Skycap Services Provider
A skycap assists passengers with their luggage. Located at the curbside of the check-in at airports, a skycap checks in passengers' luggage and meets security requirements established by the TSA to screen passengers. A skycap also assists arriving passengers with transporting luggage from the baggage carousel to ground transportation or other designated areas.
A skycap also may transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring the baggage carousel to ensure that passengers do not remove luggage not belonging to them.
Wheelchair attendants
Wheelchair attendants transport passengers through the airport in airline and/or Company owned wheelchairs and may also operate electric carts for transporting passengers through the airport. Working closely with the attendants are dispatch agents who monitor requests and assignments for wheelchairs and dispatch the attendants as needed.
Baggage Handling Services
Huntleigh provides employees who move passengers’ baggage from the check- in counter to screening machines and/or vice versa, as well as moving oversized baggage from check-in to appropriate bag belts.
Technological Systems and Solutions
APS (Advanced Passenger Screening)
The APS is a sophisticated IT system that enables pre-departure analysis of passenger information and is designed to screen airline passengers in a faster and more efficient manner. It was developed based on the extensive experience and knowledge accumulated by the Company’s professionals.
I-BOX
I-BOX, a unique technological platform developed by the Company, comprises one of the main contributors to the high operational efficiency of the Company and is used as part of our aviation security systems. It is an advanced mobile unit that can be implemented with multiple choices of software packages. The I-BOX provides an unparalleled level of performance while reducing processing times to a minimum, thus eliminating related delays and avoiding inconvenience to the passengers. The I-BOX system has been deployed successfully in various locations around the world providing our customers with enhanced security operations.
SARA
SARA is an extensive real-time airport security assets management system. It is developed using the latest IT technologies, and provides an unparalleled monitoring and control tool for managing the security personnel and assets deployed in an airport. It can also give additional invaluable data about passenger flow through (security) checkpoints.
Front-end Identity Document Authentication and Management System (FDI)
FDI automates the authentication of physical ID documents and their conversion to workable digital records. FDI speeds up customer screening and enrollment while meeting the security standards of security- and business-sensitive environments such as airports, border control, financial services, etc. FDI solutions can be used with 3-illumination professional scanners for high security requirements or with regular TWAIN scanners and even mobile devices for standard security requirements, thus enabling broad usability for different markets.
Key Features: Hi-Resolution document imaging, auto image optimization, readable + encoded content extraction, photograph extraction, multi-layer identity authentication (according to scanner type), immediate detailed exception alerts, ability to integrate with chip readers and barcode readers, ability to integrate with biometric inputs, ability to query date against databases or watch-lists and ability to operate in stand-alone or networked modes.
FDI is relevant for a broad range of commercial and government markets.
Key markets for FDI are airports, airlines, bank branches, motor, financing dealerships, HR departments, etc.
Back office Identity Document Authentication and Management System (BOS)
BOS automates the authentication of ID document image files (i.e. not the physical documents) and their conversion to workable digital records. BOS speeds up customer screening and enrollment in the Customer-Not-Present (CNP) online and mobile space. BOS is the forerunner of 2nd generation technology that offers multi-factor, high-end image tampering forensics and collateral risk-factor processing. BOS is designed to process ID images produced by customers and service providers using mobile devices in sub-optimal conditions.
Key features: 100% automated (Click & Go, data entry free), seconds-fast processing, 3-way, multi-factor authentication( logical data integrity checks, advanced image tampering forensics incl. synthetic ID detection, collateral risk factor checks), detailed actionable exception reporting and superior capacity to handle sub-optimal image qualities.
BOS is designed to handle images that originate from any standard imaging device such as mobile phones, tablets, computer cams, etc. BOS is available as cloud (SaaS) or internal service and can be integrated with additional services such as data referencing, address verification, etc.
BOS is relevant for a broad range of commercial and government markets.
Key markets for BOS are financial services including payments, wallets, money transfer, lending, remittance, online investments, trading & forex, etc.
Marketing of Security Systems and Technology
We market our technologies by establishing projects with airports, airlines, financial services (including banks, leasing and car financing), telecom, and other existing and potential customers.
Discontinued Operations
In December 2005, the Company committed to a plan to cease the operations of its entertainment segment in the United States. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment segment were classified as discontinued operations in the Company's consolidated financial statements.
In January 2011, the operations of the entertainment segment were liquidated.
In connection with the Company’s settlement of certain assessments with the Internal Revenue Service (“IRS”), the Company recognized in 2013 income of $1.8 million from reversal of accrued expense regarding the settlemnet with the IRS , including interest and penalties, related to its entertainment segment from discontinued operations.
During the year ended December 31, 2012, the Company committed to a plan to cease the operations of its subsidiary in France (I-SEC France) and in November 2012 transferred control of the subsidiary to a court-appointed liquidator. The subsidiary provided aviation security services in France.
During the year ended December 31, 2012, the Company ceased the operations of its subsidiaries in Romania (I-SEC Romania) and Hungary (I-SEC Hungary), which provided aviation security services in the respective countries.
During the year end December 31, 2013, the Company ceased the operations of its subsidiaries in the United Kingdom (I-SEC UK) and Denmark (I-SEC Denmark). In addition, the Company committed to a plan to cease operations of its subsidiary in Belgium (I-SEC Belgium). All of the subsidiaries provided aviation security services in the respective countries.
During the year ended December 31, 2014, the Company committed to a plan to cease the operations of its subsidiary in Switzerland (I-SEC Switzerland) which provided aviation security services.
Major Customers
Revenue from two customers represented 70% of total revenue during the year ended December 31, 2015, of which one customer accounted for 37% and the other customer accounts for 33% of total revenue. Accounts receivable from these two customers represented 64% of total accounts receivable as of December 31, 2015.
Revenue from two customers represented 67% of total revenue during the year ended December 31, 2014, of which one customer accounted for 38% of total revenue and the other customer accounted for 29% of total revenue. Accounts receivable from these two customers represented 65% of total accounts receivable as of December 31, 2014.
Revenue from two customers represented 52% of total revenue during the year ended December 31, 2013 of which one customer accounted for 42% of total revenue. Accounts receivable from these two customers represented 37% of total accounts receivable as of December 31, 2013.
One of the customers mentioned above, has been a principle customer in the last three years.
Prior year figures in this disclosure have been adjusted to the customer mergers within the aviation industry.
Revenue
Revenue in the U.S.
Our revenue in the United States during the years 2015, 2014 and 2013 totaled $41.8 million (22% of total revenue), $40 million (23% of total revenue) and $41.6 million (33% of total revenue), respectively.
Revenue in Europe, Japan and other locations
Our revenue in Europe, Japan and other locations during the years 2015, 2014 and 2013 totaled $145.2 million (78% of total revenue), $132.9 million (77% of total revenue) and $82.9 million (67% of total revenue), respectively.
Competition
Competition in the aviation security and aviation related services industry as well as in the technology 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.
Aviation Security Regulatory Matters
Our aviation security activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction in the serviced area. The Company, on behalf of its clients, is responsible for adherence to such regulations relating to certain security aspects of their activities. The Company is also responsible to prevent passengers without proper travel documentation from boarding a flight, thereby avoiding fines otherwise imposed on its clients by immigration authorities.
We are subject to random periodic tests by government authorities with regard to the professional level of its services and training. Any failure to pass such a test may result in the loss of a contract or a license to perform services or a fine or both.
In the airports in which we operate, a license to operate is required from the respective airport authority. The Company currently holds the licenses required to operate in such locations.
Climate Change Regulation
Our business is not affected directly or indirectly in any way by existing and pending, local, state, regional, federal or international legal requirements and agreements related to climate change.
Organizational Structure
I-SEC Global Security B.V. (The Netherlands - 100%) and its wholly-owned subsidiaries:
I-SEC International Security B.V. (The Netherlands - 100%), which holds the shares of:
Procheck International B.V. (The Netherlands - 100%)
I-SEC Nederland B.V. (Netherlands - 100%)
I-SEC Advanced Systems B.V. (Netherlands - 100%)
I-SEC Russia LLC (Russia - 100%)
I-SEC Spain Services Management S.L. ( Spain - 100%)
I-SEC Spain Security Management S.L. (Spain - 100%)
I-SEC Italy (Italy - 100%)
I-SEC Services Italia s.r.l. (Italy – 100%)
I-SEC Japan K.K. (Japan - 100%)
I-SEC International Security Portugal (Portugal - 100%)
I-SEC Germany GmbH (Germany - 100%) which holds the shares of:
I-SEC Deutsche Luftsicherheit GmbH (Germany - 100%)
I-SEC Nord GmbH (Germany - 100%)
ICTS USA, Inc. (New York - 100%) which holds the shares of:
Huntleigh USA, Corp. (New York - 100%)
AU10TIX B.V. (The Netherlands - 100%, formerly I-SEC Technologies B.V.) which holds the shares of:
10TIX Authentication and Identification Advanced Systems Ltd. (Israel – 100%)
AU10TIX Limited ( Cyprus – 100%)
Property, Plant and Equipment
The Company leases certain premises under various operating leases. Future minimum lease payments under such operating leases are as follows:
Year ended
|
|
|
|
|
|
|
|
|
|
$ |
1,356 |
|
2017
|
|
|
424 |
|
2018
|
|
|
353 |
|
2019
|
|
|
316 |
|
2020
|
|
|
312 |
|
|
|
$ |
2,761 |
|
Rent expense for the years ended December 31, 2015, 2014 and 2013 is $3.4 million, $3.3 million and $1.7 million, respectively.
|
Operating and Financial Review and Prospects
|
This section contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition. All statements other than statements of historical facts included in this annual report on Form 20-F regarding ICTS's strategy, future operations, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report on Form 20-F the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under "Risk Factors" and elsewhere in this annual report on Form 20-F.
We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 20-F represent management's expectations as of the date of this annual report on Form 20-F and should not be relied upon as representing ICTS's expectations as of any other date. Subsequent events and developments will cause management's expectations to change. However, while we may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to do so, even if its expectations change.
Overview
The Company operates in three reportable segments (a) corporate (b) airport security and other aviation services and (c) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provide security and other services to airlines and airport authorities, predominantly in Europe and the United States. The technology segment is predominantly involved in the development and sale of identity security software to financial and other institutions, in Europe and the United States. All inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole.
Critical Accounting Policies
The consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the use of judgment and estimates are listed below. Please refer to Note 2 of ICTS's consolidated financial statements included in this Annual Report for the year ended December 31, 2015 for a summary of ICTS's significant accounting policies.
Accounts Receivable
Accounts receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on historical collection experience, factors related to a specific customer and current economic trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined to be uncollectible.
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value.
Contingent Liabilities
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated.
Stock-Based Compensation
Stock-based compensation to employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. The compensation expense resulting from stock-based compensation to management and administrative employees is recorded over the vesting period of the award in selling, general and administrative expense on the accompanying consolidated statements of operations and comprehensive income (loss). Compensation expense resulting from stock based compensation to operational employees is recorded over the vesting period of the award in cost of revenue.
Stock-based compensation issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the stock-based compensation, whichever is more readily determinable.
Revenue Recognition
Revenue is recognized as services are rendered based on the terms contained in the Company’s contractual arrangements with customers, provided that services have been rendered, the fee is fixed or determinable, and collection of the related receivable is reasonably assured.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.
Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
Results of Operations
|
|
(U.S. Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$ |
187,022 |
|
|
$ |
172,929 |
|
|
$ |
124,497 |
|
Cost of revenue
|
|
|
167,844 |
|
|
|
152,224 |
|
|
|
108,995 |
|
GROSS PROFIT
|
|
|
19,178 |
|
|
|
20,705 |
|
|
|
15,502 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2,565 |
|
|
|
2,207 |
|
|
|
2,182 |
|
Selling, general and administrative
|
|
|
20,406 |
|
|
|
17,316 |
|
|
|
16,925 |
|
Forgiveness of debt
|
|
|
- |
|
|
|
- |
|
|
|
(1,312 |
) |
Total operating expenses
|
|
|
22,971 |
|
|
|
19,523 |
|
|
|
17,795 |
|
OPERATING INCOME (LOSS)
|
|
|
(3,793 |
) |
|
|
1,182 |
|
|
|
(2,293 |
) |
Other income (expenses), net
|
|
|
(760 |
) |
|
|
448 |
|
|
|
(3,987 |
) |
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE)
|
|
|
(4,553 |
) |
|
|
1,630 |
|
|
|
(6,280 |
) |
Income tax benefit(expense)
|
|
|
(149 |
) |
|
|
(90 |
) |
|
|
1,026 |
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(4,702 |
) |
|
|
1,540 |
|
|
|
(5,254 |
) |
Income (loss) from discontinued operations
|
|
|
- |
|
|
|
(109 |
) |
|
|
1,821 |
|
NET INCOME (LOSS)
|
|
$ |
(4,702 |
) |
|
$ |
1,431 |
|
|
$ |
(3,433 |
) |
The following table sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years ended December 31, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue
|
|
|
89.7 |
% |
|
|
88.0 |
% |
|
|
87.5 |
% |
Gross profit
|
|
|
10.3 |
% |
|
|
12.0 |
% |
|
|
12.5 |
% |
Research and development expenses
|
|
|
1.4 |
% |
|
|
1.3 |
% |
|
|
1.7 |
% |
Selling, general and administrative expenses
|
|
|
10.9 |
% |
|
|
10.0 |
% |
|
|
13.6 |
% |
Forgiveness of debt
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(1.1 |
)% |
Total operating expenses
|
|
|
12.3 |
% |
|
|
11.3 |
% |
|
|
14.3 |
% |
Operating income (loss)
|
|
|
(2.0 |
)% |
|
|
0.7 |
% |
|
|
(1.8 |
)% |
Other income (expense), net
|
|
|
(0.4 |
)% |
|
|
0.2 |
% |
|
|
(3.2 |
)% |
Income (loss) before income tax benefit (expense)
|
|
|
(2.4 |
)% |
|
|
0.9 |
% |
|
|
(5.0 |
)% |
Income tax benefit (expense)
|
|
|
(0.0 |
)% |
|
|
(0.0 |
)% |
|
|
0.8 |
% |
Income (loss) from continuing operations
|
|
|
(2.4 |
)% |
|
|
0.9 |
% |
|
|
(4.2 |
)% |
Income (loss) from discontinued operations
|
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
1.5 |
% |
Net income (loss)
|
|
|
(2.5 |
)% |
|
|
0.8 |
% |
|
|
(2.7 |
)% |
The following table sets forth, for the annual periods indicated, revenue generated by country:
|
|
(U.S. Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
United States of America
|
|
$ |
41,817 |
|
|
$ |
39,983 |
|
|
$ |
41,565 |
|
Netherlands
|
|
|
72,231 |
|
|
|
69,667 |
|
|
|
56,631 |
|
Germany
|
|
|
61,765 |
|
|
|
49,771 |
|
|
|
13,002 |
|
Other
|
|
|
11,209 |
|
|
|
13,508 |
|
|
|
13,299 |
|
Total
|
|
$ |
187,022 |
|
|
$ |
172,929 |
|
|
$ |
124,497 |
|
Revenue
Total revenue increased from $172.9 million in 2014 to $187.0 million in 2015.
Revenue generated in the Netherlands was $72.2 million in 2015 compared to $69.7 million in 2014. The increase in revenue generated in the Netherlands was primarily a result of additional services provided to Schiphol Airport. The average exchange rate Euro-Dollar went down by 16.5%. Revenue generated in the Netherlands in 2015 based on the 2014 exchange rate would have totaled $86.4 million compared to $72.2 million according to the current exchange rate.
Revenue generated in Germany was $61.8 million in 2015 compared to $49.8 million in 2014. The increase in revenue generated in Germany was primarily a result of additional services provided to Frankfurt Airport. The average exchange rate Euro-Dollar went down by 16.5%. Revenue generated in Germany in 2015 based on the 2014 exchange rate would have totaled $74.0 million compared to $61.8 million according to the current exchange rate.
Revenue generated in the United States of America was $41.8 million compared to $40.0 million in 2014. The increase of revenue generated in the United States was primarily a result of additional services provided to different customers and increases in prices of certain services provided by the Company.
Revenue outside the Netherlands, Germany and the United States totaled $11.2 million compared to $13.5 million in 2014. The decrease in revenue from other locations was primarily a result of fewer services required by customers in certain locations.
Cost of revenue
Cost of revenue increased from $152.2 million or 88.0% in 2014 to $167.8 million or 89.7%. Increases from $152.2 million to $167.8 million relates primarily to increase in revenues in the Netherlands and Germany and costs relating to the extended contracts in those countries. In addition, in August 2015, following a decision of the State Supreme Court of Washington regarding increase of the minimum wages for the town of SeaTac, Washington, effective January 1, 2014, the Company recorded an accrual for this liability of which $3.0 million is expensed in cost of revenue.
Research and Development expenses (“R&D”)
R&D expenses increased from $2.2 million or 1.3% in 2014 to $2.6 million or 1.4% in 2015. The increase relates mostly to increases in the number of employees working in our technology segment.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses increased from $17.3 million or 10.0% in 2014 to $20.4 million or 10.9% in 2015. The increase from 10.0% in 2014 to 10.9% in 2015 is mostly a result of bonuses to certain officers in 2015 totaling $1.6 million compared to $0 in 2014.
Other income (expense), net
Other income (expense), net totaled $(0.8) million in 2015 compared to $0.4 million in 2014. Interest expense to a related party increased from $2.3 million in 2014 to $2.6 million in 2015. Borrowings from a related party continued to increase during the year 2015 thus increasing the interest expense related to that loan.
Interest expense and bank charges increased from $1.1 million in 2014 to $1.4 million, mostly because of an increase of usage of the lines of credit in Europe and the United States.
Foreign currency gain in 2015 totaled $3.1 million in 2015 compared to $3.7 million in 2014. During 2015 the exchange rate between the Dollar and the Euro dropped from 1.21 Dollar per Euro as of December 31, 2014 to 1.09 Dollar per Euro as of December 31, 2015, a decrease of approximately 10%. As substantial balances of the Company’s liabilities are in Euro’s, the Company recorded a foreign currency gain in 2015. In 2014 the exchange rate between the Dollar and the Euro decreased by 12% which created higher foreign currency profit.
Income Tax Benefit (Expense)
The Company had income tax expense of $(0.1) million both in 2015 and 2014.
Revenue
Total revenue increased from $124.5 million in 2013 to $172.9 million in 2014.
Revenue generated in the Netherlands was $69.7 million in 2014 compared to $56.6 million in 2013.The increase in revenue generated in the Netherlands was primarily a result of additional services provided to Schiphol Airport. The effect of the exchange rates on 2014 revenue compared to 2013 was not significant.
In June 2013, the Company acquired an entity in Germany that provides aviation security services. Revenue generated in Germany was $49.8 million in 2014 compared to $13.0 million in 2013 (since date of acquisition until December 31, 2013).
Revenue in the United States decreased from $41.6 million in 2013 to $40.0 million in 2014 due to decreased services provided as well as the loss of certain contracts.
Revenue outside the United States, the Netherlands and Germany totaled to $13.5 million in 2014 compared to $13.3 in 2013.
Cost of Revenue
Cost of revenue increased from $109 million or 87.5% in 2013 to $152.2 million or 88.0% in 2014. Cost of revenue was fairly consistent at 87.5% of revenue in 2013 compared to 88.0% in 2014. Increases from $109 million in 2013 to $152.2 million in 2014 relates primarily to an increase in revenues in the Netherlands and Germany.
Research and Development expenses (“R&D”)
R&D expenses were fairly consistent at $2.2 million both in 2014 and 2013.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses increased from $16.9 million or 13.6% in 2013 to $17.3 million or 10.0% in 2014. SG&A was fairly consistent at $16.9 million in 2013 compared to $17.3 million in 2014. Decrease from 13.6% of revenue in 2013 to 10.0% of revenue in 2014 is a result of increases in revenues primarily in the Netherlands and Germany.
Forgiveness of debt
Other income (expense), net
Other income (expense), net totaled $0.4 million in 2014 compared to $(4.0) million in 2013.
Interest expense to a related party was fairly consistent from $2.3 million in 2014 compared to $2.2 million in 2013. Borrowings from a related party, including accrued interest, increased from $36.6 million in 2013 to $38.5 million in 2014. Interest related to the related party debt is expected to increase in the future as borrowings from the related party are expected to increase.
Interest expense and bank charges were fairly consistent at $1.1 million both in 2014 and 2013.
Interest income related to uncertain tax positions totaled $0 million in 2014 compared to income of $0.3 million in 2013. Interest income in 2013 resulted from the Company’s reversal of an accrued expense following a settlement with the IRS.
Foreign currency gain (loss) in 2014 totaled $3.7 million compared to $(1.0) million in 2013. During 2014 the exchange rate between the Dollar and the Euro dropped from 1.38 Dollar per Euro as of December 31, 2013 to 1.21 Dollar per Euro, a decrease of approximately 12%. As substantial balances of the Company’s liabilities are in Euros, the Company recorded a foreign currency gain in 2014. In 2013 the exchange rate between the Dollar and the Euro increased from 1.32 Dollar per Euro to 1.38, which created a foreign currency loss.
Income Tax Benefit (Expense)
The Company had income tax expense of $(0.1) million in 2014 compared to an income tax benefit of $1.0 million in 2013. The income tax benefit in 2013 relates primarily to the reversal of an accrued expense following a settlement of debt with the IRS, creating an income tax benefit of $1.1 million. This tax benefit was offset with $(0.1) million tax expense which relates primarily to certain profitable subsidiaries in Europe and the Far East, similar to the income tax expense of $(0.1) in 2014.
Income (Loss) from Discontinued Operations
Loss from discontinued operations in 2014 of $0.1 million relates primarily to discontinued operations of European subsidiaries. Income from discontinued operations in 2013 of $1.9 million relates primarily to the reversal of accrued expense following a settlement of certain income tax assessments with the IRS related to the discontinued entertainment segment.
The following table sets forth, for the annual periods indicated, certain financial data related to the Company’s reportable segments.
|
|
|
|
|
Airport
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Services
|
|
|
Technology
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
185,519 |
|
|
$ |
1,503 |
|
|
$ |
187,022 |
|
Depreciation and amortization
|
|
|
1 |
|
|
|
655 |
|
|
|
57 |
|
|
|
713 |
|
Income (loss) from continuing operations
|
|
|
(3,182 |
) |
|
|
1,597 |
|
|
|
(3,117 |
) |
|
|
(4,702 |
) |
Total assets from continuing operations
|
|
|
440 |
|
|
|
41,056 |
|
|
|
853 |
|
|
|
42,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
172,102 |
|
|
$ |
827 |
|
|
$ |
172,929 |
|
Depreciation and amortization
|
|
|
3 |
|
|
|
689 |
|
|
|
69 |
|
|
|
761 |
|
Income (loss) from continuing operations
|
|
|
(99 |
) |
|
|
5,106 |
|
|
|
(3,467 |
) |
|
|
1,540 |
|
Total assets from continuing operations
|
|
|
404 |
|
|
|
34,006 |
|
|
|
461 |
|
|
|
34,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
- |
|
|
$ |
124,130 |
|
|
$ |
367 |
|
|
$ |
124,497 |
|
Depreciation and amortization
|
|
|
2 |
|
|
|
671 |
|
|
|
91 |
|
|
|
764 |
|
Income (Loss) from continuing operations
|
|
|
(3,938 |
) |
|
|
2,373 |
|
|
|
(3,689 |
) |
|
|
(5,254 |
) |
Total assets from continuing operations
|
|
|
447 |
|
|
|
27,720 |
|
|
|
488 |
|
|
|
28,655 |
|
Corporate Segment
The Company’s loss from continuing operations in the corporate segment increased from $0.1 million in 2014 to $3.2 million in 2015. The increase is primarily due to the following: (a) bonuses granted to certain officers in 2015 totaling $1.6 million compared to $0 in 2014.(b) Grant of $0.7 million to the Chairman of the Supervisory Board as compensation for the last eleven years. (c) Decrease of exchange rate income by $0.6 million.
The Company’s loss from continuing operations in the corporate segment decreased from $3.9 million in 2013 to $0.1 million in 2014. The decrease is primarily due to the following: (a) foreign currency gain in 2014 totaled $3.7 million compared to foreign currency loss of $1.0 million in 2013 and (b) income of $0 in 2014 compared to $0.7 million related to treversal of accrual following the settlement of uncertain income tax positions with the IRS.
Airport Security and Other Aviation Services Segment
Increases in revenue from $172.1 million in 2014 to $185.5 million in 2015 relates primarily to: (a) an increase of revenues in Germany from $49.8 million in 2014 to $61.8 million in 2015. (b) An increase of revenues in the Netherlands from $69.7 million in 2014 to $72.2 million in 2015.
Revenue generated in the Netherlands, Germany and some other European countries was affected by exchange rate fluctuations as the average rate of the Euro–Dollar decreased by 16.5% in 2015 compared to 2014.
In 2015, the Company’s income from continuing operations related to aviation services was $1.6 million compared to $5.1 million in 2014. The 2015 profit includes an expense of $3.3 million relating to a minimum wage increase in SeaTac Airport, Washington, USA, following a recent decision of the Washington State Supreme Court. According to the court’s decision, the minimum wage increase is effective from January 1, 2014. The Company has estimated that it has a liability of approximately $3.3 million for back wages and accrued interest and has recorded in 2015 an accrual for this liability.
Increase in revenue from $124.1 million in 2013 to $172.1 million in 2014 relates primarily to: (a) an increase of revenues in the Netherlands from $56.6 million in 2013 to $69.7 million in 2014. Revenue generated in the Netherlands increased primarily due to increases in services provided to customers (b) following an acquisition of a German company in the aviation security field, revenues in Germany were $49.8 million in 2014 compared to $13.0 in 2013 (since date of acquisition until December 31, 2013). In 2014, the Company’s income from continuing operations related to aviation services was $5.1 million compared to $2.4 million in 2013. The 2013 figures include a non-recurring income of $1.3 million related to forgiveness of debt as a result of the
Company reversing certain accounts payable.
Technology Segment
Revenue in 2015 was $1.5 million compared to $0.8 million in 2014. The loss from continuing operations amounted to $3.1 million in 2015 compared to $3.5 million in 2014.
Revenue in 2014 was $0.8 million compared to 0.4 million in 2013. The loss from continuing operations to $3.5 million in 2014 compared to $3.7 million in 2013.
Liquidity and Capital Resources
The Company’s most significant expenditures consist of payroll, related costs and professional fees. The Company has historically financed such expenditures through cash flows from operations, funding received from lines of credit with lenders in the United States and Europe and borrowings from a convertible note arrangement with a related party.
As of December 31, 2015 and 2014, the Company had cash on hand of $7.9 million and $6.0 million, respectively, not including restricted cash of $4.4 million and $4.8 million as of December 31, 2015 and 2014, respectively. As of December 31, 2015 and 2014 the restricted cash serves as collateral for our letters of credit in the United States and restricted bank accounts in the Netherlands, which are restricted for payments to local tax authorities.
The Company has a working capital and shareholders’ deficits and a history of recurring losses from continuing operations and negative cash flows from operations. As of December 31, 2015 and 2014, the Company had a working capital deficit of $5.0 million and $2.5 million, respectively and shareholders’ deficit of $42.2 million and $39.1 million, respectively. During the years ended December 31, 2015, 2014 and 2013, the Company
incurred income (loss) from continuing operations of $(4.7) million, $1.5 million and $(5.3) million, respectively, and provided (used) cash flows from operations of $(1.1) million, $1.8 million and $(7.7) million, respectively. Collectively, these factors raise substantial doubt about our ability to continue as a going concern.
The report of our independent registered public accounting firm on our 2015 consolidated financial statements includes an explanatory paragraph stating that there is substantial doubt with respect to our ability to continue as a going concern.
Management believes that our operating cash flows and a related party / third party financing activities will provide it with sufficient funds to meet its obligations and execute its business plan for the next twelve months. However, there are no assurances that management's plans to generate sufficient cash flows from operations and obtain additional financing from a related party or third parties will be successful. In May 2014, the Company increased its borrowing capacity under the convertible notes payable to related party to $37.0 million. In addition, in April 2015, the Company entered into a new line of credit arrangements in Europe to provide it with up to €5.5 million in borrowing capacity. In January 2016 the
Company signed with the same bank a new line of credit arrangement to replace the previous agreement. According to the new agreement the line of credit increased up to €10.0 million.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Cash Flows from Operating Activities
Our cash flows from operating activities vary significantly from year to year, depending on our operating results and timing of cash receipts and disbursements on accounts receivable, accounts payable, accrued expenses and other current liabilities.
Net cash used in operating activities in 2015 was $1.1 million. This used cash resulted primarily from net loss of $4.7 million and a non-cash charge of $0.7 million for depreciation and amortization. Net cash provided by continuing operating assets and liabilities of $2.8 million is primarily attributable to an increase in accrued expenses and other current liabilities of $9.1 million, increase of accounts payable of $0.5 million and increase of VAT payable of $0.5 million. This was offset by an increase in accounts receivable, net, of $6.3 million and an increase in prepaid expenses and other current assets of $1.0 million.
Net cash provided by operating activities in 2014 was $1.8 million. This provided cash resulted primarily from net income from continuing operations of $1.5 million and a non-cash charge of $0.8 million for depreciation and amortization. Net cash used in continuing operating assets and liabilities of $0.4 million is primarily attributable to an increase in accounts receivable, net of $6.9 million, payments made to the U.S. Department of Labor of $0.3 million and decrease in other liabilities of $0.4 million. This was offset by an increase in accrued expenses and other current liabilities of $5.4 million increase of accounts payable of $0.7 million and increase of VAT payable of $1.2 million. Net cash used in discontinued operations in 2014 was $0.1 million.
Net cash used in operating activities in 2013 was $7.7 million. This use of cash resulted primarily from a net loss from continuing operations of $5.3 million and non-cash gain related to forgiveness of debt of $1.3 million. This amount was partially offset by:(a) a non-cash charge of $0.8 million for depreciation and amortization, and (b) amortization of deferred financing costs of $0.1 million. Net cash used by continuing operating assets and liabilities of $2.2 million is primarily attributable to an increase in accounts receivable, net of $3.5 million, decrease of accounts payable of $0.3 million, decrease in income taxes payable of $1.7 million following the 2013 reversal of accrual following a settlement with the IRS and payments made to the U.S. Department of Labor of $0.3 million. This was offset by an increase in accrued expenses and other current liabilities of $2.8 million and increase of $0.5 million in other
liabilities. Net cash provided by discontinued operations in 2013 was $0.1 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2015 was $1.1 million and consisted primarily of capital expenditures of $1.0 million.
Net cash provided by investing activities for the year ended December 31, 2014 was $1.2 million and consisted primarily of a decrease in restricted cash of $1.9 million, offset by capital expenditures of $ 0.6 million.
Net cash used in investing activities for the year ended December 31, 2013 was $2.1 million and consisted primarily of an increase in restricted cash of $1.5 million and capital expenditures of $0.7 million.
Cash Flows from Financing Activities
Net cash provided by financing activities in 2015 was $7.8 million, which consisted primarily of an increase of $4.0 million, net, from the Company’s convertible note arrangement with a related party, an increase of $1.9 million on our line of credit in Europe and the United States and stock issuance for $1.7 million.
Net cash provided by financing activities in 2014 was $4.3 million, which consisted primarily of an increase of $5.7 million of proceeds from our convertible note arrangement with a related party, a decrease in net borrowings on our lines of credit in Europe and the United States of $2.2 million and increase of cash overdraft of $0.8 million.
Net cash provided by financing activities in 2013 was $11.0 million, which consisted primarily of an increase of $7.3 million of net proceeds from our convertible note arrangement with a related party and an increase in net borrowings on our lines of credit in Europe and the United States of $4.1 million.
We expect to continue to draw down from our convertible note arrangement with a related party as necessary to meet our short-term cash needs. In addition, we increased several times a line of credit in Europe and expect to use the available funds pursuant to the new arrangement.
Borrowings
United States
The Company was a party to a credit facility with an independent lender, which provided it with up to $10.5 million in borrowings subject to a borrowing base limitation. The borrowing base limitation was equivalent to: (i) 80% of eligible accounts receivable, as defined, plus (ii) 70% of eligible unbilled receivables, as defined, plus (iii) 100% of the Company’s $3.5 million in cash collateral plus (iv) 95% of a $1.0 million standby letter of credit that was provided to the lender by an entity related to the Company’s main shareholder. Borrowings under the credit facility were secured by the
Company’s accounts receivable, unbilled receivables, equipment, cash, a $3.5 million certificate of deposit, and the $1.0 million letter of credit that was provided to the lender by an entity related to the Company’s main shareholder.
In June 2014, the Company amended the credit facility to decrease the maximum borrowing capacity to $6.5 million and amend existing financial and non-financial covenants, including the maintenance of a specified fixed charge coverage ratio. The borrowing base limitation was also amended and is equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 75% of eligible unbilled receivables, as defined, plus (iii) 95% of a $1,0 million standby letter of credit that was provided to the lender by an entity related to the Company’s main shareholder. In addition, as part of the amendment, the Company’s $3.5 million cash collateral was released and
used to reduce outstanding borrowings under the credit facility. The credit facility expires in June 2016.
On March 2015, the Company amended it’s credit facility with its lender. The amendment revised existing financial covenants, including the maintenance of a specified fix charge coverage ratio and maintenance of minimum monthly EBITDA requirements. As of December 31, 2015 the Company is in violation of its financial covenants. As of March 2016, the lender waaved this violation.
Borrowings made under the credit facility bore interest, which was payable monthly, at LIBOR (subject to a floor of 1.375%) plus 4.5% per annum (5.875% as of December 31, 2015).
The company evaluated the terms of the amendments and concluded that they do not constitute substantive modification.
Europe
In June 2013, the Company entered into a new line of credit arrangement with a commercial bank to provide it with up to €1.1 million ($1.3 million as of December 31, 2014) in borrowings. Borrowings under the line of credit bear interest at LIBOR plus 3.75% (3.98% as of December 31, 2014) per annum, which is payable quarterly.
The borrowing capacity under the credit facility is reduced by €0.1 million every quarter, starting December 31, 2013. The line of credit must be repaid in full on a monthly basis before any additional borrowings can be made. The line of credit is secured by the accounts receivable and tangible fixed assets of one of the Company’s European subsidiaries. As of December 31, 2014, the Company had €0.6 ($0.7 as of December 31, 2014) in outstanding borrowings under the line of credit arrangement. The line of credit
was replaced in April 2015.
In January 2014, the Company entered into a new line of credit arrangement with the same commercial bank to provide it with up to €0.8 ($1.0 as of December 31, 2014) in borrowings. Borrowings under the line of credit bear interest at LIBOR plus 3.75% (3.98% as of December 31, 2014) per annum, which is payable quarterly. The borrowing capacity under the credit facility is reduced by €0.1 million every quarter, starting July 1, 2014. The line of credit must be repaid in full on a monthly basis before any additional borrowings can be made. The line of credit is secured by the accounts receivable and tangible fixed assets of one of the
Company’s European subsidiaries. The line of credit expires on September 30, 2016. As of December 31, 2014, the Company had €0.6 million ($0.8 million as of December 31, 2014) in outstanding borrowings under the line of credit arrangement. The line of credit was replaced in April 2015.
In March 2014, the Company entered into a new line of credit arrangement with the same commercial bank to provide it with up to €1.1 million ($1.3 million as of December 31, 2014) in borrowings. Borrowings under the line of credit bear interest at LIBOR plus 3.75% (3.98% as of December 31, 2014) per annum, which is payable quarterly. The borrowing capacity under the credit facility is reduced by €0.1 million every quarter, starting June 30, 2014. The line of credit must be repaid in full on a monthly basis before any additional borrowings can be made. The line of credit is secured by the accounts receivable and tangible fixed assets of one of the
Company’s European subsidiaries. The line of credit expires on December 31, 2016. As of December 31, 2014, the Company had €0.8 million ($1.0 million as of December 31, 2014) in outstanding borrowings under the line of credit arrangement. The line of credit was replaced in April 2015.
In April 2015, the Company entered into a new line of credit arrangement with the same commercial bank to provide it with up to €5.5 million ($6.0 million as of December 31, 2015) in borrowings until further notice. Borrowings under the line of credit bear interest at LIBOR plus 3.75% (3.75% as of December 31, 2015) per annum. Non-borrowed amounts under this agreement bear interest of 0.75% per annum, which is payable quarterly.
The line of credit is secured by the accounts receivable and tangible fixed assets of three of the Company’s European subsidiaries. The line of credit cannot exceed 80% of the borrowing base. As of December 31, 2015 the Company had €5.0 million ($5.4 million as of December 31, 2015) in outstanding borrowings under the line of credit arrangement.
The line of credit replaces all other existing lines of credit with that commercial bank.
In August 2013, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to €0.5 million ($0.5 million as of December 31, 2015) in borrowings. Borrowings under this arrangement bore interest at 3.5% per annum, which was payable on August 1, 2014, the original maturity date of the arrangement. In July 2014, the line of credit arrangement was extended until August 1,2015. The line of credit is secured by a bank guarantee provided by an entity related to the Company’s main shareholder as well as a guarantee from another bank. In July 2015, the line of credit was fully paid and the line of credit expired. As
of December 31, 2014 the Company had €0.5 million ($0.6 million as of December 31, 2014) in outstanding borrowings under the line of credit arrangement.
In November 2013, the Company entered into a line of credit arrangement with a commercial bank to provide it with up to €1.2 million ($1.3 million as of December 31, 2015) in borrowings. Borrowings under the line of credit arrangement bear interest at 1.2% per annum, which is payable quarterly. The line of credit is secured by a guarantee provided by an entity related to the Company’s main shareholder. The line of credit was originally set to expire in May, 2014 and was extended until July 31, 2015. In June 2014, the borrowing capacity under the line of credit was increased up to €1.5 million ($1.6 million as of December
31, 2015). In December 2015 the borrowing capacity was reduced by €1.2 million ($1.3 million as of December 31, 2015). As of December 31, 2015 and 2014, the Company had €0.4 million and €1.3 million ($0.4 million and $1.5 million as of December 31, 2015 and 2014, respectively) in outstanding borrowings under the line of credit arrangement.
Related party financing
In November 2013, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $32 million in revolving loans through November 2015. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for
Euro-denominated loans). The arrangement is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable (including accrued interest) under the arrangement into the Company's common stock at a price of $1.50 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In May 2014, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $37 million in revolving loans through December 2016. The term of the arrangement can be automatically extended for four additional six-month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate charged by the Company’s European commercial bank (LIBOR plus 6% for U.S. dollar-denominated loans and the base rate plus 2% for Euro-denominated
loans). The arrangement is secured by a 26% interest in one of the Company's European subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable (including accrued interest) under the arrangement into the Company's common stock at a price of $1.50 per share. The Company determined that the new arrangement did not represent a substantive modification and, therefore, it was not necessary to evaluate whether the conversion feature qualified as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
In October 2015, the Supervisory Board of Directors approved a reduction to the convertible price of the unpaid interest from $1.50 per share to $0.75 per share. In addition, the loan period was extended till January 1, 2018. The term of the arrangement can be automatically extended for four additional six months periods at the option of the holder. The Company determined that the new arrangement did not represent a substantive modification and therefore it was not necessary to evaluate whether the conversion feature qualifies as a free-standing derivative instrument or contained any intrinsic value which would be considered beneficial.
At December 31, 2015 and 2014, convertible notes payable to a related party consist of $29.0 million and $30.2 million respectively, in principal and $10.4 million and $8.3 million respectively, in accrued interest. Interest expense related to these notes is $2.6 million, $2.3 million and $2.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $2.6 million, $2.2 million and $2.2 million during the years ended December 31, 2015, 2014 and 2013, respectively.
Trend Information
Labor market conditions may require the Company to increase its prices. Cost of labor is the main variable in determining any cost increases.
The Company might be affected by the worldwide economic slowdown, which might affect the aviation industry. As the Company is a service provider to this industry, such trends can affect the results of the Company.
Off-Balance Sheet Arrangements
The Company is a party to a consulting arrangement, an agency agreement and various operating lease arrangements. In addition, the Company has no unconsolidated special purpose entities.
Future Contractual Obligations
The following table summarizes our future contractual obligations as of December 31, 2015:
Contractual Obligations
|
|
Payments due by Period (U.S. Dollars in Thousands)
|
|
|
|
|
|
|
Less than
|
|
|
1-3 |
|
|
4-5 |
|
|
more than
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Line of credit in the U.S.
|
|
$ |
5,569 |
|
|
$ |
5,569 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Consulting agreements
|
|
|
1,063 |
|
|
|
218 |
|
|
|
518 |
|
|
|
327 |
|
|
|
- |
|
Lines of credit in Europe
|
|
|
5,840 |
|
|
|
5,840 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Convertible notes payable -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related party (including interest)
|
|
|
39,402 |
|
|
|
- |
|
|
|
39,402 |
|
|
|
- |
|
|
|
- |
|
Operating lease obligations
|
|
|
2,761 |
|
|
|
1,356 |
|
|
|
1,093 |
|
|
|
312 |
|
|
|
- |
|
Future interest and fees on line of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit and convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payable to related party (1)
|
|
|
9,303 |
|
|
|
- |
|
|
|
9,303 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
63,938 |
|
|
$ |
12,983 |
|
|
$ |
50,316 |
|
|
$ |
639 |
|
|
$ |
- |
|
(1)Interest and fees are estimated based on future interest rates expected to be applicable.
Contractual Obligations
|
|
Payments due by Period (U.S. Dollars in Thousands)
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
4-5
|
|
|
more than
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
290 |
|
|
$ |
290 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Letters of credit
|
|
|
274 |
|
|
|
274 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
564 |
|
|
$ |
564 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
Directors, Senior Management and Employees
|
The following table lists the directors and executive officers of ICTS:
|
|
Age
|
|
Position
|
Menachem Atzmon
|
|
71
|
|
Chairman of the Supervisory Board
|
David W. Sass
|
|
80
|
|
Member of the Supervisory Board
|
Gail F. Lieberman
|
|
72
|
|
Member of the Supervisory Board, Member of the Audit Committee and Chairman of the Compensation Committee
|
Gordon Hausmann
|
|
70
|
|
Member of the Supervisory Board, Member of the Compensation Committee and Member of the Audit Committee
|
Philip M. Getter
|
|
79
|
|
Member of the Supervisory Board, Chairman of the Audit Committee
|
|
|
70
|
|
Managing Director
|
Alon Raich
|
|
40
|
|
Chief Financial Officer
|
Menachem J. Atzmon is a CPA (Isr). From 1996 until 2012 Mr. Atzmon has been the managing director of Albermale Investment Ltd., an investment company. Since 1998 until 2012 he has served as the Chairman of the Management Board of Seehafen Rostock, Umschlagsgesellschaft GmbH and its Holding Company. Mr. Atzmon has been a member of the Supervisory Board of ICTS since 1999 and acts as the Chairman of the Supervisory Board since 2004. Since 2010 he serves as the Chairman of the of Arrow Ecology & Engineering Overseas (1999) Ltd, an advance recycling company. During 2014 Mr. Atzmon was appointed in addition to his role of Chairman of the Supervisory Board to CEO of the Arrow Ecology & Engineering Overseas Ltd.
David W. Sass for the past 54 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 and is also a director of several privately held corporations. He is an Honorary Trustee of Ithaca College and a director of the TCI College of Technology.
Gail F. Lieberman is the founder and Managing Partner of Rudder Capital, LLC, which provides financial and strategic advisory services for middle-market companies in the services & technology sectors. Previously, she was the Chief Financial Officer for Thomson Corporation’s Financial & Professional Publishing division, Moody’s Investor Service, Inc. and Scali, McCabe, Sloves, Inc. (Ogilvy Group). Ms. Lieberman is a director of Tradeworx, a private financial technology company and the South Central Connecticut Regional Water Authority. Formerly she served as board member, Compensation Committee Chair and Audit Committee Member for Dara Biosciences (NASDAQ: DARA), board member and Audit Committee Chair for I-Trax Inc. (Amex: DMX), board member and Audit and Governance Committee Member for TriPath Imaging Inc. (NASDAQ: TPTH) and board member and Audit Committee Chair for Breeze-Eastern Corporation (Amex: BZC). She also
served on the board of FTEN, a financial technology company. Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance from Temple University.
Gordon Hausmann is the senior partner of his own law firm, founded in London over 30 years ago. He specializes, amongst other things, in corporate and commercial law, including business finance and banking law, litigation and representation of several substantial family offices. He holds office as a board member of numerous companies, including listed companies in the UK and abroad. These include an international airline, some Embassies, finance companies (including a company associated with a private Swiss banking group) and other well-known and governmental entities. He also holds office and advises a number of charities, including Governor of the Hebrew University.
Philip M. Getter has been on the board of TCI College of Technology and since 2012 been Chairman of TCI. Since 1985 he has been managing member of GEMPH Development LLC a major shareholder of EVCI Career Colleges and the sole shareholder of TCI College. From 2000 to 2005 he was president of DAMG Capital, LLC Investment Bankers. Prior thereto he was most recently head of Investment Banking and a member of the board of directors of Prime Charter, Ltd. He has more than thirty years of corporate finance experience. After graduation from Cornell University he served as Administrative Assistant to the Director of United States Atomic Energy Commission. From 1960 to 1969 he was a partner with Shearson, Hammill and then Senior Partner of Devon Securities, an international investment banking boutique from 1969 to 1975. From 1975 to 1984 he was President/CEO of Generics Corporation of America, one of the largest generic drug manufacturers
in the United States. As Chairman and CEO of Wolins Pharmaceutical (1977 to 1984) he led the reorganization and restructuring of this direct to the profession distributor of pharmaceuticals. Mr. Getter was Chairman of Inksure Technologies, Inc. and a director from 2003 thru 2009. He has been a member of the League of American Theatres and Producers/The Broadway League, Chairman of the Executive Committee of The Kurt Weill Foundation for Music, and a Director of the American Theatre Wing, the TONY (awards) Administration as well as OBIE Administration Committee and has produced for Broadway, television and film.
Ran Langer joined ICTS in 1988 through 1998 as General Manager of the German subsidiaries of ICTS. From 1998 to 2013, he served as General Manager of Seehafen Rostock Umschlagsgesellschaft GmbH, the operator of the Seaport in Rostock, Germany. Mr. Langer became a Managing Director of ICTS in 2004. In 2013 Mr. Langer was appointed also as CEO of I-SEC International Security B.V., a fully owned subsidiary of ICTS.
Alon Raich is a CPA (Isr), joined ICTS in September 2005 as Financial Controller and became Chief Financial Officer (CFO) of the Company in 2008. From 2001 to 2005 he worked in the accounting firm, Kesselman & Kesselman, PriceWaterhouseCoopers (PwC). Mr. Raich holds a BA degree in economics and accounting and an MA degree in law from Bar-Ilan University, Israel.
Summary Compensation Table
The following table sets forth compensation earned by the Company’s Managing Directors and the highest paid executives during the years 2012 until 2014 (U.S. Dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
Number
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
of
|
|
|
of
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Plan
|
|
|
Compensation
|
|
|
Option
|
|
|
Stock
|
|
|
|
|
Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Compensations
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Awards
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
Managing
|
|
2015
|
|
|
222 |
|
|
|
1,110 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,353 |
|
Director
|
|
2014
|
|
|
191 |
|
|
|
0 |
|
|
|
21 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
212 |
|
(a)
|
|
2013
|
|
|
70 |
|
|
|
33 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
112 |
|
Managing
|
|
2015
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Director
|
|
2014
|
|
|
- |
|
|
|
- |
|
|
|
48 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
48 |
|
|
|
2013
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
58 |
|
General Manager
|
|
2015
|
|
|
128 |
|
|
|
73 |
|
|
|
22 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
223 |
|
of a subsidiary
|
|
2014
|
|
|
153 |
|
|
|
80 |
|
|
|
26 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
259 |
|
(b)
|
|
2013
|
|
|
146 |
|
|
|
0 |
|
|
|
26 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
172 |
|
General Manager
|
|
2015
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
of a subsidiary
|
|
2014
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
(c)
|
|
2013
|
|
|
267 |
|
|
|
148 |
|
|
|
46 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
461 |
|
a. Highest paid employee in 2015
|
|
|
|
|
|
|
|
b. Highest paid employee in 2014
|
|
|
|
|
|
|
|
c. Highest paid employee in 2013
|
|
|
|
|
|
|
|
Each member of the Supervisory Board who is not an employee of the Company receives an annual fee of $10 and a fee for each Supervisory Board or committee meeting attended of $1. The Chairman of the Audit Committee receives an additional $20 per year.
Mr. Langer has been employed as Managing Director since 2004 without compensation. During 2013, the Company signed an employment agreement with Mr. Langer for which he will be entitled to a yearly salary of €144 per year ($160 as of December 2015). In May 2015 the compensation committee and the Supervisory Board approved to increase Mr. Langer’s salary to €240 per year ($222 as of December 2015) and a one-time bonus of €1,000 ($1,110 as of December 31, 2015).
Mr. Nir has been employed as a Managing Director since 2008 until December 31, 2014, at an annual cost of $0, $48 and $58 during the years 2015, 2014 and 2013, respectively.
In December 2015 the compensation committee approved an increase in the Supervisory Board fees starting 2016. The annual fee was increased to $20 and the fee for each supervisory board or committee meeting was increased to $2. The Chairman of the Audit Committee receives an additional $10 per year. In addition, the compensation committee approved an annual fee of $60 for the Chairman of the Supervisory Board, in addition to a one time grant of $660 representing the annual salary for the last eleven years for which he was not compensated.
The following table sets forth information concerning the aggregate compensation paid or accrued on behalf of all of our directors and executive officers as a group for the year ended December 31, 2015.
|
|
Salaries, fees,
|
|
|
Pension, retirement
|
|
|
|
commissions
|
|
|
and other
|
|
|
|
and bonuses
|
|
|
similar benefits
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Directors as a group (5 persons)
|
|
$ |
752 |
|
|
$ |
- |
|
All officers as a group(4 persons)
|
|
$ |
2,308 |
|
|
$ |
85 |
|
Background and Compensation Philosophy
Our Compensation Committee consists of Gail Lieberman, Chairman and Gordon Hausmann, all independent directors. The Compensation Committee and, prior to its establishment our Supervisory Board of Directors determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies, and contributions made by the officers’ to our success. Each of the named officers will be measured by a series of performance criteria by the Supervisory Board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our Supervisory Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The Compensation Committee makes an independent evaluation of appropriate compensation of key employees, with input from management. The Compensation Committee has oversight of executive compensation plans, policies and programs.
Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. The base salary component of our compensation program is a fixed amount and does not depend on performance. Our cash incentive program takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe it does not incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are limited by the terms of our equity plans to a fixed maximum specified in the plan, and are subject to vesting to align the long-term interests of our executive officers with those of our stockholders.
Elements of Compensation
We provide our executive officers with a base salary and certain bonuses to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well.
Board Practices
We have a Supervisory Board and a Management Board. The Supervisory Board has the primary responsibility for supervising the policies of the Management Board and the general course of corporate affairs and recommending the adoption of the annual financial statements of ICTS by its shareholders. The Management Board is responsible for the day-to-day operations of ICTS. Members of the Supervisory Board and the Management Board are appointed by the shareholders for a term of one year. Non-executive officers are appointed by and serve at the satisfaction of the Management Board.
The members of the Supervisory Board as of December 31, 2015 and the initial year they joined the Supervisory Board are as follows: Menachem Atzmon (1999), Gordon Hausmann (2005), David W. Sass (2002), Gail F. Lieberman (2010) and Philip M. Getter (2003).
The Audit Committee consists of Philip M. Getter, Chairman, Gail F. Lieberman and Gordon Hausmann, all of whom are independent. Mr. Getter and Ms. Lieberman have financial expertise. The audit committee evaluates ICTS's accounting policies and practices and financial reporting and internal control structures, selects independent auditors to audit the Company’s financial statements and confers with the auditors and the officers. The Audit Committee has an Operating Charter as well.
We do not have a Nominating Committee. The members of the Audit Committee and Compensation Committee are all independent and were never officers or employees of the Company.
The Supervisory Board of the Company has adopted a Code of Ethics for principal Executive Officers, Directors and senior financial officers.
The Articles of Association of ICTS require at least one member of both the Management Board and the Supervisory Board, but do not specify a maximum number of members for such boards. The general meeting of shareholders determines the exact number of members of both the Management Board and the Supervisory Board. Under the laws of the Netherlands and the Articles of Association, each member of the Supervisory Board and Management Board holds office until such member's resignation, death or removal, with or without cause, by the shareholders.
Employees
As of December 31, 2015, we have 5,536 employees, of which 3,302 employees are located in Europe, Far East and Israel and 2,234 are located in the United States.
Share Ownership
See tables under Item 7: "Major Shareholders" and "Related Party Transactions" below.
Options to Purchase Securities
In February 2005, the Company adopted the 2005 Equity Incentive Plan and reserved 1,500,000 shares of common stock for future issuance. The plan expired in 2015 (the "Plan").
The Plan provided means whereby employees, officers, directors, and certain consultants and independent contractors of the Company ("Qualified Grantees") may acquire the Common Shares of the Company pursuant to grants of (i) Incentive Stock Options ("ISO"), (ii) non-qualified stock options (the NQSO) and (iii) restricted stock. A summary of the significant provisions of the Plan is set forth below. The following description of the Plan is qualified in its entirety by reference to the Plan itself.
The purpose of the Plan was 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 believed that the Plan would strengthen these persons' desire to remain with the Company and will further the identification of those persons' interests with those of the
Company's shareholders.
The Plan was administered by the Compensation Committee of the Supervisory Board.
The Plan provided that options to purchase up to 1,500,000 Common Shares of the Company may have been issued to the employees, certain consultants and directors.
The exercise price of shares of Company Stock covered by an ISO and NQSO should have not been less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO was granted to an employee who, at the time of the grant was a 10% shareholder, then the exercise price of the shares covered by the incentive stock option should have not been less than 110% of the fair market value of such shares on the date of grant. The Plan also provided for cashless exercise of Options at the discretion of the Compensation Committee. In such event, there would have been a charge to the earnings of the Company with respect to the cashless exercise of the Options.
The Compensation Committee could determine the number of shares that would be awarded to a participant as restricted stock and the provisions relating to risk of forfeiture and may determine that the restricted stock is only earned upon the satisfaction of performance goals established by the Committee. The Committee should have also determine the nature, length and starting date of any performance period and the terms thereof.
As of December 31, 2015 there are 150,000 options outstanding under the plan. As the plan expired there are no more options available for grant under this plan.
On December 2008 shareholders adopted the 2008 Employee, Director and Commitment Stock Option Plan (the "Plan"). The Plan provides a means whereby employees, officers, directors, and certain consultants and independent contractors of the Company ("Qualified Grantees") may acquire the Common Shares of the Company pursuant to grants of (i) Incentive Stock Options ("ISO") and (ii) "non-qualified stock options". A summary of the significant provisions of the Plan is set forth below. The following description of the Plan is qualified in its entirety by reference to the Plan itself.
The purpose of the Plan is to further the long-term stability, continuing growth and financial success of the Company by attracting and retaining key employees, directors and selected advisors through the use of stock incentives, while stimulating the efforts of these individuals upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business. The Company believes that the Plan will strengthen these individuals' desire to remain with the Company and will further the identification of their interests with those of the
Company's shareholders.
The Plan provides that options to purchase up to 1,500,000 Common Shares of the Company may be issued to the employees and outside directors. All present and future employees shall be eligible to receive incentive awards under the Plan, and all present and future non-employee directors shall be eligible to receive non-statutory options under the Plan. An eligible employee or non-employee director shall be notified in writing, stating the number of shares for which options are granted, the option price per share, and conditions surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO shall not be less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO is granted to an employee who, at the time of the grant, is a 10% shareholder, then the exercise price of the shares covered by the incentive stock option shall not be less than 110% of the fair market value of such shares on the date of the grant. The exercise price of shares covered by a non-qualified stock option shall be not less than 85% of the fair market value of such shares on the date of the grant. The Plan shall be administered by the Compensation Committee. No options have been granted under this plan as of the date hereof.
As of December 31, 2015, there were no outstanding options under the plan. Options available for grant under the plan are 1,500,000. The plan expires in 2018.
U.S. Federal Income Tax Consequences
The rules governing the U.S. federal tax treatment of stock options, restricted stock and shares acquired upon the exercise of stock options are quite technical. Therefore, the description of U.S. federal income tax consequences set forth below is necessarily general in nature and does not purport to be complete. Moreover, the statutory provisions are subject to change, as are their interpretations, and their application may vary in individual circumstances. In particular, the "American Jobs Creation Act of 2004" imposed rules concerning the taxation of various deferred compensation arrangements. It is not clear whether, and to what extent, these rules apply to awards under the Plan. Although the Company does not believe that awards under the Plan are affected by the rules, there can be no assurance to that effect until adequate guidance
is forthcoming from the U.S. Treasury Department. Finally, the tax consequences under applicable state, local and foreign income tax laws may not be the same as under the U.S. federal income tax laws.
Incentive Stock Options
ISOs granted pursuant to the Plan are intended to qualify as incentive stock options within the meaning of Section 422A of the Internal Revenue Code. If the participant makes no disposition of the shares acquired pursuant to exercise of an ISO within one year after the transfer of shares to such participant and within two years from grant of the option, such participant will realize no taxable income as a result of the grant or exercise of such option, and any gain or loss that is subsequently realized may be treated as long-term capital gain or loss, as the case may be. Under these circumstances, neither the Company nor any subsidiary will be entitled to a deduction for federal income tax purposes with respect to either the issuance of the ISOs or the issuance of shares upon their exercise.
If shares acquired upon exercise of ISOs are disposed of prior to the expiration of the above time periods, the participant will recognize ordinary income in the year in which the disqualifying disposition occurs, the amount of which will generally be the lesser of (i) the excess of the fair market value of the shares on the date of exercise over the option price, or (ii) the gain recognized on such disposition. Such amount will ordinarily be deductible for federal income tax purposes by the Company or subsidiary for which the participant performs services ("service recipient") in the same year, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied. In addition, the excess,
if any, of the amount realized on a disqualifying disposition over the market value of the shares on the date of exercise will be treated as capital gain.
The foregoing discussion does not consider the impact of the alternative minimum tax, which may be particularly applicable to the year in which an ISO is exercised.
Non-qualified Stock Options
A participant who acquires shares by exercise of a NQSO generally realizes as taxable ordinary income, at the time of exercise, the difference between the exercise price and the fair market value of the shares on the date of exercise. Such amount will ordinarily be deductible by the service recipient for federal income tax purposes in the same year, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied. Subsequent appreciation or decline in the value of the shares on the sale or other disposition of the shares will generally be treated as capital gain or loss.
Restricted Stock
A participant granted shares of restricted stock under the Plan is not required to include the value of such shares in ordinary income until the first time such participant's rights in the shares are transferable or are not subject to substantial risk of forfeiture, whichever occurs earlier, unless such participant timely files an election under Section 83(b) of the Internal Revenue Code to be taxed on the receipt of the shares. In either case, the amount of such income will be equal to the excess of the fair market value of the stock at the time the income is recognized over the amount (if any) paid for the stock.
The service recipient will ordinarily be entitled to a deduction, in the amount of the ordinary income recognized by the participant, for the service recipient's taxable year in which the participant recognizes such income, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied.
|
Major Shareholders and Related Party Transactions
|
Major Shareholders
The following table sets forth certain information regarding ownership of the Company's Common Shares as of April 15, 2016 with respect to:
(1) Each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Shares.
(2) Each director or officer who holds more than 1% of the Common shares. Except the Chairman of the Supervisory Board none of the directors or officers owns 1% or more of ICTS outstanding share capital.
(3) All directors and officers as a group.
|
|
Percent of
|
|
|
|
|
|
|
Amount Beneficially
|
|
|
Common Shares
|
|
Name Shareholders Holding Five Percent or More
|
|
Owned (a)
|
|
|
Outstanding (b)
|
|
|
|
|
|
|
|
|
MacPherson Trust (c)
|
|
|
44.2 |
% |
|
|
4,847,226 |
|
Menachem J. Atzmon
|
|
|
13.7 |
% |
|
|
1,500,000 |
|
Igal Tavori
|
|
|
11.0 |
% |
|
|
1,202,483 |
|
Amos Megides
|
|
|
9.4 |
% |
|
|
1,025,692 |
|
All officers and directors as a group including
|
|
|
|
|
|
|
|
|
the MacPherson Trust (10 persons)
|
|
|
71.9 |
% |
|
|
7,833,272 |
|
(a) The amounts include common shares owned by each of the above, directly or indirectly.
(b) As to each shareholder, the percentage is calculated using the amount beneficially owned by such shareholder (as determined in accordance with (a) above) divided by the number of total outstanding common shares and the shares issuable pursuant to the exercise of options exercisable within 60 days from the date of the grant, if any held by such shareholder. Common shares subject to options that are immediately exercisable or exercisable within 60 days of the date of the grant are deemed outstanding for computing the ownership percentage of the shareholder holding such options, but are not deemed outstanding for computing the ownership of any other shareholders.
(c) 1. The MacPherson Trust (“Trust”) was created for the benefit of the family of Mr. Menachem J. Atzmon. The Trust owns Spencer Corporation, Limited, which holds together with the Trust approximately 44.2% of the issued and outstanding Common Shares on behalf of the Trust. Mr. Atzmon disclaims any beneficial interest in the MacPherson Trust. Spencer Corporation, Limited and the MacPherson Trust together with Mr. Atzmon are able to appoint all the directors of ICTS and control the affairs of ICTS.
2. As of April 15, 2016 the Company received loans from a related party in the total amount of $30.3 million and accrued interest of $11.2 million. The principle is convertible to the Company’s common stock at a rate of $1.50 per share and the accrued interest is convertible at a rate of $0.75 per share. The calculation above does not take into consideration the conversion of those loans.
Review, Approval or Ratification of Transactions with Related Persons
All ongoing and future transactions between us and any of our officers and directors and their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by the Audit Committee (whose members are “independent” directors) and by a majority of our disinterested “independent” directors (to the extent we have any) or the members of our Supervisory Board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested (“independent”) directors determine that the terms of such transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not enter into a business combination or invest alongside any of our directors, officers, any affiliate of ours or of any of our directors or officers or a portfolio company of any affiliate of our directors or officers.
Related Party Transactions
Entities related to two of the Company’s Supervisory Board members provide legal services to the Company. Legal expense related to these services is $47 thousand, $58 thousand and $36 thousand for the years ended December 31, 2015, 2014 and 2013, respectively. Included in accounts payable on the accompanying consolidated balance sheets is $28 and $64 due for these services as of December 31, 2015 and 2014, respectively.
In January 2009, the Company engaged the services of a related party to provide certain selling and management services to its technology segment. The Company incurred expenses of $0.2 million for such services for each of the years ended December 31, 2015, 2014 and 2013, respectively.
In June 2009, a European bank, issued a performance guarantee in the amount of €1.2 million ($1.5 million as of December 31, 2014) to one of the Company’s customers to secure the Company’s performance under a service contract between the parties. To secure the European bank’s guarantee, an entity related to the Company’s main shareholder provided a guarantee to the European bank for the same amount. The guarantee issued by the European bank was renewed in April 2013 until April 2014. The performance guarantee was renewed
by the European bank until April 2015 without a corresponding guarantee by an entity related to the Company’s main shareholder.
In September 2010, an entity related to the Company’s main shareholder provided a letter of credit of $0.8 million to a commercial bank to guarantee an extension of a borrowing arrangement on behalf of one of the Company’s subsidiaries. In May 2013 the letter of credit was increased to $1.0 million.
In February 2014, the Company engaged the services of a related party to provide certain selling services to its technology segment. The Company incurred expenses of $48 and $49 for such services for the years ended December 31, 2015 and 2014 respectively.
In May 2014, the Company engaged the services of a related party to provide certain administrative services. The Company incurred expenses of $15 for such services for each of the years ended December 31, 2015 and 2014,respectively.
In December 2015 the Supervisory Board approved an annual compensation for the Chairman of the Board, a related party, of $60. In addition, as the Chairman of the Supervisory Board was not compensated for the last eleven years, a one-time grant of $0.7 million was approved.
In December 2015, the Company issued 2.9 million shares to certain Supervisory and Management Directors as well as officers of the Company for a price of $0.60 per share.
The Consolidated Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-33.
Legal Proceedings
As a result of the September 11, 2001 terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were commenced in the United States District Court, Southern District of New York (the “Court”), resulting from certain airport security services provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts.
All the wrongful death personal injury cases have been settled or dismissed at no cost to the Company because the payments were covered by the Company’s insurance. The Court approved the settlements.
All but one of the property loss cases also has been settled at no cost to the Company, because the payments were covered by the Company’s insurance. One of the property loss cases remain pending against, among others, the Company.
The Court granted defendants motion for summary judgements that the plaintiffs have appealed and oral arguments have been held. The plaintiffs in that case are seeking reimbursement for claimed damages relating to theirlease of the towers. The defendants are hopeful that the remaining property loss cases will be dismissed.
In any event, the Company has already paid the limits of its liability insurance in settlement costs. The Company contends that a federal statute passed after the events of September 11, 2001 protects it from having to make any further monetary payments, regardless of whether it is found liable in any of the remaining cases.
Claims by former employees
The Company is subject to wrongful termination claims made by certain former employees of one of its European subsidiaries. The aggregate amount of such claims is approximately $0.7 million. At the present time, the Company is not able to determine the likelihood of an unfavorable outcome or estimate a range of potential loss related to these matters.
Minimum wage increase
In August 2015, the Company was informed about a court decision, which approved an increase to the minimum wage for the city of SeaTac, Washington (location of Seattle Airport). The increase to the minimum wage was originally approved by a vote in King County, Washington in 2013 (to be effective January 1, 2014); however, a court ruled that SeaTac employees were excluded from this increase because the airport was under the jurisdiction of the Port of Seattle and not the city of SeaTac. In August 2015, this decision was overturned by the State Supreme Court and accordingly, the Company is required to increase the minimum wage of its employees at the SeaTac Airport according to the court decision, effective
January 1, 2014. The Company has estimated that it has a liability of approximately $3.3 million for back wages(inclusive of interest amounting to approximately $0.3 million as of December 31, 2015 and has recorded an accrual for this liability.
The Company is also a party to a lawsuit from a former employee seeking class action status and payment of back wages.
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount can be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
Our shares of common stock are currently traded on the OTC under the symbol ICTSF.
The reported high and low closing sales prices per shares during the last five years were as follows:
Year
|
|
High
|
|
|
Low
|
|
2011
|
|
$ |
1.50 |
|
|
$ |
0.40 |
|
2112
|
|
$ |
1.60 |
|
|
$ |
0.04 |
|
2013
|
|
$ |
1.39 |
|
|
$ |
0.45 |
|
2014
|
|
$ |
2.39 |
|
|
$ |
0.75 |
|
2015
|
|
$ |
0.85 |
|
|
$ |
0.51 |
|
The reported high and low closing sales prices per share during each quarter for the last 3 years were as follows:
2015
|
|
High
|
|
|
Low
|
|
First quarter
|
|
$ |
0.85 |
|
|
$ |
0.59 |
|
Second quarter
|
|
$ |
0.73 |
|
|
$ |
0.55 |
|
Third Quarter
|
|
$ |
0.79 |
|
|
$ |
0.56 |
|
Fourth Quarter
|
|
$ |
0.60 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
2014
|
|
High
|
|
|
Low
|
|
First quarter
|
|
$ |
0.90 |
|
|
$ |
0.75 |
|
Second quarter
|
|
$ |
2.39 |
|
|
$ |
0.87 |
|
Third Quarter
|
|
$ |
1.30 |
|
|
$ |
0.96 |
|
Fourth Quarter
|
|
$ |
1.20 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
2013
|
|
High
|
|
|
Low
|
|
First quarter
|
|
$ |
0.70 |
|
|
$ |
0.45 |
|
Second quarter
|
|
$ |
1.38 |
|
|
$ |
0.45 |
|
Third Quarter
|
|
$ |
1.37 |
|
|
$ |
1.05 |
|
Fourth Quarter
|
|
$ |
1.39 |
|
|
$ |
0.75 |
|
Introduction
The material provisions of the Company's Articles of Association are summarized below. Such summaries do not purport to be complete statements of these provisions and are qualified in their entirety by reference to such exhibit. The Company was established by the Department of Justice at Amstelveen, Netherlands on October 9, 1992. The objectives of the Company are generally to manage and finance businesses, extend loans and invest capital as described in greater detail in Article 2 of the
Company's Articles of Association.
Shares
Our authorized share capital is currently divided into 33,333,334 common shares, par value 0.45 Euro per common share. Article 24, of the Articles of Association provide that in the event the Management Board files a declaration with the Dutch Chamber of Commerce that at least ninety percent of the authorized share capital is issued, Article 3 of the Articles of Association will provide as follows: “The authorized capital of the Company amounts to EUR 67,500,000 dividend into one hundred fifty million (150,000,000) shares, each share having a par value of EUR 0.45.”
The common shares may be in bearer or registered form. As of December 31, 2015, 10,961,698 shares were issued and outstanding.
Dividends
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. Dividends on common shares may be paid out of annual profits shown in the Company’s annual accounts, which must be adopted by the general meeting. 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 adopted by the Company's general meeting. 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 payable.
Supervisory Board
Members of our Supervisory Board are appointed by the general meeting. Members of the Supervisory Board are appointed for a term of one year.
General Meeting of Shareholders
The Company’s general meeting 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. However, shareholders and other persons entitled to attend the general meetings of shareholders may be represented by proxies with written authority.
Other general meetings of shareholders may be held as often as deemed necessary by the Supervisory Board or the Management Board and must be held if one or more shareholders or other persons entitled to attend the general meeting of shareholders jointly representing at least 10% of the Company's issued share capital make a written request to the Supervisory Board or the Management Board that a meeting must be held and specifying in detail the business to be dealt with at such meeting. Resolutions are adopted at general meetings of shareholders by a majority of the votes cast, except where a different proportion of votes are required by the Articles of Association or Netherlands law, in a meeting in which holders of at least fifty percent (50%) of the
outstanding common shares are represented. Each share carries one vote.
A resolution presented to the general meeting amending the Company's Articles of Association or winding up the Company may only be taken when a proposal thereto is stated in the notice of meeting and with respect to amending the Company’s Articles of Association, a copy of the proposal in which the modification is stated in full on file and available for inspection. A resolution to dissolve the Company must
be approved by at least a two-third majority of the votes cast, in a meeting in which holders of at least fifty percent (50%) of the outstanding common shares are represented.
Adoption 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 adoption. Contrary to what is provided in the Company’s Articles of Association, approval of the annual accounts by the shareholders does not discharge the Management Board and the Supervisory Board from liability for the performance of their respective duties for the past financial year. In order to discharge the Supervisory Board and Management Board and their members from liability a separate resolution thereto needs to be adopted by the general meeting of shareholders (which resolution can be adopted in
the same meeting in which the annual accounts will be adopted). 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 new shares and pre-emptive rights
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 to another corporate body for a period not exceeding five years. The issuance of the common shares is generally subject to shareholder pre-emptive rights, except to the extent that such pre-emptive 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. Such a designation may only take place if such corporate body has also been designated to issue shares. In this regard, the general meeting of shareholders has authorized our Supervisory Board to issue any authorized and unissued shares at any time up to five years from
December 17, 2012, the date of such authorization, and has authorized the Supervisory Board to exclude or limit shareholder pre-emptive rights with respect to any issuance of common shares prior to such date. 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 Supervisory Board of directors of a surviving company may resolve to legally merge the company).
Repurchase and Cancellation of Shares
We may repurchase our 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 authorization of the general meeting of shareholders. Such authorization is not effective for more than 18 months. The Company may resell shares it purchases. Upon a proposal of the Supervisory Board, the
Company's 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.
Only shares which the Company holds or for which it holds the depository receipts may be cancelled.
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 non-resident 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.
The summary does not purport to be a complete analysis or listing of all the potential tax consequences of holding shares, nor does it purport to furnish information in the same detail or with the attention to an investor's specific tax circumstances that would be provided by an investor's own tax adviser. Accordingly, U.S. holders 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, (iii) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, of (iv) an estate, 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 Department 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, if any, (including any withholding tax thereon) made by the Company out of its current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be included in the gross income of a direct U.S. Holder as foreign source dividend income on the date of receipt but will not be eligible for the dividends received deduction generally allowed to U.S. corporations. Subject to the discussion below regarding passive foreign investment companies, the Company should be considered to be a “qualified foreign corporation” so that such dividends should be eligible to be taxed as net capital gains (at a maximum U.S. federal rate of 20 percent). Distributions
in excess of the earnings and profits of the Company will be treated, for U.S. federal income tax purposes, first as a nontaxable return of capital to the extent of the U.S. Holder's basis in the shares (thereby increasing the amount of any gain and decreasing the amount of any loss realized on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount of any dividend paid in Euro will be equal to the U.S. dollar value of the Euro on the date of receipt regardless of whether the U.S. Holder converts the payment into U.S. dollars.
The declaration of dividends will be at the discretion of the Company’s Supervisory Board of directors and will depend upon the Company’s earnings, capital requirements, financial position, general economic conditions, and other pertinent factors. The Company cannot assure Holders that dividends will be paid in the future.
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 tax treaty between the United States and the Netherlands 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, will be subject to current United States federal income taxation whether or not such Holder obtained a refund of the excess amount withheld. In the event the Company pays a dividend to a U.S. Holder out of the earnings of a non-Dutch subsidiary, however, it is possible that under certain circumstances such U.S. Holder would not be entitled to claim a credit for a portion of any Dutch taxes withheld by the Company from such dividend. The portion of Dutch withholding tax that may not be creditable in this instance equals a maximum of 3% of the gross amount of such dividend (or 20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a 15% withholding rate under
the U.S. Tax Treaty). This limitation could potentially apply only 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. A U.S. Holder who finds it more advantageous because of such limitations, to claim the Netherlands dividend withholding tax as a deduction instead of a credit may do so, but only for a year for which such Holder does not claim a credit for any foreign taxes. If the U.S. Holder is a U.S. partnership, trust, or estate, any tax credit is available only to the extent that the income derived by such partnership, trust, or estate is subject to U.S. tax on the income of a resident either in its hands or in the hands of its partners or beneficiaries, as the case may be.
Taxation on Sale or Disposition of Shares
Subject to the discussion below regarding passive foreign investment companies, U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes on the sale or other disposition of shares in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted tax basis in the shares will be equal to the amount paid by the U.S. Holder for such shares reduced by any distribution in excess of the earnings and profits of the Company. For shares held for one year or less, any such gain or loss will generally be treated as short-term gain or loss. Short-term capital gains are taxed at the same rate as ordinary income. If the shares have been held for more than a year, any such gain or loss will generally be treated
as long-term capital gain or loss. U.S. Holders are advised to consult a competent tax adviser regarding applicable capital gains tax provisions and sourcing of capital gains and losses for foreign tax credit purposes.
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 IRS and to a 31% U.S. backup withholding tax. Backup withholding generally will not apply, however, to a Holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such certification on Form W-9 (Request for Taxpayer Identification Number and Certification) and a non-US Holder will provide such certification on a version of Form W-8 (Certificate of Foreign Status).
Passive Foreign Investment Company
Management has determined that the Company has not been a passive foreign investment company (“PFIC”) for United States federal income tax purposes for prior taxable years and believes that the Company will not be treated as a PFIC for the current and future taxable years, but this conclusion is a factual determination made annually and thus subject to change. The Company would be a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder held shares, either (i) at least 75% of the Company’s gross income for the taxable year is passive income, or
(ii) at least 50% of the Company’s assets are assets that produce or are held for the production of passive income. Under a “look-through” rule, a corporation takes into account a pro rata share of the income and the assets of any corporation in which it owns, directly or indirectly, 25% or more of the stock by value. Passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from the active conduct of a trade or business and not derived from a related person), annuities, and gains from assets that produce passive income. The 50% asset test would apply to the Company based on fair market values.
If the Company is a PFIC for any taxable year during which a U.S. Holder holds shares, the U.S. Holder
will be subject to special tax rules with respect to:
|
·
|
any “excess distribution” that the U.S. Holder receives on shares, and
|
|
·
|
any gain the U.S. Holder realizes from a sale or other disposition (including a pledge) of the shares.
|
Unless the U.S. Holder makes a “qualified electing fund” or “mark-to-market” election as discussed below.
Distributions the U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the shares will be treated as an excess distribution. Under these special tax rules:
|
·
|
the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the shares,
|
|
·
|
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which the Company was a PFIC, will be treated as ordinary income, and
|
|
·
|
the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
|
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if the U.S. Holder holds the shares as capital assets.
If the Company were to become a PFIC, a U.S. Holder may avoid taxation under the excess distribution rules discussed above by making a “qualified electing fund” election to include the U.S. Holder’s share of the Company’s income on a current basis. However, a U.S. Holder may make a qualified electing fund election only if the Company, as a PFIC, agrees to furnish the shareholder annually with certain tax information. Management has not decided whether, under such circumstances, the Company would prepare or provide such information.
Alternatively, if the Company were to become a PFIC, a U.S. Holder might, depending on the volume of trading of our stock, make a mark-to-market election to elect out of the excess distribution rules discussed above. If a U.S. Holder made a mark-to-market election for the shares, the U.S. Holder would include in income each year an amount equal to the excess, if any, of the fair market value of the shares as of the close of the U.S. Holder’s taxable year over the U.S. Holder’s adjusted basis in such shares. A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their fair market value as of the close of the taxable year only to the extent of any net mark-to-market gains on the shares included in the U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under
a mark-to-market election, as well as gain on the actual sale or other dispositions of the shares are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale or disposition of the shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares. A U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss amounts.
The mark-to-market election is available only for stock which is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, or the national market system established pursuant to section 11A of the Exchange Act, or any exchange or market that the IRS has determined has rules sufficient to carry out the purposes of the income tax rules. There can be no assurance that the Company will continue to satisfy the requirements of the mark-to-market election.
Tax assessment in the U.S
The Company was subject to a tax examination for one of its subsidiaries in the United States by the IRS for the tax years 2002 to 2004. In connection with this examination, the subsidiary was required to provide information regarding its treatment of certain expenses. The IRS proposed a number of adjustments to the subsidiary's filed income tax returns for the tax years 2002 to 2004, which collectively resulted in an assessed income tax liability of $7.3 million. In July 2011 and January 2012, the Company entered into arrangements with the IRS to settle all outstanding claims against it for $3.3 million. In August 2012, the
Company filed an Offer in Compromise with the IRS to reduce the amount payable to the IRS under the settlements citing unfavorable financial condition of its American subsidiaries. In July 2013, The IRS accepted the Company’s offer to settle all outstanding amounts for $0.2 million, which has been paid in full as of December 31, 2013.
Taxes in the Netherlands
The following is a general non-exhaustive discussion of the tax laws in the Netherlands as they relate to the operations of the Company.
We are incorporated under the laws of the Netherlands and are therefore subject to the tax laws of the Netherlands. In 2015 the standard corporate income tax rate was 20% on profits up to €0.2 million ($0.2 million as of December 31, 2014) and 25% on the excess. In 2016 the standard corporate income tax rate will be the same as in 2015.
ICTS International and a number of our Dutch resident subsidiary companies form a fiscal unity for Dutch corporate income tax purposes. As a result, Dutch corporate income tax is levied from these entities on a consolidated basis at the level of ICTS.
For Dutch corporate income tax purposes business affiliates should calculate their profits on an “at arm’s length” basis. In case transactions between such affiliates are made or imposed on conditions (transfer prices) which differ from those conditions which would have been made or imposed between independent entities in the free market, the profits of those entities are determined as if the latter conditions had been agreed.
Participation Exemption
Under the Dutch participation exemption regime that is applicable as from 1 January 2010, roughly summarized, when determining whether or not the participation exemption is applicable, it should first be considered with what objective the parent company holds its participation in the subsidiary company.
If the parent company holds its participation in the subsidiary company as a portfolio investment, the participation exemption is not applicable, unless it is a “qualifying portfolio investment”. This is a subjective test and should be determined on a case by case basis taking into account all of the relevant facts and circumstances.
The parent company would be considered to hold the participation in the subsidiary company as a portfolio investment, if holding this participation is merely aimed at receiving a return therefrom that could be expected for normal asset management. The parent company would generally not be considered to hold the participation in the subsidiary company as a portfolio investment, if the business carried on by the subsidiary company is in line with the business carried on by the parent company. This should normally also apply to a holding company, which, based on its activities on a managerial, policy-making or financial level, performs a material function for the benefit of the group of companies that it forms part of, or to an intermediate holding company in case this company plays a linking role between the business activities of its parent company and the business activities of its subsidiary companies.
The subsidiary company would be deemed to be held as a portfolio investment by the parent company if (i) generally the subsidiary company’s assets consist on a consolidated basis for more than 50% of interests of less than 5% in other entities, or (ii) the subsidiary company’s activities consist for more than 50% of group financing activities. Group finance includes loans, credit instruments and also leasing of equipment, intangibles and other assets.
If the parent company would (be deemed to) hold the participation in the subsidiary company as a portfolio investment, the participation exemption would still be applicable if the investment is a “qualifying portfolio investment”. That would be the case if the “subject-to-tax” test or the “asset test” is met. We will not elaborate on these tests.
In case the participation exemption is applicable, income in the hands of ICTS arising from dividends paid by subsidiaries or capital gains from the disposal of its shares in such subsidiaries is exempt from corporate income tax in The Netherlands. Apart from special provisions in relation to certain liquidation losses, capital losses incurred in relation to qualifying participations are not deductible for Dutch corporate income tax purposes.
In case the participation exemption is not applicable, income derived from a subsidiary company will be taxed in the hands of ICTS against ordinary corporate income tax rates, while a (partial) credit may be allowed for underlying taxes. In certain cases, a yearly revaluation of the participation to its fair market value is required.
Costs related to the acquisition of qualifying participations are generally added to the cost price of the participation and are as such not deductible. Costs related to the disposal of participations falling within the scope of the participation exemption are also not deductible. Other expenses relating to participations (e.g. the cost of financing) are in principle deductible.
Interest deduction limitations
As per January 1, 2013, the thin capitalization rules have been abandoned. Instead, as per the same date the “participation debt interest limitation” was introduced in the Netherlands.
The participation debt interest limitation applies to interest and costs of loans that are (deemed to be) related to the financing of subsidiaries (“participation debt”). The interest limitation only affects the tax deductibility of the so called “excessive participation interest”, whereby excessive relates to the fiscal value of participations exceeding the taxpayer’s equity for tax purposes. Financing of subsidiaries includes the acquisition of subsidiaries and capital injections in subsidiaries.
Investments in subsidiaries that relate to the operational expansion of the activities of the group are excluded from the participation debt interest limitation. The participation debt interest limitation only applies to groups that qualify for the participation exemption.
The first €0.8 million ($0.9 million as of December 31, 2015) of “excessive participation interest” is exempt from the interest deduction limitation and is therefore deductible (unless other interest limitation rules apply). “Excessive participation interest” that exceeds the €0.8 million threshold is not tax deductible; it makes no difference if this interest is paid to related entities or to third parties.
According to the definition of the interest limitation, interest costs include: foreign exchange results, the costs of hedging currency risks and the costs of hedging interest risks. The interest costs also include, besides the cost of loans, the costs of financial lease contracts and hire-purchase contracts.
An investment can never be considered to be an expansion of the operational activities in case the financing is artificially constructed in order to obtain a tax advantage, if the interest can be deducted twice in the group (double dip) or when a hybrid loan is used (e.g. a profit participating loan).
In case of ICTS, there is no excessive debt at this stage, since its equity exceeds the cost price of the participations. Insofar this is the situation, participation debt interest limitation rules in principle do not apply.
Besides the participation debt interest limitation, Dutch tax law includes various other sets of anti-abuse provisions in relation to deduction of interest. Further, interest deduction may be disallowed based on case law.
Loss compensation
As of 2007 the term for carry-back of operating losses is reduced to one year. Further, the term for carry-forward of losses is restricted to nine years, subject to certain anti-abuse provisions. Not yet compensated losses will disappear after these terms have lapsed.
Limitations on loss compensation may also apply in the case of so-called "holding losses", being losses incurred in a book year during which the activities of ICTS (jointly with the subsidiary companies that form part of the fiscal unity for Dutch corporate income tax purposes) for the entire or almost entire year, entirely or almost entirely consist of the holding of participations or the financing of related companies. This will be deemed not to be the case if at least 25 employees are engaged in other activities on a full-time basis.
Innovation box
In the innovation box regime, which has entered into force as per 2010, income from self-developed intangible assets will be taxed against an effective tax rate of 5%. The innovation box is not only applicable to intangible assets for which a patent was granted, but also to intangible assets which are eligible for an R&D certificate (S&O verklaring). Further, application of the innovation box regime is subject to the condition that the income generated with an intangible asset, can for 30% or more, be attributed to the intangible. Brands, images and similar assets are excluded from the innovation box regime. Application of the innovation box regime is optional on a product by product basis. ICTS may also decide to deduct R&D costs against other regularly taxed income when determining its taxable income. At a later stage and subject to certain conditions aiming at avoiding that costs are deducted against
regular corporate income tax rates whereas income is taxed under the innovation box regime against an effective rate of 5%, ICTS may in this case still decide to apply the innovation box regime.
Depreciation limitations; depreciation at will
As of January 1, 2007 restrictions apply on the depreciation amount for goodwill and other business assets. The maximum yearly depreciation charge for goodwill is 10% of the cost price. The maximum yearly depreciation charge for other business assets is 20% of the cost price of said assets. It should still be possible to value assets at lower going-concern value. Further, restrictions have been introduced on the depreciation of real estate property. Depreciation of investment property is no longer allowed in case the book value of the property falls below the official fair market value of the property for tax purposes. The depreciation of real estate property used as part of a trade or business is allowed as long as the book value of the real estate property does not fall below 50% of the official fair market value of the property for tax purposes.
To stimulate the economy, investments in new assets in 2009, 2010 and 2011 can be depreciated at will, with a maximum of 50% in the year of investment. Investments in 2009 should come into operation before 1 January 2012. Investments in 2010 and 2011 should come into operation before January 1, 2013 and January 1, 2014, respectively. Excluded from the accelerated depreciation are, amongst others, investments in real estate, intangible assets and cars.
For the second half of 2013 (July 1 up to and including December 31), a temporary depreciation at will regime, similar to previous regime, has been re-introduced to boost the economy. Investments depreciated at will during this period must come into operation prior to January 1, 2016.
Dutch Tax Consequences of Holding Shares by a non-Dutch resident shareholder
The following is a general, non-exhaustive summary of Dutch tax consequences to a holder of Common Shares who is not, or is not deemed to be, a resident of the Netherlands for purposes of the relevant tax codes (a "non-resident Shareholder") and is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change, possibly on a retroactive basis. The summary does not address taxes imposed by the Netherlands other than dividend withholding tax, personal income tax, corporate income tax and gift and inheritance tax. The discussion does not address the tax consequences under tax laws of any other jurisdiction than the Netherlands.
Dividend Withholding Tax in the Netherlands
We currently do not anticipate distributing any dividends in the foreseeable future. To the extent that dividends are distributed by ICTS, such dividends ordinarily would be subject, under the tax laws of the Netherlands, to a withholding tax at a rate of 15%. Dividends include distributions in cash or in kind, deemed dividends and redemption and liquidation proceeds in excess of, for Dutch tax purposes, recognized paid-in capital. In case there are profits or in case profits can be anticipated, the repayment of ICTS' share premium is also subject to dividend withholding tax. Further, stock dividends are subject to Dutch dividend withholding tax, unless distributed out of the paid-in share premium of ICTS as recognized for tax purposes in the Netherlands.
A non-resident Shareholder could be eligible for a reduction or a refund of Dutch dividend withholding tax under a tax convention which is in effect between the country of residence of the shareholder and the Netherlands, or under provisions similar to the EU Parent/Subsidiary Directive. The Netherlands has concluded such conventions with, among others, the United States, most European Union member states, Canada, Switzerland and Japan. Under most of these conventions, dividend withholding tax in the Netherlands is effectively set at a rate of 15% (primarily applicable to individual shareholder) and may be further reduced to lower rates in the case of a corporate shareholder with a certain percentage of shareholding interest, depending on the applicable tax treaty. Based on Dutch domestic law, a 0% withholding tax rate applies to certain (corporate) shareholders.
Under the tax convention currently in force between the United States and the Netherlands (the "Treaty"), dividends paid by us to an individual shareholder resident in the United States or a corporate shareholder organized under the laws of the United States or any State or territory thereof holding less than 10% of the voting power in ICTS (each, a "U.S. Treaty Shareholder"), are subject to Dutch dividend withholding tax of 15%, unless such U.S. Treaty Shareholder has a permanent establishment or permanent representative in the Netherlands to which or to whom the Common Shares are attributable. Subject to certain conditions, the dividend withholding tax rate may be reduced to 5% or 0% in case a qualifying U.S. resident corporate shareholder would hold at least 10% respectively at least 80% of the voting power in ICTS.
Generally, there is no dividend withholding tax applicable in the Netherlands on the sale or disposition of Common Shares to persons other than ICTS or its subsidiaries or affiliates. In case of sale or disposition of Common Shares to ICTS or any of its subsidiaries, dividend withholding tax in the Netherlands may apply.
In addition, in an effort to prevent the practice of dividend stripping, strict beneficial ownership rules are incorporated in the Dutch dividend withholding tax act, which may have an impact on the levy of dividend withholding tax.
Non-resident shareholders; Income Tax and Corporate Income Tax in the Netherlands
Based on Dutch domestic tax law, a non-resident Shareholder is subject to Dutch personal income tax or Dutch corporate income tax with respect to dividends distributed by us on the Common Shares or with respect to capital gains derived from the sale or disposal of Common Shares in case:
(a) the non-resident Shareholder carries on a business in the Netherlands through a permanent establishment or a permanent representative to which or to whom the Common Shares are attributable; or
(b) the non-resident Shareholder has a direct or indirect substantial interest or deemed substantial interest in the share capital of ICTS as defined in the tax code of the Netherlands, which interest does not form part of the assets of an enterprise of that non-resident Shareholder and the interest is held with the main purpose, or one of the main purposes, to prevent the levy of personal income tax or dividend withholding tax at the level of another (legal) person; or
(c) the non-resident Shareholder is entitled to a share in the profits of an enterprise effectively managed in The Netherlands, other than through ownership of securities or, in the case of an individual shareholder, through employment, to which enterprise the Common Shares are attributable.
Generally, there is a substantial interest in the share capital of ICTS if the Shareholder, alone or together with his or her partner (spouse, registered partner or other individuals as defined in Dutch tax law), owns, directly or indirectly, (i) 5% or more of the issued capital of any class of shares in ICTS, (ii) options to acquire 5% or more of the issued capital of any class of shares or (iii) profit-sharing rights to 5% or more of the annual profits or liquidation distributions of ICTS. If an individual, alone or together with his partner, does not have a substantial interest based on these tests, he or she may nevertheless be deemed to have a substantial interest in case certain relatives hold a substantial interest in ICTS. In case of a substantial interest held by a corporate shareholder, a receivable the non-resident Shareholder has from ICTS may also belong to such substantial interest. Non-resident Shareholders
owning a substantial interest in ICTS may be subject to income tax upon the occurrence of certain events, for example when they cease to own a substantial interest.
The Netherlands' right to levy tax with respect to dividends distributed by ICTS to a non-resident Shareholder or capital gains derived from the sale or disposal of shares in ICTS by a non-resident Shareholder may be limited under a tax convention which may be in effect between the country of residence of the shareholder and the Netherlands.
In case Dutch income tax is due with respect to dividends distributed by ICTS, Dutch dividend withholding tax levied with respect to such dividends can generally be credited against the income tax due as a pre-tax.
If certain conditions are met, a non-resident individual taxpayer can opt to be treated as a resident of the Netherlands for tax purposes. This choice will allow the individual to benefit from deductions and other tax benefits only available to residents of the Netherlands. Whether or not such choice could be beneficial should be determined separately in each individual case. As of January 1, 2015, this optional treatment will be abandoned and will be replaced by a special scheme for qualifying foreign taxpayers.
Netherlands Gift and Inheritance Tax
A gift or inheritance of Common Shares received from a non-resident Shareholder will be subject to Dutch gift or inheritance tax in case:
(a) the non-resident Shareholder has been a resident of the Netherlands at any time during the ten years preceding the time of the gift or death and is a national of the Netherlands at the time of the gift or death; or
(b) for purposes of the tax on gifts, the non-resident Shareholder has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift.
Please note that this summary of Dutch gift and inheritance tax is not exhaustive.
Documents on display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, the Company files reports and other information with the United States Securities and Exchange Commission ("SEC"). These materials may be inspected at the Company's office in Schiphol-Oost, The Netherlands. Documents filed with the SEC may also be read and copied at the SEC's public reference room at 100 F Street N.E. Room 1580 Washington, DC 20549 USA. For further information please call the SEC at 1-800-SEC-0330.. All the SEC filings made electronically by ICTS are available to the public on the SEC web
site at http://www.sec.gov (commission file number 0-28542). Those reports are also available free of charge at www.icts-int.com.
Subsidiary Information
Not applicable
|
Quantitative and Qualitative Disclosure About Market Risk
|
Foreign Currency Exchange Risk - applies to our operations outside the USA. In 2015, approximately 22% of the Companies revenues were derived in the United States, and approximately 78% was derived in Europe and the Far East. The Company is subject to market risks associated with foreign currency exchange rate fluctuations. We do not utilize derivative instruments to manage its exposure to such market risk. As such, significant foreign currency exchange rate fluctuations can have a material impact of the Company’s financial position, results of operations, and cash flows.
Interest Rate Risk - We are subject to changes in interest rates based on Federal Reserve actions and general market conditions. The Company does not utilize derivative instruments to manage its exposure to interest rate risk. We believe that moderate interest rate increases will not have a material impact on the Company’s consolidated financial position, result of operations and cash flows. An increase of 1% in the interest rate would have increased the Company's interest expense for bank loans, convertible notes payable to a related party and other parties, by approximately $0.5 million in the year ended December 31, 2015.
|
Description of Securities Other than Equity Securities
|
Not applicable.
PART II
|
Defaults, Dividend Arrearages and Delinquencies
|
Not applicable.
|
Material Modifications to the Rights of Security Holders and Use of Proceeds
|
Not applicable
Management's report on internal control over financial reporting
(a) Our management, including our Managing Director and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) as of the end of the period covered by this annual report (the “Evaluation Date”). Based on such evaluation, the Managing Director and the Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective.
(b) Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, including our Managing Director and our Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the period covered by this report. Based on that evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2015. Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover all failures of
persons within the Company to comply with our internal procedures, as all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
(c) On the evaluation conducted by our Managing Director and our Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management has concluded that there was no change in our internal control over financial reporting that occurred during the year ended December 31, 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
Audit Committee Financial Experts
|
The members of the Audit Committee consist of Philip M. Getter, Gordon Hausmann and Gail F. Lieberman. All members are independent, with no relationship with management. Mr. Getter and Ms. Lieberman have financial expertise. Mr. Getter is the Chairman of the Audit Committee.
The Company has adopted a Code of Ethics for principal's executive officers and senior financial officers.
|
Fees Paid to Our Independent Registered Public Accounting Firm
|
The following table sets forth the aggregate fees billed by our independent registered public accounting firms, Mayer Hoffman McCann CPAs ("MHM"), for services rendered to us during the years ended December 31, 2015 and 2014. The audit committee has considered whether the provision of these services is compatible with maintaining the principal accountant's independence and has concluded that such services are compatible. All fees were reviewed and pre-approved by the audit committee (U.S. Dollars in thousands).
|
|
2015
|
|
|
2014
|
|
Audit fees
|
|
$ |
205 |
|
|
$ |
210 |
|
Audit related fees
|
|
|
- |
|
|
|
- |
|
Tax fees
|
|
|
- |
|
|
|
- |
|
Total fees
|
|
$ |
205 |
|
|
$ |
210 |
|
|
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
|
Not applicable.
|
Change in Accountants Disclosure
|
Not applicable.
There are no significant differences between the corporate governance practices in the Netherlands and the U.S. The Company has adopted the U.S. practices.
PART III
See Item 18.
The Consolidated Financial Statements and Financial Statement Schedule of the Company as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015, including the report of our independent registered public accounting firm thereon are set forth on pages F-1 to F-33.
5. Code of Ethics for Principal Executive Officers and Senior Financial Officers.
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.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
|
|
|
|
By:
|
|
|
Name:
|
|
|
Title:
|
Managing Director
|
|