of September 11, 2001, Huntleigh and ICTS anticipate additional related claims. See " Risk Factors-Potential For Liability Claims." Under current legislation Huntleigh and one other security company entered into agreements with the TSA have their liability limited to the amount of insurance coverage that they carry. The legislation applies to Huntleigh, but not ICTS.
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The Company has commenced an action against the U.S. Government with regard to the Fifth Amendment rights relating to the taking of its business. Dividend Policy On each of July 23, 2001 and May 13, 2002, ICTS declared and paid a $2.25 dividend per Share ($1.69 net of all withholding taxes required by The Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00 per share (net of all withholding taxes required by The Netherlands). For a discussion of the applicable taxes on such dividends see, "Netherlands Dividend Withholding Tax". The declaration of dividends will be at the discretion of our board of directors and will depend upon our earnings, capital requirements, financial position, general economic conditions, and other pertinent factors. We cannot assure you that dividends will be paid in the future. Significant Changes. None  Item 9. The Offer and Listing ICTS's shares of common stock have traded on the NASDAQ National Market since 1996 under the symbol ICTS. The reported high and low sales prices per share during the years ending December 31, 2001, 2002 and 2003 as reported on NASDAQ were as follows: The reported high and low closing sales prices per share during each quarter as reported on NASDAQ were as follows: 2001: High Low ---- --- First quarter $7.81 $5.75 Second quarter 7.55 4.75 Third quarter 10.60 4.00 Fourth quarter 11.59 6.51 2002: High Low ---- --- First quarter $7.75 $6.71 Second quarter 10.20 6.04 Third quarter 7.72 5.00 Fourth quarter 8.62 4.91 2003: High Low ---- --- First quarter $6.14 $5.08 Second quarter 5.10 3.99 Third quarter 4.42 3.12 Fourth quarter 3.63 2.49 2004: High Low ---- --- First quarter $3.98 $3.03 Second quarter $8.42 $3.25
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Item 10. Additional Information Memorandum and Articles of Association Introduction The material provisions of the Company's Articles of Association are summarized below. Such summaries do not purport to be complete statements of these provisions and are qualified in their entirety by reference to such exhibit. The Company was established by the Department of Justice at Amstelveen, The Netherlands on October 9, 1992. The objectives of the Company are generally to manage and finance businesses, extend loans and invest capital as described in greater detail in Article 2 of the Company's Articles of Association. Shares The Company's authorized share capital is currently divided into 17,000,000 common shares,par value 0.45 Euro per common share. The common shares may be in bearer or registered form. Dividends Dividends on common shares may be paid out of annual profits shown in the Company's annual accounts, which must be adopted by the Company's Supervisory Board. The Management Board, with the prior approval of the Supervisory Board, may decide that all or part of the Company's profits should be retained and not be made available for distribution to shareholders. Those profits that are not retained shall be distributed to holders of common shares, provided that the distribution does not reduce shareholders' equity below the issued share capital increased by the amount of reserves required by Netherlands law. At its discretion, subject to statutory provisions, the Management Board may, with the prior approval of the Supervisory Board, distribute one or more interim dividends on the common shares before the annual accounts have been approved by the Company's shareholders. Existing reserves that are distributable in accordance with Netherlands law may be made available for distribution upon proposal by the Management Board, subject to prior approval by the Supervisory Board. With respect to cash payments, the rights to dividends and distributions shall lapse if such dividends or distributions are not claimed within five years following the day after the date on which they were made available. Voting Rights Members of the Company's Supervisory Board are appointed by the general meeting. The Company's Articles of Association provide that the term of office of each Supervisory Director will expire no later than June in each calendar year. Members of the Supervisory Board may be re-appointed. General Meetings of Shareholders The Company's general meetings of shareholders will be held at least once a year, not later than six months after the end of the fiscal year. Notices convening a general meeting will be mailed to holders of registered shares at least 15 days before the general meeting and will be published in national newspapers in The Netherlands and abroad in countries where the Company's bearer shares are admitted for official quotation. In order to attend, address and vote at the general meeting of shareholders, the holders of the Company's registered shares must notify it in writing of their intention to attend the meeting and holders of the Company's bearer shares must direct the depository to their bearer shares, each as specified in the published notice. The Company currently does not solicit from or nominate proxies for its shareholders and is exempt from the proxy rules of the Securities Exchange Act of 1934. However, shareholders and other persons entitled to attend the general meetings of shareholders may be represented by proxies with written authority. Other general meetings of shareholders may be held as often as deemed necessary by the Supervisory Board or the Management Board and must be held if one or more shareholders or other persons entitled to attend the general meeting of shareholders jointly representing at least 10% of the Company's issued share
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capital make a written request to the Supervisory Board or the Management Board that a meeting must be held and specifying in detail the business to be dealt with at such meeting. Resolutions are adopted at general meetings of shareholders by a majority of the votes cast, except where a different proportion of votes is required by the Articles of Association or Netherlands law, in a meeting in which holders of at least one-third of the outstanding common shares are represented. Each share carries one vote. Amendment of Articles of Association and Winding Up A resolution presented to the general meeting of shareholders amending the Company's Articles of Association or winding up the Company may only be taken after a proposal made by the Management Board and approved by the Supervisory Board. A resolution to dissolve the Company must be approved by at least a three-fourths majority of the votes cast. Approval of Annual Accounts The Company's annual Netherlands statutory accounts, together with a certificate of its auditors, will be submitted to the general meeting of shareholders for approval. Consistent with business practice in The Netherlands and as provided by the Company's Articles of Association, approval of the annual accounts by the shareholders discharges the Management Board and the Supervisory Board from liability for the performance of their respective duties for the past financial year. Under Netherlands law, this discharge is not absolute and will not be effective with respect to matters which are not disclosed to the shareholders. Liquidation Rights In the event of the Company's dissolution and liquidation, the assets remaining after payment of all debts and liquidation expenses are to be divided proportionately among the holders of the common shares. Issues of Shares; Pre-emptive Rights The Company's Supervisory Board has the power to issue shares. The shareholders have by a authorizing resolution provided such authority for a five year period ending June 30, 2006. The number of shares the Supervisory Board is authorized to issue must be set at the time of the resolution and may not exceed 17,000,000 shares of the common shares then outstanding. Shareholders have a pro rata pre-emptive right of subscription to any common shares issued for the purpose of raising capital, which right may be limited or eliminated. If designated for this purpose by the general meeting of shareholders (whether by means of any authorizing resolution or an amendment to the Company's Articles of Association). Repurchase and Cancellation of Shares The Company may repurchase its common shares, subject to compliance with the requirements of certain laws of The Netherlands (and provided the aggregate nominal value of the Company's common shares acquired by it at any one time amounts to no more than one-tenth of its issued share capital). Common shares owned by the Company may not be voted or counted for quorum purposes. Any such purchases are subject to the approval of the Supervisory Board and the authorization of the general meeting of shareholders. Authorization is not effective for more than 18 months. The Company may resell shares it purchases. Upon a proposal of the Management Board and approval of the Supervisory Board, the Company's shareholders at the general meeting shall have the power to decide to cancel shares acquired by the Company or to reduce the nominal value of the common shares. Any such proposal is subject to general requirements of Netherlands law with respect to reduction of share capital. Shares may only be cancelled by vote of the shareholders at the general meeting. Only shares which the Company holds or for which it holds the depository receipts may be cancelled. However, an entire class may be cancelled provided the Company repays the par value to the holders of such shares.
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Material contracts For material contracts See "Item 8 - Financial Information, B. Significant Changes". Exchange controls There are no governmental laws, decrees or regulations in the Netherlands, the Company's jurisdiction of organization, that restrict the Company's export or import of capital in any material respect, including, but not limited to, foreign exchange controls. There are no limitations imposed by Netherlands law or the Company's charter documents on the right of nonresident or foreign owners to hold or vote Common Shares. Taxation United States Federal Income Tax Consequences The following discussion summarizes the material anticipated U.S. federal income tax consequences of the acquisition, ownership and disposition of shares by a U.S. Holder (as defined below). This summary deals only with shares held as capital assets and does not deal with the tax consequences applicable to all categories of investors some of which (such as tax-exempt entities, banks, broker-dealers, investors who hold shares as part of hedging or conversion transactions and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This summary does not deal with the tax consequences for U.S. Holders who own at any time directly or indirectly through certain related parties 10% or more of the voting stock or nominal paid-in capital of the Company. The summary does not purport to be a complete analysis or listing of all the potential tax consequences of holding shares, nor does it purport to furnish information in same detail or with attention to an investor's specific tax circumstances that would be provided by an investor's own tax adviser. Accordingly, prospective purchasers of shares are advised to consult their own tax advisers with respect to their particular circumstances and with respect to the effects of U.S. federal, state, local, or other laws to which they may be subject. As used herein, the term `U.S. Holder' means a beneficial owner of shares that is (I) for United States federal income tax purposes a citizen or resident of the United States, (ii) a corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or (iii) an estate or trust the income of which is subject to United States federal income taxation regardless of its source. The summary is based on the Internal Revenue Code of 1986, as amended (the `Code'), judicial decisions, administrative pronouncements, and existing and proposed Treasury regulations, changes to any of which after the date of this Annual Report on Form 20-F could apply on a retroactive basis and affect the tax consequences described herein. Taxation of Dividends For U.S. federal income tax purposes, the gross amount of distributions (including any withholding tax thereon) made by the Company out of its current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be included in the gross income of a direct U.S. Holder as foreign source dividend income on the date of receipt but will not be eligible for the dividends received deduction generally allowed to U.S. corporations. Distributions in excess of the earnings and profits of the Company will be treated, for U.S. federal income tax purposes, first as a nontaxable return of capital to the extent of the U.S. Holder's basis in the shares (thereby increasing the amount of any gain and decreasing the amount of any loss realized on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount of any dividend paid in euro will be equal to the U.S. dollar value of the euro on the date of receipt regardless of whether the U.S. Holder converts the payment into U.S. dollars. Gain or loss, if any, recognized by a U.S. Holder resulting from currency exchange fluctuations during the period from the date the dividend is includable to the date such payment is converted into U.S. dollars and any exchange gain or loss will be ordinary income or loss.
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Foreign Tax Credits U.S. Holders will generally be entitled to claim a credit against their United States federal income tax liability for the amount of Netherlands dividend withholding tax imposed on dividends paid to U.S. Holders. See Netherlands Dividend Withholding Tax.. U.S. Holders who are entitled to the benefits of a reduced rate of Netherlands dividend withholding tax under the U.S. Tax Treaty will be allowed a credit for only the amount of withholding tax provided for under the U.S. Tax Treaty (i.e. 15%). However, the full amount of the dividend, including any withheld amounts in excess of 15%, will be subject to current United States federal income taxation whether or not such Holder obtained a refund of the excess amount withheld. The U.S. Holder is also entitled to a U.S. foreign tax credit for Dutch corporate taxes assessed on the earnings and profits that are distributed. To the extent that Dutch corporate income tax has reduced the accumulated earnings and profits (i.e. the taxes have been paid or at least accrued with an assessment), these taxes accompany the dividend at the same pro-rata percentage as the dividend to the accumulated earnings and profits. The dividend income against which U.S. tax is assessed must be grossed up by the amount of Dutch taxes to be claimed as a credit in order to reverse the effect of the reduction to taxable earnings and profits. The amount of the credit for Netherlands income tax in accordance with the U.S. Tax Treaty will be subject to limitations contained in the foreign tax credit provisions of the Code. In the event the Company pays a dividend to a U.S. Holder out of the earnings of a non-Dutch subsidiary, however, it is possible that under certain circumstances such U.S. Holder would not be entitled to claim a credit for a portion of any Dutch taxes withheld by the Company from such dividend. The portion of Dutch withholding tax that may not be creditable in this instance equals a maximum of 3% of the gross amount of such dividend (or 20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a 15% withholding rate under the U.S. Tax Treaty). This limitation could only potentially apply under circumstances where the Company pays dividends on the shares. Depending on the particular circumstances of the U.S. Holder, dividends accrued from shares will generally be classified, for foreign tax credit purposes, as passive income or financial services income. A U.S. Holder who finds it more advantageous because of such limitations, to claim The Netherlands dividend withholding tax as a deduction instead of a credit may do so, but only for a year for which such Holder does not claim a credit for any foreign taxes. If the U.S.Holder is a U.S .partnership, trust, or estate, any tax credit is available only to the extent that the income derived by such partnership, trusts, or estate is subject to U.S. tax on the income of a resident either in its hands or in the hands of its partners or beneficiaries, as the case may be. Taxation on Sale or Disposition of Shares U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes on the sale or other disposition of shares in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted tax basis in the shares will be equal to the amount paid by the U.S. Holder for such shares. For shares held less than a year, any such gain or loss will generally be treated as short-term gain or loss and taxed as ordinary gain or loss. If the shares have been held for more than a year, any such gain or loss will generally be treated as long-term capital gain or loss. Rates of tax on long-term capital gains vary depending on the holding period. U.S. Holders are advised to consult a competent tax adviser regarding applicable capital gains tax provisions and sourcing of capital gains and losses for foreign tax credit purposes. Gift and Estate Tax An individual U.S. Holder may be subject to U.S. gift and estate taxes on shares in the same manner and to the same extent as on other types of personal property.
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Backup Withholding and Information Reporting Payments in respect of the shares may be subject to information reporting to the U.S. Internal Revenue Service and to a 31% U.S. backup withholding tax. Backup withholding generally will not apply, however, to a Holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such certification on Form W-9 (Request for Taxpayer Identification Number and Certification) and a non-US Holder will provide such certification on Form W-8 (Certificate of Foreign Status). Foreign Personal Holding Companies The Company or any of its non-US subsidiaries may be classified as a `foreign personal holding company' (`FPHC') if in any taxable year five or fewer persons who are U.S. citizens or residents own (directly or constructively after the application of certain attribution rules) more than 50% of the Company's stock (a `US Group') and more than 60% of the gross income of the Company or of any subsidiary consists of passive income for purposes of the FPHC rules. There is a look-through rule for dividends and interest received from related persons. Accordingly, dividends and interest received by the Company from its subsidiaries will be re-characterized based on the income of the subsidiaries. If the Company or any of its subsidiaries is or becomes a FPHC, each U.S.Holder of the Company (including a U.S. corporation) who held stock in the Company on the last day of the taxable year of the Company, or, if earlier, the last day of its taxable year in which a U.S. Group existed with respect to the Company, is required to include in gross income as a dividend such shareholder's pro rata portion of the undistributed FPHC income of the Company or the subsidiary, even if no cash dividend was actually paid. In this case, if the Company is a FPHC, a U.S. Holder is entitled to increase its tax basis in the shares of the Company by the amount of a deemed dividend from the Company. If a subsidiary of the Company is a FPHC, a U.S. Holder in the Company should be afforded similar relief, although the law is unclear as to the form of the relief. Taxes in the Netherlands The following is a general discussion of the tax laws in the Netherlands as they relate to the operations of the Company : Corporate Income Taxes Each subsidiary of ICTS is subject to taxation according to the applicable tax laws with respect to its place of incorporation, residency or operations. ICTS is incorporated under the laws of the Netherlands and is therefore subject to the tax laws of the Netherlands. As of January 1 2002, for Dutch corporate income tax purposes business affiliates should calculate their profits at arms length. Therefore, if in transactions between such affiliates, certain benefits are bestowed on either entity because of such affiliation and if any profits are realized due to such association, then both entities should include such profits as part of their income. Participation exemption In addition, all income of ICTS arising from dividends paid by its subsidiaries or affiliates or capital gains from the sale of its shares in subsidiaries or affiliates is exempt from corporate income tax in the Netherlands if the following conditions are fulfilled: (i) ICTS must hold at least 5% of the nominal paid-in capital of the subsidiary or affiliate, (ii) the subsidiary or affiliate must be an operating company, (iii) the subsidiary or affiliate must be subject to taxation of its profits in its jurisdiction of incorporation or residence and (iv) for non-European Community subsidiaries or
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affiliates or for European Community subsidiaries or affiliates in which ICTS owns less than 25% of the nominal paid-in capital, as well as for larger shareholdings if the EU company is to benefit from the participation exemption, ICTS must not hold the shares in the subsidiary or the affiliate merely as a portfolio investment (which is deemed to be the case if the activities of the subsidiary or affiliate consist mainly of the financing (directly or indirectly) entities related to ICTS or assets of such entities). Furthermore, the participation is denied if 70 percent or more of the assets of any participation would consist of interests in companies which would not be considered qualifying participations if the interests would have been directly held by ICTS. The participation exemption will also be excluded for participations in EU companies with foreign branches if the branches would not have been exempted in case they would have been held directly by ICTS. Consequently, income of ICTS arising from dividends paid by its subsidiaries or affiliates or capital gains from the sale of its shares in its subsidiaries or affiliates may be exempt from corporate income tax in the Netherlands. Limitations on set-off of losses As from 1 January 2004, new rules have been introduced that may affect the carry forward of losses of prior years against profits made in 2004 and subsequent years. Generally, the new rules provide that, if the activities of a company for the entire year entirely or almost entirely (i.e. 90%) consist(ed) for 90% or more of the holding of participations or (in)directly financing related companies, losses resulting from these activities can only be set off against: 1. the profits of years in which the activities of the taxpayer for (almost) the entire year also (almost) entirely consisted of the holding of participations or (in)directly financing of related companies; and 2. the book value of debt claims on related companies less the book value of debts to these companies in (almost) the entire year does not exceed the book value of other comparable debts less the book value of other comparable debts at the end of the year in which the loss was realized. The new rules clarify that the activities of a company will not be deemed to be (almost) entirely consisting of the holding of participations or (in)directly financing related companies if at least 25 employees are engaged in other activities on a full-time basis. The following is a summary of Netherlands tax consequences to a holder of Common Shares who is not, or is not deemed to be, a resident of the Netherlands for purposes of the relevant tax codes (a "non-resident Shareholder") and is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change, possibly on a retroactive basis. The summary does not address taxes imposed by the Netherlands and its political subdivisions, other than the dividend withholding tax, the individual income tax, the corporate income tax, the net wealth tax and the gift and inheritance tax. The discussion does not address the tax consequences under tax laws in any other jurisdiction besides the Netherlands. Netherlands Tax Consequences of Holding Shares The following is a general discussion of the tax laws in the Netherlands as they relate to the holding shares of the Company : Dividend Withholding Tax in the Netherlands ICTS currently does not anticipate paying any dividends in the foreseeable future. To the extent that dividends are distributed by ICTS, such dividends ordinarily would be subject, under the tax laws of the Netherlands, to a withholding tax at a rate of 25%. Dividends include distributions in cash or
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in kind, constructive dividends and redemption and liquidation proceeds in excess of, for the Netherlands tax purposes, recognized paid-in capital. Share dividends are also subject to the Netherlands dividend withholding tax, unless distributed out of the paid-in share premium of ICTS as recognized for tax purposes in the Netherlands. A non-resident Shareholder can be eligible for a reduction or a refund of the Dutch dividend withholding tax under a tax convention which is in effect between the country of residence of the shareholder and the Netherlands. The Netherlands has concluded such conventions with, among others, the United States, most European Community countries, Canada, Switzerland and Japan. Under most of these conventions, a dividend withholding tax in the Netherlands is reduced to a rate of 15% or less. Under the tax convention currently in force between the United States and the Netherlands (the "Treaty"), dividends paid by ICTS to an individual shareholder resident in the United States or a corporate shareholder organized under the laws of the United States or any State or territory thereof entitled to the benefits of the Treaty (each, a "U.S. Treaty Shareholder") are generally eligible for a reduction in the rate of the Netherlands= dividend withholding to 15%, unless such U.S. Treaty Shareholder has a permanent establishment in the Netherlands to which the Common Shares are attributable. Generally, there is no dividend withholding tax applicable in the Netherlands on the sale or disposition of Common Shares to persons other than ICTS or its subsidiaries or affiliates. In case of sale or disposition of common shares to ICTS or any of its subsidiaries, the dividend withholding tax in the Netherlands may apply. However, after January 1, 2001, in limited circumstances, the Dutch dividend withholding tax will not apply to repurchases of shares by ICTS. In addition, in an effort to reduce the practice of dividend stripping to reduce or avoid the applicable taxes, the Dutch tax authorities have introduced new laws to avoid such practices effective retroactively from April 27, 2001. Income Tax and Corporate Income Tax in the Netherlands A non-resident Shareholder will not be subject to income tax and corporate income tax in the Netherlands with respect to dividends distributed by ICTS on the Common Shares or with respect to capital gains derived from the sale or disposal of Common Shares, provided that: (a) the non-resident Shareholder does not carry on a business in the Netherlands through a permanent establishment or a permanent representative to which or to whom the Common Shares are attributable; and (b) the non-resident Shareholder does not have a direct or indirect substantial interest or deemed substantial interest in the share capital of ICTS as defined in the tax code in the Netherlands or, in the event the non-resident Shareholder does have such a substantial interest, such interest forms part of the assets of an enterprise of that non-resident Shareholder; and (c) the non-resident Shareholder is not entitled to a share in the profits of an enterprise effectively managed in the Netherlands, other than through ownership of securities or through employment, to which enterprise the Common Shares are attributable. Generally, a substantial interest in the share capital of ICTS does not exist if the non-resident Shareholder, alone or together with certain close relatives, does not own, directly or indirectly, 5% or more of the issued capital of any class of shares in ICTS, options to acquire 5% or more of the issued capital of any class of shares or certain profit-sharing rights. In case of a substantial interest claims the non-resident Shareholder has on ICTS may belong to such substantial interest. Non-resident Shareholders owning a substantial interest in ICTS may be subject to income tax upon the occurrence of certain events, for example when they cease to own a substantial interest. The above paragraph concerning substantial interest holders refers to tax legislation which became effective January 1, 1997. Special rules may apply to non-resident Shareholders who owned a substantial interest or deemed
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substantial interest under the rules applicable before such dates and to non-resident Shareholders who own a substantial interest or deemed substantial interest as a result of modifications of the special tax regime for substantial interest holders as of such dates. As of January 1, 2001, a non-resident individual taxpayer can opt to be treated like a resident of the Netherlands for tax purposes. This choice will allow the individual to benefit from deductions and other tax benefits only available to residents of the Netherlands. However, in most cases, this choice may not prove beneficial since then the individual will be liable for its worldwide income as well as its entire worldwide holdings to taxes in the Netherlands. Net Wealth Tax in the Netherlands Net wealth tax in the Netherlands was abolished on January 1, 2001. Gift, Inheritance Tax and Transfer Tax Upon Gift or Death in the Netherlands A gift or inheritance of Common Shares from a non-resident Shareholder will not be subject to gift, inheritance tax, and transfer tax upon gift or death in the Netherlands provided that: (a) (i) the Common Shares are not an asset attributable to a resident enterprise or to a permanent establishment or a permanent representative of a non-resident enterprise, as well as the Common Shares are not an asset that comes of a co-entitlement other than being a shareholder, in such an enterprise and (ii) the non-resident Shareholder is not entitled to a share in the profits of an enterprise effectively managed in the Netherlands, other than through ownership of securities or through employment, to which enterprise the Common Shares are attributable. (b) the Common Shares held by the non-resident do not qualify as "fictitious real estate holdings" for Dutch real estate transfer tax purposes. (c) the non-resident Shareholder has not been a resident of the Netherlands at any time during the ten years preceding the time of the gift or death or, in the event he or she has been a resident of the Netherlands in that period, the non-resident Shareholder is not a citizen of the Netherlands at the time of the gift or death; and (d) for purposes of the tax on gifts, the non-resident Shareholder has not been a resident of the Netherlands at any time during the twelve months preceding the time of the gift. (e) the beneficiaries of a deceased non-resident Shareholder have not requested the treatment of the deceased Shareholder as a resident of the Netherlands according to the Dutch inheritance taxes. (f) In case of a grant of the Common Shares by a non-resident Shareholder, the donee has not requested to have the donor treated as a resident of the Netherlands for Dutch gift tax purposes. Documents on display The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, the Company files reports and other information with the United States Securities and Exchange Commission (`SEC'). These materials may be inspected at the Company's office in Amstelveen, The Netherlands.. Documents filed with the SEC may also be read and copied at the SEC's public reference room at Room 1024,
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Judiciary Plaza Building, 450 Fifth Street N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 500 West Madison Street, Suite 1400, Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Subsidiary Information Not applicable  Item 11. Quantitative and Qualitative Disclosure About Market Risk Foreign Currency Exchange Risk - See Item 3 - Risk Factors; See Item 5. Operating and Financial Review and Prospects - Operating results - General; and See Item 10 - Exchange Controls.  Item 12. Description of Securities Other than Equity Securities Not applicable PART II  Item 13. Defaults, Dividend Arrearages and Delinquencies Not applicable  Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable  Item 15. Controls and Procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date within 90 days of the filing date of this Annual Report on Form 20-F, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and are operating in an effective manner. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
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Item 16C. Principal Accountant Fees and Services Auditors' fees for the year 2003 were the following: Audit fees Audit fees $452,544 Other accounting services fees $ 685 Sub total $453,229 Non-Audit services: Tax consultation services $50,527 Tax returns $54,000 Total non-audit services $104,527 Total fees $557,756 PART III Item 17. Financial Statements See Item 18. Item 18. Financial Statements Report of Independent Auditors Consolidated Financial Statements: Consolidated Balance Sheets Consolidated Statements of Operations and Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity. Consolidated of Statements of Cash Flows Notes to Consolidated Financial Statements  Item 19. Exhibits 1. Articles of Association of the Company.* 2. Specimen of the Company's Common Stock.* 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.
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ICTS INTERNATIONAL N.V. 2003 ANNUAL REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [Enlarge/Download Table] Page Report of independent auditors F-2 - F-3 Consolidated financial statements: Consolidated balance sheets F-4 - F-5 Consolidated statements of operations and comprehensive income (loss) F-6 Consolidated statements of changes in shareholders' equity F-7 Consolidated statements of cash flows F-8- F-9 Notes to consolidated financial statements F-10 - F-52
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Kesselman & Kesselman Certified Public Accountants (Isr.) Trade Tower, 25 Hamered Street Tel Aviv 68125 Israel P.O Box 452 Tel Aviv 61003 Telephone +972-3-7954555 Facsimile +972-3-7954556 REPORT OF INDEPENDENT AUDITORS To the Shareholders of ICTS INTERNATIONAL N.V. We have audited the accompanying consolidated balance sheets of ICTS International N.V. (the "Company") and its subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive income, changes in shareholders'equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company' board of directors and management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain subsidiaries, whose assets included in consolidation, constitute approximately 2% of total consolidated assets as of December 2002, and whose revenues included in consolidation constitute approximately 0.3% and 14% of total consolidated revenues for the years ended December 31, 2002 and 2001 respectively. We did not audit the financial statements of certain associated companies, the Company's investment in which, as reflected in the balance sheets as of December 31, 2003 and 2002 is $4 million and $9.6 million, respectively, and the Company's share in excess of losses over profits of which is a net amount of $1.7 million, $1.6 and $0.39 million in 2003, 2002 and 2001, respectively. The financial statements of the above subsidiaries and associated companies were audited by other independent auditors, whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for those companies, is based on the reports of the other independent auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United State) and auditing standards generally accepted in Israel, including those prescribed by the Israeli auditors (Mode of performance) Regulations, 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's Supervisory board of directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits and reports of the other independent auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other independent auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and comprehensive income, the changes in their shareholders' equity and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. F-2
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Without qualifying our opinion, we draw attention to Note 14b(3), regarding a dispute between the company's subsidiary in the U.S.A. and the Transportation Security Administration ("TSA"), with respect to the basis of calculation of payments for security services rendered in 2002, in respect of which, the TSA might be claiming refund of material amounts. As discussed in note 2g to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill to conform with FASB Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets". Tel Aviv, Israel Kesselman & Kesselman July 13, 2004 Certified Public Accountants (Isr.) F-3
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ICTS INTERNATIONAL N.V. CONSOLIDATED BALANCE SHEETS (US $ in thousands, except share data) December 31, 2003 2002 A s s e t s CURRENT ASSETS: Cash and cash equivalents (note 2c) $7,660 $32,465 Restricted cash and short term investments (note 3) 3,114 13,083 Accounts receivable - trade 13,798 15,628 Short-term loan to a related party (note 19c) 3,738 Prepaid expenses 1,323 1,108 Deferred income taxes (note 16b) 385 5,409 Other current assets 4,583 1,804 _______ _______ T o t a l current assets 30,863 73,235 _______ _______ INVESTMENTS: Investments in associated companies (note 5) 5,308 9,919 Other investments (note 6) 16,287 9,558 Deferred income taxes (note 16b) 33 28 _______ _______ 21,628 19,505 _______ _______ PROPERTY AND EQUIPMENT (note 7): Cost 30,629 32,408 Less - accumulated depreciation and amortization 6,666 2,991 _______ _______ 23,963 29,417 _______ _______ GOODWILL (note 8) 314 1,167 _______ _______ OTHER ASSETS , net of accumulated amortization (note 9) 7,732 2,120 _______ _______ T o t a l assets $84,500 $125,444 _______ _______ _______ _______ F-4
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December 31, 2003 2002 Liabilities and shareholders' equity CURRENT LIABILITIES: Short-term bank credit (note 10) $4,387 $8,651 Current maturities of long-term liabilities (note 12) 2,752 2,097 Accounts payable - trade 964 975 Liabilities for losses of associated companies (note 5) 2,130 Accrued expenses and other liabilities (note 11) 17,865 46,585 _______ _______ Total current liabilities 28,098 58,308 _______ _______ LONG-TERM LIABILITIES: Accrued severance pay (note 13) 90 78 Deferred income taxes (note 16b) 19 Long-term liabilities, net of current maturities (note 12) 9,332 5,680 _______ _______ T o t a l long-term liabilities 9,441 5,758 _______ _______ COMMITMENTS AND CONTINGENT LIABILITIES (note 14) _______ _______ T o t a l liabilities 37,539 64,066 _______ _______ SHAREHOLDERS' EQUITY: Share capital - shares of common stock, par value 0.45 Euro, December 31, 2003 and 2002: Authorized - 17,000,000 shares; issued and outstanding - 6,672,980 shares. 3,605 3,605 Additional paid-in capital 19,670 19,670 Retained earnings 30,612 49,516 Accumulated other comprehensive loss (5,947) (10,434) _______ _______ 47,940 62,357 Treasury stock at cost - December 31, 2003 and 2002-159,880 shares (979) (979) _______ _______ Total shareholders' equity 46,961 61,378 _______ _______ Total liabilities and shareholders' equity $84,500 $125,444 _______ _______ _______ _______ The accompanying notes are an integral part of the consolidated financial statements. F-5
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ICTS INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (US $ in thousands, except per share data) Year ended December 31, 2003 2002 2001 REVENUES (note 1b,c) $71,571 $279,931 $212,137 COST OF REVENUES 57,562 214,054 189,925 _______ _______ _______ GROSS PROFIT 14,009 65,877 22,212 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,216 25,636 19,461 IMPAIRMENT OF ASSETS (notes 7,8,9) 14,352 9,156 CONTRACT SETTLEMENT EXPENSES (note 5a(3)) 9,559 _______ _______ _______ OPERATING INCOME (LOSS) ( 9,559) 31,085 2,751 INTEREST INCOME 2,248 2,072 1,649 INTEREST EXPENSE (1,222) (1,678) (1,637) EXCHANGE DIFFERENCES (242) 2,356 1,965 OTHER INCOME (EXPENSES), net (note 15) (353) 41,229 29,520 _______ _______ _______ INCOME (LOSS) BEFORE TAXES ON INCOME ( 9,128) 75,064 34,248 TAXES ON INCOME (note 16) 3,115 16,442 4,919 _______ _______ _______ INCOME (LOSS) FROM OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES (12,243) 58,622 29,329 SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (note 5) (6,661) (1,807) (395) MINORITY INTERESTS IN PROFITS OF SUBSIDIARIES - net (2,736) _______ _______ _______ NET INCOME (LOSS) FOR THE YEAR $(18,904) $56,815 $26,198 _______ _______ _______ OTHER COMPREHENSIVE INCOME (LOSS): Translation adjustments 3,456 710 (1,811) Unrealized gains (losses) on marketable securities 794 731 (345) Reclassification adjustment for losses for available for sale securities included in net income 237 (771) 368 _______ _______ _______ 4,487 670 (1,788) _______ _______ _______ TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR $(14,417) $57,485 $24,410 _______ _______ _______ _______ _______ _______ EARNINGS (LOSSES) PER SHARE (note 20): Basic $(2.90) $8.85 $4.18 _______ _______ _______ _______ _______ _______ Diluted $(2.90) $8.80 $4.09 _______ _______ _______ _______ _______ _______ The accompanying notes are an integral part of the consolidated financial statements. F-6
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ICTS INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (US $ in thousands, except share data) Shares of common Accumulated stock Additional Other other Number paid-in capital Retained comprehensive Treasury of shares Amount capital surplus earnings loss stock Total BALANCE AT JANUARY 1, 2001 6,248,869 $3,565 $19,102 $45 $14,824 $(9,316) $(1,775) $26,445 CHANGES DURING 2001: Stock options exercised 69,100 27 435 462 _______ Cost of acquisition of treasury (18,902) (132) (132) stock _______ Stock options exercised from treasury Stock 33,333 (20) 187 167 _______ Dividend (14,092) (14,092) _______ Comprehensive income: Net income 26,198 26,198 Other comprehensive income (loss): Translation adjustments (1,811) (1,811) Unrealized gains on marketable Securities 23 23 _______ Total comprehensive income 24,410 ________ _______ _______ _______ _______ _______ _______ _______ BALANCE AT DECEMBER 31, 2001 6,332,400 13,592 19,537 25 26,930 * (11,104) (1,720) $37,260 ________ _______ _______ _______ _______ _______ _______ _______ CHANGES DURING 2002: Stock options exercised 32,400 13 133 146 _______ Cost of acquisition of treasury (120,000) (907) (907) stock ___ Options issued to consultants 29 29 (note 21) _____ Stock options exercised from treasury Stock 268,300 (54) (36) 1,648 1,558 ______ Dividend (34,193) (34,193) _______ Comprehensive income: Net income 56,815 56,815 Other comprehensive income (loss): Translation adjustments 710 710 Unrealized losses on marketable Securities (40) (40) _______ Total comprehensive income 57,485 ________ _______ _______ _______ _______ _______ _______ _______ BALANCE AT DECEMBER 31, 2002 6,513,100 3,605 19,670 -- 49,516 * (10,434) (979) $61,378 ________ _______ _______ _______ _______ _______ _______ _______ CHANGES DURING 2003: Comprehensive loss: Loss (18,904) (18,904) Other comprehensive income: Translation adjustments 3,456 3,456 Unrealized gains on marketable Securities 1,031 1,031 ______ Total comprehensive loss (14,417) ________ _______ _______ _______ _______ _______ _______ _______ BALANCE AT DECEMBER 31, 2003 6,513,100 $3,605 $19,670 -- $30,612 $*(5,947) $(979) $46,961 ________ _______ _______ _______ _______ _______ _______ _______ * Composed as follows: December 31, 2003 2002 2001 Cumulative translation adjustments $(6,677) $(10,133) $(10,843) Cumulative unrealized gains (losses) on marketable securities 730 (301) (261) _______ _______ _______ $(5,947) $(10,434) $(11,104) _______ _______ _______ The accompanying notes are an integral part of the consolidated financial statements. F-7
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(Continued) - 1 ICTS INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (US $ in thousands) Year ended December 31, 2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) for the year $(18,904) $56,815 $26,198 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization. 3,417 1,481 2,105 Impairment of assets 14,352 9,156 Loss on contract settlement 5,266 Deferred income taxes 5,047 (4,273) (84) Increase (decrease) in accrued severance pay 6 (9) 8 Options to service providers and consultants 29 Capital loss (gain) on fixed assets 6 (3) 550 Gain on sale of the investment in ICTS Europe (42,797) (34,260) Realized loss (gain) on sale of other investments (108) (1,232) Unrealized profit on sale of APS (468) Realized loss (gain) on marketable securities (737) 89 780 Revaluation of short term deposits (33) Write off of loans 334 Write off of Investments and impairment of investment 400 1,672 4,489 Minority interests 2,736 Share in losses of associated companies 6,661 2,036 395 Interest from other long-term investments (derivative) (31) (52) Interest on a loan to associated company (100) Changes in operating assets and liabilities: Accounts receivable 2,097 8,784 (13,768) Other current assets and prepaid expenses (2,436) 469 (1,248) Accounts payable (44) 139 1,441 Accrued expenses and other liabilities (28,852) 28,230 13,011 ______ ______ ______ Net cash provided by (used in) operating activities (19,118) 61,625 987 ______ ______ ______ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and construction of entertainment projects (7,895) (20,346) (1,564) Acquisitions of subsidiaries and operations (a) (711) (1,273) Associated companies - acquisition of shares and granting of loans (2,109) (8,448) (3,524) Acquisition of the 20% minority share in subsidiary (1,900) Other investments (5,202) (9,050) (2,100) Proceeds from sale of equipment 92 508 557 Proceeds from sale of investment in ICTS Europe, net 49,387 38,420 Cash in subsidiary excluded from consolidation (7,388) Proceeds from sale of associated company 2,000 Proceeds from sale of other investments 1,000 1,458 79 Long term loans granted to a related party (1,500) (2,219) Repayment of long term loans granted to related parties 3,700 Decrease (increase) of time deposits and restricted cash 4,735 (8,154) Purchase of marketable securities available for sale (3,309) (1,235) Proceeds from sale of marketable securities available for sale 3,726 318 388 Proceeds from sale of short-term investments 7 2,031 Decrease (increase) in other assets (579) 78 (19) ______ ______ ______ Net cash provided by (used in) investing activities (3,243) (324) 23,526 ______ ______ ______ CASH FLOWS FROM FINANCING ACTIVITIES: Stock options exercised 1,704 629 Cost of acquisition of treasury stock (907) (132) Dividend paid (34,193) (14,092) Long-term loan received 4,113 51,078 Repayments of long-term liabilities (2,266) (16,249) (51,282) Net increase (decrease) in short-term bank credit (4,270) 3,587 3,287 ______ ______ ______ Net cash used in financing activities (2,423) (46,058) (10,512) ______ ______ ______ EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (21) (192) (2,893) ______ ______ ______ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,805) 15,051 11,108 BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 32,465 17,414 6,306 ______ ______ ______ BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR $7,660 $32,465 $17,414 ______ ______ ______ ______ ______ ______ F-8
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ICTS INTERNATIONAL N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (US $ in thousands) Year ended December 31, 2003 2002 2001 SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES: Cash paid during the year for: Interest $578 $906 $1,199 _______ ______ ______ Taxes on income $5,679 $19,876 $2,548 _______ _______ _______ SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Investment in Subsidiary (note 4b) $589 _______ Purchase of equipment (note 7d) $8,500 _______ Year ended December 31, 2003 2002 (a) Acquisitions of subsidiaries and operations (see notes 4 and 5a(3)): Assets and liabilities of the subsidiaries and operations acquired at date of acquisition, net of cash acquired: Working capital, excluding cash and cash equivalents $410 Property, equipment and investments $163 183 Intangible assets 5,266 2,701 Accrued severance pay (3) _______ _______ 5,429 3,291 Goodwill 1,181 Less: Carrying amount of investments in those companies prior to consolidation (2,610) Long term liabilities - issuance of notes (1,176) Loan, including interest thereon, which was granted in the past and waived (3,542) _______ _______ 711 1,862 Less- non-cash investment 589 _______ _______ $711 $1,273 The accompanying notes are an integral part of the consolidated financial statements. F-9
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NOTE 1 - GENERAL a. Operations ICTS International N.V., including its subsidiaries (collectively referred to herein as "ICTS" or "the Company"), is a provider of aviation security and other aviation related services. ICTS also engages in certain other activities, including constructing and developing entertainment related projects, and leasing of equipment. As mentioned in b. below, in 2002 the Company derived a substantial portion of its revenues from providing aviation security services to the Transportation Security Administration ("TSA"). Commencing November 2002 the Company ceased providing such services to the TSA but continues to provide such services to aviation companies and others. As to Segment Information see note 18. b. Effect of the events of September 11, 2001 and Aviation and Transportation Security Act On November 19, 2001, as a result of the events of September 11, 2001, the Aviation and Transportation Security Act was signed into law. The Aviation and Transportation Security Act made airport security including security screening operations for passenger air transportation and intrastate air transportation a direct responsibility of the Federal government as administered by the TSA. As a result, in accordance with a contract signed with the TSA ("TSA Contract"), the Company has provided screening services in its airport locations during the transition period through November 2002, when all such activities were transferred to the TSA. Through December 31, 2002, the Company has recorded revenues of approximately $205 million from the TSA. As a result of the foregoing the Company closed certain locations and dismissed part of its employees. Closure and severance expenses in the amount of $27.3 million were included in operating expenses of 2002. As to the dispute with the TSA, see note 14b(3). During 2003, the Department of Labor in the US ("DOL") finalized its audit of the Company's subsidiary concerning the pay rates used to compensate employees for services rendered pursuant to the TSA Contract. The DOL concluded that in certain instances, employees had not been paid the correct base rate, fringe benefits, vacation and holiday pay by the subsidiary. As of December 31, 2003 a liability relating to the audit of approximately $7.2 million was recorded in the consolidated financial statements. The TSA Contract indicates that the Company will receive notification in writing at least 30 calendar days in advance of a location transition. Under the provisions of the Worker Adjustment and Retraining Notification Act (the "WARN Act"), the Company is required to give 60 days written notification to its employees of an involuntary termination. At December 31, 2002 and throughout most of fiscal 2003, management estimated the Company's liability under the WARN Act to approximate $18.9 million, which had been F-10
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NOTE 1 - GENERAL (continued) recorded by the Company in cost of revenues in 2002. However, during the fourth quarter of fiscal 2003, the Company obtained a legal letter from an outside counsel indicating that the Company may have meritorious defenses against the payment of a substantial portion of the recorded accrual. Based on the points noted in the legal letter and given the fact that no claims have been filed to date by former employees seeking compensation under the WARN Act provisions, the Company reviewed its original estimate and reduced the estimated liability to approximately $1.1 million at December 31, 2003 by recording a credit to cost of revenues in 2003 of approximately $17.8 million. The Company is still pursuing an exemption from the U.S. Federal government for all or a portion of the liability under the WARN Act; however, at December 31, 2003, no exemption has been received nor has the Company obtained an opinion from its legal counsel that such an exemption is probable. As to the other outstanding issues, see note 14b(3). c. Sale of ICTS Europe Holding B.V. ("ICTS Europe"): 1) On October 5, 2000, the Company entered into a share purchase agreement (the "Share Purchase Agreement") with Fraport AG ("Fraport"), whereby Fraport was to acquire, in two stages of 45% and 55% in 2001 and 2002, respectively, the shares of ICTS Europe. As a result of the sale, the Company has fully divested itself of its European operations except for the operations of the Company's subsidiary in the Netherlands and countries that were formerly part of the Soviet Union republics, including Russia, and Kazakhstan, and took upon certain restrictions on its operations, see note14c. The capital gains on these sales, net of transaction expenses, were approximately $42 million and $34 million, and were included among "other income" in the first quarters of 2002 and 2001, respectively. As a result of the sale, as above, and under its provisions, ICTS could no longer exercise control over ICTS Europe. Therefore, as of December 31, 2001 ICTS Europe's assets and liabilities were excluded from consolidation; however, the 2001 consolidated results of operations include the results of ICTS Europe through December 31, 2001. 2) The following table presents the operating data of ICTS Europe included in the financial statements: Year ended December 31, ----------------------- 2001 Revenues 113,088 _______ Gross profit 13,253 _______ Operating income 8,418 _______ Net income 4,166 _______ F-11
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NOTE 1 - GENERAL (continued) d. Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with U.S. GAAP (as defined herein) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the USA ("U.S. GAAP"). The significant accounting policies are as follows: a. Functional and reporting currency The accompanying financial statements have been prepared in U.S. dollars ("dollars" or "$"). As of January 1, 2002, subsequent to the sale of the Company's European activities, (see note 1c), substantially all of the revenues of ICTS and its U.S. operations are received, and substantially all of its operating costs are incurred in dollars. Therefore, the functional currency of ICTS and its U.S. operations is the dollar (prior to January 1, 2002 the Dutch Guilder was the functional currency of the Company). The financial statements of subsidiaries whose functional currency is not the dollar are translated into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("FAS") No. 52 of the Financial Accounting Standards Board of the USA ("FASB). Assets and liabilities are translated from the local currencies to dollars at year-end exchange rates. Income and expense items are translated at average exchange rates during the year. Gains or losses resulting from translation are included as a separate component of other comprehensive income (loss). Cumulative translation adjustments are reflected as a separate component of shareholders' equity, under other comprehensive income (loss). Until December 31, 2001, the functional currency of ICTS and its subsidiaries was the local currency in which the entity operated. The financial statements of ICTS and its subsidiaries, in which the dollar was not their functional currency, were translated into dollars in accordance with the principles set forth in FAS 52. The Company accounted for the change of the functional currency prospectively as from January 1, 2002. F-12
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) b. Principles of consolidation The consolidated financial statements include the accounts of ICTS and its over 50% controlled subsidiaries. Significant intercompany accounts and transactions have been eliminated. Profits from intercompany transactions, not yet realized outside the Company, have also been eliminated. c. Cash equivalents The Company considers all highly liquid investments, which include short-term bank deposits (up to three months from date of deposit) that are not restricted as to withdrawal or use, to be cash equivalents. d. Marketable securities and other investments: 1) Marketable securities The Company classifies its existing marketable securities in accordance with the provisions of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities", as available-for-sale. Securities classified as available-for-sale are reported at fair value (which is is determined based upon the quoted market prices) with unrealized gains and losses, net of related tax, recorded as a separate component of accumulated other comprehensive income (loss) in shareholders' equity until realized. Gains and losses on securities sold are included in interest income. For all investment securities, unrealized losses that are other than temporary are recognized in the income statement. The Company does not hold these securities for speculative or trading purposes. See also note 6b and 6c. 2) Other investments Investments in less than 20%-owned, privately-held companies in which the Company does not have the ability to exercise significant influence are stated at cost. The Company's management evaluates its investments from time to time and, if necessary, recognizes losses for other than temporary declines in the value of these investments. e. Investments in associated companies Investments in companies in which the Company holds a 20% interest or more or in which it has the ability to exercise significant influence, provided it does not have control, are accounted for by the equity method F-13
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) f. Property and equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the assets. The estimated useful life used in determining depreciation and amortization is as follows: Years Equipment leased out 8-15 Equipment and facilities 3-16 (mainly 15) Vehicles 3-7 Office furniture and equipment 3-14 Leasehold improvements are amortized by the straight-line method over the period of the lease or the estimated useful life of the improvements, whichever is shorter (3-5 years). g. Goodwill On January 1, 2002, the Company adopted FAS No. 142, "Goodwill and Other Intangible Assets". Pursuant to FAS 142 goodwill is no longer amortized but rather tested for impairment at least annually. Prior to January 1, 2002 goodwill was amortized by the straight-line method over the period of 20 years, see also note 8b. The Company identified its various reporting units, which consist of its operating segments. The Company has utilized expected future discounted cash flows to determine the fair value of the reporting units and whether any impairment of goodwill existed as of the date of adoption. The Company has selected December 31 of each year as the date on which it will perform its annual goodwill impairment test. As of December 31, 2003 goodwill of $797 relating to the other operating segment was written off (see note 4b). In addition to the annual impairment test and as a result of the imposed transfer of the aviation security operations to the TSA in November 2002 (see note 1b), the Company performed interim impairment tests, based on expected cash flows from the TSA Contract, on the goodwill relating to its U.S.A reporting unit. The interim impairment test performed as of September 30, 2002 resulted in an impairment and the company wrote off the balance of the goodwill in an amount of $8,484 in 2002. h. Other assets and Intangible assets The intangible asset pertaining to customer relationships is being amortized over 10 years. Technology is being amortized over 3 years and presented net of write down in value. See note 9. As to know-how acquired in December 2003 see notes 5a(3) and 9. F-14
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) i. Impairment in value of long-lived assets The Company has adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective January 1, 2002. FAS 144 requires that long-lived assets, held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be written down to their estimated fair values. j. Treasury stock The treasury stock was acquired by the Company for issuance upon the exercise of options issued under the employee option plan. The treasury stock is presented as a reduction of shareholders' equity, at its cost. Gains on the sale of these shares, net of losses and of the related tax, are recorded under "other capital surplus". k. Revenue recognition Revenue from services is recognized when services are rendered to the Company's customers, based on terms contained in a contractual arrangement, provided the fee is fixed and determinable, the services have been rendered, and collection of the related receivable is reasonably assured. Revenue from leased equipment is recognized ratably over the lease term. l. Earnings (losses) per share ("EPS"): 1) Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each year, net of treasury stock. 2) Diluted EPS is computed by dividing net income (loss) by the weighted average number of shares outstanding during the year, net of treasury stock, taking into account the potential dilution that could occur upon the exercise of options granted under stock options plan, using the treasury stock method. m. Deferred income taxes Deferred income taxes are created for temporary differences between the assets and liabilities as measured in the financial statements and for tax purposes. Deferred taxes are computed using the enacted tax rates expected to be in effect when these differences reverse. Measurement of deferred tax liabilities and assets is based on provisions of the tax laws, and deferred tax assets are reduced, if necessary, by the amount of tax benefits the realization of which is not considered likely, based on available evidence. F-15
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred tax liabilities and assets are classified as current or non-current, based on the classification of the related asset or liability for financial reporting purposes, or according to the expected reversal date of the specific temporary differences, if not related to an asset or liability for financial reporting purposes. Deferred taxes in respect of disposal of investments in subsidiaries and associated companies have not been taken into account in computing the deferred taxes, since, under the laws of The Netherlands, such disposal of investments is tax exempt. n. Concentrations of credit risks - allowance for doubtful accounts The Company and its subsidiaries operate mostly in the aviation industry. The Company renders services to a large number of airline companies to which it provides credit, with no collateral. Due to the slow-down in the aviation industry, (see also note 1b), some airline companies may have difficulties in meeting their financial obligations. This could have a material adverse effect on the Company's business. The Company and its subsidiaries regularly review the credit worthiness of their customers and determine the credit line, if any. The allowance for doubtful accounts is determined for specific debts doubtful of collection. The bad debts expenses (collection) were $(264), $5,297 and $684 in 2003, 2002, and 2001 respectively. o. Advertising costs These costs are expensed as incurred. Advertising costs in, 2003 were $552 (in 2002 and 2001 there were no advertising costs). p. Stock based compensation: 1) Employee stock based compensation The Company accounts for employee stock based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Under APB 25 compensation cost for employee stock option plans is measured using the intrinsic value based method of accounting, and is amortized by the straight-line method against income, over the expected service period. FAS 123, "Accounting for Stock-Based Compensation", establishes a fair value based method of accounting for employee stock options or similar equity instruments, and encourages adoption of such method for stock compensation plans. However, it also allows companies to continue accounting for those plans according to the accounting treatment prescribed by APB 25. The Company has elected to continue accounting for employee stock option plans under APB 25, and has accordingly complied with the disclosure requirements set forth in FAS 123 and amended by FAS 148 for companies electing to apply APB 25. F-16
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) The following table illustrates the effect on net income and earnings per share assuming the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation: Year ended December 31, 2003 2002 2001 in thousands ---------------------------------------- (except per share data) Net income as reported $(18,904) $56,815 $26,198 Add: stock based employee compensation expenses, included in reported net income - - - Deduct: stock based employee compensation expenses determined under fair value method for all awards (27) (493) (809) _______ _______ _______ Pro-forma net income $(18,931) $56,322 $25,389 _______ _______ _______ Earnings (losses) per share: Basic - as reported (2.90) 8.85 4.18 _______ _______ _______ Basic - pro-forma (2.91) 8.77 4.05 _______ _______ _______ Diluted - as reported (2.90) 8.80 4.09 _______ _______ _______ Diluted - pro-forma (2.91) 8.73 3.96 _______ _______ _______ 2) Non-employee stock based compensation The Company accounts for options granted to non-employees in exchange for services received, using the fair value based method of accounting as prescribed by FAS 123, based on the fair value of the options granted. q. Comprehensive Income (loss) In addition to net income, other comprehensive income (loss) includes unrealized gains and losses on available-for-sale securities and currency translation adjustments of non-dollar currency financial statements of investee companies. r. Costs Associated with Exit or Disposal Activities In June 2002, the FASB issued Statement on Financial Accounting Standards No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 provides guidance on the financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The Company's adoption of SFAS 146 during the current fiscal year did not have a material impact on the Company's financial statements as no new restructuring activity has occurred since the Company's adoption of SFAS 146. F-17
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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) s. Recently issued accounting pronouncements 1) In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a revision of FASB Statement No. 132 ("FAS 132 (revised 2003)")". This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The new rules require additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. Part of the new disclosures provisions are effective for 2003 calendar year-end financial statements, and accordingly have been applied by the company in these consolidated financial statements. The rest of the provisions of this Statement, which have a later effective date, are currently being evaluated by the company. 2) In May 2003, the FASB issued FAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise (except for certain instruments) is effective at the beginning of the first interim period beginning after June 15, 2003. Effective July 1, 2003, the Company adopted FAS 150. The adoption of FAS 150 did not have a material effect on the company's financial position or results of operations. 3) In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). Under FIN 46, entities are separated into two categories: (1) those for which voting interests are used to determine consolidation (this is the most common classification) and (2) those for which variable interests are used to determine consolidation. FIN 46 explains how to identify Variable Interest Entities ("VIE"s) and how to determine when a public company should include the assets, liabilities, non-controlling interests, and results of activities of a VIE in its consolidated financial statements. Since issuing FIN 46, the FASB has proposed various amendments to the interpretation and has deferred its effective dates. Most recently, in December 2003, the FASB issued a revised version of FIN 46 (FIN 46-R), which also provides for a partial deferral of FIN 46. This partial deferral established the effective dates for the application of FIN 46 and FIN 46-R based on the nature of the VIE and the date upon which the public company became involved with the VIE. In general, the deferral provides that (i) for VIEs created before February 1, 2003, a public company must apply FIN 46-R at the end of the first interim or F-18
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annual period ending after March 15, 2004, and may be required to apply FIN 46 at the end of the first interim or annual period ending after December 15, 2003, if the VIE is a special purpose entity, and (ii) for VIEs created after January 31, 2003, a public company must apply FIN 46 at the end of the first interim or annual period ending after December 15, 2003, as previously required, and then apply FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. As of December 31, 2003 the company has no variable interests in any VIE. Accordingly, while there can be no assurance that it will not have variable interests in one or more VIEs in the future, the company believes that the adoption of FIN 46 and FIN 46-R will not have material impact on its financial position, results of operations and cash flows. v. Reclassification Certain comparative figures have been reclassified to conform to the current year presentation. NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS December 31, 2003 2002 Time deposits and restricted cash * $3,088 $10,337 Marketable securities - available for sale 26 2,746 ______ ______ $3,114 $13,083 ______ ______ ______ ______ Gross unrealized gains (losses) resulting from their presentation at market value $1 $(237) ______ ______ ______ ______ * As of December 31, 2003, dollar denominated deposits bearing interest mainly at 3.7%. F-19
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NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES: a. In September 2002, ICTS increased its percentage interest in Procheck International B.V. ("PI") to 100% for a cash consideration of $2,845. PI provides security services in The Netherlands at Schiphol Airport Amsterdam. The purchase price exceeded the acquired share of the fair market value of the identified net assets of PI by approximately $1,879, which was allocated to the contract with Schiphol Airport. This intangible asset is amortized by the straight line method, over its estimated useful life, which is estimated as 10 years. PI is fully consolidated as from September 30, 2002. b. In July 1, 2002, ICTS increased its percentage interest in Demco Consultants Ltd. ("Demco") from 37% to 67% for cash consideration of $410. As part of the above transaction, ICTS has been granted a 13 months option commencing July 1, 2003 to purchase the remaining 33% equity from the minority shareholders in Demco for $589, and the Company has granted to the minority shareholders an option to sell the same equity to the company for $533. As a result, the Company had fully consolidated Demco as of July, 2002, and recorded a liability to the minority in the amount of $589. The purchase price exceeded the fair market value of the tangible net assets of Demco by approximately $440, which was allocated to goodwill. The goodwill was attributed to "other operations segment". Demco provides services for planning, organization and establishment of large scale national systems infrastructures designed to assist local governments with the operations, control and the proper decision making during national or local emergencies. During 2003 the minority shareholder exercised its put option. The balance of the liability (in excess of the final cost of the option that was exercised) was written off against the goodwill that was recorded in 2002, at the time the exercise was recorded. At the end of the third quarter of 2003, as it turned out that Demco will not be able to realize its business plans, the company tested Demco's goodwill for impairment and wrote off the balance of this goodwill of $797. C. Information regarding first time consolidation of PI and Demco The following table presents the pro forma results of operations for 2001 and 2002 as if the acquisitions of control in PI and Demco had occurred on the first day of the periods presented: Year ended December 31, --------------------------------- 2002 2001 Revenues $285,895 $217,571 _______ _______ _______ _______ Gross profit $67,652 $24,156 _______ _______ _______ _______ Operating income $34,257 $4,718 _______ _______ _______ _______ Net income $58,427 $27,069 _______ _______ F-20
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NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued): c. As to the sale of the European holdings operations, see note 1c. d. In April 2001, ICTS entered into an agreement with the minority shareholders of AMS Ltd. ("AMS"), for the exchange of its shareholding in AMS (51%), for shares held by AMS, which primarily included its 33% shareholding in APS B.V. The exchange was recorded at fair value and as a result, ICTS recognized capital gain of $980. In November 2001, ICTS sold its acquired interests in APS (as above) to PI for a cash consideration of $2,000. As a result of this transaction ICTS recognized a capital gain of $237 (representing the part of the gain realized from the sale to the minority of PI). e. On January 10, 2001, the Company exercised its option to purchase the remaining 20% of the shares of common stock of Huntleigh USA Corporation ("Huntleigh"), a company based in St. Louis, Missouri, for $1,900. The purchase price exceeded the fair market value of the acquired share in the identified net assets of Huntleigh by approximately $2,229, which was allocated to goodwill. As to the changes relating to Huntleigh's operations as a result of the events of September 11, and the Aviation and Transportation Security Act, see note 1b. As to the impairment and write off of goodwill assigned to the U.S. operations- see note 2g. NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES a. Composed and presented as follows: December 31, 2003 2002 Investment in Pioneer (1) $1,725 $1,765 Investment in 35.7% interest of InkSure Technologies Inc. (2) 3,583 4,926 Investment in 10% interest in ITA-International Tourist Attraction Ltd. (3) - 3,184 Investment in 40% interest in Ramasso Holding B.V. (4) (1,137) Investment in 50% interest in ICTS-NAS (5) (993) 44 ______ ______ $3,178 $9,919 ______ ______ The investment is presented in the balance sheets as follows: Among investments 5,308 9,919 Among current liabilities (2,130) ______ ______ $3,178 $9,919 ______ ______ ______ ______ F-21
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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued) (1) Investment in Pioneer - Composed as follows: December 31, 2003 2002 Shares (14.2%) (a) $356 $496 Subordinated debentures (b) 1,369 1,269 _______ _______ $1,725 $1,765 _______ _______ _______ _______ (a) In 1998, ICTS acquired 5.4% interest in Pioneer. In 2002 the Company acquired in private placement offerings additional shares (representing 8.8% shareholding). After these transactions the Company holds approximately 14.2% of the outstanding shares of Pioneer (443,250 shares). The excess of costs of these investments over the acquired share in Pioneer's net assets of $766 was attributed to goodwill. In addition, Pioneer granted to the Company a 5 year warrant (commencing February 2002) to purchase 13,000 shares at a price of $2.25 per share and a 3 year warrant (commencing January 2003) to purchase 5,883 shares at a price of $1.00 per share. Following the 2002 acquisition ICTS has determined that it had obtained significant influence, and as a result changed its method of accounting for this investment to the equity method. Prior years figures have been retroactively adjusted. Effective February 20, 2003, Pioneer's shares are no longer listed on the NASD Electronic Bulletin Board stock market and the company is no longer a reporting company under the Securities Exchange Act of 1934. (b) In January 2000, ICTS acquired a $1,000 non-marketable debenture of Pioneer, bearing interest at the rate of 10% per annum. The debenture is due in November 2004, and its repayment is guaranteed by Leedan International Holdings B.V a subsidiary of Leedan Business Enterprise Ltd. (hereafter - "Leedan" - a company controlled by the company's shareholders). As of December 31, 2003 the loan includes an accrued interest of $369 (2002 - $269). Due to legal procedures and based on the opinion of its legal advisors, management estimates that Pioneer will be able to repay the debenture, however, not before the procedures are finalized, therefore the amount is classified among long term assets. (2) During the period from April to September 2002, ICTS purchased 4,106,895 shares, which represent 34.3% of InkSure Technologies Inc. ("Inksure") for a consideration of $5,986. The purchase price exceeded the fair market value of the net assets of Inksure by approximately $3,881, of which $660 was allocated to in process R&D and was expensed immediately (this amount was included in "share in losses of associated companies, net"). And the remaining $3,221 was attributed to technology purchased and is being amortized using the straight-line method over 7 years. F-22
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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued) As a result of a reverse merger with a non-operating public shell corporation, performed by Inksure in October 2002, the company became the shareholder of the merged quoted company (which changed its name to Inksure Technologies Inc). In July 2003, ICTS purchased another 174,542 shares for a consideration of $192. The amount exceeding the fair value of the tangible net assets was attributed to technology purchased and is to be amortized using the straight-line method over 5.75 years (the remaining life of the technology purchased in 2002). The market value of the shares (35.7%) as of December 31, 2003 was $4,494. (3) In December 2000, the Company exercised an option to purchase a total of 10% interest of ITA (a company under the control of one of ICTS's shareholders). Comprised as follows: December 31, 2003 2002 Investment in 10% of the shares (a) $184 Loan (b) 3,000 ______ ______ $- $3,184 ______ ______ In December 2003 the Company signed an agreement to buy the activities and fixed assets ($163) of ITA. The Company paid a total amount of approximately $5.4 million by waiving the $3,000 loan and $542 accrued interest, issuing a deferred note of $546 and a promissory note of $685 and by paying $711 in cash to ITA. As to the terms of these notes - see note 12. The purchase price was based on fairness opinion that was based on free cash generated from future projects of ITA, in which ICTS planned to invest. Through the date of acquisition the free cash of ITA was derived mainly from ICTS under an agreement between ICTS and ITA, which was cancelled in the acquisition agreement mentioned above (see note 19g). The amount exceeding the fair value of the net tangible assets was attributed to know-how. Subsequent to December 31, 2003, as a result of the poor results of the entertainment projects (see note 7e) and their impairment, management resolved to cease the development of this business and not to start new projects in the foreseeable future. As a result, the company has written off the entire amount of the know-how as above, and carried the loss from the impairment to results from operations in 2004 (see note 9). (a) In October 2001, the Company was granted a warrant to purchase an additional 12% of ITA shares, exercisable over a period of three years, at an exercise price that shall be determined according to an evaluation of ITA to be made by an independent consultant. As a result, ICTS has determined that it obtained significant influence in ITA and therefore, accounted for its investment by the equity method. As a result of the agreement signed in December 2003, the warrant expired. The investment in ITA as of December 2003 is valued at zero. F-23
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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued) (b) The loan bore annual interest of Libor +3%. The loan was waived as part of the above mentioned deal. (4) (a) The investment is comprised of investment in 40% of the outstanding shares of Ramasso Holdings B.V. ("Ramasso") and a loan (see below). The remaining 60% shareholdings of Ramasso are held by ITA (40%) and other affiliates. The loan, in an original amount of $2,988 and $2,464, at December 31, 2003 and 2002, respectively, bears annual interest of 4.25%, and has no fixed repayment date. Ramasso is engaged in construction of an entertainment project in Rome owned and managed by Italian Multimedia Attraction SPA ("IMA"), a wholly owned subsidiary of Ramasso. In 2003 Ramasso recognized an impairment loss on its investment in IMA's assets and recorded a loss of $2,429 which resulted in a negative equity in the amount of $4,588. After taking into account the additional loans granted by ICTS in 2003, and the guarantee described in (b) below, ICTS recorded its share in the losses of Ramasso in the amount of $2,361. (b) In January 2002, IMA entered into a loan facility agreement with a German bank. As of December 31, 2003 the Company and ITA, collectively and individually, guaranteed the loan in full to the bank. The guarantee is a continuing guarantee for the obligations of IMA. As of December 31, 2003 IMA's net obligations to the bank amounted to $1,683. Taking into account the deferred note to ITA of $546 (which serves as a security to this guarantee (see (3) above)) the company recorded a liability of only $1,137 in respect of this guarantee. Subsequent to December 31, 2003 as a result of IMA not been able to continue and finance its operations, IMA entered into bankruptcy procedures, and ICTS representatives in the board of directors of IMA have resigned. Although the Company believes that it accounted in full for its exposure as to this investment, it is still dependent on the outcome of the Italian court bankruptcy proceedings. (5) In September 2002, ICTS and ICTS Europe established a joint venture, ICTS Netherlands Airport Services VOF ("NAS"), owned equally by the parties, which provides security services at Amsterdam Schiphol Airport in The Netherlands. NAS commenced operations in December 2002. In 2003 and 2002 the company has invested in NAS $1,399 and $135, respectively, and recorded losses on equity in amount of $2,392 and $91, respectively. F-24
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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued) c. Below is summarized financial data of Inksure, Ramasso and NAS: Share in profits (losses) of associated companies included in the consolidated statements of operations includes amortization of goodwill of $223 for 2001.  Inksure: Balance sheet data: December 31, 2003 2002 Current assets $2,194 $5,320 _______ _______ Non-current assets $745 $845 _______ _______ Current liabilities $613 $860 _______ _______ Capital deficiency $2,207 $5,230 _______ _______ Operating results data: Year ended December 31, 2003 2002 Revenues $608 $2,693 _______ _______ Gross profit $474 $2,291 _______ _______ Net loss $2,965 $821 _______ _______  Ramasso: Balance sheet data: December 31, 2003 2002 Current assets $81 $16 _______ _______ Non-current assets $1,272 _______ Current liabilities $543 $341 _______ _______ Capital deficiency $4,588 $3,705 _______ _______ Operating results data: Year ended December 31, 2003 2002 2001 Net loss $2,365 $2,247 $949 _______ _______ _______ F-25
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NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)  NAS: Balance sheet data: December 31, 2003 2002 Current assets $2,330 $228 _______ _______ Non-current assets $277 $73 _______ _______ Current liabilities $4,690 $221 _______ _______ Shareholders' equity (capital deficiency) $(1,986) $88 _______ _______ Operating results data: Year ended December 31, 2003 2002 Revenues $13,759 $6 _______ _______ Gross loss $2,852 $63 _______ _______ Net loss $4,784 $182 _______ _______ NOTE 6 - OTHER INVESTMENTS December 31 2003 2002 Long term deposits (a) $10,107 $5,052 _______ _______ Restricted deposits (e) 2,515 _______ Marketable securities: Investment in 6.1% interest in VCON Ltd.(b(1)) 686 364 Investment in 17.63% interest in PlanGraphics, Inc. (c) 1,028 514 _______ _______ * 1,714 * 878 _______ _______ Non-marketable securities: Investments in Start-up companies (d) 400 Investment in a 7% interest in Bilu Investments Ltd. (e) 228 228 Investment in a 8% interest in Power Plant LLC 1,000 Investment in a convertible debenture of VCON Ltd. (b(2)) 1,520 2,000 _______ _______ 1,748 3,628 _______ _______ Long term loan to an employee (f) 150 Other 53 _______ _______ Total $16,287 $9,558 _______ _______ *Includes: Gross unrealized gains $804 $54 _______ _______ _______ _______ Gross unrealized losses $86 _______ F-26
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_______ NOTE 6 - OTHER INVESTMENTS (continued) (a) Long term deposits: During 2002 and 2003, ICTS invested in long term bank deposits. The amounts invested bear minimum annual interests plus interests based on performance of several indices as follows: December 31 Interest 2003 2002 rate Index Amount % % Nasdaq 1.5% 106.00 $3,180 $3,015 Himalaya 2.0% 98.68 1,974 2,037 China Dragon 1.1% 99.06 4,953 _______ _______ $10,107 $5,052 _______ _______ Both the Nasdaq and Himalaya deposits were sold in April 2004 at 106% and 99%, respectively. (b) Investment in VCON Ltd. ("VCON"): (1) In January 2002, ICTS purchased 909,091 shares of VCON for $1.10 per share and invested in a convertible note with a fare value of $2 million. See 92) below. VCON is a publicly held company, the shares of which are traded on Nouveau March. The share price as of December 31, 2003 was $0.75. In addition, ICTS received 3 year warrants to purchase 1,402,597 shares of VCON at a price per share of $1.40. The fair value of the warrants as of December 31, 2003 is $348. The fair value of the warrants was calculated using Black & Scholes Valuation model. (2) The note, secured by a second degree floating charge to all existing debt of VCON, is convertible into shares of VCON at a conversion price of $1.00 per share, bears annual interest at the rate of 2% and is repayable in quarterly installments of $160 starting May 2004. The note is presented net of a current maturity of $480, which is presented among other current assets. The value of the conversion feature amounted to $262, is accumulating as additional interest over the terms of the note. (c) Investment in PlanGraphics, Inc. ("PlanGraphics")- In January 2002, ICTS purchased 17,142,857 shares (17.6%) of common stock of PlanGraphics (formerly "Integrated Spatial Information Solutions, Inc.") for $0.035 per share. PlanGraphics is a publicly held company, the securities of which are traded on the NASD Electronic Bulletin Board. The price share as of December 31, 2003 was $0.06. Unrealized gain as of December 31, 2003 amount to $428 (2002 - unrealized loss of $86). F-27
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NOTE 6 - OTHER INVESTMENTS (continued) (e) Investment in Bilu Investments Ltd. Bilu Investments Ltd. ("Bilu") is a privately held company based in Israel. ICTS acquired the shares in that company from Rogosin Development and Holding Ltd. ("Rogosin"), which was an affiliated company of Leedan. At the time. Rogosin and Leedan hold another 18% interest in Bilu. ICTS has granted bank guarantees of $2,515 in respect of Bilu's obligations, of which $1,400 is on behalf of Leedan and Rogosin. To secure the bank guarantees ICTS has pledged bank deposits at the same amounts. (f) Long term loan to an employee In December 2003 ICTS granted a loan of $150 to one of its employees. The loan bears an interest of 2% per annum and is repayable in four equal payments, every six months, starting January 2005. NOTE 7 - PROPERTY AND EQUIPMENT a. Property and equipment are composed as follows: December 31, 2003 2002 Cost: Equipment and facilities (d,e) *$27,794 $29,374 Buildings (f) 1,100 Vehicles 627 454 Leasehold improvements 847 636 Office furniture and equipment 1,361 844 _______ _______ 30,629 32,408 L e s s - accumulated depreciation and amortization (6,666) (2,991) _______ _______ $23,963 $29,417 _______ _______ * Net of an impairment provisions of $13,555, see (d,e) below. b. Depreciation expense totaled $3,169, $1,449 and $1,285 in 2003, 2002 and 2001, respectively. c. A portion of the Company's equipment is pledged as collateral for bank loans. F-28
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NOTE 7 - PROPERTY AND EQUIPMENT (continued) d. In June 2002 equipment in the amount of $23.5 - million was purchased and leased back to the seller an unaffiliated private Dutch company, for 7 years in an operating lease agreement (with respect to equipment in an amount of $12.5 million, the company entered into a purchase and lease agreement that replaced a predecessor acquirer, see below). Annual rental fees are denominated in euros and amount to Euro 2,650 (at December 31, 2003 - $2,995). The seller has the option to buy back the assets after 5 or 7 years, at their fair value, which will be determined by an appraiser. In case the seller does not exercise its option to purchase the assets upon termination of the lease , ICTS was granted a license to manufacture by the above assets and to use the intellectual property and technical information in which case it will have to pay royalties up to 5% of the revenues derived from those assets to the seller. The term of the license will be equal to the remaining economic life of the assets. The company has undertaken to repay the predecessor acquirer's liability to a bank, in an amount of $8.7 million, and issued him a promissory note. As to the balance and terms of the note - see note 12. The loan is non-recourse. In 2003, ICTS determined that the future cash flows from the leased equipment (including the estimated proceeds from exercise of the option) will not recover its investment, and as a result recorded an impairment loss of $6,042. The value of the equipment at the option exercise date was based on an external assessment. e. Equipment and facilities include an amount of $10,700 (cost) relating to the construction and development of entertainment projects in Maryland, Baltimore and in Atlantic City, New Jersey. The construction was supervised and managed by ITA, see also note 19g. The Baltimore facility was opened and started operations in June 2003. The facility in Atlantic City was still under construction as of December 31, 2003 (commenced running-in in June 2004). Shortly after the Baltimore facility was opened and based on its performances, the company's management revaluated these two facilities and determined that the forecasted cash flows from them will not cover the investments thereof, including amounts required to complete the development of the facility in Atlantic City estimated as of December 31, 2003 in an amount of $5 million. Based on their fair value which was calculated using discounted cash flows model, the company had recognized an impairment loss of $2,002 in respect of its investment in Baltimore, and wrote off of its investment in Atlantic City in amount of $5,511. f. In 2002 the Company invested in a building in Philadelphia, with the intention to use it for one of its entertainment projects. Subsequent to December 31, 2003, the building was sold and therefore it is presented among other current assets. F-29
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NOTE 8 - GOODWILL: a. The changes in the carrying value of goodwill, as assigned to the Company's reportable segments, for the year ended December 31, 2003, are as follows: Aviation Security ---------- Total Other Balance as of January 1, 2002 $8,484 $8,484 Goodwill arising from previous investments in companies consolidated for the first time 314 $427 741 Goodwill arising on acquisition during the year 440 440 Translation adjustments and differences (14) (14) Impairment of Goodwill (8,484) (8,484) _______ _______ _______ Balance as of December 31, 2002 314 853 1,167 Adjustment resulting from exercising option (see note 4b) (56) (56) Impairment of Goodwill (see note 4b) (797) (797) _______ _______ _______ Balance as of December 31, 2003 $314 $- $314 _______ _______ _______ b. As explained in note 2g, commencing January 1, 2002 goodwill is no longer amortized. The following table illustrates the Company's results adjusted to eliminate the effect of goodwill amortization expense, including goodwill with respect to an associated company accounted for by the equity method: Year ended December 31 2001 Net income as reported $26,198 Add back: Goodwill amortization 820 Goodwill amortization included in share in losses of an associated company 223 _______ Net income -adjusted $27,241 _______ Earning per share: Basic - as reported 4.18 Add back: Goodwill amortization 0.13 Goodwill amortization included in share in losses of an associated company 0.04 _______ Basic - adjusted 4.35 _______ Diluted - as reported 4.09 Add back: Goodwill amortization 0.13 Goodwill amortization included in share in losses of an associated company 0.03 _______ Diluted - adjusted $4.25 _______ F-30
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NOTE 9 - OTHER ASSETS: a. As of December 31, 2003, comprised of the following: December 31, December 31, 2003 2002 Gross carrying ------------------- Amortized Amortized amount Accumulated balance balance amortization Know-how(1) $5,266 $5,266 Customer relationship(2)* 1,879 $188 $1,691 $1,879 Technology(3)** 277 147 130 172 Other 645 645 69 _______ _______ _______ _______ $8,067 $ 335 $7,732 $2,120 _______ _______ _______ _____ _______ _______ _______ _____ (1) Relating to the acquisition of the entertainment business, see note 5a(3). Subsequent to December 31, 2003 this asset was written off. *(2) Relating to contract with Schiphol Airport, see note 4a. **(3) Relating to technology acquired by a subsidiary. Amortization expense in 2003 totaled $248. In addition, the Company recorded as of December 31, 2002 an impairment loss of the technology in the amount of $672. This impairment was determined by management, under the provision of FAS 144, due to management's evaluation of significant decrease in forecasted revenues derived from services using the technology. b. Estimated amortization expense for each of the following five years amounts to: $245; $245; $198 and $188 afterwards. NOTE 10 - SHORT-TERM BANK CREDIT Short-term bank credit, classified by currency and interest rates, is comprised of the following: Weighted average interest rates as of December 31, December 31, 2003 2003 2002 % ICTS - In dollars (a) 2.31 $2,560 $2,513 Subsidiaries: In dollars (b) 4 500 6,068 In other currencies (mainly in Euros)(c) 1,327 70 _______ _______ Total short-term bank credit $4,387 $8,651 _______ _______ _______ _______ (a) These loans were received as part of an arrangement with a bank, following which the money received and additional amounts were deposited with the bank, (see note 6(a)). F-31
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NOTE 10 - SHORT-TERM BANK CREDIT (continued) (b) In 2002, a subsidiary entered into a Revolving Line of Credit (RLC). The RLC provides a borrowing base of (i) an amount up to 85% of Eligible Accounts receivable of the subsidiary and (ii) an amount up to $2.5 million under some conditions stipulated in the RLC. In May 2003, the RLC was extended to May 2004. As of December 31, 2003, the revolving credit facility is collateralized by the restricted cash held by the Company. Interest accrues at the bank's prime rate (4.00 percent and 4.25 percent at December 31, 2003 and 2002, respectively).At December 31, 2003, $0.5 million was outstanding and $4.8 was available under the revolving credit facility for additional borrowings. The borrowing agreement also provides for an additional commitment guarantee of up to a maximum of $3 million for letters of credit and requires a per annum fee equal to 1.25 percent. The Company had letters of credit outstanding of approximately $2.7 and $1.9 at December 31, 2003 and 2002, respectively. (c) An amount of $1,309 relates to a long term loan granted to a subsidiary in 2003. The subsidiary did not comply with the covenants included in the credit agreement with the bank and therefore, the loan has to be repaid by June 2004. The loan bears ABN AMRO euro base rate plus 1.75-2.5 percent points. NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES December 31, 2003 2002 Payroll and related liabilities $3,603 $6,469 Severance pay and employees' claims (see note 1b) 9,389 24,560 Liabilities for future development costs (see note 7e) 1,595 Taxes to government institutions, including taxes payable 1,199 5,452 Related parties 21 1,074 Accrued expenses and other 3,653 9,030 _______ _______ $17,865 $46,585 _______ _______ _______ _______ F-32
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NOTE 12 - LONG-TERM LIABILITIES: a. Composition: Interest rate as of December 31, December 31, 2003 2003 2002 In dollars: Banks (1) mainly - 1.93% $4,103 Promissory Note (2) 3.12% 631 _______ 4,734 In euros - Promissory Note (3) Libor + 2.05% 6,804 $7,777 Other - Deferred note (4) See (4) 546 _______ _______ 12,084 7,777 Less - current maturities (2,752) (2,097) _______ _______ $9,332 $5,680 _______ _______ _______ _______ (1) This loan was received as part of the arrangement with a bank, following which the money received and an additional amount were deposited with the bank, the deposit amount as of December 31, 2003 is $4,953 (see note 6(a)). (2) The promissory note was issued in connection with the purchase agreement of the operations of ITA (see note 5a(3)). The note is payable in 13 quarterly installments of which the first was paid in December 2003. (3) The Promissory Note was granted to the seller of part of the leased equipment (as explained in note 7d). The Promissory Note bears annual interest of Euro Libor+2.05% (4.947% as of December 31, 2003) and is repaid over 5 years. The Company paid to the seller annual guarantee fees of $94 and $113 in 2003 and 2002, respectively. The Promissory Note is secured by a first priority security interest to a bank on part of the leased assets ($12.3 million) and all the rights under the equipment leases. (4) The deferred note was issued in connection with the purchase agreement of ITA (see note 5a(3)) .The note is payable in three equal payments every six months commencing December 2004. The interest will be 7% or The Israeli Consumer Price Index (CPI) plus 4%, the higher of. A guarantee granted to IMA (see note 5a(4)) is secured by this note. b. The long term liabilities (net of current maturities) mature in the following years after the balance sheet date: December 31, 2003 ------------------ 2005 $2,928 2006 6,364 2007 21 2008 19 ________ $9,332 ________ F-33
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________ NOTE 13 - ACCRUED SEVERANCE PAY The accrued severance pay in the consolidated financial statements relates to the Israeli subsidiaries. Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The following principal plans relate to employee rights upon retirement, as applicable to Israeli subsidiaries. a) Insurance policies for employees in managerial positions - these policies provide coverage for severance pay and pension liabilities of managerial personnel. b) Severance pay liabilities not covered by the pension funds are fully provided for in these consolidated financial statements, as if it was payable at each balance sheet date on an undiscounted basis, based upon the number of years of service and the most recent monthly salary (one month's salary for each year worked) of the company's employees in Israel. The amount of severance pay charged to income in the years ended December 31, 2003, 2002 and 2001 were approximately $98, $100 and $100 respectively. The amounts do not include expenses for severance pay in 2002 in an amount of $18.9 million and reversal of $17.8 million in 2003 (see note 1b). The Company expects to contribute in 2004 $80 to the insurance companies in respect of its severance pay obligation. NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES: a. Operating leases 1) The Company leases premises under long-term operating leases, in most cases with renewal options. Lease expenses for the years ended December 31, 2003, 2002 and 2001 were $1,166 $928 and $1,739, respectively. Future minimum lease payments under long-term leases are as follows: December 31, 2003 2004 $1,208 2005 1,110 2006 1,012 2007 946 2008 and afterwards 10,027 _______ $14,303 _______ _______ 2) As to income from leasing of equipment, see note 7d. F-34
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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued): b. Operations in the U.S.: 1) As a result of the September 11 terrorist attacks, numerous lawsuits have commenced against the Company. Huntleigh has been named in 27 lawsuits and ICTS in 25 lawsuits. All of the cases were filed in the United States Districts Court, Southern District of New York. The cases are in their early stages. The Company reviewed its security services provided at Boston's Logan International Airport, from which one of the airplanes commandeered by the terrorists departed, subsequent to September 11, 2001 for evidence of non-compliance with the policies of the Federal Aviation Administration. Based on the contracts with the airlines, the Company may be indemnified by the airlines if the Company is found to have followed the procedures enumerated by the Federal Aviation Administration. However, if the Company is found to have violated these screening regulations, it could be liable for damages. Based on the Company's review, no evidence of non-compliance has been identified with respect to the services provided at Boston's Logan International Airport on September 11, 2001. The Company maintains an aviation insurance policy, which may provide limited coverage for liabilities that may be assessed against the Company as a result of the events of September 11, 2001. Management is unable to estimate the impact of the litigation or fines, as described above. Accordingly, no provision in respect of these matters has been made. 2) As a provider of security services, the Company faces potential liability claims in the event of any successful terrorist attempt in circumstances associated with the Company. After the September 11th terrorist attacks, the Company's insurance carriers canceled all war risk insurance policies the Company carried. 3) On February 17, 2002, the Company was awarded a security services contract (the "TSA Contract") by the TSA to continue to provide security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport basis to the U.S. Federal Government or November 19, 2002. In accordance with the terms of the Contract, the U.S. Federal Government provided the Company with a non-interest bearing partial payment of $26 million to be paid back on a monthly basis of $1.3 million at the beginning of every month commencing April 1, 2002. At December 31, 2002, approximately $11.7 million of the $26 million had been paid back to the TSA (in 2003 no additional payments have been paid back to the TSA). As of December 31, 2003 the amount due from the TSA in respect of services provided under the contract aggregates $17.2 million; this amount, net of $14.3 million-the balance of the prepayment, is presented among trade receivables. F-35
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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued): The TSA in accordance with standard practices, is in the process of auditing ICTS's billings to the TSA pursuant to the TSA Contract for the provision of aviation security services. This process requires the Company to provide pricing data to the U.S. Federal government to support its pricing structure under the TSA Contract and eventually will result in final negotiations on the price of the Company's services from February 17, 2002 through the end of the Contract term. In connection with payments made by the TSA to the Company for aviation security services provided in 2002, the Defense Contract Management Agency has indicated that it believes that the Company should not have been paid on a fixed cost basis as believed by the Company, but on the basis of actual costs plus what the TSA would consider a reasonable profit. Under the last basis the Company may be required to repay the TSA the difference between such amount and the actual amounts paid to it. The Company however has various claims for additional amounts it considers due to it for the services provided to the TSA. The Company's management estimates that if the TSA will claim such difference and will prevail in all of its contentions, and none of Company's claims will be recognized, then the Company may suffer a net loss in an amount of about $27 Million. The Company's above estimate assumes, that under USA tax rules it will be able to carry-back the losses (if any) that will result from the above claims of the TSA. Management and its legal counsel are unable to estimate at this stage the final outcome of the above mentioned dispute. Accordingly, no provision in respect of this matter has been made. The Company had also filed a claim against the US Federal Government, for what it alleges to be a taking of its US aviation security business by the TSA in 2002. F-36
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NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued): c. Restrictions on operations As part of the sale of its European operations, the Company is restricted from conducting in Europe (except for The Netherlands and the former Soviet Union republics, including Russia, Georgia and Kazakhstan) any of the activities in which ICTS Europe was engaged prior to such sale. This restriction is effective through February 2005. Pursuant to an agreement dated July 1, 1995 with ICTS Global Security (1995) Ltd. ("ICTS Global Security"), the Company may not provide non-aviation security services in Latin America, Turkey or the former Soviet Union republics, including Russia, Georgia and Kazakhstan. d. Following the sale of the European operations, ICTS has undertaken to indemnify ICTS Europe and its subsidiaries in respect of any liability or loss originated prior to December 31, 2001 and not known at that date. As of December 31, 2003, management has not received any notification for any such liability or loss. e. On December 28, 1995, the Company entered into an employment contract with Lior Zouker, its Chief Executive Officer and a member of its board of directors, pursuant to which the Company agreed to employ Mr. Zouker in those capacities for a 30 month term. The contract was extended for an additional three years on November 25, 1997 and again on December 12, 2000. Pursuant to such contract, Mr. Zouker is entitled to a bonus, which is calculated at 3% of the net income of ICTS and was provided in the accounts. On April 2004, Mr. Zouker resigned as the Chief Executive Officer of the Company. f. On December 16, 2003, the Company entered into an agreement with Mr. Boaz Harel the chairman of the Supervisory Board of Directors, on which basis he receives for his services to the Company a compensation of $245 on an annual basis. g. In 2002 the Company, and one of its subsidiaries, entered into a consultancy services agreement with a company, owned by a former member of the Supervisory Board of the Company. The agreement provided for annual fees of $75 for a period of 2 years and shall be automatically renewed for an additional period of one year. In May 2004 the consultancy company's owner was appointed CEO and the agreement was amended. In January 2004 the agreement has been amended by two new agreements. In May 2004 the consultancy company's owner was appointed CEO and the agreement was amended. The agreement shall be valid for 5 years with an automatic extension of an undefined period, with a notice period of 12 months. The compensation is settled on approximately US$ 300. h. As mentioned in note 5a(4) ICTS guaranteed certain bank loans of IMA which has commenced bankruptcy proceedings in Italy. As explained in this note the company provided for the full exposure relating to the balance of such loans as of December 31, 2003. Under the Italian law and in certain defined cirucumstances the liquidator of IMA may reclaim a refund of amount paid by IMA to the bank, in which case the company might be required to repay such amounts under the above guarantee up to the amount of original guarantee. The maximum contingent liability of the company is $1,000,000. The company is currently not in a position to assess the likelihood that this contingency will materialze. i. As to the guarantee given to Bilu Investment Ltd., see note 6e. F-37
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NOTE 15 - OTHER INCOME (EXPENSES) Year ended December 31, 2003 2002 2001 Sale of ICTS Europe, see note 1c $42,797 $34,260 Write off of Investments in start-up companies $(400) (4,489) Capital gain from sale of other companies, net 43 1,182 Write-down of investment in Ramasso (932) Loss realized on marketable securities (690) (780) Write off of loans * (334) Other 47 11 (319) _______ _______ _______ $(353) $41,229 $29,520 _______ _______ _______ _______ _______ _______ * In 2001, ICTS wrote off a non-recourse loan to a former shareholder of a subsidiary, since the former shareholder pledged his shares in another company. NOTE 16 - INCOME TAXES: a. Each subsidiary of ICTS is subject to tax according to the tax rules applying with respect to its place of incorporation or residency. ICTS is incorporated under the laws of The Netherlands and is, therefore, subject to the tax laws of The Netherlands. Intercompany payments are subject to withholding taxes at varying rates according to their nature and the payer's country of incorporation or residency. b. Deferred taxes: 1) Deferred tax assets have been computed in respect of the following: December 31, 2003 2002 Carryforward losses 9,660 $3,004 Fixed assets and intangible assets 2,554 Provision for Shut down costs 3,528 Accruals and other reserves (367) 1,046 Provision for bad debts 735 812 Other 31 51 _______ _______ 12,613 $8,441 Less - valuation allowance 12,214 3,004 _______ _______ 399 $5,437 _______ _______ F-38
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NOTE 16 - INCOME TAXES (continued): 2) Deferred taxes are presented in the balance sheets as follows: December 31, 2003 2002 Among other current assets $385 $5,409 Among investments and long-term receivables 33 28 Among long term liabilities (19) _______ _______ $399 $5,437 _______ _______ c. Income (loss) before taxes on income is comprised of the following: Year ended December 31, 2003 2002 2001 ICTS and subsidiaries in The Netherlands $(7,820) $54,603 $28,112 Subsidiaries outside The Netherlands (1,308) 20,461 6,136 _______ _______ _______ $( 9,128) $75,064 $34,248 _______ _______ _______ _______ _______ _______ d. Taxes on income included in the income statements: Year ended December 31, 2003 2002 2001 Current: In The Netherlands $(85) $(223) $1,314 Outside The Netherlands (1,847) 20,938 3,689 _______ _______ _______ (1,932) 20,715 5,003 _______ _______ _______ Deferred: In The Netherlands 187 268 Outside The Netherlands 5,047 (4,460) (352) _______ _______ _______ 5,047 (4,273) (84) _______ _______ _______ $3,115 $16,442 $4,919 _______ _______ _______ _______ _______ _______ F-39
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NOTE 16 - INCOME TAXES (continued): e. The Company's effective income tax rate differs from The Netherlands' statutory rate of 34.5% with respect to the following: Year ended December 31, 2003 2002 2001 Income (loss) before taxes and equity in results of associated companies $( 9,128) $75,064 $34,248 _______ _______ _______ Statutory tax rate 34.5% 34.5% 35% _______ _______ _______ Expected tax at statutory rate $(3,149) $25,897 $11,987 Reconciliation for earnings taxed at different rates 18 86 296 Disallowable expenses 460 8,124 740 Non-taxable expense (income)* 275 (14,248) (10,365) Changes in valuation allowance 6,513 (3,330) 2,091 Provision to return matters (812) Other (190) (87) 170 _______ _______ _______ Income taxes $3,115 $16,442 $4,919 _______ _______ _______ * In 2002 and 2001 including a tax exempted capital gain (from sale of the European operations). f. Carryforward tax losses As of December 31, 2003, the Company has carryforward tax losses in the Netherlands, in the amount of approximately $28 million. As a result of change in the Netherlands tax law, commencing January 1, 2004, utilization of such losses is limited in certain circumstances. NOTE 17- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: a. Fair market value of financial instruments Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair market value of the Company's short-term and long-term debt approximates the carrying value. Furthermore, the carrying value of other financial instruments potentially subject to credit risk (principally consisting of cash and cash equivalents, time deposits and marketable securities, accounts receivable and accounts payable) also approximates fair market value. Certain financial instruments, included in other investments (including inter alia the investment in Bilu, which was acquired from related party), do not have quoted market prices and, accordingly, a reasonable estimate of fair market value could not be made without incurring excessive costs. F-40
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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued): b. Risk management: 1) The Company operates in the USA, Europe and other countries, which gives rise to exposure to market risks in respect of foreign exchange rate fluctuations. The Company did not utilize derivative financial instruments to reduce these risks. Since January 1, 2002, the functional currency is the dollar and the exposure to foreign currency fluctuations is reduced. Credit risk represents the accounting loss that would be incurred if any party failed to perform according to the terms of the financial instrument. Credit risk may arise from financial instruments that have a significant exposure to individual debtors or groups of debtors, or when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. 2) At December 31, 2003, two major customers accounted for 32% of accounts receivable (at December 31, 2002, four major customers accounted for 48% of accounts receivable). For the years ended December 31, 2003, 2002 and 2001, sales to major customers (constituting 10% or more of the Company's consolidated revenues) amounted to 36%, 73% and 21% of revenues, respectively, as set forth below: Year ended December 31, 2003 2002 2001 (% of consolidated revenues) Customer A 14% Customer B 11% 11% Customer C 11% 10% Customer D 73% 3) The Company's financial instruments that are exposed to concentrations of credit risks, consist primarily of cash and cash equivalents, trade accounts receivable, short-term investments, (see note 3), and long-term investments (see note 6). The Company places its cash and cash equivalents and time deposits with high quality credit institutions. The Company provides normal trade credit, in the ordinary course of business, to its customers. Based on past experience and the identity of its current customers, the Company believes that its accounts receivable exposure is limited. 4) Except for guarantees provided for (see note 5), the Company guarantees debts of third parties, as discussed in notes 6 and 14. Regarding these guarantees, the Company does not believe exposure to loss is likely. F-41
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NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued): 5) The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic or political instability and trade restrictions), any of which could have a significant negative impact on the Company's ability to deliver its services on a competitive and timely basis and on the results of the Company's operations. Although the Company has not encountered significant difficulties in connection with the sale or provision of its services in international markets, future imposition of, or significant increases in, the level of trade restrictions or economic or political instability in the areas where the Company operates, could have an adverse effect on the Company. For example, the Company currently provides services at several airports in the former Soviet Union. The Company's ability to continue operations in the former Soviet Union may be adversely affected by future changes in legislation or by changes in the political environment. F-42
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NOTE 18 - SEGMENT INFORMATION: The Company adopted FAS 131, which establishes disclosure and reporting requirements in respect of segments. a. Business segment data: 1) Financial data relating to reportable operating segments: Year ended December 31, 2003: Aviation Security ----------- Entertainment Other Total Leasing Revenues: Unaffiliated customers $66,454 $2,995 $643 $1,479 $71,571 Intersegment 418 3,884 4,302 _______ _______ _______ _______ ________ Total revenues $66,872 $2,995 $643 $5,363 $75,873 _______ _______ _______ _______ ________ _______ _______ _______ _______ ________ Operating income (loss) $12,215 $(5,476) $(10,114) $(3,603) $( 6,978) _______ _______ _______ _______ ________ _______ _______ _______ _______ ________ Assets (at end of year) $36,087 $36,340 $ 10,401 $51,594 $134,422 _______ _______ _______ _______ ________ _______ _______ _______ _______ ________ Goodwill (at end of year) $314 $314 _______ ________ _______ ________ Expenditures for segment assets $259 $7,451 $299 $8,009 _______ _______ _______ ________ _______ _______ _______ ________ Depreciation and amortization $493 $2,427 $265 $184 $3,369 _______ _______ _______ _______ ________ _______ _______ _______ _______ ________ Non cash expenditures other than depreciation and amortization $6,042 $7,513 $797 $14,352 _______ _______ _______ _______ _______ _______ ______ _______ Year ended December 31, 2002: Aviation Security ----------- Entertainment Other Total Leasing Revenues: Unaffiliated customers $277,636 $1,370 $925 $279,931 Intersegment 12,263 12,926 25,189 _______ _______ _______ ________ Total revenues $289,899 $1,370 $13,851 $305,120 _______ _______ _______ ________ _______ _______ _______ ________ Operating income (loss) $37,731 $271 $(517) $1,963 $39,448 _______ _______ _____ _______ ________ _______ _______ _____ _______ ________ Assets (at end of year) $52,809 $36,605 $7,259 $54,840 $153,513 _______ _______ _____ _______ ________ _______ _______ _____ _______ ________ Goodwill (at end of year) $314 $853 $1,167 _______ _______ ________ _______ _______ ________ Expenditures for segment assets $320 $23,384 $3,618 $2,088 $29,410 _______ _______ _____ _______ ________ _______ _______ _____ _______ ________ Depreciation and amortization $206 $1,158 $79 $1,443 _______ _______ _______ ________ _______ _______ _______ ________ Non cash expenditures other Than depreciation and amortization $9,156 $932 $10,778 _______ _______ ________ _______ _______ ________ F-43
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NOTE 18 - SEGMENT INFORMATION (continued): Year ended December 31, 2001: Aviation Security ------------------ Other Total Entertainment Revenues: Unaffiliated customers $211,707 $430 $212,137 Intersegment 1,186 679 1,865 _______ _______ ________ Total revenues $212,893 $1,109 $214,002 _______ _______ ________ _______ _______ ________ Operating income (loss) $13,723 $(1,145) $12,578 _______ _______ ________ _______ _______ ________ Assets (at end of year) $39,261 $3,480 $5,126 $47,867 _______ _____ _______ ________ _______ _____ _______ ________ Goodwill (at end of year) $8,484 $8,484 _______ ________ _______ ________ Expenditures for segment assets $1,496 $2 $1,498 _______ _____ ________ _______ _____ ________ Depreciation and amortization $2,061 $29 $2,090 _______ _______ ________ _______ _______ ________ 2) Following is a reconciliation of net revenues, operating income and assets of the reportable segments to the data included in the consolidated financial statements: Year ended December 31 2003 2002 2001 Revenues: Total revenues of reportable segments $70,510 $291,269 $212,893 Other revenues 5,363 13,851 1,109 Elimination of intersegment revenues (4,302) (25,189) (1,865) _______ ________ ________ Total consolidated revenues $71,571 $279,931 $212,137 _______ ________ ________ _______ ________ ________ Operating Income: Total operating income (loss) of reportable segments $( 3,375) $37,485 $13,723 Other (3,603) 1,963 (1,145) Amounts not allocated to segments: General and administrative expenses (2,581) (8,363) (9,827) Interest income 2,248 2,072 1,649 Interest expense (1,222) (1,678) (1,637) Exchange defferences (242) 2,356 1,965 Other income (expenses) (353) 41,229 29,520 _______ ________ ________ Consolidated income (loss) before taxes on income $( 9,128) $75,064 $34,248 _______ ________ ________ _______ ________ ________ Assets (at end of year): Total assets of reportable segments $82,828 $98,673 $42,741 Total goodwill of reportable segments 314 314 8,484 Other assets 51,594 55,693 5,126 Elimination of intersegment balances (71,108) (41,774) (13,378) Assets not allocated to segments 20,872 10,174 30,990 _______ ________ ________ Total consolidated assets (at end of year) $84,500 $12,538 $73,963 _______ ________ ________ _______ ________ ________ F-44
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NOTE 18 - SEGMENT INFORMATION (continued): b. Geographical information Following is a summary of revenues and long-lived assets by geographical areas: 1) Revenues - classified by country in which the services were rendered: Year ended December 31, 2003 2002 2001 Germany $26,574 France 25,756 United Kingdom 30,938 Italy 7,005 USA $59,146 $274,082 96,748 The Netherlands 10,034 4,834 2,274 Other 2,390 1,015 22,842 _______ _______ _______ Total $71,571 $279,931 $212,137 _______ _______ _______ _______ _______ _______ 2) The Company's long-lived assets, net of accumulated depreciation, are located in the following geographical areas: December 31, 2003 2002 2001 The Netherlands $19,569 $23,543 $9,107 USA 9,098 5,393 621 Other 562 480 68 _______ _______ _______ Total $29,229 $29,417 $9,796 _______ _______ _______ _______ _______ _______ c. As to the Company's major customers, see note 17b(2). F-45
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NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES: a. Revenues from, and expenses to, related parties: Year ended December 31, 2003 2002 2001 Revenues $27 $571 _______ _______ _______ _______ Cost of revenues $7 _______ _______ Selling, general and administrative expenses $1,618 $4,453 $153 _______ _______ _______ _______ _______ _______ Interest income $517 $660 $123 _______ _______ _______ _______ _______ _______ Contract settlement expenses (note 5a(3)) $5,266 _______ _______ Bonuses related to the sale of the European operation * $4,704 $3,212 _______ _______ _______ _______ * Include bonuses to Leedan, see c2) below. a. Balances with related parties: December 31, 2003 2002 Other current assets $382 $5,417 _______ _______ _______ _______ Long term loans to associated companies $2,988 $5,464 _______ _______ _______ _______ Subordinated debentures including accrued interest $1,369 $1,269 _______ _______ _______ _______ Accrued expenses and other liabilities $21 $1,074 _______ _______ _______ _______ c. 1) In 2001 and 2002, the Company lent Leedan $2,200 and $1,500, respectively. The loans bear interest at the rate of Libor for 3 months +3% per annum. The loans were repaid in February 2003 and April 2003, respectively. 2) Leedan provided the Company with certain management, administrative, consulting and advisory services, as well as advice and assistance with respect to potential acquisitions and investor relations. Such services are provided on an ad-hoc basis as authorized by the ICTS Supervisory Board. In 2003 the Company recorded no expenses for such services (in 2002 and 2001 the Company recorded $1.2 million and $1 million, respectively). d. In 2001 30,000 options were granted to Mr Lior Zouker, the former Chief Executive Officer, for an exercise price of $4.5 per share. The exercise price reflected the share price at the grant dates. As to the employment contract with him, see note 14e. F-46
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NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued): e. In 2002, ICTS bought vested and non vested options from its employees and directors. The difference between the price paid and the exercise price for the options bought back, aggregating $1,618, was recorded as selling, general and administrative expenses. In 2003 ICTS did not buy any options from its employees and directors. f. On July 24, 2001 Noaz Management Company assigned to ICTS an investment of $400 (out of its total investment of $1 million) in ArtLink Inc., representing 4.1% of the class A preferred shares. A major shareholder and member of the Supervisory Board of the Company is a major shareholder in Noaz Management Company. This investment was written off in 2003. g. As part of the investment in ITA (a company controlled by a significant shareholders of ICTS, see Note 5a(3), ITA provided to the Company supervision and management services on establishment of Entertainment project for a fee equal to 20% of the project costs. In addition, the Company was granted the right of first refusal to establish its own ITA Entertainment project in Europe and in the USA. The Company also had an option to acquire from ITA 20% of ITA's stake in each project and ITA had the option to acquire from the Company 20% of its stake in each such project for a period of 2 years from the start of the project. As a result of the transaction with ITA in December 2003, (see Note 5a(3) ICTS acquired the entertainment business of ITA and therefore this arrangement expired. h. As to guarantees issued in favor of related parties - see note 6(e). NOTE 20 - EARNINGS (LOSSES) PER SHARE The following table presents the data used for computation of basic and diluted earnings (losses) per share: Year ended December 31, 2003 2002 2001 Basic: Net income (loss) $(18,904) $56,815 $26,198 ________ ________ ________ ________ ________ ________ Weighted average shares of common stock outstanding 6,513,100 6,419,575 6,263,909 ________ ________ ________ ________ ________ ________ Diluted: Net income (loss) $(18,904) $56,815 $26,198 ________ ________ ________ ________ ________ ________ Weighted average number of shares of common stock outstanding 6,513,100 6,419,575 6,263,909 Incremental shares of common stock from stock options - Calculated under the treasury stock method 33,872 148,626 ________ ________ ________ Adjusted weighted average number of shares of common stock 6,513,100 6,453,447 6,412,535 ________ ________ ________ ________ ________ ________ F-47
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ICTS INTERNATIONAL N.V. NOTES TO FINANCIAL STATEMENTS (continued) (US $ in thousands) NOTE 21 - STOCK OPTIONS In 1995 and 1999, ICTS adopted share option plans pursuant to which 600,000 common shares were reserved under each plan for issuance upon the exercise of options to be granted to employees, consultants and members of the Supervisory Board of the Company. As of December 31, 2003, ICTS has granted options to purchase 253,500 common shares, all of which have been granted to directors, consultants and executive officers of the Company as a group, at exercise prices ranging from $4.50 to 8.50 per share under the Plan, which were the fair market value at the dates of grant. These options vest over various terms, ranging from immediately to five years. Outstanding options expire at various times, but not later than January 2007. In 2002, ICTS bought vested and non vested options from its employees and directors. The difference between the price paid and the exercise price for the options bought back, aggregating $1,618, was recorded as selling, general and administrative expenses in 2002. In 2003 ICTS did not buy any options from its employees and directors. The options granted under the Company's plans are exercisable for the purchase of shares as follows: December 31, 2003 2002 At balance sheet date 224,000 195,832 During the first year thereafter 16,500 40,668 During the second year thereafter 13,000 29,000 During the third year thereafter 0 13,000 _______ _______ 253,500 278,500 _______ _______ _______ _______ ICTS accounts for the options granted to a director and other service providers in exchange for services received using the fair market value based method of accounting, as prescribed by FAS 123, based on the fair market value of the equity instruments issued, which is more reliably measurable than the value of the services received. The fair value of each option granted is estimated on the date of grant using the Black & Scholes option-pricing model with the following weighted average assumptions: For options granted in 2002 2001 Expected life of options (years) 3 3 Expected volatility 100% 46% Risk free interest rate 3.5% 3.5% Expected dividend yield 0% 0% --------------------------------------------------------------------------------------------------- The weighted average fair value of options granted during the year, using the Black & Scholes option-pricing model was $2.03 and $1.67 for 2002 and 2001, respectively. During 2003 no options were granted. F-48
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NOTE 21 - STOCK OPTIONS (continued) Information regarding options for 2003, 2002 and 2001 is as follows: 1) Options to employees: 2003 2002 2001 Weighted Weighted Weighted Shares average Shares average Shares average (in exercise (in exercise (in exercise thousands) price thousands) price thousands) price Options outstanding at beginning of year 236 7.12 578 6.64 484 7.15 Options granted 70 5.3 203 4.73 Options exercised and bought back by the Company (412) 6.07 (109) 5.07 _____ ______ _____ ______ ______ ______ Options outstanding at end of year 236 7.12 236 7.12 578 6.64 _____ ______ _____ ______ ______ ______ _____ ______ _____ ______ ______ ______ Options exercisable at end of year 218 196 439 _____ ______ ______ _____ ______ ______ 2) Options to non-employees: 2003 2002 2001 Weighted Weighted Weighted Shares average Shares average Shares average (in exercise (in exercise (in exercise thousands) price thousands) price thousands) price Options outstanding at beginning of year 42 5.32 380 6.10 228 7.27 Options granted 42 5.3 211 4.50 Options exercised and bought back by the Company (355) 6.14 (59) 6.85 Expired options (2003- cancelled) (25) (25) 5.49 _____ _____ _____ _____ _____ _____ Options outstanding at end of year 17 5.32 42 5.32 380 6.10 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Options exercisable at end of year 6 - 380 _____ _____ _____ _____ _____ _____ 3) Total number of options: Total options outstanding At end of year 253 278 958 _____ _____ _____ _____ _____ _____ Total options exercisable At end of year 224 196 819 _____ _____ _____ _____ _____ _____ F-49 NOTE 22 - SUBSEQUENT EVENT
F-50
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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. By:/s/ Michael Barnea Name: Michael Barnea Title: Chief Executive Officer Date: July 13, 2004
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CERTIFICATIONS I, Michael Barnea, certify that: 1. I have reviewed this annual report on Form 20-F of ICTS International N.V.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 13, 2004 By: /s/ Michael Barnea
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CERTIFICATIONS I, Stefan Vermuelen, certify that: 1. I have reviewed this annual report on Form 20-F of ICTS International N.V.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 13, 2003 By: /s/ Stefan Vermuelen

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 20-F/A Filing   Date First   Last      Other Filings
10/9/9238
1/1/9411
7/1/951884
12/28/9584
1/1/9611
1/1/9744
11/25/9784
12/31/9729
1/1/99126-K
6/22/9932
10/5/0058
12/12/0084
12/31/00252620-F
1/1/014445
1/10/0168
4/27/0144
6/26/0110
7/23/01374
7/24/013694
9/11/01782
10/10/0136
10/14/0135
11/12/0134
11/19/0157
12/31/0169120-F
1/1/022188
2/1/02368-K
2/17/022783
4/1/0282
5/13/0237
7/1/0267
9/30/0221676-K
11/2/0227
11/19/0282SC 13D
12/10/02374
12/31/0259020-F, NT 20-F
1/31/0366
2/1/0365
2/20/0369
5/31/033265
6/15/0365
7/1/03656720-F, DEF 14A
7/13/0399
11/21/0320
12/15/0366
12/16/0384
12/23/031235
For The Period Ended12/31/0319520-F, NT 20-F
1/1/043087
3/15/0466
5/31/043335
7/13/045098
Filed On / Filed As Of7/22/04
11/26/0435
6/30/06396-K
 
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