Filed On 7/22/04 10:10am ET ˇ SEC File 0-28542 ˇ Accession Number 1012118-4-20
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
7/22/04 Icts International NV 20-F/A 12/31/03 2:101 McLaughlin & Ste..LLP/FA
Amendment to Annual Report of a Foreign Private Issuer ˇ 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 575K
Issuer
2: EX-99.906 Miscellaneous Exhibit 2 7K
20-F/A ˇ Amendment to Annual Report of a Foreign Private Issuer
Document Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
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.
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)
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.
ˇ 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
_______ _______
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
_______ _______
Selected Financial Data
The following table summarizes certain statement of operations data for ICTS for
the years ended December 31, 2001, 2002 and 2003:
ˇ 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
======= ======= =======
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.
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
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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
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.
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).
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:
ˇ 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
======= ==== ====
---------------------------------------------------- ------------------ -------------- --------------
The following table sets forth, for the annual periods indicated,
certain statement of operations data as a percentage of revenues:
ˇ 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.
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
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).
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
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.
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.
ˇ 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
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
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
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.
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.
ˇ 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.
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.
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:
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------------------------------------ --------------------- -----------------------------
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
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.
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.
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
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
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.
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.
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.
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
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
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
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,
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.
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.
ICTS INTERNATIONAL N.V.
2003 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ˇ 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
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
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
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
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
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
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
(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
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
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
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 $34 million, and were included among "other
income" in the first quarters of 2002 and 2001, respectively.
As a result of the sale, as above, and under its provisions, ICTS could no
longer exercise control over ICTS Europe. Therefore, as of December 31, 2001
ICTS Europe's assets and liabilities were excluded from consolidation;
however, the 2001 consolidated results of operations include the results of
ICTS Europe through December 31, 2001.
2) The following table presents the operating data of ICTS Europe included in the
financial statements:
Year ended December
31,
-----------------------
2001
Revenues 113,088
_______
Gross profit 13,253
_______
Operating income 8,418
_______
Net income 4,166
_______
F-11
NOTE 1 - GENERAL (continued)
d. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP (as defined
herein) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the USA ("U.S. GAAP").
The significant accounting policies are as follows:
a. Functional and reporting currency
The accompanying financial statements have been prepared in U.S. dollars
("dollars" or "$"). 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
_______
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
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
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
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
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
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
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
________
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
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
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
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
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 