Legal Proceedings
As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh has been named in
approximately 70 lawsuits and ICTS in approximately 70 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. At the present time
Huntleigh and ICTS are in 65 remaining cases. All of the cases involve wrongful
death except 16 which involve property damage. The cases are in their early
stages with depositions to begin on September 12, 2006.
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 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. In
December 2004 the Court denied the Government's Motion to Dismiss the case. A
motion for reconsideration was filed by the defendant and denied. Fact and
expert discovery have been completed and the U.S. Government has filed a motion
for summary judgment which is scheduled to be argued on October 12, 2006. The
trial for this action has been scheduled to commence on November 13, 2006.
The company is in dispute with Fraport A.G. International Airport Services
Worldwide in relation to alleged unlawful use of the letter combination "ICTS"
by the company. Fraport initiated proceedings before the district court of
Amsterdam, which are still pending. The principal amount claimed is (euro)57.65
million ($68.1 million as of December 31, 2005). However, this claim is based on
an alleged incorrect interpretation of the underlying contractual obligation. If
the court follows the Company's interpretation, the maximum liability is
(euro)700 thousand. ($827 thousand as of December 31, 2005). The Company filed a
counter claim of (euro)2.45 million ($2.9 million as of December 31, 2005) (or,
under the condition that Fraport's interpretation is followed, (euro)73.5
million ($86.9 million as of December 31, 2005)). Currently, this action is
stayed, pending settlement discussions between the parties.
In September 2005, Avitecture, Inc, (f/k/a Audiovisual-Washington, Inc.)
("Avitecture"), filed a Demand for Arbitration and Mediation against
ITA-Atlantic City, LLC ("ITA") with the American Arbitration Association in
Somerset, NJ. The Demand for Arbitration alleges that pursuant to a written
agreement dated March 20, 2003, ITA owes Avitecture $222 thousand for audio,
video and control systems it provided for ITA's use in a tourist attraction in
Atlantic City, New Jersey, but for which Avitecture claims it has not been paid.
The case is currently pending in a New Jersey arbitration proceeding before an
arbitrator assigned by the American Arbitration Association. In October 2005,
ITA filed its answer, generally denying the allegations in the Demand and
asserting numerous affirmative defenses. This action is currently in discovery.
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against Explore Atlantic City, LLC ("Explore")
with the American Arbitration Association in Somerset, NJ. The Demand for
Arbitration alleges that pursuant to a written agreement dated October 28, 2003,
Explore owes Turner $948 thousand for work and/or services performed pursuant to
the contract, but for which Explore has not paid Turner. The case is currently
pending in a New Jersey arbitration proceeding. An arbitrator has been assigned
to the case so the parties can explore settling the matter. At this time,
Explore has responded to the demand by denying any liability, and has asserted
defenses to the amount of the claim and to challenge Turner's right to make
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any demand for payment. A motion for summary judgment has been made by Turner
and the action is currently in discovery, with several depositions having been
taken. Based on the discovery taken place thus far, Explore is of the opinion
that there are several material factual disputes which it believes should defeat
this motion.
In December 2005, Barlo & Associates ("Barlo") filed a Demand for
Arbitration and Mediation against Explore with the American Arbitration
Association in Somerset, NJ. The Demand for Arbitration alleges that pursuant to
a written agreement dated April 16, 2002, Explore owes Turner $21 thousand for
architectural work and/or services performed pursuant to the contract, but for
which Explore has not paid Barlo. The case is currently pending in a New Jersey
arbitration proceeding. An arbitrator has been assigned to the case so the
parties can explore settling the matter. Explore has served discovery requests
on Barlo's counsel and Explore anticipates taking a number of depositions to
develop the factual support for its opposition to Barlo's claim and to support a
potential motion for summary judgment.
The TSA filed with the Office of Dispute Resolution for Acquisition
("ODRA") a contract dispute in connection with the contract entered into in
February 2002 by Huntleigh seeking reimbursement of an alleged overpayment of
principal in the amount of $59.2 million. This claim follows the lawsuit which
Huntleigh has already filed against the TSA for its breaches of its contract
with Huntleigh. Both claims are now pending before ODRA
Huntleigh intends to vigorously challenge the TSA's claim which it asserts
is devoid of any factual or legal merit. The TSA's filing comes on the heels of
a recent decision by ODRA granting Huntleigh's motion for partial Summary
Judgment against the TSA. ODRA has granted Huntleigh's motion for partial
Summary Judgment on Huntleigh's claim that the TSA breached the contract by
failing to give appropriate notice for transitioning airport locations. A
separate hearing will be held to determine the amount of damages due to
Huntleigh on this claim. With regards to the claim for the $59,2 million
overpayment, Huntleigh has filed a motion to dismiss the action. The TSA's
response to this motion is due on September 15, 2006 and Huntleigh's reply brief
is due on September 29, 2006.
The company's 40% owned subsidiary, Ramasso, which operated the Time
Elevator in Rome filed for bankruptcy. The receiver in the bankruptcy has filed
a proceeding against the financial institution which provided loans to Romasso
to recover a security deposit in the amount of (euro)866 thousand ($1 million as
of December 31, 2005) which the financial institution held as security and
applied against its outstanding indebtedness as a result of Romasso's defaults.
The financial institution has impleaded the company on its guarantee to the
financial institution if the financial institution is required to return the
security deposit to the receiver in the bankruptcy.
Last year the Company's subsidiary ICTS USA, Inc. filed a refund claim
with the Internal Revenue Service ("IRS") in an amount in excess of $2 million
which was to be reflected on the December 31, 2005 year end financial statements
as a receivable. The refund has not yet been received by the Company. The
Company made a demand to the IRS for the refund. Thereafter, by letter dated
August 15, 2006, the Company was advised that a criminal investigation by the
United States Department of Justice, Tax Division is ongoing by a grand jury
regarding possible criminal tax violations by the subsidiary for the tax years
2002 and 2003 regarding certain royalty payment made to the Company. As a result
of the investigation the Company believes that the refund had been put on hold.
Although it is not possible at this time to determine the outcome of this
matter, should the result of the IRS investigation prove unsatisfactory to the
Company, this will have a material adverse effect on the Company.
On August 30, 2006 the Company filed a complaint in the United States
District Court for the Southern District of New York against the United States
and Area Director - Technical Compliance, Internal Revenue Service to recover
the refund in the amount of $2,470,365. In addition, the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The Company is currently waiting for a response from the defendants.
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity for both properties) alleging breach of the respective
leases. One suit is in Circuit Court for Baltimore City affecting the Company's
Explore Baltimore facility, and the other is in the Superior Court of New Jersey
affecting the Company's Explore Atlantic City facility. Through legally
defective service, the landlord was able to obtain orders for possession of both
of these locations. A petition to open the Atlantic City action has been filed
and one is being prepared for the Baltimore action. In addition to seeking
possession, in both the cases the landlord is seeking unpaid
-22-
rent for the entire term of the leases. In the Atlantic City case the amount
sought is $5,970.197 and in the Baltimore case, the amount is $ 4,443,513.01.
While a resolution of both actions is being discussed, a standstill of the
proceedings is being negotiated.
On August 2006 the Company was informed that Rogozin Industries Ltd (in
liquidation) filed a litigation regarding a payment of $340 it paid during 2001,
which according to the litigation ICTS is guaranteeing.
.
Discontinued Operations:
1) On December 28, 2005 the Company sold its lease equipment to the
lessee and by that terminated its business in the Lease segment. The
loss associated with the selling of the equipment totaled to $4,774.
The cost of the equipment was $23.5 million and impairment losses
were recorded in 2004 and 2003 of $2,247 and $6,042 respectively.
2) After reviewing the financial results of the Entertainment segment,
the Company decided in December 2005 to cease its operations in this
field. As a result of this decision the company recorded an expense
of $9,701 associated with rent expenses that the company is
obligated to pay until the year 2019. ICTS is guarantying this
commitment.
Pursuant to Statement of Financial Accounting Standard ("FAS") No.144 of
the Financial Accounting Standard Board of the United States "Accounting for the
impairment or Disposal of Long Lived Assets" in a case of discontinued
operations there has to be a separation in the Financial Statements between
continuing operations and the discontinued operations - see note 2 (u) in the
financial statements.
Following this statement all the amounts that represent the discounting
operations were presented separately from the continuing operations, including
the comparative numbers of the last years.
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.
In 2004, as a result of the impairment of the entertainment projects,
management has decided to write off the goodwill related to the entertainment
acquisition amounted to $5.3 million.
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 thousand.
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.
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 substantially 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
-23-
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 require 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.
During 2004 impairment tests were conducted on the carrying amount of the
long-lived assets of the Company pursuant to which it was determined that, as of
the date of the impairment test, an impairment existed in connection with the
leased equipment in an amount of $2 million and with the entertainment sites in
the amount of $8.1 million, as a result an impairment loss totaled to $10.1
million was recognized (all discontinued operations).
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 Explores' facilities in Baltimore, Maryland and
Atlantic City, New Jersey in the amount of $7.5 million and leased equipment of
$6 million, as a result an impairment loss totaled $13.5 million was recognized
(all discontinued operations).
-24-
Discussion and Analysis of Results of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:
(U.S Dollars in thousand except per share data)
Year ended December 31,
-----------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
REVENUES $ 57,713 $ 57,993 $ 67,933 $ 278,561 $ 212,137
COST OF REVENUES 53,721 52,825 52,557 212,439 189,925
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 3,992 5,168 15,376 66,122 22,212
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,690 12,201 8,547 25,635 18,641
IMPAIRMENT OF ASSETS AND GOODWILL 797 9,156 820
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (7,698) (7,033) 6,032 31,331 2,751
FINANCIAL INCOME (EXPENSES) - net (908) (452) 4,118 3,046 1,977
OTHER INCONE (EXPENSES) - net 147 (2,907) (353) 41,229 29,520
INCOME (LOSS) BEFORE TAXES (8,459) (10,392) 9,797 75,606 34,248
INCOME TAXES BENEFIT (EXPENSE) (2,387) 1,529 (3,910) (16,442) (4,919)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (486) (1,625) (6,661) (1,807) (395)
MINORITY INTERESTS IN PROFIT OF SUBSIDIARIES (2,735)
----------- ----------- ----------- ----------- -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS (11,332) (10,488) (744) 57,357 26,198
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax benefit
of $2,525, $1,655 and $795 in 2005, 2004 and 2003,
respectively Includes loss of $4,774 on sale of
assets to a related party on 2005 and after share
in loss of associated company of $36 and $81 in 2005
and 2004, respectively (13,548) (15,474) (18,130) (542)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FOR THE YEAR (24,880) (25,962) (18,904) $ 56,815 $ 26,198
----------- ----------- ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME:
Translation adjustments (1,560) 1,043 3,456 710 (1,811)
Unrealized gains (losses) on marketable securities (214) (616) 794 731 (345)
Reclassification adjustment for losses for available
for sale securities included in net income 237 (771) 368
(1,774) 427 4,487 670 (1,788)
----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR $ (26,654) $ (25,535) $ (14,417) $ 57,485 $ 24,410
=========== =========== =========== =========== ===========
LOSSES PER SHARE:
Profit (Loss) from continued operations:
Profit (Loss) per common share - basic $ (1.74) $ (1.61) $ ( 0.12) $ 8.93 $ 4.18
=========== =========== =========== =========== ===========
Profit (Loss) per common share - diluted $ (1.74) $ (1.61) $ ( 0.12) $ 8.88 $ 4.09
=========== =========== =========== =========== ===========
(Loss) from discontinued operations:
(Loss) per common share - basic $ (2.07) $ (2.37) $ (2.78) $ (0.08)
=========== =========== =========== ===========
(Loss) per common share - diluted $ (2.07) $ (2.37) $ (2.78) $ (0.08)
=========== =========== =========== ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic $ (3.81) $ (3.98) $ ( 2.90) $ 8 .85 $ 4.18
=========== =========== =========== =========== ===========
Profit (Loss) per common share - diluted $ (3.81) $ (3.98) $ ( 2.90) $ 8.80 $ 4.09
=========== =========== =========== =========== ===========
Weighted average shares of common stock outstanding 6,528,100 6,524,250 6,513,100 6,419,575 6,263,909
Adjusted diluted weighted average shares of common
stock outstanding 6,528,100 6,524,250 6,513,100 6,453,447 6,412,535
=========== =========== =========== =========== ===========
|
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The following table sets forth, for the annual periods indicated, certain
statement of operations data as a percentage of revenues:
Year Ended December 31,
--------------------------------
2005 2004 2003
---- ---- ----
Revenues ................................ 100% 100% 100%
Cost of revenues ........................ 93.1% 91.1% 77.4%
Gross profit ............................ 6.9% 8.9% 22.6%
Selling, general and
administrative expenses ............... 20.3% 21.0% 12.6%
Operating income (loss) ................ (13.3)% (12.1)% 8.9%
Loss from continuing operations ......... (19.6)% (18.0)% (1.1)%
Loss from discontinued operations ....... (23.5)% (26.7)% (26.7)%
Loss for the year ....................... (43.1)% (44.8)% (27.8)%
|
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2005 were $57.7 million
(2004: $58 million), and consisted of $48.3 million (2004: $48.2 million) from
U.S. operations, and $9.4 million (2004: $9.8 million) from other operations.
Almost all revenues in the U.S. ($48.3 million) are derived from other
than aviation security 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, 2005 was $4 million, 7%, as a
percentage of revenue (2004: $5.2 million, 9% as a percentage of revenue). The
decrease in gross profit as a percentage of revenues is primarily attributable
to the fact that the gross profit for the year 2005 include expenses of $1.1
million regarding the new activities of operations in the aviation field by
I-SEC and its subsidiaries, mainly establishing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $11.7 million for the year ended December 31, 2005,
20.3% as a percentage of revenues, as compared to $12.2 million, 21% as a
percentage of revenues for the year ended December 31, 2004. The expenses as a
percentage of revenues are similar to last year. The improvement is a result of
efforts done by management to reduce the company expenses.
Operating Loss. Operating loss for the year ended December 31, 2005 was
$7.7 million as compared to an operating loss of $7 million for the year ended
December 31, 2004.
Financial Expenses. Financial expenses in 2005 were $908 compared to $452
in 2004. The increase mainly regards to new loans that were taken by one of the
subsidiaries to purchase new operating equipment and interest expenses form
short-term bank credit.
Other Income (Expense), Net. Other income for the year ended December 31,
2005 was $147 thousand compared to expense of $2.9 million for the year ended
December 31, 2004. $2.7 million in 2004 were attributable to a write-off of the
Company's investment in Bilu. The other income in 2005 was due mainly to one
time payments in the amount of $110 received from investments that were written
off in the past.
Taxes On Income. In 2005 the Company recorded tax expenses of $2,387
thousand attributable mainly to tax accruals regarding tax years 2002 and 2003.
-26-
Share in Losses of Associated Companies. $486 thousand in 2005 as compared
to a loss of $1.6 million for the year ended December 2004. The high loss is
according to our investments in Inksure (loss of 1.2 million during 2005
compared to $1 million in 2004) and NAS (profit of $705 during 2005 compared to
$1.2 million profit in 2004). During 2004, a $1.8 million write-off of Bilu was
also included in the loss of associated companies.
Loss from Continuing Operations. ICTS loss from continuing operations
total in 2005 to $11.3 million compared to $10.5 million in 2004.
Loss from Discontinued Operations. ICTS loss from discontinued operations
in 2005 totaled $13.5 million compared to $15.5 million in 2004. The loss of
2005 includes a capital loss of $4,774 from the selling of the leasing
equipment. The loss in 2004 includes write off losses of $15,422. During 2005 an
expense of $9.7 million was recognized regarding rent contract that should be
paid until 2019.
Net loss. As a result of the foregoing, ICTS's loss amounted to $25
million for the year ended December 31, 2005, as compared to $26 million loss
for the year ended December 31, 2004.
As to the geographical segments please see note 19(a) in the financial
statements.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2004 were $58 million
(2003: $67.9 million), and consisted of $48.2 million (2003: $58.5 million) from
U.S. operations, and $9.8 million (2003: $9.4 million) from other operations.
The decrease in revenues from U.S. operations is primarily the result of
tough competition and the weakness of the aviation industry. As a result of the
Security Act since November 2002, ICTS provides limited aviation security
services within the United States. In 2003 the Company did not generate any
revenues pursuant to a contract with the TSA.
Almost all revenues in the U.S. $48.2 million are derived from other than
aviation security 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, 2004 was $5.2 million, 9%, as
a percentage of revenue (2003: $15.4 million, 22.6% as a percentage of revenue).
The decrease in gross profit as a percentage of revenues is primarily
attributable to the fact that the gross profit for the year 2003 was positively
impacted by a non-recurring contribution of $8.6 million. The non-recurring
contribution is primarily the result of a reversal in the amount of $17.8
million of Warn Act related accrual made in 2002. This was partly offset by an
accrual concerning a dispute with the U.S. Department of Labor totaling $7.3
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.2 million for the year ended December 31, 2004,
21% as a percentage of revenues, as compared to $8.5 million, 12.6% as a
percentage of revenues for the year ended December 31, 2003. The increase in
selling, general and administrative expenses is primarily attributable to the
implementation of restructuring measures imposed by the new management of the
Company aiming into focusing to the main core business of security and disposing
of non core segments. These measures increased costs such as compensation to
previous employees, hiring new professional personnel and legal fees.
Operating Loss. Operating loss for the year ended December 31, 2004 was $7
million as compared to an operating income of $6 million for the year ended
December 31, 2003.
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Financial Income (Expenses). Financial expenses in 2004 was $452 thousand
compared to $4.1 million income. Exchange rates totaled an expense of $84
thousand in 2004 compared to $2.6 million income in 2003. The decline in
interest income is due to decrease of interest bearing deposits and marketable.
Other Income (Expense), Net. Other income for the year ended December 31,
2004 was $2.9 million negative as compared to $353 thousand for the year ended
December 31, 2003. $2.7 million were attributable to a write-off of the
Company's investment in Bilu.
Taxes On Income. In 2004 the Company recorded tax benefit of $1.5 million
attributable mainly to tax refunds on carried back losses against tax paid on
income in 2002 in the USA.
Share in Losses of Associated Companies. $1.6 million in 2004 consists
mainly of write-off of the equity investment in Pioneer ($1.8 million), loss in
Inksure ($1 million) and income in NAS ($1.2 million).
Loss from Continuing Operations. ICTS loss from continuing operations
totaled in 2004 to $10.5 million compared to $744 thousand in 2003.
Loss from Discontinued Operations. Loss from discontinued operations total
in 2004 of $15.5 million compared to $18.1 million in 2003. Write-off expenses
totaled o $15,422 and $13,555 in 2004 and 2003, respectively. Financial expenses
reduced from $3,334 in 2003 to $321 in 2004 mainly because exchange rates
expenses that totaled $0 and $2,877 in 2004 and 2003, respectively.
Net loss. As a result of the foregoing, ICTS's loss amounted to $26
million for the year ended December 31, 2004, as compared to $18.9 million loss
for the year ended December 31, 2003.
As to the geographical segments please see note 19(a) in the financial
statements.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2003 were $67.9 million
(2002: $278.6 million), and consisted of $58.5 million (2002: $272.7 million)
from U.S. operations, and $9.4 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 (74% of ICTS's 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. ($58.5 million), are derived from other
than aviation security services, compared with $37.6 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 for the year ended December 31, 2003 was $15.4 million,
22.6%, as a percentage of revenue (2002: $66.1 million, 23.7% 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. 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 in the amount
of $17.8 million of Warn Act related accrual made in 2002. This was partly
offset by an accrual concerning a dispute with the US Department of Labor
totaling $7.3 million.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.5 million for the year ended December 31, 2003,
12.6% 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 profit for the year ended December 31, 2003
was $6 million as compared to an operating profit of $31.3 million for the year
ended December 31, 2002.
Financial Income, Net. Financial 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 to $1.5 million income
from $689 thousand in 2002, 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.
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.
Profit (Loss) from Continuing Operations. ICTS loss from continuing
operations totaled in 2003 was $744 compared to $57.4 profit in 2002.
Loss From Discontinued Operations. Loss from discontinued operations
totaled in 2002 $18.1 million compared to 0.5 million in 2002. The leasing
activities started on the second half of 2002 and its activities during 2002
were almost balanced comparing to loss of $8 million in 2004, including $6
million impairment of equipment. In 2003 the loss regarding the entertainment
segment totaled $10.1 million, including $7.5 million impairment compared to
2002 in which the loss amounted to $0.5 million - establishing expenses.
Net income (Loss). As a result of the foregoing, ICTS's 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.
As to the geographical segments please see note 19(a) in the financial
statements. Revenues in the USA were negatively impacted by loss of the TSA
contract. Revenues in The Netherlands increased due to a favorable exchange rate
of the euro to the dollar and first full year of operation leasing segment.
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