<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
REGISTRATION NO. 333-80447
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
ON
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PUBLICARD, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
PENNSYLVANIA 3577 23-0991870
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
75 KINGS HIGHWAY CUTOFF
FIFTH FLOOR
FAIRFIELD, CONNECTICUT 06430
(203) 368-6800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JAMES J. WEIS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PUBLICARD, INC.
75 KINGS HIGHWAY CUTOFF
FIFTH FLOOR
FAIRFIELD, CONNECTICUT 06430
(203) 368-6800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
JOEL I. GREENBERG, ESQ.
KAYE, SCHOLER, FIERMAN, HAYS & HANDLER, LLP
425 PARK AVENUE
NEW YORK, NEW YORK 10022
(212) 836-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS
PRACTICABLE
AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] --------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] --------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. OUR
SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
4,848,309 SHARES
COMMON STOCK
PUBLICARD, INC.
Certain of our shareholders identified in this prospectus are offering for sale
from time to time under this prospectus up to 4,848,309 shares of our common
stock, including shares issuable upon exercise of options held by certain of
those shareholders. The selling shareholders may sell these shares from time to
time on the over-the-counter market in regular brokerage transactions, in
transactions directly with market makers or in privately negotiated
transactions. For additional information on the methods of sale, you should
refer to the section entitled "Plan of Distribution" on page 73. We will not
receive any portion of the proceeds from the sale of these shares.
Our common stock is traded on the Nasdaq National Market under the symbol
"CARD." On August 13, 1999, the last reported sale price of our common stock on
the Nasdaq National Market was $7.0625 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999
<PAGE> 3
We have filed with the SEC a registration statement on Form S-1 and
amendments to that registration statement, including a post-effective amendment
on Form S-3, relating to the common stock being offered. This prospectus is
filed as part of the registration statement. Other parts of the registration
statement are omitted from this prospectus. Statements made in this prospectus
concerning the contents of any contract or other document are not necessarily
complete. For a more complete description of the matter involved, you should
read the entire contract or other document, as applicable.
We are required by the Securities Exchange Act of 1934 to file reports,
proxy statements and other information with the SEC. You may read and copy such
reports, proxy statements and other information at the SEC's public reference
facilities:
<TABLE>
<S> <C> <C>
WASHINGTON, D.C. NEW YORK CHICAGO
Judiciary Plaza
450 Fifth Street, N.W. Seven World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may call 1-800-SEC-0330 for further information about the public
reference facilities. For a fee, the SEC will send copies of any of our filings
to you. In addition, our filed reports, proxy statements and other information
are contained in the Internet website maintained by the SEC. The address is
http://www.sec.gov.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CARD," and our SEC filings can also be read at the following address:
Nasdaq Operations
1735 K Street, N.W.
Washington, D.C. 20006
The SEC allows us to incorporate by reference the information we file with
it, which means we can disclose important information to you by referring you to
those documents. The information incorporated by reference is considered to be a
part of this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until
all of the securities are sold:
- our Annual Report on Form 10-K for the year ended December 31, 1998, as
amended;
- our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999
and June 30, 1999; and
- our Current Reports on Form 8-K dated February 5, 1999, February 26,
1999, March 8, 1999, April 27, 1999 and May 6, 1999.
We will provide without charge, upon written or oral request, a copy of any
or all of the documents which are incorporated by reference into this
prospectus. Requests should be directed to:
PubliCARD, Inc.
75 Kings Highway Cutoff
Fifth Floor
Fairfield, Connecticut 06430
Attention: Antonio L. DeLise
(203) 368-6800
i
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Use of Proceeds............................................. 17
Dividend Policy............................................. 18
Price Range of Common Stock................................. 19
Capitalization.............................................. 20
Selected Financial Data..................................... 21
Unaudited Pro Forma Condensed Combined Financial
Information............................................... 23
Forward-Looking Statements.................................. 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Market Risk................................................. 35
Business.................................................... 36
Management.................................................. 55
Executive Compensation...................................... 57
Certain Transactions........................................ 61
Principal Shareholders...................................... 62
Selling Shareholders........................................ 64
Description of Capital Stock................................ 67
Shares Eligible for Future Sale............................. 72
Plan of Distribution........................................ 73
Legal Matters............................................... 73
Experts..................................................... 73
</TABLE>
In this prospectus, unless we indicate otherwise, "we," "us," "our" and
"PubliCARD" refer to PubliCARD, Inc. and our subsidiaries.
PubliCARD was incorporated in the Commonwealth of Pennsylvania in 1913. Our
principal executive offices are located at 75 Kings Highway Cutoff, Fifth Floor,
Fairfield, Connecticut 06430. Our telephone number is (203) 368-6800.
2
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. This
summary is not complete and does not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully.
OUR BUSINESS
PubliCARD entered the smart card industry in early 1998 by acquiring the
first of several technology businesses that currently offer and are continuing
to develop solutions for conditional access and security, payment system and
data storage needs of a number of growth industries. In our technology business,
we design, develop, manufacture and market smart card-based hardware and smart
card-enabled software for a growing variety of applications for industries in
the United States and worldwide. Frost & Sullivan estimates that approximately
$2.1 billion in smart cards will be sold worldwide in 2002, compared to $1.1
billion in 1997, and that approximately $310 million in smart cards will be sold
in North America in 2002, compared to $33 million in 1997. By 2002, smart card
readers, software and system integration revenues will comprise approximately
three quarters of the total revenue for the world smart card industry, while one
quarter of smart card industry revenues will be comprised of smart card sales,
according to Frost & Sullivan. We believe the smart card industry is poised for
growth because smart cards and smart card-based systems provide portable and
improved security for the Internet and other remote delivery channels, rapid and
secure off-line processing without reliance on high volume on-line networks and
management of multiple applications and services on a single card. We believe
that the Internet and the development of operating standards and systems will be
the catalysts of the smart card industry's growth.
We develop smart cards, smart card readers, smart card value transfer
stations, operating systems for smart cards and smart card-related application
software. Our smart card products are used predominately for conditional access
and security systems, payment systems, loyalty programs and data storage
systems. Our smart card products are used in many industries, including
information technology, pay television, transportation, commercial laundry and
retail (including electronic commerce).
We also develop and manufacture Portable Computer Memory Card International
Association ("PCMCIA") products, hard disk duplicators and digital camera flash
film readers, which are sold to original equipment manufacturers, value-added
resellers, value-added distributors and end users.
Our objective is to become a leading provider of smart card solutions for a
variety of growth industries. Key elements of our strategy include the
following:
- FOCUS ON DIFFERENTIABLE, VALUE-ADDED PRODUCTS AND TECHNOLOGIES. We intend
to focus on smart card hardware, software, systems integration services
and customized card production rather than on the production of commodity
items such as banking cards and prepaid telephone cards.
- OFFER SOLUTIONS FOR A VARIETY OF INDUSTRIES. We have adopted a strategy
of developing smart card solutions for a variety of industries, including
industries for which standards are evolving as well as those for which
efforts towards standardization are not as visible.
- BUILD TECHNOLOGY BASE. We have acquired intellectual property and
technical expertise in many aspects of the smart card industry, which we
intend to leverage to develop new products, enhance our existing product
offerings and reduce our reliance on outside suppliers.
- ACQUIRE COMPANIES WITH COMPLEMENTARY TECHNOLOGIES, PRODUCTS AND CUSTOMER
BASES. We intend to acquire businesses that have developed smart card
products, services and technologies which broaden and strengthen our
presence in our distribution channels and in new markets.
- BUILD BRAND RECOGNITION. We have begun the process of building brand
identity around the PubliCARD name with the objective of being recognized
as a leading smart card solution provider in the U.S. and around the
world. We have linked and intend to migrate the identities of our
technology-related subsidiaries to the PubliCARD brand name over time.
3
<PAGE> 6
- INCREASE PENETRATION OF EXISTING CUSTOMER BASE. We intend to cross-sell
additional technologies, products and services to the customer bases of
our individual subsidiaries.
- BUILD STRATEGIC ALLIANCES AND RELATIONSHIPS. We intend to form strategic
relationships with a number of key industry players in order to gain
access to additional technology and to expand our marketing and sales
distribution efforts.
- LEVERAGE MANUFACTURING CAPABILITIES. We have begun to use the Chester,
Connecticut manufacturing facility of our wholly-owned subsidiary,
Greenwald Industries, Inc., to meet the manufacturing requirements of
certain of our other subsidiaries.
Our other principal business, coin products, primarily targets the
commercial laundry appliance industry, although we also manufacture and sell our
coin products to the amusement and games industry. We manufacture coin chutes,
timer mechanisms, electronic drop meters, electronic circuit boards and coin
boxes. We believe that Greenwald Industries is the leading designer and
manufacturer of coin meter systems used in the commercial laundry appliance
industry. Our coin products customers include Whirlpool Corp., General Electric,
Maytag, Web Service, Coinmach, Sears and Roebuck, Alliance Laundry Systems and
Mac-Gray. While coin products accounted for 93% of our revenues in 1998, we
expect that percentage to decline significantly in the future as our sales of
technology products increase.
4
<PAGE> 7
THE SECURITIES
<TABLE>
<S> <C>
Common stock offered by selling
shareholders.............................. 4,848,309 shares, including shares
underlying stock options (1)
Common stock outstanding prior to this
offering.................................. 18,349,809 shares (2)
Nasdaq National Market symbol............... CARD
</TABLE>
- ---------------
(1) Assumes the maximum number of shares offered by the selling shareholders
under this prospectus is sold.
(2) Does not include:
- an aggregate of 5,777,457 shares of common stock issuable upon the
exercise of certain outstanding options and warrants, of which 247,500
options, and warrants exercisable into 1,479,281 shares, are currently
exercisable at an average weighted price of $2.53 per share;
- an additional 606,500 shares which are reserved for issuance pursuant to
our stock option plans; and
- 56,666 shares of restricted stock.
See "Executive Compensation -- Stock Option Plans" and "Shares Eligible for
Future Sale."
5
<PAGE> 8
SUMMARY FINANCIAL DATA
The summary financial data presented below for the five-year period ended
December 31, 1998 have been derived from our Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP. You should read the information
set forth below in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and the related Notes thereto included elsewhere in this prospectus
and the documents incorporated by reference into this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $ 16,015 $ 16,680 $ 15,486 $ 17,039 $ 16,519
Cost of sales......................... 13,109 12,654 11,659 11,264 10,906
--------- --------- --------- --------- ---------
Gross margin........................ 2,906 4,026 3,827 5,775 5,613
--------- --------- --------- --------- ---------
Operating expenses:
General and administrative.......... 4,494 5,105 6,338 4,976 5,488
Sales and marketing................. 687 700 768 796 792
Product development................. 181 138 235 441 740
In-process research and
development....................... -- -- -- -- 2,800(1)
Goodwill amortization............... 42 42 42 42 225
Warrant expense..................... -- -- -- 768(2) --
Relocation charge................... -- -- 1,596(3) -- --
--------- --------- --------- --------- ---------
5,404 5,985 8,979 7,023 10,045
--------- --------- --------- --------- ---------
Income (loss) from operations......... (2,498) (1,959) (5,152) (1,248) (4,432)
--------- --------- --------- --------- ---------
Other income (expense):
Interest income..................... 309 138 476 683 551
Interest expense.................... (3,026) (1,877) (815) (370) (339)
Cost of
pensions -- nonoperating(4)....... (768) (744) (769) (768) (846)
Other (expense) income.............. 231 (290) 203 (200) (1,021)(5)
--------- --------- --------- --------- ---------
(3,254) (2,773) (905) (655) (1,655)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes...... (5,752) (4,732) (6,057) (1,903) (6,087)
Income tax benefit.................... -- -- 2,544 -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations.......................... (5,752) (4,732) (3,513) (1,903) (6,087)
Discontinued operations(6):
Income (loss) from discontinued
operations, net of income taxes... 3,463 4,441 1,725 215 12
Gain on sale of discontinued
operations, net of income taxes... -- -- 12,783 609 --
--------- --------- --------- --------- ---------
Net income (loss)..................... $ (2,289) $ (291) $ 10,995 $ (1,079) $ (6,075)
========= ========= ========= ========= =========
Basic earnings (loss) per common
share:
Continuing operations............... $ (.39) $ (.32) $ (.23) $ (.14) $ (.44)
Discontinued operations............. .24 .30 .95 .06 --
--------- --------- --------- --------- ---------
$ (.15) $ (.02) $ .72 $ (.08) $ (.44)
========= ========= ========= ========= =========
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(7)....................... $17,771 $ 3,689 $18,679 $14,807 $19,417
Total assets............................. 36,857 33,832 30,923 25,929 39,928
Long-term debt, including current
maturities............................. 14,869 10,226 1,714 1,272 1,138
Other non-current liabilities............ 16,433 11,245 10,220 9,167 7,780
Shareholders' equity..................... (2,616) (2,594) 13,996 10,873 21,917
</TABLE>
- ---------------
(1) Upon the consummation of the Tritheim acquisition in November 1998, we
immediately expensed $2.8 million representing purchased in-process research
and development projects that had not yet reached technological feasibility
and had no alternative future use. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview -- Recent
Acquisitions."
(2) Represents a non-cash charge associated with the modification and extension
of certain common stock purchase warrants.
(3) Represents costs for severance, lease termination, plant and employee
relocation, recruiting and training new personnel and temporary living
allowances associated with Greenwald Industries' plant relocation.
(4) Represents pension costs related to discontinued product lines and related
plant closings.
(5) Includes a $954,000 charge associated with the termination of a letter of
intent to purchase five businesses in August 1998.
(6) The selected financial data for years prior to 1998 have been restated to
reflect our subsidiary, Orr-Schelen-Mayerson & Associates, Inc. ("OSM"), as
a discontinued operation. See Note 10 to the Notes to our Consolidated
Financial Statements. Income from discontinued operations includes income
from certain subsidiaries we disposed of in 1994, 1995 and 1996.
(7) Working capital represents current assets less current liabilities.
7
<PAGE> 10
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus before deciding to invest in our
common stock. Some of the following risks relate principally to our business and
the industries in which we operate. Other risks relate principally to the
securities markets and ownership of our common stock.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition and results of operations could be materially
adversely affected. In this case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
RISKS RELATED TO THE BUSINESS OF PUBLICARD
WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, AND WE HAVE
ONGOING FUNDING OBLIGATIONS. We have incurred losses and experienced negative
cash flow from operating activities in the past, and we expect to incur losses
and experience negative cash flow from operating activities in the foreseeable
future. We incurred losses from continuing operations in 1996, 1997, 1998 and
the six months ended June 30, 1999 of approximately $3.5 million, $1.9 million,
$6.1 million and $8.9 million, respectively. In addition, we experienced
negative cash flow from continuing operating activities of $11.4 million, $3.0
million, $3.1 million and $5.7 million in 1996, 1997, 1998 and the six months
ended June 30, 1999, respectively.
We have been and may continue to be obligated to assume or extinguish
obligations of the companies we recently acquired. We expect that these acquired
companies will require ongoing funding to support the expansion of their sales
and marketing efforts, new product development, working capital growth and
capital expenditures.
We also have continuing obligations to fund payments due under an
environmental consent decree and an underfunded pension plan. As of June 30,
1999, we were required to make future aggregate payments of $2.8 million through
April 2002 in connection with the environmental consent decree to which we are
subject. Consistent with the general practices of environmental enforcement
agencies, the consent decree does not eliminate our potential liability for
remediation of contamination that had not been known at the time of the
settlement. As of December 31, 1998, the present value of the accrued benefit
liabilities of our pension plan exceeded the plan's assets by approximately $6.0
million. In addition to the cash contribution of approximately $1.0 million we
expect to make to the plan in 1999, we are obligated to make continued
contributions to the plan in accordance with the rules and regulations
prescribed by the Employee Retirement Income Security Act of 1974. Future
contribution levels depend in large measure on the mortality rate of plan
participants and the investment return on the plan assets. For a discussion of
these obligations and our results of operations, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements.
WE HAVE LIMITED EXPERIENCE IN THE SMART CARD MARKET. We acquired our first
smart card company in February 1998, and in September 1998, our board of
directors decided to significantly expand our presence in the smart card
industry. We are therefore subject to the risks inherent in establishing a new
business enterprise.
THE MARKET FOR SMART CARD PRODUCTS IS NOT WELL DEVELOPED AND MAY NOT
GROW. Existing demand for smart card products in the United States is not large
enough for all the companies seeking to engage in the smart card business to
succeed. Current participants in the smart card business rely upon anticipated
growth in demand, which may not occur. The success of the smart card industry
depends on the ability of market participants, including our company, to
convince governmental authorities, commercial enterprises and other potential
system sponsors to adopt a smart card system in lieu of existing or alternative
systems such as magnetic stripe card and paper-based systems. Smart card-based
systems may not prove economically feasible for some potential system sponsors.
For example, municipal transit authorities and colleges and universities, many
of which use magnetic stripe card systems, may resist the introduction of smart
card products. Moreover, a portion of the sales of smart card products will
depend upon emerging
8
<PAGE> 11
communications and commerce networks, such as the Internet. We cannot assure you
that there will be significant market opportunities for smart card systems in
the United States or that the acceptance of smart card systems in other
countries will be sustained. If the expected growth does not occur, our strategy
will not be successful.
THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and
market acceptance of, our products is subject to a high level of uncertainty due
to rapidly changing technology, new product introductions and changes in
customer requirements and preferences. The success of our products also depends
upon our ability to enhance our existing products and to develop and introduce
new products and technologies to meet customer requirements.
We face the risk that smart card technology generally, and our products
specifically, will not be chosen to replace existing technology or will not
otherwise achieve market acceptance. With respect to our digital camera
products, the market for digital photography is still in the early stages of
development and there has not yet been broad acceptance of our products
developed for that market.
OUR FUTURE PROFITABILITY DEPENDS LARGELY UPON PRODUCTS THAT HAVE NOT YET
PRODUCED ANY REVENUES. Certain of the technology companies we have recently
acquired have products which we believe are viable, but which have not yet
generated any material sales. Our future revenues and earnings depend in large
part on the success of these products.
OUR GROWTH STRATEGY FOCUSES ON ACQUISITIONS WHICH MAY INVOLVE RISKS. An
important element of our growth strategy has been and continues to be the
acquisition of businesses that complement, enhance or geographically expand our
existing business segments, product lines or channels of distribution. The
companies we have acquired have no prior history of operating as a combined
enterprise and have experienced net losses prior to being acquired by us.
In February 1998, we acquired, through a joint venture arrangement in
Greenwald Intellicard, Inc., the assets and intellectual property of Intellicard
Systems, Ltd. We currently own 65% of Greenwald Intellicard and have an option
that becomes exercisable in 2000 to acquire the remaining interest. In November
1998, we acquired Tritheim Technologies, Inc. In February 1999, we acquired
Amazing! Smart Card Technologies, Inc. and Greystone Peripherals, Inc.
Our recently completed acquisitions, and our strategy generally, present a
number of significant risks and uncertainties, including the risks that:
- we will not be able to retain the employees or business relationships of
acquired companies;
- we will fail to realize any anticipated synergies or other cost reduction
objectives expected from the acquisitions;
- we will not be able to integrate the operations, products, personnel and
facilities of any acquired company;
- management's attention will be diverted to pursuing acquisition
opportunities and integrating acquired products, technologies or
companies and will be distracted from performing its regular
responsibilities;
- the companies we acquire will fail to achieve or sustain profitability;
- we will incur or assume liabilities, including liabilities that are
unknown or not fully known to us at the time of an acquisition; and
- we will enter markets in which we have no prior experience.
Additional acquisitions would require us to invest financial resources and
may have a dilutive effect on our earnings or book value per share of common
stock. We cannot assure you that we will consummate any acquisitions in the
future, that financing required for future acquisitions will be available on
acceptable terms or at all, or that any past or future acquisitions will not
materially adversely affect our results of operations and financial condition.
9
<PAGE> 12
WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR
REVENUES. Whirlpool Corp. accounted for approximately 13% of our revenues on a
consolidated basis in 1998. We rely on a limited number of customers in the coin
products segment of our business. We expect to continue to depend upon a
relatively small number of customers for a majority of the revenues in our coin
products segment.
We generally do not enter into long-term supply commitments with our
technology and coin products customers. Instead, we bid on a project basis and
have supply contracts in place for each project. Significant reductions in sales
to any of our largest customers would have a material adverse effect on our
business. In addition, we generate significant accounts receivable and inventory
balances in connection with providing products to our customers. A customer's
inability to pay for our products could have a material adverse effect on our
results of operations.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF SUPPLIERS IN OUR COIN PRODUCTS
SEGMENT. We purchase mechanical coin chutes using our patented designs and
proprietary tooling exclusively from one supplier in Taiwan. Our reliance on
sole source suppliers involves several risks, including a potential inability to
obtain an adequate supply of required components, price increases, late
deliveries and poor component quality. We cannot assure you that we will be able
to obtain our full requirements of such components in the future, that prices of
such components will not increase and that problems with respect to quality and
timely delivery will not occur. Disruption or termination of the supply of these
components could delay shipments of our products, have a material adverse effect
on our business and operations and damage our relationships with our customers
and our reputation.
WE DEPEND ON THIRD PARTY MANUFACTURERS WHO ARE OUTSIDE OF OUR CONTROL. We
outsource manufacturing needs of a significant portion of our technology
products to third party contract manufacturers. Outsourcing of manufacturing
involves risks with respect to quality assurance, cost and the absence of close
engineering support. In addition, financial, operational or supply problems
encountered by the third party manufacturers we use or may use in the future,
their subcontractors or their suppliers could result in our inability to obtain
timely delivery, if at all, of finished products. Any such difficulties would
adversely affect our financial results.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL
CHANGES AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER. The smart card industry
is subject to rapid technological change. Because new product development
commitments must be made well in advance of actual sales, new product decisions
must anticipate future demand as well as the speed and direction of
technological change. Our ability to remain competitive will depend upon our
ability to develop in a timely and cost effective manner new and enhanced
products at competitive prices. New product introductions or enhancements by our
competitors could cause a decline in sales or loss of market acceptance of our
existing products and lower profit margins.
Our success in developing, introducing and selling new and enhanced
products depends upon a variety of factors, including:
- product selections;
- timely and efficient completion of product design and development;
- timely and efficient implementation of manufacturing processes;
- effective sales, service and marketing;
- price; and
- product performance in the field.
Our ability to develop new products also depends upon the success of our
research and development efforts. Our research and development expenditures, on
a pro forma basis for 1998, were $1.7 million, and are planned to increase
substantially in the near term. We cannot assure you that these expenditures
will
10
<PAGE> 13
lead to the development of viable products. We may need to devote substantially
more resources to our research and development efforts in the future.
THE DEMAND FOR THE MECHANICAL COIN METER SYSTEMS THAT WE MANUFACTURE IS
DECLINING. We design and manufacture mechanical coin meter systems used
primarily in the commercial laundry appliance industry. Sales of mechanical coin
meter systems accounted for approximately 93% and 66% of our revenues in 1998
and for the six months ended June 30, 1999, respectively. Our sales of
mechanical coin meter systems were $15.5 million, $17.0 million, $15.4 million
and $7.6 million in 1996, 1997, 1998 and the six month period ended June 30,
1999, respectively. We expect the demand for the coin handling equipment that we
manufacture to decline as advances are made towards the development of equipment
utilizing electronic, smart card or other technologies.
THE HIGHLY COMPETITIVE MARKETS IN WHICH WE OPERATE COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS. The markets in which we
operate are intensely competitive and characterized by rapidly changing
technology. We compete against numerous companies, many of which have greater
resources than we do, and we believe that competition is likely to intensify.
We believe that the principal competitive factors affecting the smart card
market are:
- the extent to which products support industry standards and are capable
of being operated or integrated with other products;
- technical features and level of security;
- strength of distribution channels;
- price;
- product reputation, reliability, quality, performance and customer
support;
- product features such as adaptability, functionality and ease of use; and
- competitor reputation, positioning and resources.
We cannot assure you that competitive pressures will not have a material
adverse effect on our business and operating results. Many of our current and
potential competitors have longer operating histories in the smart card industry
and significantly greater financial, technical, sales, customer support,
marketing and other resources, as well as greater name recognition and a larger
installed base of their products and technologies than our company.
Additionally, there can be no assurance that new competitors will not enter our
business segments. Increased competition would likely result in price
reductions, reduced margins and loss of market share, any of which would have a
material adverse effect on our business and operating results.
We experience competition from a number of companies across our range of
businesses. We also compete with original equipment manufacturers, peripheral
equipment manufacturers and others that have greater resources than we do. See
"Business -- Technology Products Business -- Competition."
We believe that the principal competitive factors affecting our coin
products business are:
- quality of product;
- delivery times;
- ease of use;
- marketing and customer service; and
- price.
In the coin products segment of our business, we compete with ESD,
Set-O-Matic and Monarch, as well as alternative technologies including
electronic systems and smart card products. We also experience
11
<PAGE> 14
indirect competition from certain of our customers that currently offer
alternative products or are expected to introduce competitive products in the
future.
OUR LONG PRODUCT SALES CYCLES SUBJECT US TO RISK. Our products fall into
two categories, those that are standardized and ready to install and use and
those that require significant development efforts to implement within the
purchasers' own systems. Those products requiring significant development
efforts tend to be newly developed technologies that can represent major
investments for customers. We rely on potential customers' internal review
processes and systems requirements. The implementation of some of our products
involves deliveries of small quantities for pilot programs and significant
testing by the customers before firm orders are received for production volumes.
For these more complex products, the sales process may take one year or longer,
during which time we may expend significant financial, technical and management
resources, without any certainty of a sale.
WE MAY BE LIMITED IN OUR USE OF OUR FEDERAL NET OPERATING LOSS
CARRYFORWARDS. As of June 30, 1999, we had federal net operating loss
carryforwards, subject to review by the Internal Revenue Service, totaling
approximately $80.0 million for federal income tax purposes, approximately $6.0
million of which will expire at the end of 1999, $12.0 million of which will
expire at the end of 2000, $9.0 million of which will expire at the end of 2001
and $25.0 million of which will expire at the end of 2002. We do not expect to
earn any significant taxable income prior to 2001, and may not do so until
later. A federal net operating loss can generally be carried back two or three
years and then forward fifteen or twenty years (depending on the year in which
the loss was incurred), and used to offset taxable income earned by a company
(and thus reduce its income tax liability).
Section 382 of the Internal Revenue Code provides that when a company
undergoes an "ownership change," the corporation's use of its net operating
losses is limited in each subsequent year. An "ownership change" occurs when, as
of any testing date, the sum of the increases in ownership of each shareholder
that owns five percent or more of the value of a company's stock as compared to
that shareholder's lowest percentage ownership during the preceding three-year
period exceeds fifty percentage points. For purposes of this rule, certain
shareholders who own less than five percent of a company's stock are aggregated
and treated as a single five-percent shareholder. We intend to issue a
substantial number of shares of our common stock in connection with future
acquisitions and public offerings. In addition, the exercise of outstanding
warrants and certain options to purchase shares of our common stock may require
us to issue additional shares of our common stock. The issuance of a significant
number of shares of common stock could result in an "ownership change." If we
were to experience such an "ownership change," we estimate that we would not be
able to use a substantial amount of our available federal net operating loss
carryforwards to reduce our taxable income.
The extent of the actual future use of our federal net operating loss
carryforwards is subject to inherent uncertainty because it depends on the
amount of otherwise taxable income we may earn. We cannot give any assurance
that we will have sufficient taxable income in future years to use any of our
federal net operating loss carryforwards before they would otherwise expire.
OUR PROPRIETARY TECHNOLOGY IS DIFFICULT TO PROTECT AND MAY INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. Our success depends significantly
upon our proprietary technology. We rely on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect our proprietary rights. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We currently have a number of patent
applications pending. We cannot assure you that any of our applications will be
approved, that any new patents will be issued, that we will develop proprietary
products or technologies that are patentable, that any issued patent will
provide us with any competitive advantages or will not be challenged by third
parties. Furthermore, we cannot assure you that the patents of others will not
have a material adverse effect on our business and operating results.
If our technology or products are determined to infringe upon the rights of
others, and we were unable to obtain licenses to use the technology, we could be
required to cease using the technology and stop selling the products. We may not
be able to obtain a license in a timely manner on acceptable terms
12
<PAGE> 15
or at all. Any of these events would have a material adverse effect on our
financial condition and results of operations.
Patent disputes are common in technology-related industries. We cannot
assure you that we will have the financial resources to enforce or defend a
patent infringement or proprietary rights action. As the number of products and
competitors in our target markets grows, the likelihood of infringement claims
also increases. Any claim or litigation may be time-consuming and costly, cause
product shipment delays or require us to redesign our products or require us to
enter into royalty or licensing agreements. Any of these events would have a
material adverse effect on our business and operating results. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to use our proprietary information and software.
In addition, the laws of some foreign countries do not protect proprietary and
intellectual property rights to as great an extent as do the laws of the United
States. Our means of protecting our proprietary and intellectual property rights
may not be adequate. There is a risk that our competitors will independently
develop similar technology, duplicate our products or design around patents or
other intellectual property rights.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS. Our
customers may rely on certain of our current products and products in
development to prevent unauthorized access to computer networks, personal
computers, computer files, cellular telephones, digital video broadcasting,
websites and real property. A malfunction of or design defect in certain of our
products could result in tort or warranty claims. Although we attempt to reduce
the risk of exposure from such claims through warranty disclaimers and liability
limitation clauses in our sales agreements and by maintaining product liability
insurance, we cannot assure you that these measures will be effective in
limiting our liability for any damages. Any liability for damages resulting from
security breaches could be substantial and could have a material adverse effect
on our business and operating results. In addition, a well-publicized actual or
perceived security breach involving our conditional access or security products
could adversely affect the market's perception of our products in general,
regardless of whether any breach is attributable to our products. This could
result in a decline in demand for our products, which would have a material
adverse effect on our business and operating results.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN MANAGEMENT, TECHNICAL AND OTHER
KEY PERSONNEL. Our future success depends on our ability to attract and retain
management, technical and other key personnel at the corporate level and at each
of our subsidiaries. We cannot assure you that we will be able to do so.
Our ability to execute our acquisition and growth plan depends upon the
continued services of Harry I. Freund, Chairman, Jay S. Goldsmith, Vice
Chairman, James J. Weis, President and Chief Executive Officer and M. Richard
Phillimore, Executive Vice President/Smart Card Businesses. Our ability to
execute our strategic plan could be materially adversely affected should the
services of any of these individuals cease to be available to us. None of these
employees is subject to an agreement not to compete with us in the event his
services are terminated. We cannot guarantee that we will be able to attract and
retain our key personnel in the future. Failure to attract or retain key
personnel could have a material adverse effect on our operations.
YEAR 2000 COMPLIANCE ISSUES COULD NEGATIVELY IMPACT OUR BUSINESS. The Year
2000 issue concerns the potential exposures that our company and other companies
have because certain computer systems, computer chips and hardware use two
digits, rather than four, to define the applicable year. On January 1, 2000,
these systems and programs may recognize the date as January 1, 1900 and may
process data incorrectly or stop processing data altogether. In that event, our
products or the products of our suppliers could fail to perform, which could
result in claims against us and could otherwise have a material adverse effect
on our business and operating results.
We are in the process of assessing and attempting to remediate any Year
2000 issues relating to our information technology, embedded chips and business
partners. We have conducted a process to identify and assess potential Year 2000
exposures to our business processes, infrastructure and communications. Our
failure, or the failure of our suppliers, to be Year 2000 compliant may require
us to establish
13
<PAGE> 16
relationships with alternative suppliers, which may not be available, and would
otherwise have a material adverse effect on us.
We currently estimate that the costs for defined Year 2000 remediation
projects and for project management, inventory and identification of
non-compliant systems will be less than $250,000. For more information on the
Year 2000 issue, please turn to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."
OUR ARTICLES OF INCORPORATION AND BY-LAWS, CERTAIN CHANGE OF CONTROL
AGREEMENTS, OUR RIGHTS PLAN AND PROVISIONS OF PENNSYLVANIA LAW COULD DETER
TAKEOVER ATTEMPTS.
Blank check preferred stock. Our board of directors has the authority to
issue up to 136,566 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of these
shares without any further vote or action by the holders of our common stock.
The rights of the holders of any preferred stock that may be issued in the
future may adversely affect the rights of the holders of our common stock. The
issuance of preferred stock could make it more difficult for a third party to
acquire a majority of our outstanding voting stock, thereby delaying, deferring
or preventing a change of control. Such preferred stock may have other rights,
including economic rights, senior to our common stock, and as a result, the
issuance of the preferred stock could limit the price that investors might be
willing to pay in the future for shares of our common stock and could have a
material adverse effect on the market value of our common stock.
Rights plan. Our rights plan entitles the registered holders of rights to
purchase shares of our class A preferred stock upon the occurrence of certain
events, and may have the effect of delaying, deferring or preventing a change of
control.
14
<PAGE> 17
Change of control agreements. We are a party to change of control
agreements which provide for payments to certain of our directors and executive
officers under certain circumstances following a change of control. Since the
change of control agreements require large cash payments to be made by any
person effecting a change of control, these agreements may discourage takeover
attempts.
The change of control agreements provide that, if the services of any
person party to a change of control agreement is terminated within three years
following a change of control, that individual will be entitled to receive, in a
lump sum within 10 days of the termination date, a payment equal to 2.99 times
that individual's average annual compensation for the shorter of the five years
preceding the change of control and the period the individual received
compensation from us for personal services. Assuming a change of control were to
occur at the present time, payments in the following amounts would be required:
Mr. Harry I. Freund -- $942,709; Mr. Jay S. Goldsmith -- $942,709; Mr. David L.
Herman -- $394,376 and Mr. James J. Weis -- $1,419,180. If any such payment,
either alone or together with others made in connection with the individual's
termination, is considered to be an excess parachute payment under the Internal
Revenue Code, the individual will be entitled to receive an additional payment
in an amount which, when added to the initial payment, would result in a net
benefit to the individual, after giving effect to excise taxes imposed by
Section 4999 of the Internal Revenue Code and income taxes on such additional
payment, equal to the initial payment before such additional payment. We would
not be able to deduct these payments for income tax purposes. See "Executive
Compensation -- Employment and Change of Control Agreements."
Pennsylvania law. We are a Pennsylvania corporation. Anti-takeover
provisions of Pennsylvania law could make it difficult for a third party to
acquire control of us, even if such change of control would be beneficial to our
shareholders. See "Description of Capital Stock -- Pennsylvania Anti-Takeover
Laws."
Limited use of net operating loss carryforwards. As discussed in "-- We may
be limited in our use of our federal net operating loss carryforwards," the
potential loss of our available federal net operating loss carryforwards to
reduce our taxable income in the event of an "ownership change" may have the
effect of discouraging, or otherwise preventing, a change of control of our
company.
FLUCTUATIONS IN THE CURRENCY EXCHANGE RATE BETWEEN THE U.S. DOLLAR AND THE
NEW TAIWAN DOLLAR COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS. One of
our principal suppliers is located in Taiwan. Our purchases from this supplier
were approximately $2.1 million in 1998 and are expected to continue at that
level in the future. As a result, a portion of our purchases is subject to
certain risks, including tariffs and other trade barriers, currency exchange
risks and exchange controls. These factors could have a material adverse effect
on our business and operating results.
Also, as a result of our Taiwanese purchases, a portion of our supply costs
are subject to significant fluctuations based upon changes in the exchange rate
of the new Taiwan dollar in relation to the U.S. dollar. We do not currently
engage in hedging activities with respect to foreign currency exposure. Our
management will continue to monitor our exposure to currency fluctuations and,
when appropriate, may use financial hedging techniques in the future to minimize
the effect of these fluctuations.
WE ARE SUBJECT TO GOVERNMENT REGULATION. Market needs and competitive
pressures require that our products contain mathematical methods used to protect
data or establish the genuineness of data called cryptographic algorithms, in
order to protect information and cash substitutes stored in smart cards. The
U.S. and many other governments restrict the export of products containing
"strong cryptography" for reasons of national security. In the case of the U.S.,
"strong cryptography" means any product exceeding 40 bits of symmetric
algorithms or 512 bits of asymmetric algorithms. Companies wishing to export
products of this nature are subject to a license requirement. Our PCDefender(TM)
product uses a 448 bit symmetric key for its privacy function, and would
therefore require a license for export. Currently, we do not export this
product. However, if we decide to export PCDefender(TM), we could not do so
without obtaining an export license. Export, import and usage of such
cryptographic algorithms are subject to a large and changing body of regulations
in the United States. Our failure to comply with any regulations that may be
enacted with respect to cryptographic algorithms would have a material adverse
effect on our business.
15
<PAGE> 18
Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases which may be used in our present or
future assembly processes. Moreover, changes in such environmental rules and
regulations may require us to invest in capital equipment and implement
compliance programs in the future. Any failure by our company to comply with
environmental rules and regulations, including the discharge of hazardous
substances, would subject us to liabilities and would materially adversely
affect our operations.
RISKS RELATED TO COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY. The stock
market in general and the market for shares of technology companies in
particular have recently experienced extreme price fluctuations, which have
often been unrelated to the operating performance of the affected companies. We
believe that the principal factors that may cause price fluctuations are:
- fluctuations in our financial results;
- general conditions or developments in the technology and coin-products
industries and the worldwide economy;
- sales of our common stock into the marketplace;
- the number of market makers for our common stock;
- announcements of technological innovations or new or enhanced products by
us or our competitors or customers;
- a shortfall in revenue, gross margin, earnings or other financial results
from operations or changes in analysts' expectations; and
- developments in our relationships with our customers and suppliers.
We cannot be certain that the market price of our common stock will not
experience significant fluctuations in the future, including fluctuations that
are adverse and unrelated to our performance.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE IF A LARGE NUMBER OF
SHARES IS SOLD IN THE FUTURE.
Future sales of our common stock in the public market, or the issuance of
shares of common stock upon the exercise of stock options and warrants or
otherwise, could adversely affect the market price of our common stock and
impair our ability to raise capital through the sale of equity or equity-related
securities. As of the date of this prospectus, the following number of shares of
common stock will be issued or issuable:
<TABLE>
<S> <C>
Issued and outstanding...................................... 18,349,809
Issuable upon exercise of currently-exercisable stock
options and warrants(1)................................... 4,307,267
Issuable upon exercise of outstanding stock options and
warrants, whether or not currently-exercisable(2)......... 5,777,457
Restricted stock(3)......................................... 56,666
</TABLE>
- ---------------
(1) Currently exercisable at exercise prices ranging from $1.12 to $10.25 per
share.
(2) Of these, 512,718 become exercisable during the remainder of 1999 and in
2000 at exercise prices ranging from $1.12 to $12.50 per share; 723,545
become exercisable in 2001 at exercise prices ranging from $1.12 to $12.50
per share; and 233,927 become exercisable in 2002 and thereafter at exercise
prices ranging from $1.12 to $10.75 per share.
(3) Includes 50,000 shares of common stock that an executive officer will be
entitled to receive in January 2000.
Of the unissued shares and the shares held by non-affiliates identified in
the table above, 4,169,949 are "restricted securities" within the meaning of
Rule 144 under the Securities Act, and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available.
16
<PAGE> 19
Such restricted securities will be eligible for sale in the public market
subject to compliance with Rule 144. In addition, other exemptions may be
available for sales of such restricted securities held by non-affiliates of our
company. See "Shares Eligible for Future Sale."
We cannot predict the effect, if any, that market sales of shares of common
stock, or the availability of such shares of common stock for sale, will have on
the market price of the shares of common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of shares of common stock in the
public market, or the perception that such sales could occur, could adversely
affect prevailing market prices for the shares of common stock and could impair
our ability to raise capital through an offering of our equity securities.
USE OF PROCEEDS
The proceeds from the sale of shares of common stock under this prospectus
are solely for the account of the selling shareholders. Accordingly, we will not
receive any proceeds from the sale of the shares being sold by the selling
shareholders under this prospectus.
17
<PAGE> 20
DIVIDEND POLICY
PubliCARD did not pay cash dividends on its common stock during the prior
25 fiscal years and does not anticipate paying dividends in the foreseeable
future.
As of the date of this prospectus, there are no shares of preferred stock
outstanding. However, under the terms of PubliCARD's Amended and Restated
Articles of Incorporation, so long as any preferred stock is outstanding, no
dividend may be declared or distribution made by purchase, redemption, payment
to any sinking fund or otherwise on the common stock, other than a dividend or
distribution in stock junior to the preferred stock, unless (a) all dividends
shall have been paid and sinking fund payments made on the preferred stock; (b)
after giving effect to the payment of the proposed dividends or distribution,
the aggregate of all dividends and distributions on the PubliCARD common stock
subsequent to December 31, 1944, plus all dividends paid or accrued and sinking
fund payments made or due on the preferred stock and any stock ranking prior to
or on a parity with the preferred stock subsequent to December 31, 1944, shall
not exceed the sum of the consolidated net earnings subsequent to December 31,
1944, plus the aggregate net cash consideration received from the sale of any
stock ranking junior to the preferred stock subsequent to December 31, 1944; and
(c) after giving effect to the payment of the proposed dividend or distribution,
the consolidated net current assets shall be at least $10.0 million.
The Pennsylvania Business Corporation Law (the "PBCL") provides that a
distribution may not be made to a corporation's shareholders if, after giving
effect thereto: (a) the corporation would be unable to pay its debts as they
become due in the usual course of its business; or (b) the total assets of the
corporation would be less than the sum of its total liabilities plus the amount
that would be needed if the corporation were to be dissolved at the time at
which the distribution is measured to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
18
<PAGE> 21
PRICE RANGE OF COMMON STOCK
PubliCARD's common stock has been traded on the Nasdaq National Market
under the symbol "CARD" since December 22, 1998. The following table sets forth
the high and low closing sale prices of PubliCARD's common stock, as reported by
the Nasdaq National Market, for the calendar periods indicated, in dollars:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Fourth Quarter (from December 22, 1998)..................... $14 1/4 $8 1/4
1999
First Quarter............................................... $12 5/8 $9 1/4
Second Quarter.............................................. $15 1/2 $8 7/8
Third Quarter (until August 13, 1999)....................... $ 9 5/8 $6 3/4
</TABLE>
From August 1, 1996 to December 21, 1998, PubliCARD's common stock was
quoted on the Over-the-Counter Bulletin Board. The following table sets forth
the high and low closing prices for PubliCARD's common stock, as quoted in the
Over-the-Counter Bulletin Board, for the calendar periods indicated, in dollars:
<TABLE>
<CAPTION>
HIGH(1) LOW(1)
------- ------
<S> <C> <C>
1997
First Quarter............................................... $1 1/2 $1 3/8
Second Quarter.............................................. $1 3/8 $1 3/16
Third Quarter............................................... $1 11/16 $1 1/4
Fourth Quarter.............................................. $1 11/16 $1 5/16
1998
First Quarter............................................... $1 1/2 $1 1/4
Second Quarter.............................................. $1 3/4 $1 1/2
Third Quarter............................................... $3 3/8 $1 5/8
Fourth Quarter (until December 22, 1998).................... $8 1/4 $3 3/8
</TABLE>
- ---------------
(1) Such Over-the-Counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
The closing sale price of PubliCARD's common stock as reported on the
Nasdaq National Market on August 13, 1999 was $7.0625 per share. As of the date
of this prospectus, there were approximately 2,600 record holders of the common
stock.
19
<PAGE> 22
CAPITALIZATION
The following table sets forth, as of June 30, 1999, the cash position and
capitalization of PubliCARD.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
(IN
THOUSANDS)
<S> <C>
Cash and short-term investments............................. $ 9,217
========
Long-term debt, including current maturities................ $ 1,066
Redeemable shares(1)........................................ 2,029
Shareholders' equity:
Common stock, par value $0.10 per share; 40,000,000 shares
authorized; 21,783,272 shares issued; and 18,324,809
shares issued and outstanding(2)....................... 2,178
Additional paid-in capital................................ 84,098
Accumulated deficit....................................... (50,346)
Common stock held in treasury, at cost.................... (8,252)
Unearned compensation..................................... (839)
--------
Total shareholders' equity............................. 26,839
--------
Total capitalization................................... $ 29,934
========
</TABLE>
- ---------------
(1) PubliCARD was required to register 241,266 shares of its common stock issued
as a portion of the merger consideration in the Tritheim acquisition under a
shelf registration statement under the Securities Act of 1933. If the shelf
registration statement was not effective by May 24, 1999, the holders of
these shares were entitled, for a specified period of time, to cause
PubliCARD to repurchase their shares for a cash purchase price equal to the
fair market value of the shares on the date of repurchase. As such, these
shares have been reflected in the table above under the caption "Redeemable
shares" and subsequent adjustments to the value of the redemption obligation
were charged or credited to additional paid-in capital.
Prior to July 21, 1999, the date the registration statement of which this
prospectus forms a part was originally declared effective, holders caused
PubliCARD to repurchase 42,129 shares for $503,000. Upon registration of the
shares, the repurchase right has terminated.
(2) Does not include the following as of June 30, 1999:
- an aggregate of 5,452,862 shares of common stock issuable upon the
exercise of outstanding options and warrants, of which 2,860,391 options
and warrants exercisable into 1,479,281 shares were then exercisable at
an average weighted price of $2.53 per share;
- an additional 619,500 shares which were reserved for issuance pursuant to
PubliCARD's stock option plans; and
- 56,666 shares of restricted stock.
See "Executive Compensation -- Stock Option Plans" and "Shares Eligible for
Future Sale."
20
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data of PubliCARD presented below for the five-year
period ended December 31, 1998 have been derived from the Consolidated Financial
Statements of PubliCARD, which have been audited by Arthur Andersen LLP. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
PubliCARD's Consolidated Financial Statements and the related Notes thereto
included elsewhere in this prospectus and the documents incorporated by
reference into this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................................ $ 16,015 $ 16,680 $ 15,486 $ 17,039 $ 16,519
Cost of sales............................ 13,109 12,654 11,659 11,264 10,906
--------- --------- --------- --------- ---------
Gross margin........................... 2,906 4,026 3,827 5,775 5,613
--------- --------- --------- --------- ---------
Operating expenses:
General and administrative............. 4,494 5,105 6,338 4,976 5,488
Sales and marketing.................... 687 700 768 796 792
Product development.................... 181 138 235 441 740
In-process research and development.... -- -- -- -- 2,800(1)
Goodwill amortization.................. 42 42 42 42 225
Warrant expense........................ -- -- -- 768(2) --
Relocation charge...................... -- -- 1,596(3) -- --
--------- --------- --------- --------- ---------
5,404 5,985 8,979 7,023 10,045
--------- --------- --------- --------- ---------
Income (loss) from operations............ (2,498) (1,959) (5,152) (1,248) (4,432)
--------- --------- --------- --------- ---------
Other income (expense):
Interest income........................ 309 138 476 683 551
Interest expense....................... (3,026) (1,877) (815) (370) (339)
Cost of pensions -- nonoperating(4).... (768) (744) (769) (768) (846)
Other (expense) income................. 231 (290) 203 (200) (1,021)(5)
--------- --------- --------- --------- ---------
(3,254) (2,773) (905) (655) (1,655)
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes.................... (5,752) (4,732) (6,057) (1,903) (6,087)
Income tax benefit....................... -- -- 2,544 -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations............................. (5,752) (4,732) (3,513) (1,903) (6,087)
Discontinued operation(6):
Income (loss) from discontinued
operations, net of income taxes...... 3,463 4,441 1,725 215 12
Gain on sale of discontinued
operations, net of income taxes...... -- -- 12,783 609 --
--------- --------- --------- --------- ---------
Net income (loss)........................ $ (2,289) $ (291) $ 10,995 $ (1,079) $ (6,075)
========= ========= ========= ========= =========
Basic earnings (loss) per common share:
Continuing operations.................. $ (.39) $ (.32) $ (.23) $ (.14) $ (.44)
Discontinued operations................ .24 .30 .95 .06 --
--------- --------- --------- --------- ---------
$ (.15) $ (.02) $ .72 $ (.08) $ (.44)
========= ========= ========= ========= =========
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(7)................................. $17,771 $ 3,689 $18,679 $14,807 $19,417
Total assets....................................... 36,857 33,832 30,923 25,929 39,928
Long-term debt, including current
maturities....................................... 14,869 10,226 1,714 1,272 1,138
Other non-current liabilities...................... 16,433 11,245 10,220 9,167 7,780
Shareholders' equity............................... (2,616) (2,594) 13,996 10,873 21,917
</TABLE>
- ---------------
(1) Upon the consummation of the Tritheim acquisition in November 1998,
PubliCARD immediately expensed $2.8 million, representing purchased
in-process research and development projects that had not yet reached
technological feasibility and had no alternative future use.
(2) Represents a non-cash charge associated with the modification and extension
of certain common stock purchase warrants.
(3) Represents costs for severance, lease termination, plant and employee
relocation, recruiting and training new personnel and temporary living
allowances associated with Greenwald Industries' plant relocation.
(4) Represents pension costs related to discontinued product lines and related
plant closings.
(5) Includes a $954,000 charge associated with the termination of a letter of
intent to purchase five businesses in August 1998.
(6) The selected financial data for years prior to 1998 have been restated to
reflect OSM as a discontinued operation. See Note 10 to the Notes to
PubliCARD's Consolidated Financial Statements. Income from discontinued
operations includes income from certain subsidiaries PubliCARD disposed of
in 1994, 1995 and 1996.
(7) Working capital represents current assets less current liabilities.
22
<PAGE> 25
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by PubliCARD of all of the issued and outstanding
common stock of Tritheim, Amazing and Greystone in business combinations
accounted for by the purchase method of accounting. The unaudited pro forma
condensed combined financial statements are derived from the historical
financial statements of PubliCARD, Tritheim, Amazing and Greystone.
The unaudited pro forma condensed combined statements of income for the
year ended December 31, 1998 give effect to the acquisitions of Tritheim,
Amazing and Greystone as if they had occurred at the beginning of that period.
The pro forma adjustments are based on certain assumptions that management
believes are reasonable under the circumstances. The pro forma information is
not necessarily indicative of the results that would have been reported had such
events actually occurred on the dates specified, nor is it intended to project
PubliCARD's results of operations or financial position for any future period or
date. The information set forth should be read in conjunction with PubliCARD's
audited financial statements for the year ended December 31, 1998 included
elsewhere in this prospectus and in the documents incorporated by reference into
this prospectus, and the audited financial statements of Tritheim, Amazing and
Greystone included elsewhere in this prospectus.
23
<PAGE> 26
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PUBLICARD TRITHEIM AMAZING GREYSTONE PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* HISTORICAL HISTORICAL ADJUSTMENTS BALANCES
---------- ----------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 16,519 $ 220 $ 2,483 $ 4,196 $ -- $ 23,418
Cost of sales................. 10,906 80 2,383 2,552 -- 15,921
-------- ----- ------- ------- ------- --------
Gross Margin................ 5,613 140 100 1,644 -- 7,497
Operating expenses:
General and
administrative............ 5,488 292 1,405 961 -- 8,146
Sales and marketing......... 792 133 738 425 -- 2,088
Product development......... 740 219 318 397 -- 1,674
In-process research and
development............... 2,800 -- -- -- 2,919(a) 5,719
Goodwill amortization....... 225 -- -- -- 4,014(b) 4,239
-------- ----- ------- ------- ------- --------
10,045 644 2,461 1,783 6,933 21,866
-------- ----- ------- ------- ------- --------
Income (loss) from
operations.................. (4,432) (504) (2,361) (139) (6,933) (14,369)
Other income (expense):
Interest income............. 551 -- 1 -- (131)(d) 421
Interest expense............ (339) (50) (207) (61) 137(c) (520)
Cost of pensions -- non-
operating................. (846) -- -- -- -- (846)
Other income (expense),
net....................... (1,021) -- (103) 1 -- (1,123)
-------- ----- ------- ------- ------- --------
(1,655) (50) (309) (60) 6 (2,068)
-------- ----- ------- ------- ------- --------
Net income (loss) from
continuing operations....... $ (6,087) $(554) $(2,670) $ (199) $(6,927) $(16,437)
======== ===== ======= ======= ======= ========
Earnings (loss) per common
share....................... $ (.44) $ (1.02)
======== ========
Weighted average number of
shares outstanding.......... 13,716,243 2,361,432(e) 16,077,675
========= =========== ==========
</TABLE>
- ---------------
* Reflects results for Tritheim for the period from January 1, 1998 to November
23, 1998
24
<PAGE> 27
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
TRITHEIM ACQUISITION
On November 24, 1998, PubliCARD completed the acquisition of Tritheim
pursuant to an Agreement and Plan of Merger dated as of October 30, 1998 (the
"Tritheim Merger Agreement"), pursuant to which a wholly-owned subsidiary of
PubliCARD merged with and into Tritheim. As a result of this merger, Tritheim
became a wholly-owned subsidiary of PubliCARD. As consideration for the merger,
holders of Tritheim's common stock received a total of 1,495,037 shares of
common stock of PubliCARD in exchange for their shares of common stock of
Tritheim. The merger was accounted for as a purchase.
In addition, pursuant to the Tritheim Merger Agreement, options to purchase
354,616 shares of Tritheim common stock outstanding immediately prior to the
closing of the merger were converted into options to purchase 83,270 shares of
PubliCARD common stock with an exercise price of $2.00 per share. These
PubliCARD options are exercisable from November 24, 1998 until November 24,
2003. Furthermore, pursuant to the Tritheim Merger Agreement, PubliCARD issued
on November 24, 1998 options to purchase 250,000 shares of PubliCARD common
stock to all of the salaried employees of Tritheim. These options have an
exercise price of $2.00 per share and will be exercisable from November 24, 2001
until November 24, 2006.
Pursuant to the Tritheim Merger Agreement, PubliCARD was required to
register approximately 241,266 shares of PubliCARD common stock issued as a
portion of the merger consideration (not including the 1,253,771 shares issued
to officers of Tritheim and one additional employee of Tritheim), under a shelf
registration statement under the Securities Act. To the extent these shares have
not been redeemed, they are included in the 4,848,309 shares registered under
the registration statement of which this prospectus forms a part.
Pursuant to the Tritheim Merger Agreement, PubliCARD repaid Tritheim's
indebtedness, including bank indebtedness and accrued interest, of $102,000 and
to former shareholders of Tritheim in the amount of $531,000. The repayment of
certain indebtedness of Tritheim by PubliCARD was financed with available cash
on hand.
AMAZING
On February 11, 1999, PubliCARD completed the acquisition of Amazing,
pursuant to an Agreement and Plan of Merger dated as of February 11, 1999 (the
"Amazing Merger Agreement"), pursuant to which a wholly-owned subsidiary of
PubliCARD merged with and into Amazing. As a result of this merger, Amazing
became a wholly-owned subsidiary of PubliCARD. As consideration for the merger,
holders of Amazing's common stock received a total of 350,000 shares of common
stock of PubliCARD in exchange for their shares of common stock of Amazing. The
merger was accounted for as a purchase.
In addition, pursuant to the Amazing Merger Agreement, options to purchase
200,000 shares of PubliCARD common stock with an exercise price of $9.75 per
share were granted to the shareholders of Amazing. These PubliCARD options are
exercisable from February 11, 1999 until February 11, 2004. Shares underlying
these options are included in the 4,848,309 shares registered under the
registration statement of which this prospectus forms a part. Also, options to
purchase 842,300 shares of Amazing common stock outstanding immediately prior to
the closing of the merger were converted into options to purchase 7,503 shares
of PubliCARD common stock with exercise prices ranging from $1.12 to $10.10 per
share. These PubliCARD options vest over three or four years and are exercisable
for a period of five or ten years. Furthermore, pursuant to the Amazing Merger
Agreement, PubliCARD issued on February 11, 1999 options to purchase 250,000
shares of PubliCARD common stock to several employees of Amazing. These options
have an exercise price of $9.75 per share, vest over a three year period and
will be exercisable until February 11, 2004.
25
<PAGE> 28
Pursuant to the Amazing Merger Agreement, PubliCARD was required to
register the shares of PubliCARD common stock issued in connection with the
merger under a shelf registration statement under the Securities Act. These
shares are included in the 4,848,309 shares registered under the registration
statement of which this prospectus forms a part.
Pursuant to the Amazing Merger Agreement, PubliCARD repaid certain
indebtedness of Amazing, including accrued interest, to a bank in the amount of
approximately $75,000, and indebtedness to former Amazing shareholders of
approximately $717,000. The repayment of certain indebtedness of Amazing by
PubliCARD was financed with available cash on hand.
GREYSTONE
On February 22, 1999, PubliCARD completed the acquisition of Greystone
pursuant to an Agreement and Plan of Merger dated as of February 22, 1999 (the
"Greystone Merger Agreement"), pursuant to which a wholly-owned subsidiary of
PubliCARD merged with and into Greystone. As a result of this merger, Greystone
became a wholly-owned subsidiary of PubliCARD. As consideration for the merger,
holders of Greystone's common stock received a total of 666,401 shares of common
stock of PubliCARD and $6,180 in exchange for all of the outstanding shares of
common stock of Greystone. Pursuant to the Greystone Merger Agreement, 80,000
shares of common stock of PubliCARD were issued to certain service providers of
Greystone. The merger was accounted for as a purchase.
In addition, pursuant to the Greystone Merger Agreement, options to
purchase 224,000 shares of Greystone common stock outstanding immediately prior
to the closing of the merger were converted into options to purchase 22,388
shares of PubliCARD common stock with exercise prices ranging from $2.50 to
$5.00 per share. These options vest over four years and are exercisable for a
period of one year after the respective vesting dates. Furthermore, pursuant to
the Greystone Merger Agreement, PubliCARD issued on February 22, 1999 options to
purchase 110,000 shares of PubliCARD common stock to several employees of
Greystone. These options have an exercise price of $10.75 per share, vest over a
three year period and will be exercisable until February 22, 2004.
Pursuant to the Greystone Merger Agreement, PubliCARD was required to
register the shares of PubliCARD common stock issued in connection with the
merger under a shelf registration statement under the Securities Act. These
shares are included in the 4,848,309 shares registered under the registration
statement of which this prospectus forms a part.
Pursuant to the Greystone Merger Agreement, PubliCARD repaid certain
indebtedness of Greystone, including bank indebtedness and accrued interest of
approximately $604,000. The repayment of such indebtedness of Greystone by
PubliCARD was financed with available cash on hand.
PRO FORMA ADJUSTMENTS
The pro forma adjustments included in the unaudited pro forma condensed
combined financial statements were as follows:
(a) Under the purchase method of accounting, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair
values. Allocations are subject to valuation adjustments as of the date of
the purchase transaction. The amount and components of the estimated
26
<PAGE> 29
purchase price along with the preliminary allocation of the estimated
purchase price are as follows (in thousands):
<TABLE>
<CAPTION>
TRITHEIM AMAZING GREYSTONE
-------- ------- ---------
<S> <C> <C> <C>
Purchase price:
Estimated value of common stock and stock
options........................................ $ 9,743 $ 5,327 $8,729
Estimated acquisition expenses.................... 467 406 293
------- ------- ------
$10,210 $ 5,733 $9,022
======= ======= ======
Allocation of purchase price:
Net assets (liabilities) of acquired businesses... $ (713) $(1,187) $ 401
In-process research and development............... 2,800 1,509 1,410
Goodwill.......................................... 8,123 5,411 7,211
------- ------- ------
$10,210 $ 5,733 $9,022
======= ======= ======
</TABLE>
For purposes of the accompanying unaudited pro forma condensed combined
financial statements, the aggregate purchase price has been allocated to the net
assets acquired, with the remainder recorded as goodwill on the basis of
preliminary estimates of fair values. These preliminary estimates of fair value
were determined by management based on information currently available.
PubliCARD has retained independent valuation professionals to assist in the
determination of the value to be assigned to the individual assets acquired,
including intangible assets and in-process research and development. While the
pro forma information has been presented based on the best information currently
available to management, the final allocation of the purchase price will be
based on a complete evaluation of the assets and liabilities of Tritheim,
Amazing and Greystone. The final valuation may result in values that are
different from management's estimates as included in the unaudited pro forma
condensed combined financial statements.
As stated above, the purchase price has been allocated on the basis of
preliminary estimates of fair value. Management currently estimates that the
allocation to in-process research and development is approximately $2.8 million,
$1.5 million and $1.4 million for Tritheim, Amazing and Greystone, respectively.
(b) Represents the amortization of goodwill over an estimated life of five
years.
(c) Represents the elimination of interest expense on indebtedness of Tritheim,
Amazing and Greystone, which is assumed to be repaid as of the beginning of
the period presented.
(d) Represents the reduction of interest income due to the repayment of certain
indebtedness and payment of acquisition expenses as of the beginning of the
period presented.
(e) Represents the issuance of shares of PubliCARD's common stock to the former
shareholders of Tritheim, Amazing and Greystone.
27
<PAGE> 30
FORWARD-LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections of this prospectus contain forward-looking
statements, including, without limitation, statements concerning possible or
assumed future results of operations of PubliCARD preceded by, followed by or
that include the words "believes," "expects," "anticipates," "estimates,"
"intends," "plans" or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
U.S. Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. You should understand that such
statements made under "Risk Factors" and elsewhere in this document could affect
our future results and could cause those results to differ materially from those
expressed in such forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of PubliCARD should be read in conjunction with PubliCARD's
Consolidated Financial Statements.
OVERVIEW
PubliCARD entered the smart card industry in early 1998 by acquiring the
first of several technology businesses that currently offer and are continuing
to develop solutions for conditional access and security, payment system and
data storage needs of a number of growth industries. In its technology business,
PubliCARD designs, develops, manufactures and markets smart card-based hardware
and smart card-enabled software for a growing variety of applications for
industries in the United States and worldwide.
PubliCARD develops smart cards, smart card readers, smart card value
transfer stations, operating systems for smart cards and smart card-related
application software. PubliCARD's smart card products are used predominantly for
conditional access and security systems, payment systems, loyalty programs and
data storage systems. PubliCARD's smart card products are used in many
industries, including information technology, pay television, transportation,
commercial laundry and retail (including electronic commerce).
PubliCARD also develops and manufactures PCMCIA products, hard disk
duplicators and digital camera flash film readers, which are sold to original
equipment manufacturers ("OEMs"), value-added resellers ("VARs"), value-added
distributors ("VADs") and end users. In addition, PubliCARD, through Greenwald
Industries, is a leading designer and manufacturer of coin meter systems used in
the commercial laundry appliance industry. While coin products accounted for 93%
of PubliCARD's revenues in 1998, PubliCARD expects that percentage to decline
significantly in the future as its sales of technology products increase.
RECENT ACQUISITIONS
Beginning in 1998, PubliCARD entered the smart card industry by acquiring
several businesses that currently offer and are continuing to develop solutions
for the conditional access and security, payment system and data storage needs
of a number of growth industries. PubliCARD intends to continue acquiring
businesses that broaden its technology and product base and strengthen its
presence in its channels of distribution.
In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, the assets and intellectual property of Intellicard
Systems. Greenwald Intellicard provides smart cards, smart card readers, value
transfer stations, card management software and machine interface boards for the
commercial laundry appliance and other industries. PubliCARD currently owns 65%
of Greenwald Intellicard, and has an option that becomes exercisable in February
2000 to acquire the remaining 35%.
28
<PAGE> 31
In November 1998, PubliCARD acquired Tritheim, which develops conditional
access and security products for software, computers and the electronic
information and digital video broadcasting ("DVB") industries. Through Tritheim,
PubliCARD provides smart card readers, writers and chip sets, and has developed
software and application specific integrated circuits ("ASICs") for television
set-top boxes, secure electronic commerce, Internet security, computer security
and software copy protection.
In February 1999, PubliCARD acquired Amazing, a developer of consumer smart
card solutions for the Internet, such as web filtering software, which permits
parents to limit their children's access to websites at public institutions,
libraries and schools by defining each child's use profile on a smart card.
Amazing also offers loyalty programs, which reward customers for their
continuing patronage. In addition, Amazing manufactures customized smart cards
for customers requiring rapid turnaround and smaller volumes.
In February 1999, PubliCARD also acquired Greystone, a leading U.S.
developer of PCMCIA products, hard disk duplicators and digital camera flash
film readers.
On June 30, 1999, PubliCARD announced that it had executed a letter of
intent to acquire all of the assets of Absec Ltd., a designer, manufacturer and
distributor of cost recovery and cashless payment and control systems.
Consummation of the acquisition is subject to, among other things, negotiation
and execution of a mutually satisfactory definitive acquisition agreement and
satisfaction or waiver of the conditions that may be specified in that
agreement. There can be no assurance that this transaction will be consummated.
Greenwald Intellicard was acquired for cash; the other companies were
acquired for shares of PubliCARD common stock. PubliCARD typically amortizes
goodwill associated with the acquisition of technology companies over five
years.
The aggregate purchase price paid in the Tritheim, Amazing and Greystone
acquisitions amounted to approximately $25.5 million and included the issuance
of 2,591,438 shares of common stock and options to purchase a total of 923,161
shares of common stock. The assets and liabilities of acquired businesses were
recorded at their estimated fair values as of the respective acquisition dates
and are subject to adjustment when additional information concerning asset and
liability valuations is finalized. The aggregate fair value of research and
development efforts that had not reached technological feasibility and had no
alternative future uses was determined by appraisal to be $2.8 million, $1.5
million and $1.4 million for Tritheim, Amazing and Greystone, respectively, and
was expensed at the respective acquisition dates. Tritheim, Amazing and
Greystone had 16 projects in various states of completion ranging from 8% to 82%
complete at the time of the acquisitions, including a smart card-enabled
software product that enables a personal computer to encrypt and decrypt
computer files and e-mail and secures personal computer access, ASICs to
incorporate multiple chip set functionality into a single integrated circuit
board, an enhanced smart card operating system, smart card data access
technology, several hard disk duplicator projects to enhance duplication speeds
or add various software options and expansion of interface capability of digital
flash film reader products. As of June 30, 1999, three of the 16 projects were
complete and estimated costs to complete the remaining projects aggregate
approximately 525,000. PubliCARD expects to complete development of the
remaining in-process projects at various dates in 1999 and the first quarter of
2000.
PubliCARD determined the value assigned to in-process technology by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the percentage of completion of each
project, estimating the resulting net cash flows from such projects and
discounting the net cash flows back to their present values. The discount rate
includes a factor that takes into account the uncertainty surrounding the
successful development of the purchased in-process technology. PubliCARD used
the following assumptions, among others, to estimate discounted net cash flows:
- The projected revenues were based on management's estimates of total
market size, penetration rate and life expectancy for each particular
product. For the majority of products, revenue was expected to cease
beyond 2002 as other new products were expected to enter the market.
Revenues for three in-process products were expected to peak in 2003 and
decline rapidly in 2004-2006.
29
<PAGE> 32
- The projected cost of sales, sales and marketing expenses, general and
administrative expenses and income taxes were estimated by management
based on expected and historical operating characteristics.
- A risk-adjusted discount rate was used to discount the net cash flows
back to their present value. The discount rate for a specific project
incorporated the likelihood of success of each product based on the
estimated percentage completed as of the date of the acquisition. The
discount rates used to value in-process technology ranged from 23% to
45%.
Management believes that the assumptions used in the valuation of the
purchased in-process research and development reasonably estimate the future
benefits attributable to the purchased in-process technology. However, no
assurance can be given that commercial or technological viability of these
projects will be achieved or that actual results will not deviate from those
assumptions in future periods.
DISCONTINUED OPERATION
In March 1999, PubliCARD's board of directors adopted a plan to dispose of
its engineering services subsidiary, OSM. PubliCARD has been seeking buyers and
expects to sell OSM by December 31, 1999. During the second quarter of 1999,
PubliCARD revised its estimates of expected sales proceeds and operating results
through the expected disposition date and recorded a loss provision of $2.1
million. The majority of the loss provision covers the write-off of OSM's
goodwill. The loss on disposition of OSM was based on estimates of the proceeds
expected to be realized on the sale. The amounts PubliCARD will ultimately
realize could differ materially from the amounts assumed in arriving at the
charge recorded.
PRESENTATION
The results of operations for the three years ended December 31, 1998 and
the three months ended March 31, 1998 have been restated to reflect OSM as a
discontinued operation. In addition, the results of operations for Greenwald
Intellicard and Tritheim have been reflected in the 1998 financial statements
from the respective acquisition dates thereof, and the results of operations for
Amazing and Greystone have been reflected in the 1999 financial statements from
the respective acquisition dates thereof.
RESULTS OF OPERATIONS
The following table presents, as a percentage of sales, selected
consolidated statements of income data for each of the three years in the period
ended December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net sales:
Coin products......................................... 100% 100% 93%
Technology products................................... -- -- 7
--- ---- ---
Total net sales.................................... 100 100 100
Gross margin:
Coin products(1)...................................... 25 34 36
Technology products(2)................................ -- -- 10
Total gross margin................................. 25 34 34
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Operating expenses:
General and administrative............................ 41 29 33
Sales and marketing................................... 5 5 5
Product development................................... 2 3 4
In-process research and development................... -- -- 17
Goodwill amortization................................. -- -- 1
Warrant expense....................................... -- 5 --
Relocation charge..................................... 10 -- --
Total operating expenses........................... 58 41 61
Income (loss) from operations........................... (33) (7) (27)
Other (expense) income, net............................. (6) (4) (10)
Income (loss) from continuing operations before income
taxes................................................. (39) (11) (37)
</TABLE>
- ---------------
(1) Expressed as a percentage of coin products segment sales.
(2) Expressed as a percentage of technology products segment sales.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales. Consolidated net sales decreased by 3% in 1998 to $16.5 million
compared to $17.0 million in 1997. Sales for the coin products segment decreased
by 10% to $15.4 million in 1998, compared to $17.0 million in 1997. Sales for
the technology products segment were $1.1 million in 1998 and principally
related to the sale of readers, value transfer stations and smart cards to the
commercial laundry appliance industry.
Gross margin. Gross margin was 34% in both 1998 and 1997. Gross margin for
the coin products segment was 36% in 1998 compared to 34% in 1997. An
improvement in manufacturing productivity accounted for the increase in the coin
products segment's gross margin. Gross margin for the technology products
segment was 10% in 1998. Beginning in the fourth quarter of 1998, the production
of certain smart card products was transferred from Greenwald Intellicard's
operations in Florida to Greenwald Industries' facility in Connecticut.
Operating expenses. General and administrative expenses increased by
approximately 10% in 1998 to $5.5 million from $5.0 million in 1997. The
majority of the increase was due to $388,000 of general and administrative
expenses, mainly salaries and benefits, at PubliCARD's technology products
businesses.
Sales and marketing expenses were $792,000 in 1998 compared to $796,000 in
1997.
Product development expenses increased to $740,000 in 1998 from $441,000 in
1997 primarily due to product development activities at the technology products
businesses PubliCARD acquired in 1998.
Operating expenses in 1997 included a non-cash charge of $768,000 related
to the extension and modification of certain common stock purchase warrants.
Goodwill amortization increased to $225,000 in 1997 from $42,000 in 1996.
The increase was primarily due to the amortization of goodwill associated with
the acquisition of Tritheim.
Other income and expense. Interest income decreased to $551,000 in 1998
from $683,000 in 1997 due to lower average cash balances. Interest expense
decreased to $339,000 in 1998 from $370,000 for 1997. Pension costs related to
discontinued product lines and related plant closings in prior years increased
to $846,000 in 1998 from $768,000 in 1997. Other expense in 1998 includes a
$954,000 charge associated with the termination of a letter of intent to
purchase five businesses.
31
<PAGE> 34
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
During the years ended December 31, 1997 and 1996, PubliCARD's continuing
operations were solely in the coin products segment.
Net sales. Consolidated net sales volume increased by 10% to $17.0 million
compared to $15.5 million in 1996. The increase was primarily due to coin chute,
money box and meter case sales volume improvements. Consolidated net sales in
1996 were negatively impacted by Greenwald Industries' plant relocation.
Gross margin. Gross margin was 34% in 1997 compared to 25% in 1996.
Manufacturing productivity improvements primarily accounted for the increase in
the gross margin. In addition, cost of sales in 1996 included a $372,000 write
down of certain obsolete inventories and a disruption in manufacturing
activities caused by the plant relocation.
Operating expenses. General and administrative expenses decreased by
approximately 21% in 1997 to $5.0 million from $6.3 million in 1996. The
decrease was primarily attributable to a reduction in corporate headcount and
overhead expenses.
Sales and marketing expenses were $796,000 in 1997 compared to $768,000 in
1996. Product development costs increased to $441,000 in 1997 from $235,000 in
1996 due to the expansion of the product development group at Greenwald
Industries. Goodwill amortization was $42,000 in both 1997 and 1996.
Operating expenses in 1997 included a non-cash charge of $768,000 related
to the extension and modification of certain common stock purchase warrants.
Operating expenses in 1996 included a special charge of $1.6 million associated
with Greenwald Industries' plant relocation which included $627,000 in severance
costs associated with 110 terminated employees, $246,000 for lease termination
costs and $723,000 for costs related to plant and employee relocation,
recruiting and training new personnel and for temporary living allowances. The
move was completed by April 30, 1996.
Other income and expense. Interest income increased to $683,000 in 1997
from $476,000 in 1996 due to higher amounts of cash investments. Interest
expense decreased to $370,000 in 1997 from $815,000 in 1996 due to repayments of
certain subordinated notes and revolver and term notes in 1996 and 1997. Pension
costs related to discontinued product lines and related plant closings in prior
years were $766,000 in 1997 and $769,000 in 1996.
Discontinued operations. In 1996, PubliCARD completed the sale of
substantially all of the assets of Masterview Window Company, Inc., Fenwal
Electronics, Inc. and Bright Star Industries Incorporated. The aggregate
consideration for the dispositions was $47.8 million. The aggregate pre-tax gain
on sale of discontinued operations recorded in 1996 of $22.0 million was offset
by a provision for income taxes of $9.3 million, of which $6.5 million was
credited directly to paid-in-capital due to the utilization of tax loss
carryforwards originating prior to a quasi-reorganization in 1984.
LIQUIDITY
During 1998, PubliCARD's cash, including short-term investments, increased
by $5.4 million to $18.5 million at December 31, 1998. The increase in cash was
principally due to the November 1998 issuance of 2,059,000 shares of common
stock through a private placement. These shares were sold at $5.00 per share for
net proceeds of $10.3 million.
Operating activities used cash of $3.3 million in 1998 and principally
consisted of $6.1 million of losses from continuing operations, $1.1 million of
payments made to the United States Environmental Protection Agency and the
Pennsylvania Department of Environment Protection ("PADEP") (see below) offset
by non-cash charges of $3.6 million for acquired in-process research and
development associated with the acquisition of Tritheim, amortization of
goodwill and unearned compensation on stock awards and option grants and
depreciation. Discontinued operations used $245,000 of cash in 1998.
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Investing activities used cash of $1.8 million in 1998 and consisted
principally of cash paid, including $1.5 million of debt assumed and immediately
repaid, in connection with the acquisition of Tritheim and Greenwald
Intellicard.
Financing activities provided cash of $10.5 million in 1998 and consisted
of the net proceeds from the private placement of common stock of $10.3 million
and proceeds from the exercise of options to purchase common stock of $649,000
offset by treasury stock purchases of $326,000. In April 1998, PubliCARD
concluded a common stock buy-back program under which a total of 3,094,100
shares of common stock were purchased for an aggregate cost since inception of
the program in August 1996 of $4.3 million.
PubliCARD anticipates that it will be able to fund its capital expenditures
during 1999 with its available cash resources as well as through capital
equipment financing. PubliCARD has experienced negative cash flow from operating
activities in the past, and expects to experience negative cash flow in 1999 and
2000. Uses of cash subsequent to June 30, 1999 include the following:
- PubliCARD expects that its technology businesses will require ongoing
funding to support the expansion of sales and marketing, new product
development, working capital growth and capital expenditures.
- An important element of PubliCARD's growth strategy has been and
continues to be the acquisition of businesses that complement, enhance or
geographically expand PubliCARD's existing business segments, product
lines or channels of distribution. As mentioned above, PubliCARD has
signed a letter of intent to acquire the assets of Absec Ltd. Completion
of this acquisition and future acquisition activities will require the
expenditure of funds. There can be no assurance, however that PubliCARD's
acquisition of Absec Ltd. will be consummated, or that it will
successfully consummate other acquisitions.
- In April 1996, a consent decree among PubliCARD, the United States
Environmental Protection Agency and PADEP was entered, which resolved all
of the United States' and PADEP's claims against PubliCARD for recovery
of costs incurred in responding to releases of hazardous substances at a
facility previously owned and operated by PubliCARD. Pursuant to this
consent decree, PubliCARD was required to pay a total of $14.4 million
plus interest to the United States and Commonwealth of Pennsylvania.
Through June 30, 1999, PubliCARD had made principal payments aggregating
$11.8 million. Further payments totaling $2.8 million, including
interest, will be made to the United States and Commonwealth of
Pennsylvania in the amounts of $1.1 million due April 2000, $861,667 due
April 2001 and $822,502 due April 2002.
- PubliCARD sponsors a defined benefit pension plan which was frozen in
1993. As of December 31, 1998, the actuarial present value of accrued
liabilities exceeded the plan assets by approximately $6.0 million. The
annual contribution to the plan is expected to be approximately $1.0
million in 1999 and beyond.
During the year ended December 31, 1998, PubliCARD's capital expenditures
totaled $318,000. PubliCARD anticipates that its level of capital expenditures
in 1999 will be significantly greater than those in 1998. PubliCARD will have to
utilize its current capital resources and external sources of funding to satisfy
its needs. Although PubliCARD has generated funds to meet its capital
requirements in the past and expects to be able to generate funds to meet its
obligations and other needs enumerated above, there can be no assurance that
such funds will be available when required.
At June 30, 1999, approximately $80.0 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
1999 through 2019, were available to offset future taxable income. Due to the
"change of ownership" provisions of the Internal Revenue Code, the availability
of net operating loss carryforwards to offset federal taxable income in future
periods could be subject to an annual limitation if a change in ownership for
income tax purposes occurs. See "Risk Factors -- We may be limited in our use of
our federal net operating loss carryforwards."
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YEAR 2000
YEAR 2000 ISSUE
The Year 2000 issue concerns the potential exposures that PubliCARD and
other companies have because certain computer systems, computer chips and
hardware use two digits, rather than four, to define the applicable year. On
January 1, 2000, these systems and programs may recognize the date as January 1,
1900 and may process data incorrectly or stop processing data altogether.
STATUS OF REMEDIATION
PubliCARD's assessment of the impact of the Year 2000 issue focuses on
three functional areas:
- information technology, which includes computer systems and related
application software;
- embedded chips, which are hidden internal components of many non-computer
devices and equipment as well as PubliCARD's own products; and
- business partners, which include suppliers, vendors, third party
manufacturers and customers.
Based on PubliCARD's assessment to date, it believes that the current
versions of its products are Year 2000 ready. New products are being designed to
be Year 2000 ready. Although PubliCARD's products have undergone, or will
undergo, its usual quality testing procedures, there can be no assurance that
PubliCARD's products will contain all necessary date code changes. Furthermore,
use of PubliCARD's products in connection with other products which are not Year
2000 compliant, including non-compliant hardware, software and firmware, may
result in inaccurate exchange of dates and result in performance problems or
system failures. In addition, older product versions may not be Year 2000 ready.
Any failure of PubliCARD's products to perform properly or at all, or any system
malfunctions associated with the onset of Year 2000, could result in claims
against PubliCARD and have a material adverse effect on PubliCARD.
PubliCARD has conducted a process to identify and assess potential Year
2000 exposures to its business processes, infrastructure and communications.
Substantially all of the internal information systems, communications systems,
building security systems and embedded chips in areas such as manufacturing
processes have been identified, assessed and categorized for Year 2000
compliance. PubliCARD has included computer hardware and software, operating
systems and utilities, desktop applications, computer peripherals, business
partners, embedded chips and plant facilities in the project scope.
The only items for which PubliCARD does not know Year 2000 compliance
status are low-risk devices, such as certain alarm systems and office equipment,
which would not materially impact normal operations if they malfunctioned, and
certain embedded chips and packaged software where the remediation is believed
to require minimal effort. PubliCARD has several application programs used for
certain critical functions such as order entry, inventory management and
accounting, which PubliCARD expects to remediate during the third quarter of
1999. In addition, PubliCARD has identified certain older generation personal
computers, file servers, embedded chips and telephone systems as requiring Year
2000 software upgrades or replacement. While PubliCARD expects all systems to be
Year 2000 compliant, it can give no assurance that compliance will be achieved
with respect to those items not currently compliant or for which compliance is
not known. In addition, PubliCARD cannot assure you that the failure to ensure
Year 2000 compliance will not have a material adverse impact on its business and
operating results.
THIRD PARTY COMPLIANCE
PubliCARD's Year 2000 project scope extends to identifying and assessing
issues affecting suppliers' and customers' products, services, systems and
operations. PubliCARD has identified approximately 150 major suppliers and other
third parties integral to the operations of its business and has initiated
communications with those parties. To date, PubliCARD has received responses
from approximately 50% of those contacted. For those suppliers or vendors deemed
to be critical or important to its business,
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PubliCARD is following up on all unsatisfactory responses or non-responses.
PubliCARD intends to arrange, to the extent available, alternate supplier
sources in the event a third party vendor is deemed to be non-compliant or is
materially impacted by Year 2000 issues. However, PubliCARD cannot assure you
that it will be able to identify and resolve any significant Year 2000 problems
related to third party products or services. Any failure of these suppliers or
other third parties to resolve Year 2000 problems with their systems in a timely
manner could have a material adverse effect on PubliCARD's business, financial
condition and results of operations.
CONTINGENCY PLANS
PubliCARD is currently in the process of developing contingency plans for
potential Year 2000 failures. PubliCARD intends to develop, where practicable,
contingency plans for all mission critical processes by the end of 1999. Any
failure by PubliCARD to address any unforeseen Year 2000 issues could adversely
affect PubliCARD's business, financial condition and results of operations.
ESTIMATED COSTS
PubliCARD currently estimates that the costs for defined Year 2000
remediation projects and for project management, inventory and identification of
non-compliant systems will be less than $250,000. PubliCARD has not completed
the scope, definition and contingency plans for every identified non-compliant
system, device or third party provider, nor can PubliCARD assure you that it has
identified all possible Year 2000 deficiencies. Accordingly, PubliCARD cannot
assure you that it will timely identify and remedy all significant Year 2000
problems, that any such remediation efforts will not involve significant time
and expense or that such problems or additional remediation expenditures will
not have a material adverse effect on PubliCARD's business, financial condition
and results of operations. PubliCARD finances its Year 2000 expenditures through
cash on hand and funds generated from operations, and capitalize them to the
extent they enhance the capabilities and useful life of the underlying systems.
PubliCARD has not assessed the specific financial impact of not being Year
2000 compliant. In connection with PubliCARD's acquisitions of each of Tritheim,
Amazing and Greystone, certain of the sellers gave PubliCARD representations and
warranties with respect to the Year 2000 compliance of the applicable company's
information technology. Subject to certain financial limitations, certain of the
sellers are required to indemnify PubliCARD for any losses it may incur as a
result of any breach of such representations and warranties. These
indemnification obligations of such sellers expire in May 2000. However, any
failure to be Year 2000 compliant could have a material adverse effect on
PubliCARD's business, results of operations and financial condition.
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BUSINESS
BACKGROUND
PubliCARD entered the smart card industry in early 1998 by acquiring the
first of several technology businesses that currently offer and are continuing
to develop solutions for conditional access and security, payment system and
data storage needs of a number of growth industries. In its technology business,
PubliCARD designs, develops, manufactures and markets smart card-based hardware
and smart card-enabled software for a growing variety of applications for
industries in the United States and worldwide. Frost & Sullivan estimates that
approximately $2.1 billion in smart cards will be sold worldwide in 2002,
compared to $1.1 billion in 1997, and that approximately $310 million in smart
cards will be sold in North America in 2002, compared to approximately $33
million in 1997. By 2002, smart card readers, software and system integration
revenues will comprise approximately three quarters of the total revenue for the
world smart card industry, while one quarter of smart card industry revenues
will be comprised of smart card sales, according to Frost & Sullivan. PubliCARD
believes the smart card industry is poised for growth because smart cards and
smart card-based systems provide portable and improved security for the Internet
and other remote delivery channels, rapid and secure off-line processing without
reliance on high volume on-line networks and management of multiple applications
and services on a single card. PubliCARD believes that the Internet and the
development of operating standards and systems will be the catalysts of the
smart card industry's growth.
PubliCARD develops smart cards, smart card readers, smart card value
transfer stations, operating systems for smart cards and smart card-related
application software. PubliCARD's smart card products are used predominantly for
conditional access and security systems, payment systems, loyalty programs and
data storage systems. PubliCARD's smart card products are used in many
industries, including information technology, pay television, transportation,
commercial laundry and retail (including electronic commerce).
PubliCARD also develops and manufactures PCMCIA products, hard disk
duplicators and digital camera flash film readers, which are sold to OEMs, VARs,
VADs and end users. In addition, PubliCARD, through Greenwald Industries, is the
leading designer and manufacturer of coin meter systems used in the commercial
laundry appliance industry. While coin products accounted for 93% of PubliCARD's
revenues in 1998, PubliCARD expects that percentage to decline significantly in
the future as its sales of technology products increase.
RECENT ACQUISITIONS
Beginning in 1998, PubliCARD entered the smart card industry by acquiring
several businesses that currently offer and are continuing to develop solutions
for the conditional access and security, payment system and data storage needs
of a number of growth industries. PubliCARD intends to continue acquiring
businesses that broaden its technology and product base and strengthen its
presence in its channels of distribution.
In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, the assets and intellectual property of Intellicard
Systems. Greenwald Intellicard provides smart cards, smart card readers, value
transfer stations, card management software and machine interface boards for the
commercial laundry appliance and parking industries. PubliCARD currently owns
65% of Greenwald Intellicard, and has an option that becomes exercisable in 2000
to acquire the remaining 35%.
In November 1998, PubliCARD acquired Tritheim, which develops conditional
access and security products for software, computers and the electronic
information and DVB industries. Through Tritheim, PubliCARD provides smart card
readers, writers and chip sets, and has developed software and ASICs for
television set-top boxes, secure electronic commerce, Internet security,
computer security and software copy protection.
In February 1999, PubliCARD acquired Amazing, a developer of consumer smart
card solutions for the Internet, such as web filtering software, which permits
parents to limit their children's access to websites at public institutions,
libraries and schools by defining each child's use profile on a smart card.
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Amazing also offers loyalty programs, which reward customers for their
continuing patronage. In addition, Amazing manufactures customized smart cards
for customers requiring rapid turnaround and smaller volumes.
In February 1999, PubliCARD also acquired Greystone, a leading U.S.
developer of PCMCIA products, hard disk duplicators and digital camera flash
film readers.
RECENT DEVELOPMENTS
In June 1999, PubliCARD announced that it has signed a letter of intent to
acquire all of the assets of Absec Ltd., a designer, manufacturer and
distributor of cost recovery and cashless payment and control systems.
Consummation of the acquisition is subject to, among other things, negotiation
and execution of a mutually satisfactory definitive acquisition agreement and
satisfaction or waiver of the conditions that may be specified in that
agreement. There can be no assurance that this transaction will be consummated.
In April 1999, PubliCARD announced that it has established
SmartCardSource.com, Inc., a wholly-owned subsidiary, through which PubliCARD
intends to develop and introduce www.smartcardsource.com, a world wide web
portal designed to offer comprehensive smart card solutions for business
customers seeking to take advantage of smart card technology. Users will be able
to log on to the www.smartcardsource.com site, and through a series of
interactive screens, "build" their desired smart card solution.
www.smartcardsource.com will then deliver the solutions that most closely match
the user's smart card needs. PubliCARD has contracted with a web information
management service provider to assist it in the construction of
www.smartcardsource.com, which is scheduled to go live on the Internet in the
third quarter of 1999.
TECHNOLOGY PRODUCTS BUSINESS
SMART CARD OVERVIEW
A smart card is similar in appearance to a traditional credit card, but
stores information on an integrated circuit chip embedded within the card,
rather than on a magnetic stripe on the surface. While a typical magnetic stripe
card, such as a traditional credit card, stores approximately 212 bytes of
information, generally consisting of a user's name, account and personal
identification number offset, a smart card can store 64 kilobytes or more of
information, which is 300 times that of a typical magnetic stripe card. The
integrated circuit chip allows smart cards to protect the information stored
from damage or theft. For this reason, smart cards are more secure than magnetic
stripe cards, which carry information on the outside of the card and can
therefore be more easily copied or accidentally erased.
There are two basic types of smart cards. An "intelligent" smart card
contains a central processing unit that has the ability to store, secure and
process information in accordance with the issuer's specific applications.
Intelligent smart cards offer a read/write capability, which permits new
information to be added and processed after the smart card is initially issued.
The microprocessor chip on an intelligent smart card has the ability to perform
complex computing operations that require decision-making and data manipulation
capabilities. The second type of smart card is a memory card, which is primarily
an information storage card that contains stored value which the user can draw
upon.
Smart cards are further characterized as contact, contactless or
dual-interface. A contact smart card must be inserted into a reader or writer in
order to process data. A contactless smart card receives its power and
communicates through an embedded antenna, and therefore, need not physically
contact a reader or writer in order for the embedded chip to perform
applications. A dual interface smart card can function as both a contact smart
card and a contactless smart card.
SMART CARD TECHNOLOGY
Chips. The chips used in smart cards are fundamentally the same as chips
used in computers, and are manufactured in the same way by many of the same
manufacturers. The type of chip used depends on the complexity of the
application the smart card is designed to perform. Chips of different types are
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sometimes used in a single smart card called a combi-card. In recent years,
technological advances in the design of smart card chips have occurred at a
rapid rate, resulting in substantially enhanced storage and processing
capabilities. At the same time, the costs of chip production are declining.
Smart Card Production. The manufacture of smart cards involves the
production of chip modules in which wire leads connect a chip to the gold
contact on the surface of the smart card. The module is then either embedded
into a plastic card or the card is molded around the module. Cards may be
produced with both contact and contactless chips and may also incorporate
magnetic stripes to be compatible with an existing infrastructure. During the
manufacture of the smart card, the operating system to be used by the card is
installed and the card is also personalized for security purposes.
Operating Systems and Standards. Historically, smart cards have been single
application cards built on the proprietary operating systems of major card
manufacturers. Since 1997, advancements have been made in the development of
open multi-application operating systems, which permit an application and an
operating system to be clearly separated in the smart card chip. These
advancements will facilitate the ability of card issuers to move more freely
between card manufacturers without being required to re-write their
applications. In addition, these operating systems will permit applications to
be added to and deleted from smart cards after the cards have been issued.
A clear standard for operating systems has yet to emerge in the smart card
industry. For the most part, each operating system has developed its own
standard, and there has been very little uniformity among operating systems.
However, certain standards have begun to develop, such as ISO-7816 for contact
chip technology, which is used by global payment associations. ISO-7816
standardizes the voltage used and the number of electrical contacts between the
card and reader, the position of the chip on the card and security requirements,
among other things.
Within the personal computer environment, Microsoft has led the development
of personal computer/smart card (PC/SC) specifications, which define the use of
smart cards, and are designed to ensure interoperability. Microsoft has also
developed its Microsoft Smart Cards for Windows 7 multi-application operating
system, which makes a smart card a direct, secure extension of a personal
computer network and offers card users the ability to change components from a
variety of suppliers. This operating system can be programmed with tools that
are commonly used by independent software vendors and in-house developers.
Sun Microsystems has been leading a growing consortium of smart card
industry companies in the development of JavaCard. JavaCard is a subset of the
highly popular Java programming language, and is designed to provide
interoperability between smart card applications regardless of the underlying
operating system. JavaCard also supports multi-application environments and is
intended to enable the loading and deletion of applications even after a smart
card has been issued. During the second quarter of 1999, leading smart card
manufacturing companies have announced a number of new JavaCard implementations.
For the pay television market, the Society of Cable TV Engineers published
the DVS Specifications, which are subject to revision, but form a stable base
from which the industry can begin to migrate to digital television broadcasting.
The DVS Specifications define the hardware and software requirements and
communications protocols for the set-top box market and will allow different
manufacturers to develop interoperable smart card solutions.
Smart Card Terminals and Interface Devices. Smart card terminals
incorporate interface devices such as smart card readers and writers and value
transfer stations that interact with smart cards to permit the processing and
modification of stored data. Terminals may be used in banking, attended and
unattended points of sale, satellite and cable television set-top boxes, public
telephones and as peripheral equipment on personal computers. Smart card
terminals, together with smart cards, perform card authentication and cardholder
verification procedures at the point of use, while similar magnetic stripe card
transactions require contact with a central host system. To enhance cardholder
verification, terminals may also utilize personal identification numbers and
biometrics, such as fingerprinting. In addition to the more common terminals
used for contact type cards, terminals designed to work with contactless smart
cards are used in
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such applications as transit and access control. Readers, writers and other
interface devices are frequently designed to be upgradable to accommodate new
applications and security enhancements.
INDUSTRY OVERVIEW
Smart card technology was developed in 1974. In 1992 and 1993, France
became the first country to roll out a national banking system using smart
cards. By the beginning of 1993, all of the 21 million banking cards issued in
France were smart cards. In 1994, France Telecom reached an agreement allowing
22 million Carte Bancaires cardholders access to the 120,000 French chip-reading
public telephones. (Source: The Smart Card 1998, Jones and Mearns). Following
the successful introduction of smart cards in France, other countries began
deploying smart cards for a number of applications in industries ranging from
banking to telecommunications to healthcare to pay television, making smart card
technology the de facto standard for a wide variety of applications. Frost &
Sullivan estimates that approximately 592 million smart cards were shipped in
Europe in 1997. In recent years, Asia has begun to deploy smart card technology
in several industries, and Frost & Sullivan estimates that Asia will comprise
approximately 24% of the total smart card market by 2002.
Businesses in the U.S. have been slower to adopt smart card technology
because of the wide usage and existing infrastructure of magnetic stripe
technology, the cost of deploying new technology and the lack of industry-wide
standards for smart card operating systems. However, PubliCARD believes that
smart card technology is beginning to achieve greater adoption in the U.S. for
several reasons, including:
- The cost of producing smart card products, including microchips, cards,
readers, writers and terminals, has decreased.
- Technological advancements have improved the functionality and storage
capacity of smart cards.
- New technology such as the Internet and electronic commerce have
increased the need for the added security and versatility smart cards
provide.
- Several industry standards have been recently developed by such
organizations as Microsoft, MasterCard, Visa and Sun Microsystems.
Frost & Sullivan estimates that, by 2002, there will be approximately 226
million smart cards shipped in North America, compared to 13 million in 1997.
According to Frost & Sullivan, by 2002, smart card readers, software and system
integration revenues will comprise approximately three quarters of the total
revenue for the world smart card industry, while one quarter of such revenues
will be comprised of smart card sales. The following table depicts the expected
shipments of smart cards, by geographic region:
<TABLE>
<CAPTION>
1997 2000 2002
--------------- ---------------- ---------------
REVENUE UNITS REVENUE UNITS REVENUE UNITS
------- ----- -------- ----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Europe......................................... $ 769 592 $ 912 1,059 $1,011 1,335
Asia/Pacific................................... 197 101 351 361 492 672
North America.................................. 33 13 207 106 310 226
Latin America.................................. 86 206 147 365 219 508
Rest-of-World.................................. 17 7 38 31 87 85
------ --- ------ ----- ------ -----
Total..................................... $1,102 919 $1,655 1,922 $2,119 2,826
====== === ====== ===== ====== =====
</TABLE>
Source: Frost & Sullivan.
SMART CARD APPLICATIONS
Smart card technology permits applications such as conditional access and
security, payment systems and data storage to be performed in a low cost,
easy-to-use, secure manner. Conditional access and security applications include
those that restrict the use of products and services, and access to proprietary
content, software, networks and physical properties. Payment system applications
include the use of smart
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cards in connection with credit and debit card systems, as well as coin and
currency replacement, couponing and electronic commerce. Data storage
applications utilize the data storage capacity of smart cards to provide the
secure storage of data in a durable, portable form. Data storage applications
include consumer loyalty programs, identification and medical record storage and
retrieval.
PubliCARD is focusing on developing smart card solutions in the following
markets:
Information Technology. Individuals and corporations increasingly rely upon
computer networks, the Internet and intranets to access information in a digital
form. Data has become more vulnerable to unauthorized access as enterprises move
toward distributed computing and data is made more accessible to internal and
external users. According to the Computer Security Institute, 64% of respondents
to its 1998 CSI/FBI Computer Crime and Security Survey acknowledged that they
had experienced security breaches with respect to their computer systems within
the prior 12 months, an increase of 14% over 1997 and 22% over 1996. The
consequences of unauthorized access, which can often go undetected, can range
from theft of proprietary information or other assets to the alteration or
destruction of stored data. The total financial losses reported by the
organizations that could quantify them in the CSI/FBI survey increased by 36%
over 1997 reported losses. As a result of unauthorized access, many enterprises
have been reluctant to make their computing resources as open as may be
otherwise desirable, and those that allow access are adopting various security
measures to guard against unauthorized access.
Smart cards are capable of performing several key functions in association
with computers, computer networks and the Internet. A basic function is security
and identification of users. Information technology cards can contain personal
identification numbers and biometric data that can firmly establish the identity
of a user and prevent unauthorized entry into computer networks and access to
data. Information technology cards can also contain multiple passwords and
configuration settings, which eliminate the need for users to enter passwords
manually. Additionally, smart cards can be used to determine an individual's
ability to access certain websites on the Internet. Historically, it was only
possible to censor inappropriate sites based on the computer system being used,
rather than on the status of the user. As a result, one of the issues facing
public institutions such as libraries is the ability to control minors' access
to inappropriate websites while ensuring access to adults. Smart cards provide a
convenient way for public institutions to provide a smart card that can be
encoded with appropriate information so that the parameters of a user's access
can be defined. According to Frost & Sullivan, worldwide unit sales of network
security smart cards are expected to increase to 23 million in 2002 from less
than 1 million in 1997, and revenues are expected to increase to $144 million
from $6 million over that same period.
Pay Television. In May 1997, the Federal Communications Commission adopted
service rules to implement digital television with the intended effect of
promoting rapid conversion to and implementation of digital television. DVB
signals allow content providers to deliver very high resolution, high quality
video images and to provide a broad range of private content and ancillary
services, including web browsing, video on demand and interactive menus. Content
providers currently use set-top boxes to limit the access of their subscribers
to the services for which they pay. Consumers wishing to obtain content or
services from more than one provider would be required to use multiple
proprietary set-top boxes. A number of set-top box manufacturers and other
enterprises have recently developed universal set-top boxes that are capable of
receiving content from a variety of providers. Multiple providers can deliver
digital content to the same universal set-top box, and consumers can access the
content to which they have subscribed by using a smart card that fits into a
reader in the set-top box. Because the conversion to DVB will require the use of
digital television equipment, millions of traditional analog set-top boxes will
need to be replaced. According to Frost & Sullivan, worldwide unit sales of pay
television cards are expected to increase to 39 million in 2002 from 26 million
in 1997, and revenues are expected to decrease to $126 million from $163 million
as average unit prices decrease over that same period.
Electronic Commerce and Coupons. Much of the information available on the
Internet is currently free because there is no practical method by which
information providers can charge recipients. For example, the cost of
downloading the text information contained on a newspaper page may be 15 cents,
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and therefore, the use of a credit or debit card to pay this charge is not
practical because the costs of processing this transaction far outweigh the
income that can be generated.
The ability of smart cards to store value pre-loaded from a user's bank
account and to undertake transactions off-line provides a solution for small
Internet transactions. The stored value systems that are currently being
developed are expected to work effectively on the Internet and through set-top
boxes and WebTV.
The couponing market in the U.S. is a $3 billion business. Smart cards will
enable coupon issuers to use remote distribution channels such as the Internet,
digital set-top boxes and WebTV, from which consumers can download coupons for
future redemption at local retail locations. Smart card-based coupon systems are
expected to reduce fraud and processing costs and facilitate targeted marketing.
Transportation. Smart card-based payment systems provide mass transit and
municipal parking operators with a means of reducing fraud, theft and other
collection costs and also improve cash flow and profitability through the
generation of the float associated with prepaid mass transit and parking cards.
Payment systems that use contactless smart card technology also reduce commuting
time. Transportation systems worldwide are beginning to make use of smart card
technology for subways, buses and toll roads. For example, on May 26, 1999, the
Metropolitan Transportation Commission of the San Francisco Bay Area awarded a
10-year contract to a consortium of companies to develop a smart card-based
single ticket system called TransLink(R) for use on all Bay Area transit
systems. The New York metropolitan area uses E-ZPass, a contactless smart card,
to facilitate the payment of many highway and bridge tolls. According to Frost &
Sullivan, worldwide unit sales of transportation cards are expected to increase
to 118 million in 2002 from 18 million in 1997, and revenues are expected to
increase to $78 million from $41 million over that same period.
Identification. Applications for identification smart cards include
passports and drivers' licenses, college and corporate identification cards.
When smart cards are used in lieu of traditional identification cards, they can
provide additional functions such as storing employee records, providing or
denying access to specific areas of facilities and storing value for payment
transactions. In a campus environment, smart cards can store value for vending
and food service transactions and student records and billing information, and
can be used in lieu of traditional library and access cards. According to Frost
& Sullivan, worldwide unit sales of institutional smart cards (including
government, campus and healthcare cards, and including applications such as
electronic benefit transfer, travel, meal plans, long distance calling and
stored value) are expected to increase to 324 million in 2002 from 24 million in
1997, and revenues are expected to increase to $105 million from $41 million
over that same period.
Loyalty Programs. Retailers and service providers can use the data storage
and payment system capabilities of loyalty cards to give "frequent buyer" points
to customers, allowing customers to accrue value that can be used to buy
additional merchandise and services. Retailers can use the data accumulated
through these programs to develop customized and focused consumer marketing
programs.
Smart card loyalty programs vary in sophistication and complexity depending
on the size and needs of the merchant. Large national chains require highly
sophisticated programs to meet their diverse customer bases and their
sophisticated marketing capabilities. Smaller merchants, by contrast, do not
require, nor do they have the marketing or technology resources to manage, a
sophisticated loyalty product. Their needs can be met by simpler, low cost
solutions that will still be capable of providing tangible benefits over the
card index systems that many employ today.
Health Care. PubliCARD also intends to develop technology and consummate
acquisitions to penetrate markets such as the healthcare industry which, with
its millions of participants and individualized information and payment
requirements, can benefit significantly from smart card technology. Health care
smart cards can provide patient identification and medical record storage and
retrieval, as well as electronic benefit transfers, determination of benefit
eligibility and drug interaction information. This will be particularly
beneficial in an emergency situation, when a quick assessment of vital
information such as allergies, prescriptions and immunizations is required.
Health care cards can be used to improve and
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streamline administrative and billing procedures, as well as insurance
reimbursements. According to Frost & Sullivan, worldwide unit sales of health
care cards are expected to increase to 325 million in 2002 from 24 million in
1997, and revenues are expected to increase to $106 million from $41 million
over that same period.
The table below sets forth Frost & Sullivan's estimate of the size of the
worldwide smart card market, taking into account cards only, by certain of the
applications described above:
<TABLE>
<CAPTION>
1997 2000 2002
--------------- --------------- ---------------
REVENUE UNITS REVENUE UNITS REVENUE UNITS
------- ----- ------- ----- ------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Application
Network Security.............. $ 6 4 $ 53 5 $144 23
Pay Television................ 163 26 124 30 126 39
Transportation................ 41 18 52 47 78 118
Institutional................. 41 24 152 269 105 324
Health Care................... 78 34 574 419 788 639
</TABLE>
Source: Frost & Sullivan.
STRATEGY
PubliCARD's objective is to become a leading provider of smart card
solutions for a variety of growth industries. Key elements of PubliCARD's
strategy include the following:
- FOCUS ON DIFFERENTIABLE, VALUE-ADDED PRODUCTS AND TECHNOLOGIES. PubliCARD
intends to focus on smart card hardware, software, systems integration
services and customized card production rather than on the production of
commodity items such as banking cards and prepaid telephone cards. For
example, PubliCARD has launched SmartGuardian(TM), and intends to launch
other smart card-enabled software, including SmartCommerce(TM),
SmartPassky(TM) and PCDefender(TM), in 1999.
- OFFER SOLUTIONS FOR A VARIETY OF INDUSTRIES. PubliCARD has adopted a
strategy of developing smart card solutions for a variety of industries,
including industries for which standards are evolving as well as those
for which efforts toward standardization are not as visible.
- BUILD TECHNOLOGY BASE. PubliCARD has acquired intellectual property and
technical expertise in many aspects of the smart card industry, which it
intends to leverage to develop new products, enhance existing product
offerings and reduce its reliance on outside suppliers. PubliCARD has
established a Technology Committee which will provide advice and counsel
on the future technological and commercial trends in the smart card
market.
- ACQUIRE COMPANIES WITH COMPLEMENTARY TECHNOLOGIES, PRODUCTS AND CUSTOMER
BASES. PubliCARD intends to acquire businesses that have developed smart
card products, services and technologies which broaden and strengthen its
presence in its distribution channels and in new markets. PubliCARD's
four acquisitions since February 1998 have enabled it to develop a
meaningful presence in the smart card industry.
- BUILD BRAND RECOGNITION. PubliCARD has begun the process of building
brand identity around the PubliCARD name with the objective of being
recognized as a leading smart card solution provider in the U.S. and
around the world. PubliCARD has linked and intends to migrate the
identities of its technology-related subsidiaries to the PubliCARD brand
name over time. Participation in trade shows and in advertising will
consistently be under the PubliCARD name, as will all public relations
and investor relations activities.
- INCREASE PENETRATION OF EXISTING CUSTOMER BASE. PubliCARD intends to
cross-sell additional technologies, products and services to the customer
bases of its individual subsidiaries. To achieve this, PubliCARD has
established a centralized marketing function to oversee the management of
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<PAGE> 45
key customer relationships and will implement a formalized program for
cross-training subsidiary-level sales executives. Since December 31,
1998, PubliCARD has added 9 sales representative agencies to represent
its technology businesses.
- BUILD STRATEGIC ALLIANCES AND RELATIONSHIPS. PubliCARD intends to form
strategic relationships with key industry players in order to gain access
to additional technology and to expand its marketing and distribution
efforts.
- LEVERAGE MANUFACTURING CAPABILITIES. PubliCARD has begun manufacturing
Greenwald Intellicard's value transfer stations at the Chester,
Connecticut facility. Since Greenwald Intellicard's manufacturing
processes have been moved to the Chester, Connecticut facility, the value
transfer station assembly time has been significantly reduced and the
cost of production has been reduced by over 60%. PubliCARD will continue
to evaluate future opportunities to relocate other manufacturing
operations to the Chester, Connecticut facility.
THE PUBLICARD SOLUTION
PubliCARD has developed smart card solutions for the information
technology, pay television, transportation and identification markets, and
intends to penetrate other markets, including healthcare, through the
development and acquisition of new technology and complementary businesses.
PubliCARD's smart card solutions meet a variety of user needs, including
conditional access and security, payment and coin replacement and data storage
functions, as well as a combination of these and other functions.
CONDITIONAL ACCESS AND SECURITY
PubliCARD believes that smart cards provide a portable and superior
security system that can reliably identify users in order to prevent
unauthorized access to information and resources. PubliCARD has developed a
number of smart card solutions to provide conditional access and security for a
variety of markets.
Information Technology. PubliCARD has developed technology that permits
Internet users to insert a smart card into their WebTV boxes to automatically
access their desired websites. In addition, PubliCARD believes that Amazing is
one of the first companies to market a smart card application for the Internet
by developing technology that encrypts passwords necessary to access certain
sites. Each site recognizes the user's password for that site, thus alleviating
the user's need to memorize multiple passwords. PubliCARD also offers web
filtering software, which permits parents to limit their children's access to
websites at public institutions, libraries and schools by defining each child's
use profile on a smart card.
PubliCARD is currently marketing smart card-enabled software that enables
personal computers to encrypt and decrypt computer files and e-mail. This
software is capable of securing personal computers as well as computers linked
to a network.
Pay Television. PubliCARD is currently marketing an ASIC to an OEM of
set-top boxes. This ASIC will permit that OEM to incorporate smart card readers
into the set-top boxes it manufactures. When inserted into the reader, a smart
card will "unlock" the specific services to which a consumer has subscribed.
When consumers subscribe to different or additional content services, the
service providers will control access to the new or additional services through
smart cards.
Identification. PubliCARD can add individual identifying data to smart
cards that function with other of its smart card applications. For example,
PubliCARD is able to provide a laundry facility smart card that permits the user
access to the laundry facility as well as serving as a coin replacement.
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<PAGE> 46
PAYMENT SYSTEMS
PubliCARD believes that smart cards provide an easy, flexible and
cost-effective way to achieve the key benefits of highly secure, authenticated
transactions. PubliCARD develops and sells a variety of stored value
applications for payment systems.
Pay Television. PubliCARD is currently marketing software, together with
related chips, readers and ASICs, that will enable subscribers to perform
transactions such as purchase merchandise and order video on demand services via
their smart card-operated set-top boxes.
Electronic Couponing. PubliCARD is marketing an application, including
readers, chips and electronic commerce software, which would enable consumers to
download electronic coupons onto a smart card and redeem them at retailers.
Transportation. PubliCARD produces smart cards, software and value transfer
stations which enable municipalities to replace coin-operated parking meters
with meters that read smart cards.
Commercial Laundry Appliance and Vending. PubliCARD manufactures and
markets smart cards, smart card readers, value transfer stations, card
management software and machine interface boards for the commercial laundry
appliance and vending industries. A value transfer station, which is installed
at an issuer's site, such as a laundromat, dispenses and adds value to smart
cards, thus alleviating the need for the issuer's customers to use cash. Issuers
are able to audit transactions conducted at value transfer stations through
PubliCARD's readers and software to determine, among other things,
accountability, usage and diagnostic data.
DATA STORAGE
PubliCARD is using the data storage capabilities of smart cards to develop
a wide range of products.
Loyalty Programs. PubliCARD has developed a loyalty program which will
permit a smart card to be incorporated into a traditional point of sale
application, enabling a retailer to track all aspects of the sales process and
reward repeat customers with premiums or discounts through the use of their
smart cards. PubliCARD expects that its consumer loyalty program will permit
retailers to use the data accumulated to develop customized and focused consumer
marketing programs.
Digital Media. PubliCARD currently manufactures digital camera flash film
readers for OEMs. This market consists of software and hardware interfaces that
allow digital content to be transferred between two devices and into a digital
format for alteration, distribution or examination, such as the transfer of
digital photographs from a digital camera to a personal computer or laptop.
PubliCARD also offers PCMCIA products for use in desktop, laptop, notebook and
palmtop computers using PC Cards. These products permit the interchangeability
of PC Cards for the sharing of peripherals, updating files, modifying and
loading software onto PC Cards, as well as loading pictures from digital
cameras.
PRODUCTS
PubliCARD develops, manufactures and markets smart cards, hardware
(including readers, writers and value transfer stations) and smart card-enabled
software. PubliCARD intends to combine these elements to provide total smart
card solutions for specific applications.
<TABLE>
<CAPTION>
CONDITIONAL ACCESS
AND SECURITY PAYMENT SYSTEMS DATA STORAGE
------------------ --------------- ------------
<S> <C> <C> <C>
INFORMATION TECHNOLOGY X X
PAY TELEVISION X X
TRANSPORTATION X
IDENTIFICATION X X
LOYALTY X X
ELECTRONIC COUPONING X X
COMMERCIAL LAUNDRY AND VENDING X X
</TABLE>
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<PAGE> 47
SMART CARDS AND OPERATING SYSTEMS
PubliCARD currently manufactures and sells smart cards to participants in a
variety of industries. PubliCARD generally manufactures smart cards in smaller
volumes for customers requiring rapid turnaround. PubliCARD manufactures all
types of smart cards, including intelligent, memory, contact, contactless and
combi-card smart cards. Through subcontractors, PubliCARD customizes smart cards
for its customers with specified printing, holograms and special coatings. Smart
cards accounted for approximately 33% of PubliCARD's pro forma
technology-related revenue in 1998. PubliCARD believes that this percentage will
decrease over time as it increases its sales of smart card hardware and smart
card-enabled software.
PubliCARD's operating systems include (a) Gator, an operating system for
handling multiple applications, (b) a Global System for Mobile Telecommunication
operating system, which is a phase II cellular telephone operating system and
(c) SCOS (Smart Card Operating System), which organizes a smart card's memory
into data files and provides protection for such files with authentication keys.
SmartCard Management System Version II allows accountability and audit of
all smart card transactions conducted in laundry or other vending machines. This
software performs functions such as taking inventory of readers and creating
special price profiles, as well as a variety of management control functions.
INTERFACE DEVICES
PubliCARD manufacturers stand-alone card readers for desktop computers and
card readers for laptop and mobile computers. PubliCARD also manufactures and
markets serial readers, internal readers and PCMCIA readers, as well as smart
card readers for the commercial laundry, vending and parking industries.
PubliCARD has also developed readers for access control and secure Internet
transactions. In addition, PubliCARD manufactures value transfer stations, which
permit the transfer of value from cash, credit cards, debit cards, ATM cards and
currency to smart cards.
SOFTWARE AND APPLICATIONS
PubliCARD's software and application products include the following:
<TABLE>
<CAPTION>
PRODUCT APPLICATION TYPE DESCRIPTION
------- ---------------- -----------
<S> <C> <C>
SmartGuardian(TM) Conditional Access - Provides Internet access control for
and Security children; denies the user access to
certain websites as predetermined by
each individual user's parent or
guardian
- Targeted toward public institutions,
libraries and schools
PCDefender(TM) Conditional Access - Protects computers from unauthorized
and Security intrusion
- Enables personal computers to encrypt
and decrypt computer files and e-mail
SmartCommerce(TM) Conditional Access - Internet purchase terminal software
and Security/
Payment Systems - Enables secure electronic value
transfer for retail, paid television and
banking transactions
SmartPassky(TM) Conditional Access - Storage of multiple passwords for
and Security Internet accounts
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
PRODUCT APPLICATION TYPE DESCRIPTION
------- ---------------- -----------
<S> <C> <C>
Smart Card Reader ASIC Conditional Access - Facilitates the integration of smart
and Security card readers into television set-top boxes
and personal computers
SmartRewards(TM) Data Storage/ - Loyalty program designed for small
Payment Systems retailers seeking to improve customer
retention and reward customer loyalty.
VirtualTokens(TM) Conditional Access - Provide a high level of security for
and Security software copy protection, data security
and Internet password protection.
</TABLE>
SmartGuardian(TM). Internet filtering software and related readers, smart
cards and smart card personalization devices that allow children to surf the
Internet without continuous supervision at public institutions, libraries and
schools. To access the Internet with SmartGuardian(TM), a user needs a smart
card which contains the coded list of website types the user is prohibited from
accessing, as predetermined by the child's guardian. The card issuing station
which encodes the smart card is operated by authorized personnel, who input the
access parameters for each smart card issued. Therefore, children are able to
access the Internet without adult supervision because they will be largely
unable to access sites deemed undesirable. PubliCARD has installed
SmartGuardian(TM) in one public library, and intends to market SmartGuardian(TM)
to other libraries, schools and public institutions. PubliCARD developed Smart
Guardian(TM) in conjunction with OnePlace, Ltd. using GuardiaNet, OnePlace's
automatic Internet filtering service. SmartGuardian(TM) is certified for Windows
95/98/NT, TCP/IP and ISO-7816 standards.
PCDefender(TM). Smart card-enabled software that enables personal computers
to encrypt and decrypt computer files and e-mail. PCDefender(TM) is a
hardware/software solution to protect laptop, desktop or networked computers
from unauthorized intrusion utilizing smart cards with military-grade encryption
algorithms and virus control. PCDefender(TM) was developed in conjunction with
Norman Data Defense Systems. PCDefender(TM) is certified for Mondex, ISO-7816,
VisaCash and PCMCIA standards.
SmartPassky(TM). Stores multiple passwords for Internet accounts. PubliCARD
believes SmartPassky(TM) is among the first smart card applications designed to
facilitate access to all of a user's password-protected Internet accounts. When
a website address is selected by the user, this product automatically takes the
user to the login screen of that website and prepares the user identification
and password for automatic login. The user need only click in the appropriate
field to complete the login procedure. PubliCARD began actively marketing
SmartPassky(TM) in the second quarter of 1999. SmartPassky(TM) is certified for
Windows 95/98/NT/CE, Netscape/Internet Explorer and ISO-7816 standards.
Smart Card Reader ASIC. Currently being marketed to an OEM of set-top
television boxes. This ASIC will permit that OEM to incorporate smart card
readers into the set-top boxes it manufactures. This ASIC is certified for PCSC,
Mondex, ISO-7816, VisaCash and PCMCIA standards.
SmartRewards(TM). A loyalty program designed for small retailers seeking to
improve customer retention and reward customer loyalty. SmartRewards(TM) points
may be issued by a single retailer, or in cooperation with other non-competing
retailers. The level of reward will be at the discretion of the participating
retailer, and may vary by retailer. Rewards will be redeemable only at the
issuing or participating retailer, ensuring that customers return to the point
of sale. PubliCARD introduced SmartRewards(TM) in Europe in the second quarter
of 1999. SmartRewards(TM) is certified for Windows 95/98 and ISO-7816 standards.
SmartCommerce(TM). Software that is capable of linking merchants, banks and
consumers so that merchants and banks can accept electronic cash from their
customers over the Internet. In addition, PubliCARD intends to market
SmartCommerce(TM) to cable broadcasters. SmartCommerce(TM) will permit banking
customers to download electronic cash from their banks via the Internet onto a
bank-issued smart
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card. SmartCommerce(TM) is expected to be marketed beginning in the first
quarter of 2000. SmartCommerce(TM) is Mondex compliant, and is certified for
VisaCash and EMV standards.
VirtualTokens(TM). A patented process which provides a low cost method for
software copy protection. VirtualTokens(TM) are electronic packets of secure
information that can be transferred electronically or via a smart card to
special hardware chips (also produced by PubliCARD) in order to provide a high
level of security for software copy protection, data security and Internet
password protection. PubliCARD expects to initiate beta-testing of
VirtualTokens(TM) during 2000. PubliCARD was among 300 winners of the
Smithsonian Award of 3,000 nominees for VirtualTokens(TM) in 1999.
COMPLEMENTARY TECHNOLOGY
In addition to products relating to its smart card business, PubliCARD also
offers the following products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
High Speed Disk Duplicators - Duplicates master disk drives to multiple target disk
drives in low, medium and high volume applications
Digital Media Readers, Writers and - PCMCIA, compact flash memory card, smart card, SmartMedia
Adapters and other form factor readers, writers and adapters
</TABLE>
PubliCARD manufactures high-speed disk duplicators for use by OEMs, system
integrators, VARs, VADs and end users, including the United States government.
PubliCARD's disk duplicators duplicate master disk drives to target disk drives
in low, medium and high volume applications. PubliCARD believes that its disk
duplicators, which use high-speed technology certified by Microsoft, are the
fastest on the market.
In addition, PubliCARD designs and manufactures digital camera and compact
flash accessories, which read and write to PCMCIA, compact flash and SmartMedia
cards. Such products enable digital camera users to download images to laptops
or desktop computers more rapidly than other interface methods.
PubliCARD also offers common PCMCIA products for use in desktop, laptop,
notebook and palmtop computers using PC Cards. These products enable total
interchangeability of PC Cards for the sharing of peripherals, updating files,
modifying and loading software onto PC Cards, as well as loading pictures from
digital cameras.
SALES AND MARKETING
PubliCARD sells and distributes its technology products through a broad
range of distribution channels, including VARs, VADs and distributors. PubliCARD
also sells and distributes its technology products directly to OEMs and end
users through its direct sales force and independent sales representatives.
PubliCARD intends to use the Internet for sales and marketing purposes and for
providing enhanced after-sales support.
PubliCARD uses a combination of full-time employee sales personnel and
sales representatives to optimize market potential and geographic coverage.
PubliCARD has approximately 15 employees directly engaged in the sale and
distribution of its technology products in the United States and two employees
in Europe. PubliCARD is represented by independent sales representative
agencies. During 1999 and thereafter, PubliCARD plans to expand both its
employee and representative sales forces in the U.S. and abroad to capitalize on
the forecast market demand for smart card products.
In support of its sales strategies, PubliCARD also makes use of direct mail
campaigns to its customer databases, advertising in targeted trade media and at
trade shows and conferences.
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<PAGE> 50
PubliCARD intends to form strategic relationships with a number of key
industry players to provide it with access to leading edge technology, marketing
and sales leverage and access to key customers and accounts.
CUSTOMERS
PubliCARD's primary customer base for its technology products consists of
OEMs, systems integrators, service providers, application developers, VARs,
VADs, public institutions, governmental agencies and end users.
PubliCARD's customers for its smart card products include The Englewood
Colorado Public Library, Lucent Technologies, Microsoft, Racal, Aurora Barcode,
Siemens and the City of San Diego, California. PubliCARD's customers in its disk
duplication business include IBM, Sun Microsystems, Dell Computer Corporation,
Compaq and Gateway. PubliCARD's customers for its PCMCIA products include U.S.
governmental agencies, Acer and Kodak.
MANUFACTURING
PubliCARD conducts manufacturing and assembly operations in its own
facilities and on an outsourced basis using contract manufacturers. Contract
manufacturing is used to produce smart card readers and PCMCIA cards, chip sets,
ASICs, smart cards and a variety of peripheral equipment. PubliCARD also
manufactures smart cards, smart card readers, value transfer stations and
commercial laundry machine interface boards. These products are manufactured in
PubliCARD's facilities in Santa Clara, California and Chester, Connecticut.
PubliCARD intends to expand the card manufacturing capacity at its Santa Clara,
California facility in several phases through 1999 and 2000. PubliCARD will
continually evaluate the cost/benefit relationship of manufacturing its products
in its own facilities versus using contract manufacturing. The Chester,
Connecticut manufacturing facility contains surplus capacity and provides a
favorable opportunity for reducing overall manufacturing costs of fabricated and
assembled products.
RESEARCH AND DEVELOPMENT
Research and development is a key element to PubliCARD's future success and
competitive position. PubliCARD intends to develop an annual technology
development plan as an integral part of its business planning process. This will
identify new areas requiring development in support of identified business
opportunities, as well as a program of maintenance and enhancement for
PubliCARD's existing product line.
PubliCARD has established a Technology Committee comprised of internal
technology specialists together with invited leading industry experts drawn from
both commerce and academia. The role of the Technology Committee is to provide
PubliCARD with advice and counsel on the future technological and commercial
trends in the smart card industry.
PubliCARD strives to develop and maintain close relationships with key
suppliers of components and technologies in order to enable it to quickly
introduce new products that incorporate the latest technological advances.
PubliCARD's future success will depend upon its ability to develop and to
introduce new products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. See "Risk Factors -- Our future success
depends on our ability to keep pace with technological changes and introduce new
products in a timely manner."
COMPETITION
Competition in the technology markets in which PubliCARD operates is
intense and is characterized by rapidly changing technologies, evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. To maintain and improve its competitive position, PubliCARD must
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<PAGE> 51
continue to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. The principal competitive factors affecting the market for
PubliCARD's technology products are the product's technical characteristics and
price, customer service and competitor reputation, as well as competitor
reputation positioning and resources. See "Risk Factors -- The highly
competitive markets in which we operate could have a material adverse effect on
our business and operating results." PubliCARD will be required to continue to
respond promptly and effectively to the challenges of technological changes and
its competitors' innovations.
PubliCARD competes with Gemplus and Schlumberger Technologies, among
others, in the manufacture and sale of smart cards. PubliCARD's competitors for
its smart card readers and writers include SCM Microsystems, Gemplus, Utimaco,
Towitoko Electronics and Philips Electronics. In the future, PubliCARD may also
experience competition from IBM and Microsoft. PubliCARD competes with Danyl,
ESD and Set-O-Matic for its commercial laundry smart card products. PubliCARD's
competitors in the disk duplication market include Intelligent Computer Systems,
CSC, Wytron, Symantec Corp. and MicroHouse. PubliCARD's competitors in the
digital flash camera market include SanDisk, Lexmar and SCM Microsystems.
PubliCARD also competes with OEMs, peripheral equipment manufacturers and
others that have greater resources than PubliCARD.
Many of PubliCARD's current and potential competitors have longer operating
histories and significantly greater financial, technical, sales, customer
support, marketing and other resources, as well as greater name recognition and
a larger installed base of their products and technologies than PubliCARD. In
addition, as the smart card market develops, a number of companies with
significantly greater resources than PubliCARD could attempt to increase their
presence in the market by acquiring or forming strategic alliances with
competitors of PubliCARD, resulting in increased competition.
COIN PRODUCTS BUSINESS
PubliCARD believes that Greenwald Industries is the leading designer and
manufacturer of coin meter systems used in the commercial laundry appliance
industry. Greenwald Industries also manufactures and sells its coin products to
the amusement and games industry. The commercial laundry appliance industry is
comprised of manufacturers of coin-operated washers and dryers for component
manufacturers, route operators, distributors, multi-family housing properties
and commercial laundromats. PubliCARD estimates that the installed base of
washers and dryers is 4.5 million appliances, and that approximately 400,000
units are purchased each year.
Significant changes have recently begun to develop in the markets served by
the coin products segment of PubliCARD's business. One such change is the
migration from mechanical and electro-mechanical products to electronic
products. Another such change is the movement toward smart card payment systems,
which is being addressed by PubliCARD through Greenwald Intellicard.
STRATEGY
PubliCARD's objectives in its coin products segment are to maintain the
market share it has achieved for its traditional product lines, while continuing
to develop electronic and smart card solutions for the commercial laundry
appliance and amusement and games industries.
- INTRODUCE NEW PRODUCTS. In the last several years, the demand for
electronic equipment has increased. This electronic equipment generally
uses electronic drop meters instead of mechanical coin chutes as the coin
acceptor for the applicable machine. Drop meters are coin acceptors that
accept and register one coin at a time, and integrate more easily with
the electronic components of the machines in which they are installed.
PubliCARD has developed a high quality, low cost drop meter which is
currently being evaluated by a major OEM customer. PubliCARD intends to
develop other prototypes and final products for use by its other
customers, such as Alliance.
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- INTEGRATE LEGACY OPERATIONS WITH SMART CARD PRODUCT LINE. PubliCARD has
begun manufacturing Greenwald Intellicard's value transfer stations at
the Chester, Connecticut facility. PubliCARD intends to reorganize both
the engineering and development group and the sales and marketing group
at this facility to support the addition of its smart card product line.
- BUILD STRATEGIC ALLIANCES AND RELATIONSHIPS. The relationships PubliCARD
enjoys with its significant trade partners are critical to its past and
future success. PubliCARD also has an informal alliance with the import
agent responsible for supplying its foreign produced coin chutes.
PubliCARD intends to develop similar alliances with additional suppliers
and customers to give it a competitive advantage in its coin products
business.
- LEVERAGE MANUFACTURING CAPABILITIES. PubliCARD has recently experienced
savings as a result of in-sourcing stamped metal components and all
assembly operations. As the demand for laundry-related smart card
products increases, PubliCARD intends to invest in new equipment with
cost-effective short-run capabilities. PubliCARD believes this investment
will result in cost savings and improved delivery.
PRODUCTS
PubliCARD sells the following products:
- DROP METERS are coin acceptors which can accept one coin at a time and
any combination of coins. Drop meters are increasingly being used in
electronic applications.
- TIMER ASSEMBLIES are used to control cycles on commercial dryers and
return timers to a "ready" position on certain commercial washers.
- COIN CHUTES are coin acceptors that can accept up to eight coins or
tokens at once. A machine is activated when the slide of a coin chute is
pushed forward to engage the start mechanism.
- MONEY BOXES are trays which are located below a drop meter or coin chute
and capture coins. Money boxes are available in a variety of sizes and
security configurations.
- METER CASES are the "vaults" attached to commercial laundry and amusement
equipment. Coin acceptors, money boxes and timer mechanisms are mounted
inside meter cases, which are constructed on heavy gauge steel for
security purposes.
- LOCKS are used in money boxes and meter cases. Locks are available in a
variety of styles, depending upon the degree of security required for a
particular location.
SALES AND MARKETING
PubliCARD sells and distributes its coin products through OEMs, route
operators and equipment and parts distributors. OEMs install PubliCARD's
products on their equipment. Route operators service and maintain commercial
laundry appliances, and therefore are end users of PubliCARD's commercial
laundry coin products. Equipment and parts distributors sell PubliCARD's
products to smaller end users such as laundry store owners.
PubliCARD currently employs seven sales and marketing personnel who are
responsible for the sales and marketing of PubliCARD's coin products. In
addition, PubliCARD also uses two independent sales representatives.
CUSTOMERS
PubliCARD's customers in its coin products business include Whirlpool
Corp., which accounted for approximately 13% of PubliCARD's revenues on a
consolidated basis in 1998, as well as General Electric, Maytag, Web Service,
Coinmach, Sears and Roebuck, Alliance Laundry Systems and Mac-Gray.
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<PAGE> 53
RESEARCH AND DEVELOPMENT
Following the relocation of PubliCARD's coin products business to Chester,
Connecticut in 1996, increased focus has been placed on the strengthening of its
engineering capabilities and new product development activities. PubliCARD
recently developed a new electronic drop meter and a laundry controller circuit
board using distributed intelligence networking architecture. In 1998, PubliCARD
spent $446,000 in research and development for its coin products business.
COMPETITION
PubliCARD competes with ESD, Set-O-Matic, W.H. Munzprufer Dietmar Trenner
GmbH and Monarch in its coin products business. PubliCARD believes that the
principal competitive factors affecting its coin products business are quality
of product, delivery times, ease of use, marketing and customer service and
price. See "Risk Factors -- The highly competitive markets in which we operate
could have a material adverse effect on our business and operating results."
INTELLECTUAL PROPERTY
PubliCARD's success depends significantly upon its proprietary technology.
PubliCARD relies on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. PubliCARD seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. PubliCARD's subsidiaries have entered into confidentiality
and non-disclosure agreements with certain of their employees and with certain
key vendors and suppliers. Despite PubliCARD's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of
PubliCARD's products or to obtain and use information that PubliCARD regards as
proprietary. Moreover, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries, making the possibility of
misappropriation of PubliCARD's proprietary technology more likely. The steps
taken by PubliCARD to protect its proprietary technology might not prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar to
PubliCARD's products.
PubliCARD currently has various trademarks and trademark applications
registered and pending in the United States and certain other jurisdictions.
PubliCARD will continue to evaluate the registration of additional trademarks as
it deems appropriate. PubliCARD currently has a number of patents issued, and
various patent applications pending. There can be no assurance that any new
patents will be issued, that PubliCARD will develop proprietary products or
technologies that are patentable, that any issued patent will provide PubliCARD
with any competitive advantages or will not be challenged by third parties or
that the patents of others will not have a material adverse effect on
PubliCARD's business and operating results. See "Risk Factors -- Our proprietary
technology is difficult to protect and may infringe on the intellectual property
rights of third parties."
In the event that PubliCARD's technology or products are determined to
infringe upon the rights of others, PubliCARD could be required to cease using
such technology and stop selling such products, if PubliCARD were unable to
obtain licenses to use that technology. There can be no assurance that PubliCARD
would be able to obtain such licenses in a timely manner on acceptable terms and
conditions, and the failure to do so could have a material adverse effect on
PubliCARD's financial condition and results of operations. If PubliCARD is
unable to obtain such licenses, it could encounter significant delays in product
market introductions while it attempted to design around the infringed-upon
patents or rights, or could be forced to stop selling certain products. In
addition, patent disputes are common in the smart card and computer industries
and there can be no assurance that PubliCARD will have the financial resources
to enforce or defend a patent infringement or proprietary rights action.
PubliCARD expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in
PubliCARD's industry segments grow and the functionality of products in
different industry segments overlaps. Any such claim, with or without merit,
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<PAGE> 54
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, cause product shipment delays or require PubliCARD to
develop non-infringing technology or enter into royalty or licensing agreements
or to stop selling certain products. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to PubliCARD or at all. In
the event of a successful claim of product infringement against PubliCARD and
failure or inability of PubliCARD to develop non-infringing technology or
license the infringed or similar technology, PubliCARD's business, financial
condition and results of operations could be materially adversely affected. See
"Risk Factors -- Our proprietary technology is difficult to protect and may
infringe on the intellectual proprietary rights of third parties."
PubliCARD relies on certain software technology that it licenses from third
parties. For instance, PubliCARD relies on license agreements relating to its
PCDefender(TM), SmartPassky(TM), SmartRewards(TM) and SmartGuardian(TM)
products, among others. There can be no assurance that these third-party
licenses will continue to be available to PubliCARD on commercially reasonable
terms or at all. In addition, PubliCARD is to a certain extent dependent upon
such third parties' ability to enhance their current products and develop new
products on a timely and cost-effective basis that will meet changing customer
needs and respond to emerging industry standards and other technological
changes. There can be no assurance that PubliCARD would be able to replace the
functionality provided by the third-party technology currently used in
PubliCARD's products in the event that such technology becomes obsolete or
incompatible with future versions or enhancements of PubliCARD's products, or is
subject to claims by third parties of infringement of proprietary rights. The
loss of or inability to maintain any of these licenses or the inability of the
third parties to timely and cost-effectively enhance their products could result
in delays or reductions in product shipments by PubliCARD until equivalent
technology could be developed internally or identified, licensed and integrated,
or could force PubliCARD to stop selling certain products, either of which would
have a material adverse effect on PubliCARD's business, financial condition and
results of operations.
GOVERNMENT REGULATION
Market needs and competitive pressures require that PubliCARD's products
contain mathematical methods used to protect data or establish the genuineness
of data called cryptographic algorithms, in order to protect information and
cash substitutes stored in smart cards. The U.S. and many other governments
restrict the export of products containing "strong cryptography" for reasons of
national security. In the case of the U.S., "strong cryptography" means any
product exceeding 40 bits of symmetric algorithms or 512 bits of asymmetric
algorithms. Companies wishing to export products of this nature are subject to a
license requirement. PubliCARD's PCDefender(TM) product uses a 448 bit symmetric
key for its privacy function, and would therefore require a license for export.
Currently, PubliCARD does not export this product. However, if PubliCARD decides
to export PCDefender(TM), it could not do so without obtaining an export
license. Export, import and usage of such cryptographic algorithms are subject
to a large and changing body of regulations in the United States. PubliCARD's
failure to comply with any regulations that may be enacted with respect to
cryptographic algorithms could have a material adverse effect on its business.
Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases which may be used in PubliCARD's present
or future assembly processes. Moreover, changes in such environmental rules and
regulations may require PubliCARD to invest in capital equipment and implement
compliance programs in the future. Any failure by PubliCARD to comply with
environmental rules and regulations, including the discharge of hazardous
substances, would subject it to liabilities and would materially adversely
affect its operations.
DISCONTINUED OPERATIONS
In March 1999, PubliCARD's board of directors adopted a plan to dispose of
its engineering services subsidiary, OSM. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discontinued
Operation."
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<PAGE> 55
SEGMENT INFORMATION
During 1998, PubliCARD operated in two business segments: coin products and
technology products. Information about PubliCARD's operations by segment for the
years ended December 31, 1996, 1997 and 1998 is presented in the following
table. For 1996, 1997 and 1998, PubliCARD had export sales of approximately
$805,000, $1.0 million and $1.4 million, respectively. Such sales were
principally made into Canada and Europe.
FINANCIAL INFORMATION RELATING TO
SEGMENTS AND CLASSES OF PRODUCTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net Sales to Unaffiliated Customers:
Coin products............................................. $15,486 $17,039 $15,372
Technology products....................................... -- -- 1,147
------- ------- -------
$15,486 $17,039 $16,519
======= ======= =======
Income (Loss) from Operations:(1)
Coin products (2)......................................... $ (286) $ 3,090 $ 2,920
Technology products....................................... -- -- (814)
Corporate and other (3)................................... (4,886) (4,338) (6,538)
------- ------- -------
$(5,152) $(1,248) $(4,432)
======= ======= =======
Identifiable Assets:
Coin products............................................. $ 8,823 $ 9,614 $ 9,601
Technology products....................................... -- -- 8,918
Corporate and other....................................... 22,100 16,315 21,410
------- ------- -------
$30,923 $25,929 $39,929
======= ======= =======
Depreciation and Amortization Expense:
Coin products............................................. $ 350 $ 432 $ 329
Technology products....................................... -- -- 194
Corporate and other....................................... 89 80 228
------- ------- -------
$ 439 $ 512 $ 751
======= ======= =======
Capital Expenditures:
Coin products............................................. $ 1,109 $ 312 $ 180
Technology products....................................... -- -- 50
Corporate and other....................................... 38 19 80
------- ------- -------
$ 1,147 $ 331 $ 318
======= ======= =======
</TABLE>
- ---------------
(1) Before interest income, interest expense and items of a nonoperating nature.
(2) The 1996 loss from operations for the coin products segment includes a
special charge of $1.6 million associated with Greenwald Industries' plant
relocation.
(3) The 1997 loss from operations includes a non-cash charge of $768,000 related
to the modification and extension of certain common stock purchase warrants.
The 1998 loss from operations for corporate and other includes a charge of
$2.8 million to expense in-process research and development associated with
the acquisition of Tritheim.
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<PAGE> 56
EMPLOYEES
PubliCARD has approximately 185 employees engaged in manufacturing
operations, engineering, marketing, sales, service and administrative activities
at its continuing operations. Of these 185 employees, approximately 80 are
employed in the technology products segment and 90 are employed in the coin
products segment.
LEGAL PROCEEDINGS
Various legal proceedings are pending against PubliCARD, which PubliCARD
considers to be ordinary litigation incident to the character of its businesses.
Certain claims are covered by liability insurance. PubliCARD believes that the
resolution of those claims to the extent not covered by insurance will not,
individually or in the aggregate, have a material adverse effect on the
financial position or results of operations of PubliCARD.
FACILITIES
PubliCARD owns or leases the following facilities:
<TABLE>
<CAPTION>
EXPIRATION SQUARE
PREMISES PURPOSE LEASED/OWNED DATE FOOTAGE
- -------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Chester, CT Manufacturing and office space Owned N/A 119,000 (27
for Greenwald Industries and acres of
manufacturing operations of land)
Greenwald Intellicard
Boynton Beach, FL Office space for Greenwald Leased 2000 5,000
Intellicard
Santa Clara, CA Manufacturing and office space Leased 1999 9,000
for Amazing
London, England Sales office for Amazing Leased month-to-month 4,000
Los Gatos, CA Manufacturing and office space Leased 2001 7,000
for Greystone
Tarpon Springs, FL Office space for Tritheim Leased month-to-month 2,000
Tarpon Springs, FL Office space for Tritheim Leased 1999 1,000
Fairfield, CT Office space for Leased 2000 1,000
smartcardsource.com
Fairfield, CT Office space for PubliCARD Leased 2004 3,000
New York, NY Office space for PubliCARD Leased 2004 4,500
</TABLE>
54
<PAGE> 57
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of PubliCARD are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harry I. Freund 59 Chairman of the Board and Chairman
Jay S. Goldsmith 55 Vice Chairman of the Board and Vice Chairman
James J. Weis 50 Director, President and Chief Executive Officer
M. Richard Phillimore 53 Executive Vice President -- Smart Card Businesses
Antonio L. DeLise 38 Vice President, Chief Financial Officer and
Secretary
Clifford B. Cohn(1) 47 Director
David L. Herman(1) 85 Director
L.G. Schafran(1) 60 Director
Hatim A. Tyabji 54 Director
</TABLE>
- ---------------
(1) Member of the compensation committee and the audit committee.
HARRY I. FREUND has been a Director of PubliCARD since April 12, 1985,
Chairman of the Board of Directors since December 1985 and Chairman of PubliCARD
since October 1998. Since 1975, Mr. Freund has been Chairman of Balfour
Investors Inc., a merchant banking firm that had previously been engaged in a
general brokerage business.
JAY S. GOLDSMITH has been a Director of PubliCARD since April 12, 1985,
Vice Chairman of the Board of Directors since December 1985 and Vice Chairman of
PubliCARD since October 1998. Since 1975, Mr. Goldsmith has been President of
Balfour.
JAMES J. WEIS joined PubliCARD in September 1984 as Assistant to the
President. Mr. Weis was elected Vice President in November 1984, Chief Financial
Officer and Secretary in April 1986, Executive Vice President-Finance in August
1989 and President, Chief Executive Officer and Director In March 1995.
M. RICHARD PHILLIMORE was appointed Executive Vice President -- Smart Card
Businesses in January 1999. He was formerly Senior Vice President/Chip Business
Development with MasterCard International from February 1997 until December
1998, where he led the department responsible for MasterCard's global chip
strategy. From October 1989 until January 1997, Mr. Phillimore was Senior
Manager -- Chip Business Development at Europay International, where he was
responsible for development of chip and e-cash strategy for the European market.
ANTONIO L. DELISE, a Certified Public Accountant, joined PubliCARD in April
1995 as Vice President, Chief Financial Officer and Secretary. Prior to joining
PubliCARD, Mr. DeLise was employed as a Senior Manager with the firm of Arthur
Andersen LLP, where he had been employed from July 1983 through March 1995.
CLIFFORD B. COHN has been a Director of PubliCARD since July 31, 1980, and
was Vice President of Government Affairs of PubliCARD from April 1, 1982 to
November 20, 1984. Since 1977, Mr. Cohn has been engaged in the private practice
of law in Philadelphia, Pennsylvania. Mr. Cohn is a director of Leslie Fay
Company Ltd.
DAVID L. HERMAN has been a Director of PubliCARD since April 12, 1985. Mr.
Herman was President and Chief Executive Officer of PubliCARD from March 31,
1986 until March 8, 1995. Prior to 1986, Mr. Herman was an independent
consultant advising clients on the reorganization of businesses and potential
acquisitions. Mr. Herman is a director of Equitable Bag Co., Inc.
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<PAGE> 58
L.G. SCHAFRAN has been a Director of PubliCARD since December 3, 1986. Mr.
Schafran is the Managing General Partner of L.G. Schafran & Associates, a real
estate investment and development firm established in 1984. He was Chairman of
the Executive Committee of Dart Group Corporation from 1994 to October 1997 and
a director of Dart (and its publicly-traded subsidiaries) from 1993 to October
1997. Mr. Schafran is a director of COMSAT Corporation, Discovery Zone, Inc.,
Equitable Bag Co., Inc., Kasper A.S.L., LTD. and Tarragon Realty Advisors, Inc.,
and is Chairman of the Board of Delta-Omega Technologies, Inc.
HATIM A. TYABJI has been a Director of PubliCARD since March 16, 1999.
Since September 1998, Mr. Tyabji has been the Chairman and Chief Executive
Officer of Saraide.com, which provides mobile data services for the Internet and
the wireless communications industry. Mr. Tyabji was the Chairman, Chief
Executive Officer and President of VeriFone, Inc. from September 1986 until
March 1998. Mr. Tyabji is a director of each of Deluxe Corporation, Best Buy,
Bank of America Merchant Services, Novatel Wireless and Ariba Technologies.
TECHNOLOGY COMMITTEE
PubliCARD has established a Technology Committee comprised of internal
technology specialists together with invited leading industry experts drawn from
both commerce and academia. The role of the Technology Committee is to provide
PubliCARD with advice and counsel on the future technological and commercial
trends in the smart card industry. The primary functions of the Technology
Committee are to:
- plan PubliCARD's technological strategy;
- review and plan PubliCARD's overall corporate strategy;
- direct PubliCARD's continuing acquisition strategy; and
- develop synergies among PubliCARD's subsidiaries.
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<PAGE> 59
EXECUTIVE COMPENSATION
The following tables set forth information concerning the cash
compensation, stock options and retirement benefits provided to PubliCARD's
executive officers. The notes to these tables provide more specific information
concerning compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------- --------------------------
OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) SARS(#)(2) COMPENSATION
- --------------------------- ---- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Harry I. Freund(3).................. 1998 $325,000 $ -- -- $15,000(4)
Chairman 1997 325,000 -- 91,912 15,000(4)
1996 325,000 -- 125,000 15,000(4)
Jay S. Goldsmith(3)................. 1998 325,000 -- -- 22,966(4)
Vice Chairman 1997 325,000 -- 91,912 17,000(4)
1996 325,000 -- 125,000 17,000(4)
James J. Weis....................... 1998 325,000 250,000 140,000 7,604(5)
President, Chief Executive Officer 1997 325,000 162,500 -- 7,958(5)
and Director 1996 325,000 200,000 100,000 8,146(5)
Antonio L. DeLise................... 1998 183,611 100,000 75,000 5,861(6)
Vice President, 1997 163,700 67,000 -- 6,036(6)
Chief Financial Officer and 1996 149,561 85,000 50,000 6,727(6)
Secretary
</TABLE>
- ---------------
(1) Reflects bonus earned during the fiscal year. In some instances, all or a
portion of the bonus was paid during the next fiscal year.
(2) Options to acquire shares of common stock.
(3) On November 1, 1998, Messrs. Freund and Goldsmith were appointed executive
officers of PubliCARD with the titles of Chairman and Vice Chairman,
respectively. Prior to such time, Messrs. Freund and Goldsmith were
directors of PubliCARD with the titles of Chairman of the Board and Vice
Chairman of the Board, respectively; titles and positions which they still
hold in addition to their positions as executive officers of PubliCARD. For
the period prior to November 1, 1998, Messrs. Freund and Goldsmith received
compensation from PubliCARD solely in their capacities as directors of
PubliCARD. As Chairman of the Board and Vice Chairman of the Board, pursuant
to informal arrangements with PubliCARD, Messrs. Freund and Goldsmith each
received annual compensation at the rate of $325,000 per year. Commencing
November 1, 1998, Messrs. Freund and Goldsmith have received compensation
from PubliCARD at the same rate in their capacities as executive officers.
(4) Represents life insurance premiums paid on behalf of Mr. Freund and Mr.
Goldsmith for 1996, 1997 and 1998.
(5) Consists of $4,750, $4,750 and $4,800 in contributions to PubliCARD's 401(k)
plan for 1996, 1997 and 1998, respectively, and $3,396, $3,208 and $2,804
for term life and disability insurance premiums paid on behalf of Mr. Weis
for 1996, 1997 and 1998, respectively.
(6) Consists of $4,750, $4,750 and $4,800 in contributions to PubliCARD's 401(k)
plan for 1996, 1997 and 1998, respectively, and $1,977, $1,286 and $1,061
for term life and disability insurance payments paid on behalf of Mr. DeLise
for 1996, 1997 and 1998, respectively.
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<PAGE> 60
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants to
purchase shares of common stock to the following persons during the fiscal year
ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
TOTAL RATES OF STOCK PRICE
OPTIONS EXERCISE APPRECIATION FOR FIVE YEAR
OPTIONS GRANTED TO PRICE PER EXPIRATION OPTION TERM (1)
NAME GRANTED(3) EMPLOYEES SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Harry I. Freund................. -- -- -- -- -- --
Jay S. Goldsmith................ -- -- -- -- -- --
James J. Weis................... 140,000 24.8% $1.75 9/14/2003 $ 67,689 $ 149,575
Antonio L. DeLise............... 75,000 13.3% $1.75 9/14/2003 36,262 80,129
All shareholders(2)............. N/A N/A N/A N/A 8,162,301 18,036,551
Named officers' gain as % of all
shareholders' gain............ N/A N/A N/A N/A 1.27% 1.27%
</TABLE>
- ---------------
(1) The potential gain is calculated from the closing price of common stock of
$1.75 on September 14, 1998, the date of grant to executive officers. These
amounts represent certain assumed rates of appreciation only. Actual gains,
if any, on stock option exercises and common stock holdings are dependent on
the future performance of the common stock and overall market conditions.
There can be no assurance that the amounts reflected in this table will be
achieved.
(2) Based on the number of shares outstanding at December 31, 1998.
(3) Options granted under PubliCARD's 1993 Long-Term Incentive Plan expire five
years from the date of grant.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31, 1998
concerning exercisable and unexercisable stock options held by the following
persons:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE YEAR END FISCAL YEAR END(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Harry I. Freund............ 125,000 $7,812 541,912(2)/ -- $6,481,759/ --
Jay S. Goldsmith........... 125,000 7,812 541,912(2)/ -- 6,481,759/ --
James J. Weis.............. 60,000 1,875 400,000 / -- 4,913,750/ --
Antonio L. DeLise.......... -- -- 150,000 / -- 1,846,875/ --
</TABLE>
- ---------------
(1) These values are based on the December 31, 1998 closing price for
PubliCARD's common stock on the Nasdaq National Market of $14.00 per share.
(2) Excludes shares of common stock which may be acquired by Messrs. Freund and
Goldsmith through the exercise of stock purchase warrants in the amounts of
668,865 and 723,308, respectively.
RETIREMENT INCOME PLAN
Effective December 31, 1993, benefits under the PubliCARD Retirement Plan
were frozen. Accordingly, plan participants will accumulate no additional
credited service, and earnings subsequent to December 31, 1993 will no longer
have an impact on accumulated benefits. The annual benefits payable upon
retirement for Mr. Weis under this plan are $23,831. The foregoing amount is
based on a straight life annuity. Retirement benefits are payable at age 65 to
married employees in the form of a 50% joint and
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<PAGE> 61
survivor annuity with their spouses, at a reduced amount, unless they elect to
receive a straight life annuity. Single employees receive a straight life
annuity. The foregoing benefit amount is not subject to any deduction for
Federal Insurance Contributions Act or other offset amounts.
STOCK OPTION PLANS
Under the 1991 Stock Option Plan for directors, officers and key employees
adopted by shareholders of PubliCARD in 1992, PubliCARD has been authorized to
grant nonqualified stock options to purchase up to 750,000 shares of common
stock. Under the 1993 Long-Term Incentive Plan and the Non-employee Director
Stock Option Plan adopted by shareholders of PubliCARD in 1994, PubliCARD may
grant stock options, restricted stock options, stock appreciation rights,
performance awards and other stock-based awards equivalent to up to 3,550,000
shares of common stock. 247,500 shares of common stock in the aggregate are
currently available for grant under the 1991 Stock Option Plan, 1993 Long-Term
Incentive Plan and the Non-employee Director Stock Option Plan.
The plans are administered by the compensation committee of the board of
directors of PubliCARD, except the Non-employee Director Stock Option Plan,
which is administered by the board of directors. Subject to the express
provisions of the plans, the compensation committee of the board of directors
has full and final authority to determine the terms of all awards granted under
the plans including (a) the purchase price of the shares covered by each award,
(b) whether any payment will be required upon grant of the award, (c) the
individuals to whom, and the time at which, awards shall be granted, (d) the
number of shares to be subject to each award, (e) when an award can be exercised
and whether in whole or in installments, (f) whether the exercisability of the
awards is subject to risk of forfeiture or other condition and (g) whether the
stock issued upon exercise of an award is subject to repurchase by PubliCARD,
and the terms of such repurchase.
Under the 1991 Stock Option Plan, the term of options is for such period as
the compensation committee of the board of directors determines, but may not
exceed 12 years from the date of the option's grant. Under the 1993 Long-Term
Incentive Plan, the term of options granted are prescribed by the compensation
committee of the board of directors, but no stock option may be exercised after
five years from the date it is granted. There are currently 30,000 stock options
available for grant to directors who are not employees of PubliCARD under the
Non-employee Director Stock Option Plan.
During the year ended December 31, 1998, 215,000 stock options were granted
to executive officers of PubliCARD under the 1993 Long-Term Incentive Plan.
STOCK OPTION AGREEMENTS
In April 1985, PubliCARD issued 1.6 million shares of common stock at $2.50
per share in a private placement. Under the terms of the related agreement,
Balfour, the agent for the purchasers, received options to buy 400,000 shares of
PubliCARD's common stock at a price of $2.50 per share for five years, which
period was subsequently extended by ten years. Balfour subsequently transferred
the options to Messrs. Freund and Goldsmith, who currently hold them. In January
1996, PubliCARD issued options to Messrs. Cohn and Schafran to purchase a total
of 200,000 shares of PubliCARD's common stock at a price of $2.50 per share for
five years. None of these options had been exercised as of December 31, 1998.
On January 18, 1999, PubliCARD granted stock options to purchase an
aggregate of 200,000 shares of common stock to Mr. Phillimore. 100,000 of those
options are exercisable for five years beginning January 19, 2000 at $5.50 per
share. The remaining 100,000 of those options are exercisable for five years
beginning January 19, 2001 at $5.50 per share.
On March 16, 1999, PubliCARD granted stock options to purchase an aggregate
of 250,000 shares of common stock to Mr. Tyabji. 125,000 of those options are
exercisable for four years beginning March 16, 2000 at $9.75 per share. The
remaining 125,000 of those options are exercisable for three years beginning
March 16, 2001 at $9.75 per share.
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<PAGE> 62
COMPENSATION OF DIRECTORS; CERTAIN ARRANGEMENTS
Directors of PubliCARD are elected at each annual meeting of shareholders
to hold office until the next annual meeting of shareholders and until their
respective successors are duly elected and qualified. Executive officers are
elected to hold office until the first meeting of directors following the next
annual meeting of shareholders or until their successors are sooner elected by
the board of directors and qualified.
Directors who are not officers of PubliCARD are paid $2,500 per month for
services as directors and, in addition, $750 per day for each meeting of the
board of directors or of shareholders that they attended without regard to the
number of meetings attended each day.
EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS
In August 1987, PubliCARD entered into change of control agreements with
each of Messrs. Freund, Goldsmith, Herman and Weis, which agreements provide for
payments to them under certain circumstances following a change of control of
PubliCARD. These agreements were not adopted in response to any specific
acquisition of shares of PubliCARD or any other event threatening to bring about
a change of control of PubliCARD. For purposes of the agreements, a "change of
control" is defined as any of the following: (a) PubliCARD ceasing to be a
publicly owned corporation having at least 2,000 shareholders, (b) any person or
group acquiring in excess of 30% of the voting power of PubliCARD's securities,
(c) Messrs. Freund, Goldsmith, Herman, Cohn, Schafran and Weis and any other
director designated as a "continuing director" prior to his election as a
director by a majority of the foregoing persons (the "Continuing Directors")
ceasing for any reason to constitute at least a majority of the board of
directors, (d) PubliCARD merging or consolidating with any entity, unless
approved by a majority of the Continuing Directors or (e) the sale or transfer
of a substantial portion of PubliCARD's assets to another entity, unless
approved by a majority of the Continuing Directors.
In the event one of the above-named individuals: (a) is terminated as an
employee of PubliCARD for any reason other than conviction of a felony or any
act of fraud or embezzlement, is disabled for six consecutive months or dies,
(b) is not elected and maintained in the office which he now occupies, (c) is
not included by the board of directors in the slate of directors recommended to
shareholders, (d) receives a reduction in his salary or fringe benefits, (e)
experiences a change in his place of employment or is required to travel
excessively or (f) experiences other substantial, material and adverse changes
in conditions under which the individual's services are to be rendered, within
three years following a change of control, the individual will be entitled to
receive in a lump sum within 10 days of the date of discontinuance, a payment
equal to 2.99 times the individual's average annual compensation for the shorter
of (a) the five years preceding the change of control, or (b) the period the
individual received compensation from PubliCARD for personal services. Assuming
a change of control of PubliCARD and the discontinuance of an individual's
services were to occur at the present time, payments in the following amounts,
assuming there are no "excess parachute payments" as defined in the Internal
Revenue Code of 1986 (the "Code"), would be made pursuant to the change of
control agreements: Mr. Freund -- $942,709; Mr. Goldsmith -- $942,709; Mr.
Herman -- $394,376 and Mr. Weis -- $1,419,180. In the event any such payment,
either alone or together with others made in connection with the individual's
discontinuance, is considered to be an "excess parachute payment," the
individual is entitled to receive an additional payment in an amount which, when
added to the initial payment, results in a net benefit to the individual, after
giving effect to excise taxes imposed by Section 4999 of the Code and income
taxes on such additional payment, equal to the initial payment before such
additional payment. Since the change of control agreements would require large
cash payments to be made by any person or group effecting a change of control of
PubliCARD, absent the assent of a majority of the Continuing Directors, these
agreements may discourage hostile takeover attempts of PubliCARD.
The change of control agreements would have expired on December 1, 1998 but
have been and will continue to be automatically extended for a period of one
year on each December 1, unless terminated by either party prior to any December
1. In the event a change of control occurs while the change of control
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<PAGE> 63
agreements are in effect, the term of such agreements will automatically be
extended to three years from the date of the change of control and the foregoing
renewal option will become inapplicable.
PubliCARD has entered into an agreement with Mr. Weis which provides that,
in the event his employment is terminated without cause or is considered
terminated by reason of a change in Mr. Weis' duties which would require him to
relocate his principal residence, he will receive a continuation of salary
payments and all other employee benefits then provided him until the earlier of
one year from the date of notice of termination or the date upon which he begins
full-time employment with a new employer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors, which consists
entirely of directors who are not also officers of PubliCARD, reviews the
compensation of key employees of PubliCARD. The present members of the
compensation committee are David L. Herman, Chairman, Clifford B. Cohn and L.G.
Schafran. See "-- Compensation of Directors; Certain Arrangements,"
"-- Employment and Change of Control Agreements" and Notes 2 and 3 to the table
under "Principal Shareholders."
KEY MAN LIFE INSURANCE POLICIES
PubliCARD currently maintains key man insurance policies on the lives of
Messrs. Harry I. Freund, Jay S. Goldsmith and James J. Weis. The benefits
payable to PubliCARD upon the death of Mr. Freund, Mr. Goldsmith and Mr. Weis
are $1.0 million, $1.0 million and $2.0 million, respectively.
CERTAIN TRANSACTIONS
On March 8, 1995, following Mr. Herman's retirement as President of
PubliCARD, PubliCARD and Mr. Herman entered into an informal consulting
agreement pursuant to which Mr. Herman renders consulting services to the board
of directors of PubliCARD. The consulting agreement provides for a consulting
fee at a rate of $20,000 per year, payable in monthly installments. The services
rendered to PubliCARD by Mr. Herman include consultation on acquisitions and
divestitures, litigation and other matters. The consulting agreement is
terminable at any time by PubliCARD or Mr. Herman.
PubliCARD and Balfour are parties to a license agreement, dated as of
October 26, 1994, with respect to a portion of the office space leased by
PubliCARD in New York City. Messrs. Freund and Goldsmith are Chairman and
President, respectively, and the only shareholders of Balfour. The term of the
license agreement commenced on January 1, 1995 and will expire on June 30, 2004,
unless sooner terminated pursuant to law or the terms of the license agreement.
The license agreement provides for Balfour to pay PubliCARD an amount equal to
40% of the rent paid by PubliCARD under its lease, including base rent,
electricity, water, real estate tax escalations and operation and maintenance
escalations. In addition, Balfour has agreed to reimburse PubliCARD for 40% of
the cost of insurance which PubliCARD is obligated to maintain under the terms
of its lease with respect to the premises. In November 1998, Balfour's share of
rent and other costs was reduced to 20% due to an increase in the space utilized
by PubliCARD. The base rent payable by Balfour under the license agreement is
$3,745 per month through September 30, 1999, and $4,030 per month thereafter.
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<PAGE> 64
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of August 1, 1999, the beneficial
ownership of PubliCARD's common stock by (a) each person who owns of record or
is known by PubliCARD to own beneficially more than 5% of the common stock of
PubliCARD, (b) all directors, nominees and executive officers, individually and
(c) all directors, nominees and executive officers as a group. All information
with respect to beneficial ownership has been furnished to PubliCARD by the
respective shareholders of PubliCARD.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------------ ----------------------- ----------------
<S> <C> <C>
Harry I. Freund 2,328,959(2) 11.9%
Chairman of the Board of Directors and Chairman
Jay S. Goldsmith 2,352,552(3) 12.0%
Vice Chairman of the Board of Directors and Vice Chairman
James J. Weis 549,500(4) 2.9%
President, Chief Executive Officer and Director
Clifford B. Cohn 238,271(5) 1.3%
Director
David L. Herman 296,946(6) 1.6%
Director
L.G. Schafran 334,997(7) 1.8%
Director
Hatim A. Tyabji -- --
Director
Richard Phillimore 50,000(8) Less than 1%
Executive Vice President/Smart Card Businesses
Antonio L. DeLise 152,000(9) Less than 1%
Vice President, Chief Financial Officer and Secretary
All directors, nominees and officers as a group (9 persons) 6,303,225(10) 28.7%
</TABLE>
- ---------------
(1) Calculated in accordance with Rule 13d-3 adopted by the SEC under the
Securities Exchange Act of 1934.
(2) Includes shares of common stock which may be acquired by Mr. Freund within
60 days as follows: 541,912 shares through the exercise of stock options
and 668,865 shares through the exercise of stock purchase warrants. Also
includes 2,450 shares of common stock held by Mr. Freund's spouse over
which Mr. Freund has shared voting and investment power but as to which he
disclaims any beneficial interest. Also includes 273,625 shares that may be
deemed to be owned beneficially by Mr. Freund which are held by Balfour for
its clients in discretionary accounts, as to which Mr. Freund disclaims any
beneficial interest. Also includes 13,000 shares that may be deemed to be
owned beneficially by Mr. Freund which are held by the Balfour Defined
Benefits Pension Plan, for which Mr. Freund acts as trustee and plan
administrator, and in which he participates. Mr. Freund disclaims
beneficial ownership of 5,850 of such 13,000 shares. Messrs. Freund and
Goldsmith are Chairman and President, respectively, and the only
shareholders of Balfour. The discretionary clients of Balfour have the sole
power to vote and direct the vote of the shares held in their account.
Balfour and its discretionary clients have shared power to dispose of or
direct the disposition of the shares held in such clients' accounts. At
present, Balfour has the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of PubliCARD's
common stock for all of its discretionary clients.
(3) Includes shares of common stock which may be acquired by Mr. Goldsmith
within 60 days as follows: 541,912 shares through the exercise of stock
options and 723,308 shares through the exercise of stock purchase warrants.
Also includes 1,250 shares of common stock held by Mr. Goldsmith's
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<PAGE> 65
spouse over which Mr. Goldsmith has shared voting and investment power but
as to which he disclaims any beneficial interest, and includes 273,625
shares that may be deemed to be owned beneficially by Mr. Goldsmith which
are held by Balfour for its clients in discretionary accounts as to which
Mr. Goldsmith disclaims beneficial ownership. See Note 2 above. Also
includes 13,000 shares that may be deemed to be owned beneficially by Mr.
Goldsmith which are held by the Balfour Defined Benefits Pension Plan, for
which Mr. Goldsmith acts as trustee and plan administrator, and in which he
participates. Mr. Goldsmith disclaims beneficial ownership of 7,280 of such
13,000 shares.
(4) Includes 400,000 shares which may be acquired by Mr. Weis within 60 days
through the exercise of stock options.
(5) Includes 182,059 shares which may be acquired by Mr. Cohn within 60 days
through the exercise of stock options.
(6) Includes shares which may be acquired by Mr. Herman within 60 days as
follows: 142,058 shares through the exercise of stock options and 38,888
shares through the exercise of stock purchase warrants.
(7) Includes 182,059 shares which may be acquired by Mr. Schafran within 60
days through the exercise of stock options. Also includes 114,050 shares of
common stock and 38,888 shares of common stock that may be acquired through
the exercise of stock purchase warrants held by Mr. Schafran's spouse as to
which Mr. Schafran disclaims any beneficial interest.
(8) Represents 50,000 shares of common stock that Mr. Phillimore will be
entitled to receive in January 2000, on the one-year anniversary of his
employment with PubliCARD.
(9) Includes 150,000 shares which may be acquired by Mr. DeLise within 60 days
through the exercise of stock options.
(10) Includes shares of common stock which may be acquired by such persons
within 60 days as follows: 2,140,000 shares through the exercise of stock
options and 1,469,949 shares through the exercise of stock purchase
warrants.
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<PAGE> 66
SELLING SHAREHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of PubliCARD common stock as of August 1, 1999 by each
selling shareholder. The following table assumes that the selling shareholders
sell all of the shares registered under the registration statement of which this
prospectus forms a part and shown as beneficially owned by them. PubliCARD is
unable to determine the exact number of shares that actually will be sold.
The number and percentage of shares beneficially owned is based on
18,349,809 shares issued and outstanding at August 1, 1999, determined in
accordance with Rule 13d-3 of the Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rule, beneficial ownership includes any shares as to which the individual has
sole or shared voting power or investment power and also any shares which the
individual has the right to acquire within 60 days of August 1, 1999 through the
exercise of any stock option or other rights.
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF SHARES OF COMMON STOCK
COMMON STOCK COMMON BENEFICIALLY
BENEFICIALLY OWNED STOCK TO BE SOLD OWNED AFTER
PRIOR TO THIS OFFERING IN THIS OFFERING THIS OFFERING(1)
----------------------- ---------------- -----------------
SELLING SHAREHOLDER NUMBER PERCENT NUMBER PERCENT
- ------------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Salomon Smith Barney IRA Custodian for Anthony
W. Adams MD................................... 23,678 * 23,478 200 *
John E. and MaryAnn Aide........................ 23,478 * 23,478 0 0
David M. Alexander.............................. 10,000 * 10,000 0 0
Askham International LTD........................ 491,500 2.7 491,500(2) 0 0
Terry Bazzone................................... 987 * 987 0 0
Terry and Kelly Best............................ 1,096 * 1,096 0 0
Jay Bloom....................................... 40,000 * 40,000 0 0
Charles A. Brooks and Sandra S. Brooks, as
tenants by the entirety....................... 7,044 * 7,044 0 0
Robert Brotherton TTEE FBO Robert G.
Brotherton.................................... 18,782 * 18,782 0 0
Michael Bumpers................................. 10,000 * 10,000 0 0
Thomas E. Carson and Susan K. Carson............ 11,739 * 11,739 0 0
Bill Castle..................................... 3,859 * 3,859 0 0
Peter Chope..................................... 10,000 * 10,000 0 0
Gerald W. Coleman............................... 11,739 * 11,739 0 0
Terry and Frances Cooley........................ 1,503 * 1,503 0 0
Laura J. Craig.................................. 282 * 282 0 0
George P. Delucchi.............................. 5,000 * 5,000 0 0
Fidela Docena................................... 7,000 * 7,000 0 0
Egger Nominees.................................. 40,000 * 40,000 0 0
Michel H. and Marianne M. Elias................. 4,696 * 4,696 0 0
Stephen A. Ewald................................ 74,843 * 66,913(3) 7,930 *
FEHZ V Consulting, Inc. ........................ 7,000 * 7,000 0 0
James Forquer................................... 5,000 * 5,000 0 0
Machon Foster................................... 1,800 * 1,800 0 0
Michael Goddard................................. 429,900 2.3 90,000 129,900 *
Pierrette Goddard............................... 429,900 2.3 210,000 129,900 *
Andrew Heyer.................................... 56,000 * 40,000 6,000 *
Andrew R. Heyer, Trust for Harris Heyer......... 2,500 * 2,500 0 0
Andrew R. Heyer, Trust for James Heyer.......... 2,500 * 2,500 0 0
Andrew R. Heyer, Trust for Peter Heyer.......... 2,500 * 2,500 0 0
Andrew Heyer, Trust for William Heyer........... 2,500 * 2,500 0 0
Song Zun Huang.................................. 14,945 * 14,945 0 0
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF SHARES OF COMMON STOCK
COMMON STOCK COMMON BENEFICIALLY
BENEFICIALLY OWNED STOCK TO BE SOLD OWNED AFTER
PRIOR TO THIS OFFERING IN THIS OFFERING THIS OFFERING(1)
----------------------- ---------------- -----------------
SELLING SHAREHOLDER NUMBER PERCENT NUMBER PERCENT
- ------------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Cy Allen Hudson................................. 8,000 * 8,000 0 0
A. Daniel Jesselson 4/8/71 Trust................ 100,000 * 100,000 0 0
Benjamin J. Jesselson........................... 600,000 3.3 150,000 0 0
Michael G. Jesselson 12/18/80 Trust............. 200,000 1.1 200,000 0 0
October 1983 Trust FBO Jesselson
Grandchildren................................. 150,000 * 150,000 0 0
Joi B. Koulianos................................ 1,879 * 1,879 0 0
Philip La Marche................................ 11,739 * 11,739 0 0
Edward Levy..................................... 20,000 * 20,000 0 0
Paul S. Levy.................................... 40,000 * 40,000 0 0
Robert Martell.................................. 19,566 * 19,566 0 0
B.K. Marya...................................... 3,360 * 3,360(4) 0 0
Wayne and Alice Matthews........................ 1,835 * 987(3) 848 *
Jason Maynard................................... 100 * 100 0 0
Walter McLallen................................. 4,000 * 4,000 0 0
Kenneth Mellem.................................. 987 * 987 0 0
Joel Miller..................................... 5,000 * 2,500 0 0
Mario Monello................................... 40,000 * 40,000 0 0
Jack Nash....................................... 200,000 1.1 200,000 0 0
Joseph Oberzeir................................. 5,000 * 5,000 0 0
James Orris..................................... 10,000 * 10,000 0 0
Naomi J. Patterson.............................. 470 * 470 0 0
John C. Pauley.................................. 1,541 * 1,541 0 0
Joseph P. Poole................................. 18,783 * 7,044 0 0
Thomas V. Poole, Ann M. Poole, Joseph P. Poole,
as joint tenants.............................. 11,739 * 11,739 0 0
Vincent T. Poole................................ 91,452 * 84,521(3) 6,931 *
William Marc Postlewaite........................ 748,107 4.1 725,702(3)(5) 22,405 *
Rodger D. Powell................................ 4,696 * 4,696 0 0
Bruce Raben..................................... 12,000 * 12,000 0 0
Barry Radolan................................... 14,339 * 11,739 2,600 *
George Robinson................................. 58,915 * 58,915 0 0
John Ronan and Mary Poole....................... 4,696 * 4,696 0 0
Robert Schoenthal............................... 5,000 * 2,500 0 0
Winn Schwartau.................................. 987 * 987 0 0
Judith A. Scutt................................. 141 141 0 0
Lorri Segaux.................................... 5,000 * 5,000 0 0
Steven T. Shapiro............................... 5,000 * 5,000 0 0
Spira Family Investment Partnership............. 40,000 * 40,000 0 0
Bruce Spohler................................... 10,000 * 10,000 0 0
Bank of New York Trust and Depositary Company
Limited as Trustee of the St. James's Place
International Unit Trust...................... 220,000 1.2 220,000 0 0
Michael Steinhardt.............................. 400,000 2.2 400,000 0 0
Nicholas Streit................................. 5,000 * 5,000 0 0
Harold Taylor................................... 0 0 15,000(6) 0 0
Jay Carter Thomason............................. 282 * 282 0 0
John D. Thuet................................... 4,461 * 4,461 0 0
Bret Tobey...................................... 881 * 881 0 0
Dave M. and Joan Tobey.......................... 11,739 * 11,739 0 0
</TABLE>
65
<PAGE> 68
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF SHARES OF COMMON STOCK
COMMON STOCK COMMON BENEFICIALLY
BENEFICIALLY OWNED STOCK TO BE SOLD OWNED AFTER
PRIOR TO THIS OFFERING IN THIS OFFERING THIS OFFERING(1)
----------------------- ---------------- -----------------
SELLING SHAREHOLDER NUMBER PERCENT NUMBER PERCENT
- ------------------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
John Usher...................................... 583,920 3.2 583,920(7) 0 0
Yvonne Varga.................................... 11,192 * 9,392 1,800 *
Kim Vogel....................................... 397,956 2.2 375,648(3) 22,308 *
Leon M. Wagner IRA Rollover..................... 20,000 * 20,000 0 0
Gordon Watson................................... 10,000 * 10,000 0 0
Lawrence Weltman................................ 5,000 * 5,000 0 0
Donald Witmer................................... 61,538 * 57,976(8) 3,562 *
WHIM LLC........................................ 3,360 * 3,360(4) 0 0
Loveday Ziluca.................................. 3,000 * 3,000 0 0
Total........................................... 4,848,309
</TABLE>
- ---------------
(1) Assumes the maximum number of shares registered under the registration
statement of which this prospectus forms a part is sold.
(2) Includes 178,727 shares of common stock underlying currently-exercisable
options.
(3) Pursuant to the Tritheim Merger Agreement, these individuals agreed not to
sell, exchange, assign, transfer, pledge, encumber or otherwise dispose of
any shares of common stock received in connection with the acquisition of
Tritheim prior to November 25, 1999.
(4) Includes 1,222 shares of common stock underlying currently-exercisable
options.
(5) Mr. Postlewaite is the President of Tritheim.
(6) Represents shares underlying stock options which are not exercisable within
60 days from the date of this prospectus.
(7) Pursuant to the Greystone Merger Agreement, Mr. Usher agreed not to sell,
exchange, assign, transfer, pledge, encumber or otherwise dispose of any
shares of common stock received in connection with the acquisition of
Greystone prior to August 22, 1999. After August 22, 1999 and until
February 22, 2002, Mr. Usher may transfer the shares of common stock
received in connection with the acquisition of Greystone, subject to
certain volume limitations. Mr. Usher is the President and Chief Executive
Officer of Greystone.
(8) Includes 18,829 shares of common stock underlying currently-exercisable
options. Mr. Witmer is the President and Chief Executive Officer of
Amazing.
* Less than 1%.
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<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
CAPITAL STOCK
PubliCARD is authorized to issue 40,000,000 shares of common stock, par
value $.10 per share, 136,566 shares of preferred stock without par value and
1,000,000 shares of class A preferred stock without par value. As of the date of
this prospectus, no shares of the preferred stock or class A preferred stock
were outstanding. However, 300,000 shares of class A preferred stock have been
authorized and reserved for issuance in connection with the preferred stock
purchase rights described below.
COMMON STOCK
Each share of common stock is entitled to one vote upon all matters on
which shareholders are entitled to vote. Upon liquidation, such holders are
entitled to receive pro rata the assets of PubliCARD remaining after the
satisfaction of corporate liabilities and the payment of the liquidation
preference of any preferred stock or any series of class A preferred stock that
may be outstanding. The common stock has no preemptive rights.
Under Section 2541 et seq. of the PBCL, holders of common stock will be
entitled, under certain circumstances, to receive the fair value of their shares
from a controlling person or group. These rights are conditioned upon, among
other things, (a) the occurrence of a control transaction, which is the
acquisition by the controlling person or group with voting power of at least
twenty percent of the shares entitled to vote in an election of directors; (b)
demand being timely made by the shareholder and (c) the surrendering by the
shareholder of his shares to the controlling person or group.
PREFERRED STOCK
Under the terms of PubliCARD's Amended and Restated Articles of
Incorporation, so long as any preferred stock is outstanding, no dividend may be
declared or distribution made by purchase, redemption, payment to any sinking
fund or otherwise on the common stock, other than a dividend or distribution in
stock junior to the preferred stock, unless (a) all dividends shall have been
paid and sinking fund payments made on the preferred stock; (b) after giving
effect to the payment of the proposed dividends or distribution, the aggregate
of all dividends and distributions on the PubliCARD common stock subsequent to
December 31, 1944, plus all dividends paid or accrued and sinking fund payments
made or due on the preferred stock and any stock ranking prior to or on a parity
with the preferred stock subsequent to December 31, 1944, shall not exceed the
sum of the consolidated net earnings subsequent to December 31, 1944, plus the
aggregate net cash consideration received from the sale of any stock ranking
junior to the preferred stock subsequent to December 31, 1944; and (c) after
giving effect to the payment of the proposed dividend or distribution, the
consolidated net current assets shall be at least $10.0 million. No shares of
preferred stock are currently issued and outstanding.
PubliCARD may issue class A preferred stock in series having whatever
rights and preferences the board of directors may determine. One or more series
of class A preferred stock may be made convertible into PubliCARD common stock
at rates determined by the board of directors, and class A preferred stock may
be given priority over the PubliCARD common stock in payment of dividends,
rights on liquidation, voting and other rights. PubliCARD has not issued any
class A preferred stock and has no present plans to issue any class A preferred
stock; however, PubliCARD has reserved 300,000 shares of class A preferred
stock, designated "First Series," for issuance upon exercise of the rights
described below. Class A preferred stock may be issued from time to time upon
authorization of the board of directors without action of the shareholders.
On August 9, 1988, the board of directors of PubliCARD declared a dividend
distribution of one right (a "Right") for each outstanding share of PubliCARD
common stock to shareholders of record at the close of business on August 23,
1988. Each Right, the terms of which are set forth in an Amended and Restated
Rights Agreement, dated as of August 7, 1998, between PubliCARD and Continental
Stock Transfer & Trust Company (the "Rights Agreement"), entitles the registered
holder until August 8, 2008,
67
<PAGE> 70
unless earlier exercised by the holder or redeemed by PubliCARD, to purchase
from PubliCARD, at a price of $7.50 (the "Purchase Price"), subject to
adjustment, one-hundredth of a share of PubliCARD's class A preferred stock,
First Series. The Rights are evidenced by the PubliCARD common stock
certificates and will not be exercisable or transferable apart from the
PubliCARD common stock until the earlier of (a) the tenth day after a public
announcement that a person or group (an "Acquiring Person") has acquired
beneficial ownership of stock representing 20% or more of the voting power of
PubliCARD or (b) the tenth day after the commencement or announcement of a
tender offer or exchange offer by a person or group other than PubliCARD if,
upon consummation of such offer, such person or group would beneficially own
stock representing 30% or more of such voting power (the earlier of (a) and (b)
being called the "Distribution Date").
In the event that (a) an Acquiring Person, or persons affiliated or
associated with it, engages in one of a number of self-dealing transactions with
PubliCARD as specified in the Rights Agreement, (b) a person, together with
persons affiliated or associated with it, becomes the beneficial owner of 30% or
more of the outstanding common stock, (c) PubliCARD is the surviving corporation
in a merger with an Acquiring Person or an affiliate or associate of an
Acquiring Person and its common stock is not changed or exchanged or (d) if
there is an Acquiring Person, and any reclassification of securities, including
any reverse stock split, recapitalization of PubliCARD, merger or consolidation
involving PubliCARD or any subsidiary of PubliCARD, or any other transaction
other than a transaction described below which has the effect of increasing by
more than 1% the proportionate shares of equity securities or securities
convertible into equity securities of PubliCARD held by an Acquiring Person or
affiliate or associate of it, proper provision shall be made so that each holder
of a Right, except as provided below, shall thereafter have the right to
receive, upon exercise, PubliCARD common stock or, in certain circumstances as
determined by PubliCARD, other securities, cash, or other property having a
value equal to a multiple, calculated in accordance with the Rights Agreement,
of the Purchase Price. Notwithstanding the foregoing, any Rights beneficially
owned by an Acquiring Person or an affiliate or associate of an Acquiring
Person, or a transferee of a person who is or, in certain circumstances, becomes
an Acquiring Person, shall become null and void upon the first occurrence of an
event described in this paragraph and no holder of such Rights shall have any
right with respect to such Rights from and after such occurrence.
In the event that, following the Distribution Date, PubliCARD (a) engages
in a merger or other business combination transaction with another person in
which the PubliCARD common stock is changed, or exchanged, or (b) sells or
transfers 50% or more of its assets or earning power to another person, proper
provision shall be made so that each holder of a Right, other than rights that
theretofore become null and void as described in the preceding paragraph, shall
thereafter have the right to receive, upon exercise, common stock of such other
person (or in certain circumstances one of its affiliates) having a value equal
to a multiple, calculated in accordance with the Rights Agreement, of the
Purchase Price.
The class A preferred stock purchasable upon exercise of the Rights will be
nonredeemable and subordinate to other series of PubliCARD's preferred stock.
Each share of the class A preferred stock will be entitled to an aggregate
dividend of 100 times the dividend declared with respect to each share of the
PubliCARD common stock. In the event of liquidation, the holders of the class A
preferred stock will receive a preferred liquidation payment of $750.00 per
share, and will be entitled to receive an aggregate liquidation payment equal to
100 times the payment made per share of the PubliCARD common stock. Each share
of the class A preferred stock will have 100 votes, voting together with the
PubliCARD common stock. In the event of any merger, consolidation or other
transaction in which PubliCARD common stock is exchanged for or changed into
other stock or securities, cash or other property, it is required that provision
be made so that each share of the class A preferred stock will receive 100 times
the amount received per share of the PubliCARD common stock. Fractional shares
of the class A preferred stock in integral multiples of one one-hundredth of a
share will be issuable; however, to facilitate trading of such fractional
interests, it is presently intended that depositary receipts will be made
available.
The overall effect of the Rights, the undesignated voting rights of class A
preferred stock and of the rights of the holders of PubliCARD common stock under
Sections 2541 et seq. of the PBCL to receive the fair value of their shares upon
the occurrence of a control transaction within the meaning of such section
68
<PAGE> 71
will render more difficult the accomplishment of mergers or the assumption of
control by a principal shareholder, and thus make it more difficult to remove
current management. See "Risk Factors--Our articles of incorporation and
by-laws, certain change of control agreements, our rights plan and provisions of
Pennsylvania law could deter takeover attempts."
WARRANTS
In December 1986, PubliCARD issued $30.0 million of 13% subordinated notes
together with detachable warrants ("Warrants") to purchase 3,600,000 shares of
PubliCARD's common stock for five years, which period was subsequently extended
by five years. In addition, PubliCARD issued 1,200,000 underwriter's warrants
("Underwriter's Warrants") to purchase PubliCARD's common stock for five years,
which period was subsequently extended by five years. Each Warrant and
Underwriter's Warrant entitles its holder to purchase 1.024 shares of common
stock for $1.95 per share, subject to adjustment in certain circumstances.
Unexercised warrants were to expire on December 15, 1996 (December 17, 1996, in
the case of the Underwriter's Warrants).
On November 8, 1996, PubliCARD's board of directors, acting upon the
recommendation of a special committee of disinterested directors, determined it
would be in PubliCARD's best interests to modify the Warrants and Underwriter's
Warrants owned by any holder who exercises, at the current exercise price of
$1.95 per share of common stock, 25% of the Warrants owned on December 15, 1996
(December 17, 1996, in the case of the Underwriter's Warrants). On November 7,
1996, the closing price of PubliCARD's stock was $1.375 per share. PubliCARD's
shareholders subsequently approved the modification on July 2, 1997. As of July
2, 1997, a total of 2,257,050 Warrants and Underwriter's Warrants were
outstanding entitling the holders to purchase an aggregate of 2,311,220 shares
of common stock.
The modification resulted in the following changes to the holders'
unexercised Warrants and Underwriter's Warrants (i.e., the 75% balance of the
Warrants and Underwriter's Warrants owned on December 15, 1996 or December 17,
1996, as the case may be) (the "Remaining Modified Warrants"):
(a) Five-Year Extension. The expiration date of the holders' Remaining
Modified Warrants was extended to July 2, 2002.
(b) Increased Exercise Price. Subject to certain reset provisions, the
exercise price of the holders' Remaining Modified Warrants was increased from
$1.95 per share to (a) $2.00 per share during the year ending July 2, 1998, (b)
$2.10 per share during the year ending July 2, 1999, (c) $2.20 per share during
the year ending July 2, 2000, (d) $2.30 per share during the year ending July 2,
2001 and (e) $2.40 per share during the year ending July 2, 2002.
In September 1997, a total of 486,912 shares of common stock were issued
pursuant to the exercise of 475,500 warrants. The net proceeds received amounted
to $927,000. As of June 30, 1999, there were 1,426,500 Remaining Modified
Warrants. Members of PubliCARD's board of directors hold 1,417,500 of the
Remaining Modified Warrants. Pursuant to the terms of the Warrant and
Underwriter's Warrant agreements, an adjustment to the number of Warrants and
Underwriter's Warrants purchasable is required if the issuance of options would
result in an increase or decrease of at least 1% of the warrant price. Pursuant
to certain reset provisions, in January 1999, the number of shares of common
stock purchasable upon the exercise of each Warrant and Underwriter's Warrant
increased to 1.037 and the exercise price per share decreased to $2.07. On July
2, 1999, the exercise price per share increased to $2.17.
PENNSYLVANIA ANTI-TAKEOVER LAWS
The PBCL contains provisions applicable to publicly-held Pennsylvania
corporations that may be deemed to have an anti-takeover effect. The following
is a description of the provisions of the PBCL that are applicable to PubliCARD.
Under Section 1715 of the PBCL, directors of a corporation are not required
to regard the interests of the shareholders as being dominant or controlling in
considering the best interests of the corporation. The
69
<PAGE> 72
directors may consider, to the extent they deem appropriate, such factors as the
effects of any action upon any group affected by such action (including
shareholders, employees, suppliers, customers and creditors of the corporation
and upon communities in which offices or other establishments of the corporation
are located); the short-term and long-term interests of the corporation
(including benefits that may accrue to the corporation from its long-term plans
and the possibility that these interests may be best served by the continued
independence of the corporation); the resources, intent and conduct of any
person seeking to acquire control of the corporation; and all other pertinent
factors. Section 1715 of the PBCL further provides that any act of the board of
directors, a committee of the board or an individual director relating to or
affecting an acquisition or potential or proposed acquisition of control to
which a majority of disinterested directors have assented will be presumed to
satisfy the standard of care set forth in the PBCL, unless it is proven by clear
and convincing evidence that the disinterested directors did not consent to such
act in good faith after reasonable investigation. As a result of this and the
other provisions of Section 1715 of the PBCL, directors are provided with broad
discretion with respect to actions that may be taken in response to acquisitions
or proposed acquisitions of corporate control.
Under Section 2513 of the PBCL, a corporation when creating and issuing any
securities, contracts, warrants or other instruments evidencing any shares,
option rights, securities having conversion or option rights or obligations
relating to stock rights and options may set forth therein such terms as are
fixed by the board of directors, including, without limiting the generality of
such authority, conditions including, but not limited to, conditions that
preclude or limit any person or persons owning or offering to acquire a
specified number or percentage of the outstanding shares of common stock, other
stock, option rights, securities having conversion or option rights or
obligations of the corporation or transferee or transferees of the person or
persons from exercising, converting, transferring or receiving the shares,
option rights, securities having conversion or option rights or obligations.
Such authority allows the board of directors of the corporation to create
"poison pills" on terms fixed by the board of directors.
Generally, subchapters 25E, F, G, H, I and J of the PBCL place certain
procedural requirements and establish certain restrictions upon the acquisition
of voting shares of a corporation which would entitle the acquiring person to
cast or direct the casting of a certain percentage of votes in an election of
directors. Subchapter 25E of the PBCL provides generally that, if a corporation
were involved in a "control transaction," shareholders of the corporation would
have the right to demand from a "controlling person or group" payment of the
fair value of their shares. For purposes of subchapter 25E, a "controlling
person or group" is a person or group of persons acting in concert that, through
voting shares, has voting power over at least 20% of the votes which
shareholders of the corporation would be entitled to cast in the election of
directors. A "control transaction" arises, in general, when a person or group
acquires the status of a controlling person or group.
In general, Subchapter 25F of the PBCL delays for five years and imposes
conditions upon "business combinations" between an "interested shareholder" and
the corporation in which such shareholder has an interest. The term "business
combination" is defined broadly to include various merger, consolidation,
division, exchange or sale transactions, including transactions utilizing the
corporation's assets for purchase price amortization or refinancing purposes. An
"interested shareholder," in general, is a beneficial owner of at least 20% of
the corporation's voting shares.
In general, Subchapter 25G of the PBCL suspends the voting rights of the
"control shares" of a shareholder that acquires for the first time 20% or more,
33 1/3% or more or 50% or more of a corporation's shares entitled to be voted in
an election of directors. The voting rights of the control shares generally
remain suspended until such time as the "disinterested" shareholders of the
corporation vote to restore the voting power of the acquiring shareholder.
Subchapter 25H of the PBCL provides for the recovery by a corporation, in
certain circumstances, of profits made upon the sale of its common stock by a
"controlling person or group" if the sale occurs within 18 months after the
controlling person or group became such and the common stock was acquired during
such 18 month period or within 24 months before such period. In general, for
purposes of Subchapter 25H, a "controlling person or group" is a person or group
that:
70
<PAGE> 73
(a) has acquired;
(b) offered to acquire; or
(c) publicly disclosed or caused to be disclosed an intention to acquire
voting power over shares that would entitle such person or group to cast at
least 20% of the votes that shareholders of the corporation would be entitled to
cast in the election of directors.
If the disinterested shareholders of a corporation vote to restore the
voting power of a shareholder who acquires control shares subject to Subchapter
25G, such corporation would then be subject to subchapters 25I and J of the
PBCL. Subchapter 25I generally provides for a minimum severance payment to
certain employees terminated within two years of such approval. Subchapter 25J,
in general, prohibits the abrogation of certain labor contracts prior to their
stated date of expiration.
The above sections and subchapters of the PBCL may discourage open market
purchases of PubliCARD's common stock or a non-negotiated tender or exchange
offer for PubliCARD's common stock and, accordingly, may be considered
disadvantageous by a shareholder who would desire to participate in any such
transaction. In addition, the provisions of such sections and subchapters may
have a depressive effect on the price of PubliCARD's common stock.
The descriptions of the above sections and subchapters of the PBCL
summarize the material anti-takeover provisions contained in the PBCL, but are
not a complete discussion of those provisions.
TRANSFER AGENT, REGISTRAR, AND WARRANT AGENT
PubliCARD serves as the warrant agent. The transfer agent and registrar for
PubliCARD's common stock and preferred stock is Continental Stock Transfer &
Trust Company, New York, New York.
71
<PAGE> 74
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of PubliCARD's common stock in the public market, or the
issuance of shares of common stock upon the exercise of stock options and
warrants, or otherwise, could adversely affect the market price of PubliCARD's
common stock and impair its ability to raise capital through the sale of equity
or equity-related securities. As of the date of this prospectus the following
number of shares of common stock will be issued or issuable:
<TABLE>
<S> <C>
Issued and outstanding.................................... 18,349,809
Issuable upon exercise of currently-exercisable stock
options and warrants(1)................................ 4,307,267
Issuable upon exercise of outstanding stock options and
warrants, whether or not currently-exercisable(2)...... 5,777,457
Restricted stock(3)....................................... 56,666
</TABLE>
- ---------------
(1) Currently exercisable at exercise prices ranging from $1.12 to $10.25 per
share.
(2) Of these, 512,718 become exercisable during the remainder of 1999 and in
2000 at exercise prices ranging from $1.12 to $12.50 per share; 723,545
become exercisable in 2001 at exercise prices ranging from $1.12 to $12.50
per share; and 233,927 become exercisable in 2002 and thereafter at exercise
prices ranging from $1.12 to $10.75 per share.
(3) Includes 50,000 shares of common stock that Mr. Phillimore will be entitled
to receive in January 2000.
Of the unissued shares and the shares held by non-affiliates identified in
the table above, 4,169,949 are "restricted securities" within the meaning of
Rule 144 under the Securities Act, and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available. Such restricted securities will be eligible for sale in the public
market subject to compliance with Rule 144. In addition, other exemptions may be
available for sales of such restricted securities held by non-affiliates of
PubliCARD.
In general, under Rule 144 of the Securities Act, as currently in effect, a
person (or persons whose shares are required to be aggregated) who has
beneficially owned "restricted securities" for at least one year, including a
person who may be deemed an "affiliate," is entitled to sell, within any
three-month period, a number of shares of common stock that does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly reported trading volume of the common stock during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the SEC pursuant to Rule 144 (or, if no such notice is required, the date of
receipt of the order to execute the transaction by the broker or the date of
execution of the transaction directly with a market maker). Sales under Rule 144
are also subject to certain other requirements relating to manner of sale,
notice of sale and availability of current public information with respect to
PubliCARD. A person (or persons whose shares are required to be aggregated) who
is not and has not been an "affiliate" of PubliCARD at any time during the three
months preceding a sale is entitled to sell such shares of common stock under
Rule 144 without regard to the volume limitations described above, provided that
two years have elapsed since the date on which such restricted shares of common
stock were acquired from PubliCARD or the date on which they were acquired from
an affiliate of PubliCARD. The foregoing summary of Rule 144 is not intended to
be a complete description thereof.
No prediction can be made as to the effect, if any, that market sales of
shares of common stock, or the availability of such shares of common stock for
sale, will have on the market price of the shares of common stock prevailing
from time to time. Nevertheless, sales of substantial amounts of shares of
common stock in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices for the shares of common
stock and could impair PubliCARD's ability to raise capital through an offering
of its equity securities.
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<PAGE> 75
PLAN OF DISTRIBUTION
A total of 4,848,309 shares, including shares underlying stock options, of
PubliCARD common stock may be offered and sold from time to time by the selling
shareholders under this prospectus. Each selling shareholder will act
independently from PubliCARD in making decisions with respect to the timing,
manner and size of each sale. Each selling shareholder may sell all or a portion
of the shares owned by him from time to time through the Nasdaq National Market
and may sell shares of PubliCARD common stock to or through one or more
broker-dealers at prices prevailing on the Nasdaq National Market at the times
of such sales. Each selling shareholder may also make private sales directly or
through one or more broker-dealers. Broker-dealers participating in such
transactions may receive compensation in the form of discounts, concessions or
commissions from the selling shareholder effecting such sales. The selling
shareholders and any broker-dealers who act in connection with sales of
PubliCARD common stock may be deemed to be "underwriters" as that term is
defined in the Securities Act, and any commissions received by them and profit
on any resale of the shares of PubliCARD common stock might be deemed to be
underwriting discounts and commissions under the Securities Act. In effecting
sales, broker-dealers engaged by a selling shareholder may arrange for other
broker-dealers to participate.
The selling shareholders will pay all discounts and selling commissions, if
any, fees and expenses of counsel and other advisors to the selling
shareholders, or any of them, and any other expenses incurred in connection with
the registration and sale of the PubliCARD common stock, other than the
registration fee payable to the SEC hereunder, the listing fee to be paid for
listing the shares of PubliCARD common stock on the Nasdaq National Market, fees
and expenses relating to the registration or qualification of the shares of
PubliCARD common stock pursuant to any applicable state securities or "blue sky"
laws and the fees and expenses of PubliCARD's counsel and independent
accountants, which will be paid by PubliCARD.
LEGAL MATTERS
The validity of the common stock being offered hereby is being passed upon
for PubliCARD by Schnader Harrison Segal & Lewis LLP, Philadelphia,
Pennsylvania. In addition, certain other matters in connection with this
offering will be passed upon for PubliCARD by Kaye, Scholer, Fierman, Hays &
Handler, LLP, New York, New York.
EXPERTS
The audited financial statements included in this prospectus and related
registration statement and incorporated by reference from PubliCARD's Annual
Report on Form 10-K for the year ended December 31, 1998, as amended, have been
audited by Arthur Andersen LLP, independent auditors, as set forth in their
reports thereon appearing therein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
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<PAGE> 76
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Income (Loss) for the years ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
AMAZING! SMART CARD TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-22
Balance Sheets as of December 31, 1997 and 1998............. F-23
Statements of Operations for each year of the two year
period ended December 31, 1998............................ F-24
Statements of Shareholders' Deficit for each year of the
three year period ended December 31, 1998................. F-25
Statements of Cash Flows for each year of the two year
period ended December 31, 1998............................ F-26
Notes to Financial Statements............................... F-27
GREYSTONE PERIPHERALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-32
Consolidated Balance Sheet as of December 31, 1998.......... F-33
Consolidated Statement of Operations for the year ended
December 31, 1998......................................... F-34
Consolidated Statement of Shareholders' Equity for the year
ended December 31, 1998................................... F-35
Consolidated Statement of Cash Flows for the year ended
December 31, 1998......................................... F-36
Notes to Consolidated Financial Statements.................. F-37
TRITHEIM TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......... F-41
Balance Sheet as of December 31, 1997....................... F-42
Statement of Operations as of December 31, 1997............. F-43
Statement of Changes in Stockholders' Deficit for the year
ended December 31, 1997................................... F-44
Statement of Cash Flows for the year ended December 31,
1997...................................................... F-45
Notes to Financial Statements............................... F-46
Balance Sheet as of September 30, 1998 (unaudited).......... F-51
Statement of Operations for the nine month periods ended
September 30, 1997 and September 30, 1998 (unaudited)..... F-52
Statement of Changes in Stockholders' Deficit for the nine
month periods ended September 30, 1997 and September 30,
1998 (unaudited).......................................... F-53
Statement of Cash Flows for the nine month periods ended
September 30, 1997 and September 30, 1998 (unaudited)..... F-54
Notes to Unaudited Financial Statements..................... F-55
</TABLE>
F-1
<PAGE> 77
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PubliCARD, Inc.:
We have audited the accompanying consolidated balance sheets of PubliCARD,
Inc. (a Pennsylvania corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related consolidated statements of income (loss),
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PubliCARD, Inc. and
subsidiary companies as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 26, 1999
F-2
<PAGE> 78
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash, including short-term investments of $17,547 in 1998
and $11,779 in 1997 (Note 1)........................... $ 18,482 $ 13,077
Trade receivables, less allowance for doubtful accounts
(1998 -- $74; 1997 -- $36) (Note 1).................... 1,988 2,136
Inventories (Note 1)...................................... 2,810 2,461
Net assets of discontinued operations (Note 10)........... 1,518 1,292
Other..................................................... 481 592
-------- --------
Total current assets.............................. 25,279 19,558
-------- --------
Property, plant and equipment (Note 1):
Land...................................................... 234 234
Buildings and leasehold improvements...................... 2,377 2,331
Machinery and equipment................................... 2,656 2,306
Less -- accumulated depreciation.......................... (1,661) (1,289)
-------- --------
3,606 3,582
-------- --------
Goodwill (Note 1)........................................... 9,781 1,376
Other assets (Note 6)....................................... 1,262 1,413
-------- --------
$ 39,928 $ 25,929
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 3)............. $ 147 $ 134
Trade accounts payable.................................... 1,331 810
Accrued liabilities (Notes 6 and 8)....................... 4,384 3,807
-------- --------
Total current liabilities......................... 5,862 4,751
Long-term debt (Note 3)..................................... 991 1,138
Other non-current liabilities (Notes 6 and 8)............... 7,780 9,167
-------- --------
Total liabilities................................. 14,633 15,056
-------- --------
Redeemable shares (Note 2).................................. 3,378 --
-------- --------
Shareholders' equity (Notes 4 and 7):
Common shares, $0.10 par value, Authorized -- 40,000,000
shares Issued -- 20,300,954 shares in 1998 and
16,551,849 shares in 1997.............................. 2,030 1,655
Additional paid-in capital................................ 67,091 49,915
Accumulated deficit....................................... (38,891) (32,816)
Common shares held in treasury, at cost................... (8,207) (7,881)
Unearned compensation..................................... (106) --
-------- --------
Total shareholders' equity........................ 21,917 10,873
-------- --------
$ 39,928 $ 25,929
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE> 79
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $16,519 $17,039 $15,486
Cost of sales............................................... 10,906 11,264 11,659
------- ------- -------
Gross margin.............................................. 5,613 5,775 3,827
------- ------- -------
Operating expenses:
General and administrative................................ 5,488 4,976 6,338
Sales and marketing....................................... 792 796 768
Product development....................................... 740 441 235
In-process research and development....................... 2,800 -- --
Goodwill amortization..................................... 225 42 42
Warrant expense (Note 7).................................. -- 768 --
Relocation charge (Note 11)............................... -- -- 1,596
------- ------- -------
10,045 7,023 8,979
------- ------- -------
Income (loss) from operations............................... (4,432) (1,248) (5,152)
------- ------- -------
Other income (expenses):
Interest income........................................... 551 683 476
Interest expense.......................................... (339) (370) (815)
Cost of pensions -- nonoperating (Note 6)................. (846) (768) (769)
Other (expense) income (Note 11).......................... (1,021) (200) 203
------- ------- -------
(1,655) (655) (905)
------- ------- -------
Income (loss) from continuing operations before income
taxes..................................................... (6,087) (1,903) (6,057)
Income tax benefit.......................................... -- -- 2,544
------- ------- -------
Income (loss) from continuing operations.................... (6,087) (1,903) (3,513)
Discontinued operations (Note 10):
Income from discontinued operations, net of income
taxes.................................................. 12 215 1,725
Gain on sale of discontinued operations, net of income
taxes.................................................. -- 609 12,783
------- ------- -------
Net income (loss)........................................... $(6,075) $(1,079) $10,995
======= ======= =======
Basic earnings (loss) per common share (Note 1):
Continuing operations..................................... $ (.44) $ (.14) $ (.23)
Discontinued operations................................... -- .06 .95
------- ------- -------
$ (.44) $ (.08) $ .72
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 80
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON SHARES
------------------- ADDITIONAL ACCUMULATED COMMON
SHARES PAID-IN DEFICIT TREASURY UNEARNED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL SINCE 1-1-84 SHARES(1) COMPENSATION EQUITY
---------- ------ ---------- ------------ --------- ------------ -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1995..... 15,405,937 $1,541 $42,488 $(42,732) $(3,891) $ -- $(2,594)
Common shares issued under stock
option plans................... 632,000 63 583 -- -- -- 646
Purchase of common shares........ -- -- -- -- (220) -- (220)
Net income....................... -- -- -- 10,995 -- -- 10,995
Charge in lieu of income taxes
(Note 5)....................... -- -- 5,169 -- -- -- 5,169
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1996..... 16,037,937 1,604 48,240 (31,737) (4,111) -- 13,996
Common shares issued under stock
option plans................... 27,000 2 29 -- -- -- 31
Common shares issued pursuant to
exercise of stock purchase
warrants....................... 486,912 49 878 -- -- -- 927
Expense related to extension of
common stock purchase
warrants....................... -- -- 768 -- -- -- 768
Purchase of common shares........ -- -- -- -- (3,770) -- (3,770)
Net loss......................... -- -- -- (1,079) -- -- (1,079)
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1997..... 16,551,849 1,655 49,915 (32,816) (7,881) -- 10,873
Common shares issued under stock
option plans................... 433,000 43 606 -- -- -- 649
Common shares issued in a private
placement...................... 2,059,000 206 10,079 -- -- -- 10,285
Common shares issued for a
business acquisition........... 1,253,771 126 8,261 -- -- -- 8,387
Issuance of restricted shares and
grant of stock options to
consultants.................... 3,334 -- 251 -- -- (251) --
Amortization of unearned
compensation................... -- -- -- -- -- 145 145
Market adjustment to redeemable
shares......................... -- -- (2,021) -- -- -- (2,021)
Purchase of common shares........ -- -- -- -- (326) -- (326)
Net loss......................... -- -- -- (6,075) -- -- (6,075)
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1998..... 20,300,954 $2,030 $67,091 $(38,891) $(8,207) $(106) $21,917
========== ====== ======= ======== ======= ===== =======
</TABLE>
- ---------------
(1) Represents common shares held in treasury of 3,660,252 at December 31, 1998,
3,440,252 at December 31, 1997 and 678,352 at December 31, 1996.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 81
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations........................... $(6,087) $(1,903) $ (3,513)
Adjustments to reconcile loss to net cash used in
continuing operations:
In-process research and development.................... 2,800 -- --
Amortization of goodwill............................... 225 42 42
Amortization of unearned compensation.................. 145 -- --
Depreciation........................................... 384 470 497
Warrant expense........................................ -- 768 --
Income tax benefit..................................... -- -- (2,544)
Gain on sale of assets................................. -- -- (290)
Changes in operating assets and liabilities (Note
12).................................................. (537) (2,424) (5,634)
------- ------- --------
Net cash used in continuing operations............... (3,070) (3,047) (11,442)
------- ------- --------
Income from discontinued operations....................... 12 824 14,508
Adjustments to reconcile income to net cash used in
discontinued operations:
Gain on sale of discontinued operations................ -- (609) (19,251)
Charge in lieu of income taxes......................... -- -- 7,713
Change in net assets of discontinued operations........ (257) (264) (6,517)
------- ------- --------
Net cash used in discontinued operations............. (245) (49) (3,547)
------- ------- --------
Net cash used in operating activities................ (3,315) (3,096) (14,989)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired........... (1,467) -- --
Proceeds from sale of discontinued operations............. 31 1,488 45,852
Proceeds from sale of assets.............................. -- -- 601
Capital expenditures...................................... (318) (331) (1,147)
------- ------- --------
Net cash provided by (used in) investing
activities........................................ (1,754) 1,157 45,306
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common shares.......... 10,285 -- --
Repurchase or redemption of 13% Subordinated Notes........ -- -- (7,500)
Repayments under revolving credit lines................... -- -- (3,502)
Repayment of term loans and notes payable................. (134) (490) (2,297)
Issuance of common shares pursuant to stock option
exercises.............................................. 649 958 646
Purchase of treasury shares............................... (326) (3,770) (220)
------- ------- --------
Net cash provided by (used in) financing
activities........................................ 10,474 (3,302) (12,873)
------- ------- --------
NET INCREASE (DECREASE) IN CASH............................. 5,405 (5,241) 17,444
CASH -- BEGINNING OF PERIOD................................. 13,077 18,318 874
------- ------- --------
CASH -- END OF PERIOD....................................... $18,482 $13,077 $ 18,318
======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 82
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
PubliCARD, Inc. ("PubliCARD") was incorporated in the Commonwealth of
Pennsylvania in 1913. The Company was known as Publicker Industries Inc. until
1998, when its name was changed to PubliCARD, Inc. During 1998, the Company
operated in two segments: technology products and coin products. For 1998, the
Company's technology products segment consisted of two subsidiary companies,
Greenwald Intellicard, Inc. ("Greenwald Intellicard") and Tritheim Technologies,
Inc. ("Tritheim"), which design, manufacture and market smart card readers and
writers, value transfer stations, card management and other software
applications designed for a wide variety of applications including commercial
laundry, electronic commerce and computer security. The Company's coin products
segment consists of one subsidiary company, Greenwald Industries, Inc.
("Greenwald Industries") which designs and manufactures coin meter systems used
primarily in the commercial laundry appliance industry. The term "Company"
refers to PubliCARD, Greenwald Intellicard, Tritheim, Greenwald Industries and
PubliCARD's other consolidated subsidiaries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PubliCARD and
its majority-owned subsidiaries. All significant intercompany transactions are
eliminated in consolidation.
SHORT-TERM INVESTMENTS
Short-term investments consist of certain liquid instruments with original
maturities of three months or less including U.S. Treasury obligations,
repurchase agreements and money market funds.
INVENTORIES
Inventories are recorded at cost, determined on a first-in, first-out, or
FIFO, basis and do not exceed net realizable values. Inventories at December 31,
1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies................................. $1,756 $1,407
Work in process............................................ 214 282
Finished goods............................................. 840 772
------ ------
$2,810 $2,461
====== ======
</TABLE>
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation and amortization is computed using
the straight-line method over estimated useful lives of 3 to 7 years for
machinery and equipment and 7 to 39 years for buildings and leasehold
improvements.
Goodwill is the excess of the purchase price and related costs over the
value assigned to the net tangible assets of the businesses acquired. Goodwill
is amortized on a straight-line basis over periods ranging from five to forty
years. Accumulated amortization was $525,000 and $300,000 as of December 31,
1998 and 1997, respectively. At each balance sheet date, the Company evaluates
the realizability of goodwill based upon expectations of non-discounted cash
flows and operating income for each subsidiary
F-7
<PAGE> 83
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
having a goodwill balance. Based upon its most recent analysis, the Company
believes that no impairment of goodwill exists at December 31, 1998.
REVENUE RECOGNITION
Sales from product sales are recorded upon shipment of the product.
Provisions are recorded for estimated warranty repairs, returns and bad debts at
the time the products are shipped.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and has provided in Note 7
the pro forma disclosures of the effect on net income (loss) and earnings (loss)
per common share as if the fair value-based method had been applied in measuring
compensation expense.
USE OF ESTIMATES
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. While all available information has been considered,
actual amounts could differ from those reported.
COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. This
standard is effective for the Company's 1998 fiscal year. The adoption of SFAS
130 had no impact on the Company's 1998 consolidated results of operations,
financial position or cash flows.
SEGMENT DATA
During 1998, the Company adopted SFAS No. 131 Disclosures about Segments of
an Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The adoption of SFAS 131 did not affect results of
operations or the financial position of PubliCARD but did affect the disclosure
of segment information (See Note 9).
EARNINGS (LOSS) PER COMMON SHARE
During 1997, the Company adopted SFAS No. 128 Earnings Per Share. Basic net
income (loss) per common share is based on net income divided by the weighted
average number of common shares outstanding during each year (13,716,243 in
1998, 14,057,396 in 1997 and 15,294,504 in 1996). Diluted net income (loss) per
common share assumes issuance of the net incremental shares from stock options
and warrants at the later of the beginning of the year or date of issuance.
Diluted net income (loss) per share was not computed for 1998, 1997 and 1996 as
the effect of stock options and warrants were antidilutive.
F-8
<PAGE> 84
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including cash and short-term
investments, accounts receivable and accounts payable approximated fair value as
of December 31, 1998, because of the relatively short maturity of these
instruments. The Company maintains all of its cash and short-term investments
with high-credit quality financial institutions. Concentrations of credit risk
with respect to accounts receivable are limited because the Company's customer
base consists primarily of numerous large, well known corporations with no
history of bad debts.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
over accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specific costs and amortization of such
costs. The Company does not believe that the adoption of SOP 98-1 will have a
material impact on its results of operations or financial position.
In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement is
not expected to affect the Company as the Company currently does not have
derivative instruments or hedging activities.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 -- ACQUISITIONS
In February 1998, the Company purchased, through a joint venture
arrangement in Greenwald Intellicard, the assets and intellectual property of
Intellicard Systems, Ltd. Greenwald Intellicard develops, manufactures and
markets smart card systems for the commercial laundry and other industries. The
initial cash investment in Greenwald Intellicard, all of which was provided by
the Company, was $314,000. The Company has two fixed price options aggregating
$400,000 plus 33,000 shares of common stock to increase its ownership to 100%.
The Company exercised the first option on February 17, 1999 thereby increasing
its ownership interest to 65% and intends on exercising the second option which
is exercisable beginning February 1, 2000. Since the Company has funded all of
Greenwald Intellicard's operations and losses, it intends to exercise the
purchase options, its venture partner has limited financial resources and it has
significant managerial and financial influence, the operations of Greenwald
Intellicard have been consolidated with the Company's since inception of the
joint venture.
On November 24, 1998, the Company acquired 100% of the common stock of
Tritheim, a Florida company that designs, develops, and sells technologies used
in smart card and other token-based network security, conditional access systems
and secure electronic commerce over the Internet. The aggregate purchase price
was approximately $10,150,000 and included the issuance of 1,495,037 shares of
common stock and options to purchase a total of 333,270 shares of common stock
at an exercise price of $2.00 per
F-9
<PAGE> 85
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share. The amount and components of the estimated purchase price along with the
preliminary allocation of the estimated purchase price are as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price:
Value of common stock and stock options..................... $ 9,743
Acquisition expenses........................................ 407
-------
$10,150
=======
Allocation of purchase price:
Net liabilities of Tritheim................................. $ (713)
In-process research and development......................... 2,800
Goodwill.................................................... 8,063
-------
$10,150
=======
</TABLE>
The assets and liabilities of Tritheim were recorded at their fair values
as of the acquisition date. The aggregate fair value of Tritheim's research and
development efforts that had not reached technological feasibility and had no
alternative future uses was determined by appraisal to be $2,800,000, and was
expensed at the date of the acquisition. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired and is amortized using the straight-line method over its
estimated life of five years.
The acquisition has been accounted for as a purchase and, accordingly,
Tritheim's results are included in the consolidated financial statements of the
Company since the date of acquisition. The following summarized unaudited pro
forma financial information assumes that the acquisition had occurred as of
January 1 of each period (in thousands except per share data):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net sales................................................ $16,739 $17,100
Net loss from continuing operations...................... (5,236) (3,857)
Net loss per share from continuing operations............ (.35) (.25)
</TABLE>
The summarized pro forma information omits the non-recurring charge for
acquired in-process research and development. The pro forma information is not
necessarily indicative of the results that would have been reported had such
event actually occurred on the dates specified, nor is it intended to project
the Company's results of operations or financial position for any future period
or date.
The Company is required to register 241,266 shares of Company common stock
issued as the merger consideration under a shelf registration statement under
the Securities Act of 1933. In the event that the shelf registration statement
is not effective by May 24, 1999, the holders of these shares are entitled, for
a specified period of time, to cause the Company to repurchase their shares for
a cash purchase price equal to the fair market value of the shares on the date
of repurchase. As such, these shares have been reflected in the accompanying
consolidated balance sheet under the caption "Redeemable shares". Subsequent
adjustments to the value of the redemption obligation will be charged or
credited to additional paid-in capital.
On February 11, 1999, the Company acquired 100% of the common stock of
Amazing! Controls, Inc., a California company that provides smart card solutions
and smart cards for the Internet, electronic commerce, loyalty programs, access
control, finance and telecom. The aggregate purchase price was approximately
$5,700,000 and included the issuance of 350,000 shares of common stock and
options to purchase a total of 457,503 shares of common stock. On February 22,
1999, the Company also acquired
F-10
<PAGE> 86
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
100% of the common stock of Greystone Peripherals, Inc., a California company
that designs, manufactures and markets PC Card (PCMCIA) products, digital camera
flash film readers and hard disk duplicators. The aggregate purchase price was
approximately $9,000,000 and included the issuance of 746,401 shares of common
stock and options to purchase a total of 132,388 shares of common stock. The
acquisitions will be accounted for as purchases. Accordingly, the assets and
liabilities will be recorded at their fair values as of the acquisition dates.
The fair value of research and development efforts that had not reached
technological feasibility and had no alternative future uses will be allocated
to in-process research and development and expensed at the date of the
acquisition. The balance of the purchase price will be recorded as goodwill. The
Company is currently in the process of preparing the purchase price allocation
and determining the useful lives of the assets acquired.
NOTE 3 -- DEBT
Debt at December 31, 1998 and 1997, consisted solely of a note payable
entered in December 1995 in connection with the purchase of a building and land
in Chester, Connecticut. The note amortizes on a 120 month straight-line basis,
is secured by the building and land and bears a 9% interest rate. The annual
maturities are $147,000 in 1999, $160,000 in 2000, $176,000 in 2001, $192,000 in
2002 and $210,000 in 2003.
In December 1986, the Company issued $30 million of 13% Subordinated Notes
due December 1996. In April 1996, the Company redeemed all of its remaining 13%
Subordinated Notes. The redemption price was equal to the principal amount of
$7,500,000, plus accrued interest to the redemption date.
NOTE 4 -- SHAREHOLDERS' EQUITY
In November 1998, the Company completed the issuance of 2,059,000 shares of
common stock through a private placement. The shares were sold at $5.00 per
share for net proceeds of $10,285,000.
The Company has 1,000,000 shares of authorized and unissued Class A
Preferred Stock, without par value. On August 9, 1988, the Company declared a
dividend of one Right for each outstanding share of its common stock. Each Right
entitles the holder to purchase one one-hundredth of a share of a new series of
Class A Preferred Stock at an exercise price of $7.50, subject to adjustment to
prevent dilution. The Rights become exercisable 10 days after a person or group
acquires 20% or more of the Company's common stock or announces a tender or
exchange offer for 30% or more of the Company's common stock. If, after the
Rights become exercisable, the Company is party to a merger or similar business
combination transaction, each Right not held by a party to such transaction may
be used to purchase common stock having a market value of two times the exercise
price. The Rights, which have no voting power, may be redeemed by the Company at
$.01 per Right. In July 1998, the Company's Board of Directors approved the
extension of the rights plan to August 8, 2008.
In August 1996, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares of the Company's common stock and, in 1997,
increased the Company's share repurchase authorization to 3,300,000 shares. In
April, 1998, the Company announced the conclusion of the common stock buy-back
program. The Company repurchased 3,094,100 shares of common stock under the buy-
back program for an aggregate cost of $4,270,000.
In March 1998, the Company initiated an odd-lot buy-back offer allowing
holders of less than 100 shares a convenient method of selling their shares of
the Company's common stock. A total of 7,990 shares were tendered under the
offer which expired on April 3, 1998.
F-11
<PAGE> 87
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- INCOME TAXES
As of December 31, 1998, approximately $77,000,000 of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
1999 through 2018, were available to offset future taxable income. The
carryforwards expire as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999....................................................... $ 6,000
2000....................................................... 12,000
2001....................................................... 9,000
2002....................................................... 25,000
2005....................................................... 7,000
2006 - 2018................................................ 18,000
-------
$77,000
=======
</TABLE>
Due to the "change of ownership" provisions of the Internal Revenue Code of
1986, the availability of net operating loss carryforwards to offset federal
taxable income in future periods could be subject to an annual limitation if a
change in ownership for income tax purposes occurs. If such change in ownership
were to occur, management estimates that the Company would not be able to use a
substantial amount of the available net operating loss carryforwards to reduce
its income tax liability. Furthermore, the extent of the actual future use of
the net operating loss carryforwards is subject to inherent uncertainty, because
it depends on the amount of otherwise taxable income the Company may earn. No
assurance can be given that the Company will have sufficient taxable income in
future years to use the net operating losses before they would otherwise expire.
As a result of a corporate revaluation during 1984, tax benefits resulting
from the utilization in subsequent years of net operating loss carryforwards
existing as of the date of the corporate revaluation were excluded from the
results of operations and directly credited to additional paid-in capital when
realized. As of December 31, 1998, none of the tax loss carryforward predated
the corporate revaluation. Approximately $16,000,000 of the Company's U.S. tax
loss carryforwards were utilized in 1996.
No income tax provision or benefit was recognized in 1998 and 1997 because
the tax benefit associated with the Company's operating losses were offset in
full by an increase in the valuation allowance. In 1997, the Company reversed
$609,000 of tax reserves provided in 1996 relating to the sales of certain
subsidiaries. The consolidated provision for income taxes for the year ended
December 31, 1996, consisted of the following (in thousands):
<TABLE>
<S> <C>
Current provision
Federal................................................... $ 358
State..................................................... 2,433
------
2,791
------
Deferred provision
Federal................................................... (623)
State..................................................... (117)
Change in valuation allowance............................. 740
------
--
------
Charge in lieu of income taxes.............................. 5,169
------
Total consolidated income tax provision..................... $7,960
======
</TABLE>
F-12
<PAGE> 88
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the federal statutory tax rate and the effective tax
rate for 1996 was as follows:
<TABLE>
<S> <C>
Federal statutory tax rate.................................. 35.0%
State taxes, net of federal benefit......................... 5.8
Other, net.................................................. 1.2
----
Actual tax rate............................................. 42.0%
====
</TABLE>
The significant temporary differences which gave rise to the deferred tax
provision were as follows (in thousands):
<TABLE>
<S> <C>
Discontinued operations reserves............................ $(893)
Pension expense............................................. 236
Other, net.................................................. (83)
-----
$(740)
=====
</TABLE>
The components of net deferred taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward........................ $ 26,832 $ 27,749
Pension expense........................................ 1,737 1,845
Discontinued operations reserves....................... 287 178
Depreciation........................................... 203 175
Other, net............................................. 174 144
-------- --------
29,233 30,091
Less valuation allowance............................... (29,233) (30,091)
-------- --------
Net deferred taxes..................................... $ -- $ --
======== ========
</TABLE>
NOTE 6 -- EMPLOYEE BENEFITS
The Company and its subsidiaries maintain a 401(k) plan for substantially
all of the Company's employees. The assets of the Company's 401(k) plan are held
by an outside fund manager and are invested in accordance with the instructions
of the individual plan participants. The Company's 401(k) contributions totaled
$197,000, $190,000 and $156,000 in 1998, 1997 and 1996, respectively.
The Company sponsors a defined benefit pension plan which was frozen in
1993. The assets of the defined benefit pension plan are managed by an outside
trustee and invested primarily in a short duration bond fund. Consolidated
pension expense includes amounts related to discontinued product lines and
F-13
<PAGE> 89
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related plant closings in prior years totaling $846,000, $768,000 and $769,000
in 1998, 1997 and 1996, respectively. Information regarding the defined benefit
pension plan is as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year..................... $10,775 $11,230
Interest cost............................................. 749 766
Benefit payments.......................................... (1,164) (1,190)
Actuarial (gain) or loss.................................. 541 (31)
------- -------
Benefit obligation at end of year........................... 10,901 10,775
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year.............. 4,253 4,247
Actual return on plan assets.............................. 762 252
Employer contributions.................................... 1,032 944
Benefit payments.......................................... (1,164) (1,190)
------- -------
Fair value of plan assets at end of year.................... 4,883 4,253
Funded status............................................... (6,018) (6,522)
Unrecognized transition obligation.......................... 1,469 1,775
Unrecognized net gains...................................... (414) (524)
------- -------
$(4,963) $(5,271)
======= =======
Amounts recognized in statement of financial position
consist of:
Accrued benefit liability................................... $(6,018) $(6,522)
Intangible asset............................................ 1,055 1,251
------- -------
Net amount recognized....................................... $(4,963) $(5,271)
======= =======
</TABLE>
A discount rate of 6.75% and 7.25% were used as of December 31, 1998 and
1997, respectively. The expected return on plan assets was 8%.
The components of the net periodic pension cost were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest cost............................................. $ 749 $ 766 $1,228
Expected return on plan assets............................ (331) (327) (759)
Amortization of transition obligation..................... 306 306 290
----- ----- ------
Net periodic pension cost................................. $ 724 $ 745 $ 759
===== ===== ======
</TABLE>
As of December 31, 1998, the accrued pension liability was $6,018,000, of
which $1,032,000 was included in accrued liabilities and $4,986,000 was included
in other noncurrent liabilities. As of December 31, 1997, the accrued pension
liability was $6,522,000, of which $1,032,000 was included in accrued
liabilities and $5,490,000 was included in other noncurrent liabilities. Accrued
liabilities also included accrued payroll and other employment related accruals
of approximately $1,173,000 and $1,003,000 as of December 31, 1998 and 1997,
respectively.
F-14
<PAGE> 90
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- STOCK OPTIONS AND WARRANTS
At December 31, 1998, the Company has several fixed stock option plans,
which are described below. The Company applies APB Opinion 25 Accounting for
Stock Issued to Employees and related interpretations in accounting for its
plans. The exercise price of each option granted was equal to the market price
of the Company's common stock on the date of grant. Accordingly, no compensation
cost has been recognized for the fixed stock option plans. Had compensation cost
been determined based on the fair value at the grant dates for awards under the
fixed option plans consistent with the method of FASB Statement 123 Accounting
for Stock-Based Compensation, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss)
As reported......................................... $(6,075) $(1,079) $10,995
Pro forma........................................... $(6,684) $(1,253) $10,470
Earnings per share
As reported......................................... $ (.44) $ (.08) $ .72
Pro forma........................................... $ (.49) $ (.09) $ .68
</TABLE>
For purposes of the pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. The weighted average assumptions used to estimate the value of the
options included in the pro forma amounts, and the weighted average estimated
fair value of an option granted are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected option term (years)................................ 5 5 5
Expected volatility......................................... 52.7% 53.7% 64.3%
Risk-free interest rate..................................... 4.9% 6.0% 6.0%
Weighted average fair value per option...................... $1.08 $ .70 $1.21
</TABLE>
Under the stock option plans for directors, officers and key employees
adopted by shareholders of the Company, the Company may grant stock options,
restricted stock options, stock appreciation rights, performance awards and
other stock-based awards equivalent to up to 4,300,000 shares of common stock.
The plans are administered by the Board of Directors of the Company. Subject to
the express provisions of the plans, the Board has full and final authority to
determine the terms of options granted to key employees under the plans
including (a) the purchase price of the shares covered by each option, (b)
whether any payment will be required upon grant of the option, (c) the
individuals to whom, and the time at which, options shall be granted, (d) the
number of shares to be subject to each option, (e) when an option can be
exercised and whether in whole or in installments, (f) whether the options are
immediately transferable, (g) whether the exercisability of the options is
subject to risk of forfeiture or other condition and (h) whether the stock
issued upon exercise of an option is subject to repurchase by the Company, and
the terms of such repurchase. The term of the options granted during 1998, 1997
and 1996 was five years from the date of grant and such options were immediately
exercisable. The exercise price of each option granted was equal to the market
price of the Company's common stock on the date of grant.
F-15
<PAGE> 91
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's fixed stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years then ending is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1.......... 2,130,500 $1.65 1,938,500 $1.69 2,068,500 $1.45
Granted..................... 565,000 2.10 250,000 1.31 525,000 1.85
Exercised..................... (433,000) 1.50 (27,000) 1.15 (592,000) 1.09
Canceled.................... (30,000) 1.50 (31,000) 1.58 (63,000) .89
--------- --------- ---------
Balance at December 31........ 2,232,500 1.80 2,130,500 1.65 1,938,500 1.69
========= ========= =========
</TABLE>
All of the options outstanding granted under the fixed stock option plans
are immediately exercisable when granted. The exercise price of stock options
outstanding at December 31, 1998 ranges from $1.31 to $5.69 and the weighted
average contractual life is approximately 2.6 years.
In April 1985, the Company issued 1.6 million shares of common stock at
$2.50 per share in a private placement. Under the terms of this agreement, the
agent for the purchasers received options to buy 400,000 shares of the Company's
common stock at a price of $2.50 per share for five years, which period was
subsequently extended by ten years. These options are held by two members of the
Company's Board of Directors. In January 1996, the Company issued options to two
members of the Company's Board of Directors to buy 200,000 shares of the
Company's common stock at a price of $2.50 per share for five years. None of
these options have been exercised as of December 31, 1998.
In 1998, a consultant received options to purchase 25,000 shares of common
stock at an exercise price of $7.75 per share. These options are immediately
exercisable. The Company also granted in 1998 to another consultant options to
purchase 25,000 shares of common stock at an exercise price of $8.25 per share
and a stock award of 10,000 shares of common stock. The options and stock award
vest over a two year period. The fair value of the awards to the two consultants
at the date of grant was $251,000. The expense for these awards will be charged
to earnings over the vesting period, if any, and amounted to $145,000 in 1998.
In connection with the acquisition of Tritheim, the Company granted options
to purchase 333,270 shares of common stock to the employees of Tritheim. These
options have an exercise price of $2.00 per share, vest through November 24,
2001 and expire on November 24, 2006. The fair value of the stock options
granted in the Tritheim acquisition was included in the purchase price.
In December 1986, the Company issued $30 million of 13% Subordinated Notes
together with detachable warrants ("Warrants") to purchase 3,600,000 shares of
the Company's common stock for five years, which period was subsequently
extended by five years. In addition, the Company issued 1,200,000 Underwriter's
Warrants to purchase the Company's common stock for five years, which period was
subsequently extended by five years. Each Warrant and Underwriter Warrant
entitles its holder to purchase 1.024 shares of common stock for $1.95 per share
(subject to adjustment in certain circumstances). Unexercised warrants were to
expire on December 15, 1996 (December 17, 1996, in the case of the Underwriter's
Warrants).
On November 8, 1996, the Company's Board of Directors, acting upon the
recommendation of a special committee of disinterested directors, determined it
would be in the Company's best interests to modify the Warrants and
Underwriter's Warrants owned by any holder who exercises, at the current
exercise price of $1.95 per share of common stock, 25% of the warrants owned on
December 15, 1996
F-16
<PAGE> 92
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(December 17, 1996, in the case of the Underwriter's Warrants). Shareholders of
the Company subsequently approved the modification on July 2, 1997 ("the
Approval Date"). As of July 2, 1997, a total of 2,257,050 warrants were
outstanding entitling the warrant holders to purchase an aggregate of 2,311,220
shares of common stock.
The modification resulted in the following changes to the holder's
unexercised Warrants and Underwriter's Warrants (i.e., the 75% balance of the
warrants owned on December 15, 1996 or December 17, 1996, as the case may be)
(the "Remaining Modified Warrants"):
(a) Five-Year Extension The expiration date of the holder's Remaining
Modified Warrants was extended to July 2, 2002.
(b) Increased Exercise Price The exercise price of the holder's
Remaining Modified Warrants was increased from $1.95 per share to (i) $2.00
per share, during the year ending on the first anniversary of the Approval
Date, (ii) $2.10 per share, during the year ending on the second
anniversary of the Approval Date, (iii) $2.20 per share, during the year
ending on the third anniversary of the Approval Date, (iv) $2.30 per share,
during the year ending on the fourth anniversary of the Approval Date, and
(v) $2.40 per share, during the year ending on the fifth anniversary of the
Approval Date.
In September 1997, a total of 486,912 shares of common stock were issued
pursuant to the exercise of 475,500 warrants. The net proceeds received amounted
to $927,000. As of December 31, 1998, there are 1,426,500 Remaining Modified
Warrants. Members of the Company's Board of Directors hold 1,417,500 of the
Remaining Modified Warrants. A non-cash charge to income of $768,000 was
recorded in 1997 based on the fair value of the Remaining Modified Warrants. In
January 1999, pursuant to the terms of the Warrant and Underwriter Warrant
agreements, the number of shares of common stock purchasable upon the exercise
of each warrant increased to 1.037 and the exercise price per share decreased to
$2.07.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next seven years. Certain of these
operating leases provide the Company with the option, after the initial lease
term, to either purchase the property or renew the lease. Total rent expense for
all operating leases amounted to approximately $328,000 in 1998, $283,000 in
1997, and $416,000 in 1996.
Minimum payments for operating leases having initial or remaining
noncancellable terms in excess of one year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999........................................................ $ 318
2000........................................................ 297
2001........................................................ 268
2002........................................................ 253
2003........................................................ 242
Remainder................................................... 121
------
Total minimum lease payments................................ $1,499
======
</TABLE>
The Company and Balfour Investors Inc. ("Balfour"), are parties to a
License Agreement, dated as of October 26, 1994, with respect to a portion of
the office space leased by the Company in New York City. The Chairman and Vice
Chairman of the Company's Board of Directors are the only shareholders of
Balfour. The term of the License Agreement commenced on January 1, 1995 and will
expire on June 30,
F-17
<PAGE> 93
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2004, unless sooner terminated pursuant to law or the terms of the License
Agreement. The License Agreement provides for Balfour to pay the Company an
amount equal to 40% of the rent paid by the Company under its lease, including
base rent, electricity, water, real estate tax escalations and operation and
maintenance escalations. In addition, Balfour has agreed to reimburse the
Company for 40% of the cost of insurance which the Company is obligated to
maintain under the terms of its lease with respect to the premises. In November
of 1998, Balfour's share of rent and other costs was reduced to 20% due to an
increase in the space utilized by the Company. The base rent payable by Balfour
under the License Agreement is $3,745 per month through September 30, 1999 and
$4,030 per month thereafter.
In April 1996, a Consent Decree among the Company, the United States
Environmental Protection Agency and the Pennsylvania Department of Environmental
Protection ("PADEP") was entered by the court which resolved all of the United
States' and PADEP's claims against the Company for recovery of costs incurred in
responding to releases of hazardous substances at a facility previously owned
and operated by the Company. Pursuant to the Consent Decree, the Company will
pay a total of $14,350,000 plus interest to the United States and Commonwealth
of Pennsylvania. Through December 31, 1998, the Company has made principal
payments aggregating $10,992,000. Further payments totaling $3,358,000 plus
interest will be made to the United States and Commonwealth of Pennsylvania over
the next four years. The annual principal payments are $846,000 in 1999,
$946,000 in 2000, $783,000 in 2001 and $783,000 in 2002.
The Company's coin products segment relies on a limited number of suppliers
of several key components utilized in the assembly of its products. For example,
mechanical coin chutes using the Company's patented designs and proprietary
tooling are purchased exclusively from one supplier in Taiwan. Reliance on sole
source suppliers involves several risks including a potential inability to
obtain an adequate supply of required components, price increases, late
deliveries and poor component quality. Although to date the Company has been
able to source requirements of such components, there is no assurance that the
Company will be able to obtain the full requirements of such components in the
future, that prices of such components will not increase and that problems with
respect to quality and timely delivery will not occur. Disruption or termination
of the supply of these components could delay product shipments, have a material
adverse effect on the business and operations and damage relationships with
customers and the Company's reputation.
Various legal proceedings are pending against the Company. The Company
considers all such proceedings to be ordinary litigation incident to the
character of its businesses. Certain claims are covered by liability insurance.
The Company believes that the resolution of those claims to the extent not
covered by insurance will not, individually or in the aggregate, have a material
adverse effect on the financial position or results of operations of the
Company.
NOTE 9 -- BUSINESS SEGMENT INFORMATION
The Company manages its business segments based on the nature of products
sold. The Company's reportable segments are comprised of coin products and
technology products. Each operating segment provides products as further
described in Note 1. The accounting policies of the various segments are the
same as those described in Note 1. The Company evaluates the performance of its
segments based on segment operating income. Operating income for each segment
includes sales and marketing expenses, product development expenses and
non-corporate general and administrative expenses. Costs excluded from segment
operating income primarily consists of corporate expenses, including income
taxes, as well as certain non-recurring charges such as purchased in-process
research and development. Corporate expenses are comprised principally of
general and administrative expenses and marketing expenses which are
F-18
<PAGE> 94
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
separately managed. Segment assets exclude corporate assets. Corporate assets
include cash and short-term investments and net assets of discontinued
operations.
Segment information is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Sales to Unaffiliated Customers:
Coin products............................................. $15,372 $17,039 $15,486
Technology products....................................... 1,147 -- --
------- ------- -------
$16,519 $17,039 $15,486
======= ======= =======
Income (loss) From Operations:(1)
Coin products(2).......................................... $ 2,920 $ 3,090 $ (286)
Technology products....................................... (814) -- --
Corporate and other(3).................................... (6,538) (4,338) (4,866)
------- ------- -------
$(4,432) $(1,248) $(5,152)
======= ======= =======
Identifiable Assets:
Coin products............................................. $ 9,601 $ 9,614 $ 8,823
Technology products....................................... 8,918 -- --
Corporate and other....................................... 21,410 16,315 22,100
------- ------- -------
$39,929 $25,929 $30,923
======= ======= =======
Depreciation and Amortization Expense:
Coin products............................................. $ 329 $ 432 $ 350
Technology products....................................... 197 -- --
Corporate and other....................................... 228 80 189
------- ------- -------
$ 754 $ 512 $ 539
======= ======= =======
Capital Expenditures:
Coin products............................................. $ 180 $ 312 $ 1,109
Technology products....................................... 50 -- --
Corporate and other....................................... 88 19 38
------- ------- -------
$ 318 $ 331 $ 1,147
======= ======= =======
</TABLE>
- ---------------
(1) Before interest income, interest expense and items of a nonoperating nature.
(2) The 1996 loss from operations for the coin products segment includes a
special charge of $1,596,000 associated with Greenwald Industries' plant
relocation.
(3) The 1998 loss from operations for Corporate and other includes a charge of
$2,800,000 to expense in-process research and development associated with
the Tritheim acquisition. The 1997 loss from operations includes a non-cash
charge of $768,000 related to the modification and extension of certain
common stock purchase warrants.
For 1998, 1997 and 1996 the Company had export sales of approximately
$1,435,000, $1,003,000 and $805,000, respectively. The majority of such sales
were to Canada. One customer of the Company's coin products segment accounted
for 13%, 14% and 13% of consolidated revenues during 1998, 1997 and 1996,
respectively.
F-19
<PAGE> 95
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- DISCONTINUED OPERATIONS
In March 1999, the Company's Board of Directors adopted a plan to dispose
of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates
("OSM"). No significant gain or loss is expected on the disposition. In 1996,
the Company completed the sale of substantially all of the assets of Masterview
Window Company, Inc. ("Masterview"), Fenwal Electronics, Inc. ("Fenwal") and
Bright Star Industries Incorporated ("Bright Star"). The aggregate sales price
for the dispositions was $47,771,000. A portion of the sales prices were held in
escrow to cover potential purchase price adjustments, indemnity claims and
certain environmental remediation activities. During 1997 and 1998, an
additional $1,519,000 in cash was received principally relating to the
finalization of the Masterview purchase price adjustment.
OSM, Masterview, Fenwal and Bright Star have been reflected as discontinued
operations in the accompanying financial statements. Net sales of discontinued
operations for the years ended December 31, 1998, 1997 and 1996 were $8,888,000,
$9,095,000 and $36,362,000 respectively. The aggregate pre-tax gain on sale of
discontinued operations recorded in 1996 of $22,042,000 was offset by a
provision for income taxes of $9,259,000, of which $6,468,000 was credited
directly to paid-in-capital due to the utilization of pre-corporate
reorganization tax loss carryforwards. The pre-tax income from discontinued
operations in 1996 of $2,970,000 was offset by a provision for income taxes of
$1,245,000 which was also credited directly to paid-in-capital (see Note 5).
NOTE 11 -- RELOCATION CHARGE AND OTHER EXPENSES
During the fourth quarter of 1995, the Company decided to move Greenwald
Industries' operations from a leased facility in Brooklyn, New York to a newly
acquired facility in Chester, Connecticut. A special charge of $1,596,000 was
recorded in 1996 which included $627,000 in severance costs associated with 110
terminated employees, $246,000 for lease termination costs and $723,000 for
costs related to plant and employee relocation, recruiting and training new
personnel and for temporary living allowances. The move was completed by April
30, 1996.
In April 1998, the Company executed a letter of intent to purchase
substantially all of the assets of a group of five businesses from Katy
Industries, Inc. On August 5, 1998, the Company announced that the letter of
intent terminated due to the inability of the parties to reach agreement on
certain aspects of the transaction. Included in "Other (expense) income" is a
charge of $954,000 relating to legal, environmental and financing related fees.
F-20
<PAGE> 96
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities are net of acquisitions of
businesses and consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Restricted cash....................................... $ -- $ -- $ 4,500
Trade receivables..................................... 207 (563) 270
Inventories........................................... (268) 45 381
Other current assets.................................. 126 (34) 79
Other assets.......................................... 151 209 123
Trade accounts payable................................ 482 (586) (1,865)
Accrued liabilities................................... 152 (442) (8,097)
Other non-current liabilities......................... (1,387) (1,053) (1,025)
------- ------- -------
$ (537) $(2,424) $(5,634)
======= ======= =======
</TABLE>
Acquisition of businesses in the consolidated statement of cash flows is
net of cash acquired and includes debt assumed and immediately repaid in
acquisitions. Cash paid for interest during 1998, 1997 and 1996 was $340,000,
$402,000, and $623,000, respectively. Cash paid for income taxes during 1996 was
$1,912,000. No income taxes were paid in 1998 and 1997. Noncash investing
activities include the acquisition of Tritheim for shares of common stock and
options valued at $9,743,000 described in Note 2.
F-21
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Amazing! Smart Card Technologies, Inc.:
We have audited the accompanying balance sheets of Amazing! Smart Card
Technologies, Inc. (a California corporation) as of December 31, 1998 and 1997,
and the related statements of operations, shareholders' deficit and cash flows
for each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of Amazing! Smart Card
Technologies, Inc. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
April 16, 1999
F-22
<PAGE> 98
AMAZING! SMART CARD TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 18,820 $ 113,148
Accounts receivable, less allowance for doubtful accounts
of $71,493 and $101,493 in 1998 and 1997,
respectively........................................... 319,467 213,972
Inventories (Note 3)...................................... 389,583 372,515
Prepaid expenses and other current assets................. 23,256 190,807
------------ -----------
Total current assets................................... 751,126 890,442
PROPERTY AND EQUIPMENT, net (Note 3)........................ 682,411 933,343
OTHER ASSETS................................................ 4,104 593,841
------------ -----------
$ 1,437,641 $ 2,417,626
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of capital lease obligations.............. $ 82,688 $ --
Accounts payable.......................................... 955,188 465,253
Accrued liabilities....................................... 509,387 491,834
------------ -----------
Total current liabilities.............................. 1,547,263 957,087
CONVERTIBLE NOTES PAYABLE TO SHAREHOLDER (Note 4)........... -- 7,321,854
NOTES PAYABLE TO SHAREHOLDERS (Note 5)...................... 623,247 --
CAPITAL LEASE OBLIGATIONS, net of current portion........... 19,238 --
------------ -----------
Total liabilities...................................... 2,189,748 8,278,941
COMMITMENTS (Note 6)
SHAREHOLDERS' DEFICIT:
Convertible preferred stock: 50,000,000 shares authorized;
no shares issued or outstanding........................ -- --
Common stock: no par value; 50,000,000 shares authorized;
39,300,000 and 13,350,000 shares issued and outstanding
at December 31, 1998 and 1997, respectively............ 9,842,542 1,114,830
Accumulated deficit....................................... (10,594,649) (6,976,145)
------------ -----------
Total shareholders' deficit............................ (752,107) (5,861,315)
------------ -----------
$ 1,437,641 $ 2,417,626
============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-23
<PAGE> 99
AMAZING! SMART CARD TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 2,483,539 $ 3,349,975
COST OF REVENUES............................................ 2,382,843 3,027,958
----------- -----------
Gross profit........................................... 100,696 322,017
----------- -----------
OPERATING EXPENSES:
Research and development.................................. 318,338 719,907
Sales and marketing....................................... 738,317 941,280
General and administrative................................ 1,405,221 1,320,600
----------- -----------
Total operating expenses............................... 2,461,876 2,981,787
----------- -----------
LOSS FROM CONTINUING OPERATIONS............................. (2,361,180) (2,659,770)
INTEREST AND OTHER EXPENSE, net............................. 308,736 620,832
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED
OPERATIONS................................................ (2,669,916) (3,280,602)
----------- -----------
DISCONTINUED OPERATIONS (NOTE 1):
LOSS FROM OPERATIONS...................................... (274,696) (97,941)
LOSS ON DISPOSAL.......................................... (673,892) --
----------- -----------
LOSS FROM DISCONTINUED OPERATIONS......................... (948,588) (97,941)
----------- -----------
NET LOSS.................................................... $(3,618,504) $(3,378,543)
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-24
<PAGE> 100
AMAZING! SMART CARD TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996........... 5,520,000 1,107,000 $ (3,597,602) $(2,490,602)
Issuance of common stock for cash at
$0.001 per share.................. 7,830,000 7,830 -- 7,830
Net loss.......................... -- -- (3,378,543) (3,378,543)
---------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1997........... 13,350,000 1,114,830 (6,976,145) (5,861,315)
Conversion of note payable to
shareholder into common stock (see
Note 4)........................... 29,600,000 8,731,362 -- 8,731,362
Repurchase of common stock for cash
at $0.001 per share............... (3,650,000) (3,650) -- (3,650)
Net loss............................. -- -- (3,618,504) (3,618,504)
---------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1998........... 39,300,000 $9,842,542 $(10,594,649) $ (752,107)
========== ========== ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-25
<PAGE> 101
AMAZING! SMART CARD TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(3,618,504) $(3,378,543)
Adjustments to reconcile net loss to net cash used in
operating activities:
Allowance for doubtful accounts...................... -- 34,493
Depreciation and amortization........................ 338,628 433,752
Loss on disposal of fixed assets..................... 129,947 170,140
Loss on disposal of discontinued operations.......... 673,892 --
Changes in current assets and liabilities:
Accounts receivable............................... (105,495) 203,240
Inventories....................................... (17,068) 338,929
Prepaid expenses and other assets................. 83,396 137,962
Accounts payable.................................. 489,935 (196,706)
Accrued liabilities............................... 17,373 176,277
----------- -----------
Net cash used in operating activities........... (2,007,896) (2,080,456)
----------- -----------
CASH FLOWS FOR INVESTING ACTIVITIES:
Purchases of property and equipment....................... (115,717) (292,007)
Proceeds from sale of fixed assets........................ -- 83,000
----------- -----------
Net cash used for investing activities.......... (115,717) (209,007)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable from shareholders.......... 2,032,935 2,025,429
Issuances of common stock................................. -- 7,830
Repurchases of common stock............................... (3,650) --
----------- -----------
Net cash provided by financing activities....... 2,029,285 2,033,259
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (94,328) (256,204)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 113,148 369,352
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 18,820 $ 113,148
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes........................................... $ 800 $ 800
=========== ===========
Noncash financing activity:
Conversion of note payable to shareholder for common
stock................................................. $ 8,731,542 $ --
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-26
<PAGE> 102
AMAZING! SMART CARD TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Amazing! Smart Card Technologies, Inc. (the "Company"), formerly known as
Amazing! Controls, Inc., was incorporated in California on December 20, 1996.
Previously, the Company operated as WOW Technologies, Inc. The Company develops
and manufactures smart cards for use in satellite television,
telecommunications, identification and transportation.
In September 1997, the Company acquired all of the outstanding stock of
Amazing! Controls, B.V. ("ACBV"), which is based in the Netherlands, in exchange
for the assumption of liabilities and the forgiveness of certain amounts due to
the Company. The total purchase price was $546,000, and the acquisition was
accounted for as a purchase. Intangibles arising from the acquisition were being
amortized on a straight-line basis over three years.
In connection with the acquisition, the purchase price was allocated to the
following items:
<TABLE>
<S> <C>
Property, plant and equipment, net.......................... $ 70,000
Other..................................................... 257,000
Goodwill.................................................. 219,000
--------
$546,000
========
</TABLE>
The results of operations of ACBV and the estimated fair value of the
assets acquired and liabilities assumed are included in the Company's financial
statements from the date of acquisition through the date of divestiture of the
operation in 1998.
In April 1998, the Company divested the operations of ACBV to certain
shareholders of the Company. The divestiture of ACBV resulted in a loss on
disposal of the net assets of the operations $674,000, primarily from the
writedown of intangibles acquired in the acquisition of ACBV and other assets
which no longer benefitted the Company. The operating results of the
discontinued operation have been reported as discontinued operations in the
statements of operations for all years presented. The prior year balance sheet
as of December 31, 1997, has also been adjusted to reflect the net current
assets of ACBV of $77,000 as a single line item in other current assets and to
reflect the net noncurrent assets of $275,000 as a single line item in other
noncurrent assets. There were no remaining assets on the Company's balance sheet
as of December 31, 1998, related to ACBV. Revenue of the discontinued operation
was $170,000 and $154,000 for the years ended December 31, 1998 and 1997,
respectively.
On February 11, 1999 (the "Closing Date"), PubliCARD, Inc. ("PubliCARD")
completed the acquisition of the Company, pursuant to an Agreement and Plan of
Merger dated as of February 11, 1999 (the "Merger Agreement"), whereby a
wholly-owned subsidiary of PubliCARD merged with and into the Company. As a
result of this merger, the Company became a wholly-owned subsidiary of
PubliCARD. As consideration in the merger, the holders of the Company's common
stock received a total of 350,000 shares of common stock of PubliCARD in
exchange for their shares of common stock of the Company. In addition, pursuant
to the Merger Agreement, options to purchase 200,000 shares of PubliCARD common
stock with an exercise price of $9.75 were granted to the shareholders of the
Company.
The Company is subject to a number of risks, including, but not limited to,
the dependence upon PubliCARD for its continuing financial support; competition
from larger, more established companies in the industry; the successful
development and marketing of its products; rapid technological changes in the
industry; and the dependence on key individuals. PubliCARD has committed to
continue to support the Company's working capital needs for the foreseeable
future.
F-27
<PAGE> 103
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid investments
purchased with original maturities of three months or less.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located in the U.S., Europe and the Far East.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its credit customers. The
Company maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. At December 31, 1998 and 1997, the
top five customers accounted for approximately 70% and 88% of total accounts
receivable, respectively.
Ten customers accounted for 65% and 62% of the Company's revenues for the
years ended December 31, 1998 and 1997, respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and includes materials, labor and manufacturing overhead costs.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of
the assets, generally three to five years, or the lease term of the respective
assets, if applicable.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time the product is
shipped to the customer, with provisions established for estimated product
returns and allowances. Returns and allowances have been insignificant to date.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of payroll costs, other direct expenses and overhead.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes
eligible computer software development costs upon the establishment of
technological feasibility, which it has defined as completion of a working
model. To date, the amount of costs eligible for capitalization, after
consideration of factors such as realizable
F-28
<PAGE> 104
value, were not material and, accordingly, all software development costs have
been charged to research and development in the accompanying statements of
operations.
WARRANTY COSTS
Anticipated costs related to product warranties are charged to expense as
sales are recognized. The Company has not experienced significant warranty
claims to date.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting of comprehensive income and its components in a full set of
general-purpose financial statements for periods ending after December 15, 1997.
As the Company has no material items of other comprehensive income, this
statement has no impact on the Company's financial statements.
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires a new basis of
determining reportable business segments, i.e., the management approach. This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, the Company is organized and operates in one business
segment, the development and manufacturing of smart cards for use in satellite
television, telecommunications, identification and transportation. As a result,
the adoption of SFAS No. 131 had no impact on the Company's disclosures or
financial statements.
3. BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Inventories, net:
Raw materials and work-in-progress..................... $ 303,930 $ 320,131
Finished goods......................................... 85,653 52,384
----------- -----------
$ 389,583 $ 372,515
=========== ===========
Property and equipment:
Computer equipment..................................... $ 451,307 $ 446,484
Furniture and fixtures................................. 107,313 88,461
Shop equipment......................................... 1,452,614 1,566,023
Leasehold equipment.................................... 90,222 139,818
----------- -----------
2,101,456 2,240,786
Less: Accumulated depreciation and amortization........ (1,419,045) (1,307,443)
----------- -----------
$ 682,411 $ 933,343
=========== ===========
</TABLE>
F-29
<PAGE> 105
4. CONVERTIBLE NOTES PAYABLE TO SHAREHOLDER:
The Company's operations to date have been funded by one of its major
shareholders through the issuance of convertible notes payable. In fiscal 1998,
the shareholder converted $8,731,542 of convertible notes payable into
29,600,000 shares of common stock of the Company based on an agreed-upon
weighted-average conversion price of $0.295 per share. As of December 31, 1998,
no amounts were outstanding under the notes payable.
5. NOTES PAYABLE TO SHAREHOLDERS:
As of December 31, 1998, the Company has outstanding notes payable of
$608,631 to two shareholders. The notes bear interest at the prime rate plus 1%
per annum (8.75% at December 31, 1998) and will mature on June 30, 2000. Under
the terms of the notes, the holder of the notes has the option to convert the
note, wholly or partially, into preferred stock of the Company at the fair value
of the Company's common stock at the time of conversion. Accrued interest at
December 31, 1998 was $14,616.
6. COMMITMENTS:
LEASES
The Company leases equipment and office space under various capital and
operating leases with various expiration dates through 2003. Rent expense for
the years ended December 31, 1998 and 1997, was $178,444 and $111,264,
respectively.
At December 31, 1998, future minimum lease payments under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------- ---------
<S> <C> <C>
1999........................................................ $ 60,932 $113,973
2000........................................................ 40,619 4,533
2001........................................................ 5,828 4,533
2002........................................................ 5,828 3,400
2003........................................................ 5,828 --
-------- --------
Total..................................................... 119,035 $126,439
========
Less: Amounts representing interest....................... (17,109)
--------
Present value of minimum lease payments (Average interest
rate of 8%)............................................ 101,926
Less: Current portion..................................... (82,688)
--------
Long-term portion......................................... $ 19,238
========
</TABLE>
7. COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 50,000,000 shares of no par value common stock.
STOCK OPTION PLAN
In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"). The
Plan provides for the granting of stock options to employees and consultants of
the Company. Options granted under the Plan may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees (including officers and directors who are also
employees). Nonqualified stock options ("NSO") may be granted only to Company
employees and consultants. The Company has reserved 4,000,000 shares of common
stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of
F-30
<PAGE> 106
the estimated fair value of the shares on the date of grant, respectively, and
(ii) the exercise price of an ISO and NSO granted to a 0% shareholder shall not
be less than 110% of the estimated fair value of the shares on the date of
grant. To date, options granted generally vest over four years.
Activity under the Plan was as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING OPTION PRICE
---------- ----------- ------------
<S> <C> <C> <C>
Inception of Plan.............................. 2,000,000 -- --
Authorized................................... 500,000 -- --
Granted...................................... (1,587,200) 1,587,200 $0.01
Canceled..................................... 10,100 (10,100) $0.01
---------- ---------- -----
Balances, December 31, 1997.................... 922,900 1,577,100 $0.01
Authorized................................... 1,500,000 -- --
Granted...................................... (280,300) 280,300 --
Canceled..................................... 1,030,600 (1,030,600) $0.01
---------- ---------- -----
Balances, December 31, 1998.................... 3,173,200 826,800 $0.01
========== ========== =====
</TABLE>
The weighted-average remaining contractual life of the options outstanding
at December 31, 1998 was 8.8 years. No options have been exercised as of
December 31, 1998.
FAIR VALUE DISCLOSURES
The Company accounts for the Plan under APB Opinion No. 25 under which no
compensation expense has been recognized, as all stock options are exercisable
at a price equal to the fair market value of the underlying shares on the date
of grant. There was no material difference between the Company's net loss as
reported and the pro forma net loss had compensation expense for the plan been
determined consistent with SFAS No. 123.
To determine compensation expense under SFAS No. 123, the Company used the
following assumptions to estimate that fair value of each option grant on the
date of grant using the Black-Scholes option valuation model: risk-free interest
rate of 6.0% for 1998 and 1997, average expected life of 4 years, expected
dividend yields of zero and expected volatility of 0.01%. The weighted-average
fair value of options granted during 1998 and 1997 was approximately $0.01.
8. INCOME TAXES:
At December 31, 1998, the Company had approximately $9,410,000 of Federal
and state net operating loss carryforwards available to offset future taxable
income. These carryforwards expire in varying amounts through 2018, if not
utilized. Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined, over a three-
year period.
As of December 31, 1998 and 1997, the Company had gross deferred tax assets
of approximately $3,858,000 and $2,376,000, respectively. Management believes
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. Deferred tax assets
relate primarily to net operating loss carryforwards and certain expenses and
reserves that are not currently deductible for income tax purposes.
9. EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. Employer contributions were $15,100 and $10,300 under this
plan for the years ended December 31, 1998 and 1997, respectively.
F-31
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Greystone Peripherals, Inc.:
We have audited the accompanying consolidated balance sheet of Greystone
Peripherals, Inc. (a California corporation) and subsidiary as of December 31,
1998, and the related consolidated statements of operations, shareholders=
equity and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of Greystone Peripherals, Inc.
and subsidiary as of December 31, 1998, and the results of their operations and
their cash flows for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
April 23, 1999
F-32
<PAGE> 108
GREYSTONE PERIPHERALS, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 27,797
Accounts receivable, less allowances of $22,000........... 250,075
Inventories (Note 3)...................................... 928,485
Other assets.............................................. 249
----------
Total current assets................................... 1,206,606
PROPERTY AND EQUIPMENT, net (Note 3)........................ 86,107
OTHER ASSETS................................................ 10,656
----------
Total assets........................................... $1,303,369
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4)................................... $ 414,950
Accounts payable and accruals............................. 447,066
----------
Total liabilities...................................... 862,016
----------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY:
Common stock: no par value; 20,000,000 shares authorized;
6,674,749 shares issued and outstanding................ 449,725
Accumulated deficit....................................... (8,372)
----------
Total shareholders' equity............................. 441,353
----------
$1,303,369
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 109
GREYSTONE PERIPHERALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
REVENUES.................................................... $4,196,145
COST OF REVENUES............................................ 2,552,260
----------
Gross profit........................................... 1,643,885
----------
OPERATING EXPENSES:
Research and development.................................. 397,346
Sales and marketing....................................... 424,617
General and administrative................................ 960,781
----------
Total operating expenses............................... 1,782,744
----------
LOSS FROM OPERATIONS........................................ (138,859)
INTEREST EXPENSE AND OTHER INCOME, net...................... 59,912
LOSS BEFORE TAXES........................................... (198,771)
INCOME TAXES................................................ 3,991
----------
NET LOSS.................................................... $ (202,762)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 110
GREYSTONE PERIPHERALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK RETAINED EARNINGS TOTAL
--------------------- (ACCUMULATED) SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
--------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997.............. 6,674,749 $449,725 $ 194,390 $ 644,115
Net loss.............................. -- -- (202,762) (202,762)
--------- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.............. 6,674,749 $449,725 $ (8,372) $ 441,353
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 111
GREYSTONE PERIPHERALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(202,762)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for inventory reserves..................... 105,000
Depreciation and amortization........................ 68,675
Loss on disposition of fixed assets.................. 20,223
Changes in current assets and liabilities:
Accounts receivable............................... 477,503
Inventories....................................... 19,257
Other assets...................................... 18,249
Accounts payable.................................. (448,323)
Accrued liabilities............................... (12,665)
---------
Net cash provided by operating activities....... 45,157
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (67,927)
---------
Net cash used in investing activities........... (67,927)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit.............................. 39,950
---------
Net cash provided by financing activities....... 39,950
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 17,180
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 10,617
---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 27,797
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 112
GREYSTONE PERIPHERALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
THE COMPANY
Greystone Peripherals, Inc. (the "Company") was incorporated in California
on March 10, 1992. The Company develops and manufactures high capacity disk
drive duplication products for OEM's, as well as smart card readers and other
peripheral devices such as PCMCIA card ports and readers for digital photography
applications.
On February 22, 1999 (the "Closing Date"), PubliCARD, Inc. ("PubliCARD")
completed the acquisition of the Company, pursuant to an Agreement and Plan of
Merger dated as of February 22, 1999 (the "Merger Agreement"), whereby a
wholly-owned subsidiary of PubliCARD merged with and into the Company. As a
result of this merger, the Company became a wholly-owned subsidiary of
PubliCARD. As consideration in the merger, the holders of the Company's common
stock received a total of 666,401 shares of common stock of PubliCARD and $6,180
in exchange for all of the shares of common stock of the Company.
The Company is subject to a number of risks, including, but not limited to,
the dependence upon PubliCARD for its continuing financial support; competition
from larger, more established companies in the industry; the successful
development and marketing of its products; rapid technological changes in the
industry; and the dependence on key individuals. PubliCARD has committed to
continue to support the Company's working capital needs for the foreseeable
future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and a wholly-owned subsidiary which was dormant during 1998. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located primarily in the U.S. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its credit customers. The Company
maintains an allowance for doubtful accounts receivable based upon the expected
collectibility of all accounts receivable.
F-37
<PAGE> 113
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and include materials, labor and manufacturing overhead costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally five to seven years.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be treated as an
S corporation. Tax attributes, including profits or losses for such
corporations, are passed through to their respective shareholders, and no
provision for income taxes is required at the corporate level except for state
tax in California of 1.5% and certain taxes in some states.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time the product is
shipped, with provisions established for estimated product returns and
allowances.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of payroll costs, other direct expenses and overhead.
WARRANTY COSTS
Anticipated costs related to product warranties are charged to expense as
sales are recognized. The Company has not experienced significant warranty
claims to date.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under APB No. 25,
compensation cost is recognized based on the difference, if any, on the date of
grant between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting of comprehensive income and its components in a full
set of general-purpose financial statements for periods ending after December
15, 1997. As the Company has no material items of other comprehensive income,
this statement has no impact on the Company's financial statements.
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires a new basis for
determining reportable business segments, i.e., the management approach. This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, the Company is organized and operates in one business
segment -- the development and manufacturing of high capacity disk drive
duplication products and smart card reader-related products. As a result, the
adoption of SFAS No. 131 had no impact on the Company's disclosures or financial
statements.
F-38
<PAGE> 114
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
Inventories, net
Finished goods.............................................. $ 625,867
Raw materials.......................................... 302,618
---------
$ 928,485
=========
Property and equipment:
Furniture and fixtures.................................... 28,546
Manufacturing equipment................................... 58,740
Engineering test equipment................................ 10,797
Office equipment.......................................... 76,333
Software.................................................. 28,906
Motor vehicles............................................ 6,303
---------
209,625
Less: Accumulated depreciation and amortization........... (123,518)
---------
$ 86,107
=========
</TABLE>
4. LINE OF CREDIT
As of December 31, 1998, the Company has a line of credit agreement with a
bank that provides for borrowings of up to $1,000,000 secured by the Company's
accounts receivable, inventories and fixed assets. As of December 31, 1998, the
Company had an outstanding balance on this line of credit of $414,950. This
agreement expires on May 1, 1999. Interest is paid monthly at the reference rate
plus 0.5%, which equated to 8.25% as of December 31, 1998. Additionally, all
debt outstanding under this line of credit, up to the full amount of the line,
was covered by a guarantee to the bank from the primary shareholder of the
Company as of December 31, 1998.
The Company is subject to covenants under this agreement, including minimum
current ratio, minimum tangible net worth and maximum ratio of debt to tangible
net worth. As of December 31, 1998, the Company was in violation of these
covenants and, as such, all debt outstanding on this line as of that date is
reflected as a current liability in the accompanying financial statements. On
March 3, 1999, subsequent to the closing date of the merger discussed in Note 1,
PubliCARD paid the entire outstanding balance on the line of credit as of that
date, and terminated the line of credit agreement.
5. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 20,000,000 shares of no par value common stock.
STOCK OPTION PLAN
In February 1997, the Company adopted the Incentive Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted only to Company employees and consultants. The Company has reserved
1,600,000 shares of common stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a shareholder who holds more
than 10% of the total combined voting power of all classes of stock shall not be
less than 110% of the estimated fair value of the shares on the date of grant.
To date, options granted generally vest over four years with 25% vesting after
one year, and the
F-39
<PAGE> 115
remaining shares vesting 1/36th per month over the remaining three years.
Additionally, under the Plan, the Company has the right, at its option, to
repurchase any and all shares of stock acquired via exercise of options under
this Plan from a terminated employee, regardless of the cause of termination, at
the then fair market value of the shares.
Activity under the Option Plan was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AVAILABLE OPTIONS OPTION PRICE
FOR GRANT OUTSTANDING PER SHARE
--------- ----------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1997................ 1,451,000 149,000 $0.25
Granted....................................... (75,000) 75,000 $0.50
--------- ------- -----
Outstanding at December 31, 1998................ 1,376,000 224,000 $0.33
========= ======= =====
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
OPTIONS WITH EXERCISE PRICE OF: OUTSTANDING LIFE (IN YEARS) PRICE
------------------------------- ----------- --------------- --------
<S> <C> <C> <C>
$0.25...................................... 149,000 8.25 $0.25
$0.50...................................... 75,000 9.40 $0.50
</TABLE>
FAIR VALUE DISCLOSURES
The Company accounts for the Plan under Accounting Principles Board Opinion
No. 25 under which no compensation expense has been recognized, as all stock
options are exercisable at a price equal to the fair market value of the
underlying shares on the date of grant. Had compensation expense for the Plan
been determined consistent with SFAS No. 123, the impact on the Company's net
loss for fiscal 1998 would have been immaterial.
6. COMMITMENTS
LEASES
The Company leases office space under noncancellable operating leases with
various expiration dates through December 31, 2001. Rent expense for the year
ended December 31, 1998 was $69,000. The terms of the facility lease provide for
rental payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period and has accrued for rent expense
incurred but not paid.
Future minimum lease payments under noncancellable operating leases,
including lease commitments entered into subsequent to December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING LEASE
- ------------------------ ---------------
<S> <C>
1999................................................... $121,354
2000................................................... 128,709
2001................................................... 136,064
--------
Total............................................. $386,127
========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions are made solely by the employees with no matching or
discretionary contributions made by the Company. Employee contributions under
this plan amounted to approximately $22,000 for the year ended December 31,
1998.
F-40
<PAGE> 116
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Tritheim Technologies, Inc.:
We have audited the accompanying balance sheet of Tritheim Technologies,
Inc. (a Florida Subchapter S corporation) as of December 31, 1997, and the
related statements of operations, changes in stockholders' deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tritheim Technologies, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Tampa, Florida,
November 6, 1998
F-41
<PAGE> 117
TRITHEIM TECHNOLOGIES, INC.
BALANCE SHEET -- DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 247,430
Accounts receivable, net of allowance of approximately
$11,000................................................ 8,259
Inventories............................................... 45,513
---------
Total current assets................................... 301,202
---------
PROPERTY AND EQUIPMENT, net................................. 36,340
---------
Total assets........................................... $ 337,542
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 30,386
Accrued expenses.......................................... 31,900
Note payable to bank...................................... 100,451
Notes payable to stockholders -- current, net of
unamortized discount of approximately $15,000 (Note
5)..................................................... 317,033
---------
Total current liabilities.............................. 479,770
---------
NOTES PAYABLE TO STOCKHOLDERS, net of current maturities and
unamortized discount of approximately $17,000 (Note 5).... 33,333
---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 10,000,000 shares authorized,
6,260,386 shares issued and outstanding................ 466,891
Accumulated deficit....................................... (642,452)
---------
Total stockholders' deficit............................ (175,561)
---------
Total liabilities and stockholders' deficit............ $ 337,542
=========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-42
<PAGE> 118
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES.................................................... $ 61,074
---------
OPERATING EXPENSES:
Cost of goods sold........................................ 26,335
Research and development expenses......................... 125,835
Selling and marketing expenses............................ 128,796
General and administrative expenses....................... 155,708
---------
Total operating expenses............................... 436,674
---------
Loss from operations................................... ( 375,600)
INTEREST EXPENSE, net....................................... (33,122)
---------
NET LOSS.................................................... $(408,722)
=========
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE> 119
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996................... 5,280,000 $ 10,560 $(233,730) $(223,170)
Issuance of common stock................... 980,386 456,331 -- 456,331
Net loss................................... -- -- (408,722) (408,722)
--------- -------- --------- ---------
BALANCE, December 31, 1997................... 6,260,386 $466,891 $(642,452) $(175,561)
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-44
<PAGE> 120
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(408,722)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 6,558
Increase in operating assets and liabilities --
Accounts receivable.................................. (8,259)
Inventory............................................ (45,513)
Accounts payable and accrued expenses................ 46,023
---------
Net cash used in operating activities............. (409,913)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment..................................... (35,142)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders............... 160,878
Proceeds from note payable to bank........................ 200,878
Principal payments on note payable to bank................ (100,427)
Proceeds from issuance of common stock.................... 422,669
---------
Net cash provided by financing activities......... 683,998
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 238,943
CASH AND CASH EQUIVALENTS, beginning of year................ 8,487
---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 247,430
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 5,240
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Allocation of proceeds from notes payable to stockholders
to common stock........................................ $ 33,662
</TABLE>
The accompanying notes are an integral part of this statement.
F-45
<PAGE> 121
TRITHEIM TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND LIQUIDITY:
Tritheim Technologies, Inc. (the Company) was incorporated in the State of
Florida on October 5, 1995. Prior to 1997, the Company was in the development
stage. The Company designs, develops and manufactures intelligent personal smart
card readers and writers designed specifically for (1) companies who integrate
these products with their existing applications, (2) financial institutions who
distribute the products to customers for electronic commerce, (3) cable
television companies who wish to authenticate customers and purchases, and (4)
distributors and value-added resellers who resell the products. The Company also
designs software for developing smart card applications. The majority of the
Company's customers are located in the United States.
The Company incurred a substantial operating loss and negative cash flows
from operations for the year ended December 31, 1997. As further discussed in
Note 10 to the financial statements, management plans to obtain future funding
from its new parent company, PubliCARD, Inc. (formerly Publicker Industries,
Inc.) (PubliCARD). PubliCARD has committed to funding the operations of the
Company through at least December 31, 1998. Management believes that this
funding will allow the Company to increase sales and marketing efforts, which in
turn should generate increased revenues and improve operating results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
investments totaling $202,879 are classified within cash and cash equivalents at
December 31, 1997.
INVENTORIES
Inventories consist of electronic parts and components purchased for
resale. All inventories are stated at the lower of cost or market using the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of depreciable assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in the statement of operations.
F-46
<PAGE> 122
COMPUTER SOFTWARE DEVELOPMENT COSTS
All costs incurred to establish the technological feasibility of a computer
software product to be sold, leased or otherwise marketed are charged to
research and development expense as incurred. Technological feasibility of a
computer software product is established when the Company has completed all
planning, designing, coding and testing activities that are necessary to
establish that the product can be produced to meet its design specifications
including functions, features and technical performance requirements.
The Company's policy is to capitalize costs incurred after the development
of a working model. Costs to date, subsequent to the development of a working
model, have not been material.
REVENUE RECOGNITION
During 1997, the majority of the Company's revenues resulted from sales of
kits that include smart card readers and software for developing smart card
applications. Revenue from these sales is recognized when a contract has been
executed and the product has been shipped, at which time there are no
significant remaining obligations. Provisions are made at the time of sale for
any insignificant obligations, including telephone support.
During 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
is effective for financial statements beginning after December 15, 1997, and
supersedes SOP 91-1. The AICPA subsequently issued SOP 98-4, which deferred for
one year the effective date of certain provisions of SOP 97-2 with respect to
vendor-specific objective evidence. The Company has early adopted SOP 97-2
during the year ended December 31, 1997, which did not have a material impact on
the financial statements.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Accordingly, the accompanying statement of operations
does not include a provision for income taxes. All income or loss is reported
through the stockholders' personal tax returns. The tax returns and the amount
of taxable income are subject to examination by federal and state taxing
authorities. If such examinations result in changes to taxable income, the tax
liabilities of the stockholders could be changed accordingly.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying value of financial instruments on
the accompanying balance sheet approximates their fair value.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS 131)
was issued. SFAS 131 requires that companies report financial and descriptive
information about their reportable operating segments. Segment information to be
reported is to be based upon the way management organizes the segments for
making operating decisions and assessing performance. The Company believes that
the future effects of SFAS 131 will not be significant to its financial
statements.
F-47
<PAGE> 123
3. PROPERTY AND EQUIPMENT:
A summary of property and equipment at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
IN YEARS AMOUNT
------------ -------
<S> <C> <C>
Computer equipment..................................... 5 $10,748
Production equipment................................... 5 29,537
Furniture and fixtures................................. 5 2,179
-------
42,464
Less-Accumulated depreciation.......................... (6,124)
-------
$36,340
=======
</TABLE>
4. NOTE PAYABLE TO BANK:
Note payable to bank consists of a promissory note, bearing interest at 8.5
percent, with principal and interest due on March 4, 1998. The note is
collateralized by a certificate of deposit owned by a stockholder of the
Company.
5. NOTES PAYABLE TO STOCKHOLDERS:
Notes payable to stockholders are unsecured and consist of the following as
of December 31, 1997:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Notes payable to stockholder, bearing interest at 9%,
principal and interest due in balloon payments at various
dates through December 1998, net of unamortized discount
of approximately $15,000.................................. $317,033
Note payable to stockholder, bearing interest at 8%,
interest payable quarterly, principal due in August 2008,
net of unamortized discount of approximately $17,000...... 33,333
--------
350,366
Less -- current maturities.................................. (317,033)
--------
Notes payable to stockholders, net of current maturities.... $ 33,333
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases office space on a month-to-month basis and leases
certain computer equipment under an operating lease.
Future aggregate minimum rental payments are as follows as of December 31,
1997:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ -------
<S> <C>
1998............................................... $ 5,916
1999............................................... 5,916
2000............................................... 4,930
-------
$16,762
=======
</TABLE>
Rent expense under operating leases for the year ended December 31, 1997,
totaled $10,914.
PRODUCT ROYALTY AGREEMENTS
The Company has entered into two product royalty agreements with various
entities that have provided their licenses or product designs to the Company.
One agreement requires that royalties shall be
F-48
<PAGE> 124
paid on the basis of the quantity of units manufactured. Royalty fees range from
$0.10 to $0.20 per unit manufactured. The other agreement requires a royalty of
$2 to $12 for each time a product is licensed to an end user. No significant
royalty fees were incurred under these arrangements during 1997.
7. RELATED-PARTY TRANSACTIONS:
The Company's management consists of stockholders who are employed by the
Company and are either not paid a salary or are paid salaries at amounts which
are significantly below market rates. Management intends to increase these
salaries once funding is obtained from an outside investor.
8. CAPITAL STOCK:
Upon the Company's incorporation on October 5, 1995, authorized
capitalization consisted of 10,000 shares of $1.00 par value common stock. The
stockholders amended the articles of incorporation on November 22, 1995, to
authorize 100,000 shares of $0.10 par value common stock.
On July 1, 1997, the stockholders amended the Company's articles of
incorporation to increase the number of authorized shares of common stock to
10,000,000, with no par value, and declared a 50 to 1 stock split on the
Company's outstanding common stock. The shares outstanding and all other
references to shares of common stock reported have been restated to give
retroactive effect to the stock split.
On September 29, 1997, the Company issued 50,000 shares of common stock to
a stockholder in exchange for loaning the Company $50,000. On November 8, 1997,
the Company issued 50,986 shares of common stock to a stockholder in exchange
for extending the maturity date on a loan until November 8, 1998. Approximately
$34,000 in debt proceeds were allocated to common stock and recorded as a
discount to the related debt. The discounts are being amortized over the
remaining terms of the respective notes.
During the fourth quarter of 1997, the Company issued approximately 844,000
shares of common stock to employees and new investors at a price of $0.50 per
share, the estimated fair value of the common stock during that period.
9. STOCK COMPENSATION PLANS:
STOCK OPTION PLAN
During October 1997, the Company adopted a stock option plan (the Plan)
which allows the issuance of incentive stock options at an exercise price of
$0.50 per share. Options granted under the Plan vest immediately and expire 10
years from the date of grant. As of December 31, 1997, 354,616 options were
outstanding at an exercise price of $0.50 per share.
Stock option activity for the year ended December 31, 1997, was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, beginning of period............................ -- $ --
Granted................................................... 354,616 0.50
Exercised................................................. -- --
Canceled or expired....................................... -- --
------- -----
Outstanding, end of period.................................. 354,616 $0.50
======= =====
Options vested at year-end.................................. 354,616 $0.50
======= =====
</TABLE>
The weighted-average remaining contractual life for options outstanding at
December 31, 1997, was 4.75 years.
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), under which no compensation
F-49
<PAGE> 125
expense has been recognized. In October 1995, the Financial Accounting Standards
Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
which allows companies to continue following the accounting guidance of APB 25,
but requires disclosure of net income and earnings per share for the effects on
compensation expense, had the accounting guidance of SFAS 123 been adopted.
The Company has elected SFAS 123 for disclosure purposes. Under SFAS 123,
the fair value of each option granted has been estimated as of the grant date
using the minimum value method, which is equivalent to using the Black-Scholes
valuation method for a non-public company, with the following weighted-average
assumptions: risk-free interest rate of 6 percent, expected life of five years
and no expected dividends. Adopting the accounting guidance of SFAS 123 would
have resulted in an increase in compensation expense of approximately $2,500 for
the year ended December 31, 1997.
10. SUBSEQUENT EVENTS:
On October 30, 1998, the Company executed a definitive merger agreement
with PubliCARD, whereby PubliCARD would acquire 100 percent of the common stock
of the Company in exchange for 1,495,000 shares of PubliCARD common stock plus
certain other considerations. Consummation of the transaction is subject to
approval of the Company's shareholders and other customary conditions. In
conjunction with the execution of the letter of intent, PubliCARD provided an
interest free advance of $300,000 to the Company. The advance is evidenced by a
note payable and secured by all of the assets of the Company. The note payable
is due the earlier of September 18, 1999, or the date on which the Company
receives any debt or equity capital from any person.
Subsequent to December 31, 1997, the Company entered into agreements with
various entities related to software licensing arrangements and distribution
partnerships. Under the software licensing arrangements, the Company generally
grants the rights and license to its software technology in exchange for other
technology, or in exchange for the distribution and marketing of the related
software. Under the distribution agreements, the Company generally partners with
a distributor in exchange for providing that distributor with volume discounts
on the Company's products.
The Company adopted an Employee Stock Purchase Plan (ESPP) effective
January 1, 1998. Under the terms of the ESPP, employees who have been with the
Company for at least three months may choose to have up to 15 percent of their
salary withheld to purchase the Company's common stock. The purchase price of
the stock is $0.50 per share. Approximately 17,000 shares were purchased under
the ESPP during 1998. On September 30, 1998, the ESPP was terminated.
F-50
<PAGE> 126
TRITHEIM TECHNOLOGIES, INC.
BALANCE SHEET -- SEPTEMBER 30, 1998
UNAUDITED
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 283,538
Accounts receivable, net of allowance of approximately
$21,376................................................ 81,901
Inventories............................................... 29,852
-----------
Total current assets................................... 395,291
-----------
PROPERTY AND EQUIPMENT, net................................. 42,705
-----------
Total assets........................................... $ 437,996
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 35,917
Accrued expenses.......................................... 68,500
Note payable to bank...................................... 105,024
Note payable to PubliCARD, Inc. .......................... 300,000
Notes payable to stockholders -- current, net of
unamortized discount of approximately $2,000........... 442,462
-----------
Total current liabilities.............................. 951,903
===========
NOTES PAYABLE TO STOCKHOLDERS, net of current maturities and
unamortized discount of approximately $10,000............. 51,345
-----------
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 10,000,000 shares authorized,
6,366,620 shares issued and outstanding................ 483,299
Accumulated deficit....................................... (1,048,551)
-----------
Total stockholders' deficit............................ (565,252)
-----------
Total liabilities and stockholders' deficit............ $ 437,996
===========
</TABLE>
See accompanying note to unaudited financial statements.
F-51
<PAGE> 127
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUES.................................................... $ 202,908 $ 41,865
--------- ---------
OPERATING EXPENSES:
Cost of goods sold........................................ 71,633 7,001
Research and development expenses......................... 206,001 56,979
Selling and marketing expenses............................ 94,739 72,728
General and administrative expenses....................... 188,085 102,031
--------- ---------
Total operating expenses............................... 560,458 238,739
--------- ---------
Loss from operations................................... (357,550) (196,874)
INTEREST EXPENSE, net....................................... 48,549 4,242
--------- ---------
NET LOSS.................................................... $(406,099) $(201,116)
========= =========
</TABLE>
See the accompanying notes to unaudited financial statements
F-52
<PAGE> 128
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1997.................. 6,260,386 $466,891 $ (642,452) $(175,561)
Issuance of common stock.................. 106,234 16,408 -- 16,408
Net loss.................................. -- -- (406,099) (406,099)
--------- -------- ----------- ---------
BALANCE, September 30, 1998................. 6,366,620 $483,299 $(1,048,551) $(565,252)
========= ======== =========== =========
</TABLE>
See the accompanying notes to unaudited financial statements.
F-53
<PAGE> 129
TRITHEIM TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:....................... $(406,099) $(201,116)
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 4,290 4,060
Increase in operating assets and liabilities --
Accounts receivable.................................. (73,642) (6,484)
Inventories.......................................... 15,661 (30,986)
Accounts payable and accrued expenses................ 42,132 10,308
--------- ---------
Net cash used in operating activities............. (417,658) (224,218)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment..................................... (10,656) (41,074)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to stockholders............... 143,441 173,925
Proceeds from note payable to bank........................ 4,573 100,000
Proceeds from note payable to PubliCARD, Inc.............. 300,000 --
Proceeds from issuance of common stock.................... 16,408 311,008
--------- ---------
Net cash provided by financing activities......... 464,422 584,933
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 36,108 319,641
CASH AND CASH EQUIVALENTS, beginning of period.............. 247,430 8,487
--------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 283,538 $ 328,128
========= =========
</TABLE>
See the accompanying notes to unaudited financial statements.
F-54
<PAGE> 130
TRITHEIM TECHNOLOGIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
UNAUDITED
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position of Tritheim Technologies, Inc.
("Tritheim") as of September 30, 1998 and the results of their operations and
their cash flows for the nine months ended September 30, 1998 and 1997. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted. These financial statements should be read in conjunction with the
audited financial statements and notes thereto of Tritheim Technologies, Inc. as
of and for the year ended December 31, 1997.
2. SUBSEQUENT EVENT
On November 24, 1998 (the "Closing Date"), PubliCARD, Inc. ("PubliCARD")
completed the acquisition of Tritheim pursuant to an Agreement and Plan of
Merger dated as of October 30, 1998 (the "Merger Agreement") whereby a
wholly-owned subsidiary of PubliCARD merged with and into Tritheim. As a result
of this merger, Tritheim became a wholly-owned subsidiary of PubliCARD. As
consideration in the merger, holders of Tritheim's common stock received a total
of 1,495,037 shares of common stock of PubliCARD in exchange for their shares of
common stock of Tritheim. In addition, pursuant to the Merger Agreement options
to purchase 354,616 shares of Tritheim common stock outstanding immediately
prior to the closing of the merger were converted into options to purchase
83,270 shares of PubliCARD common stock with an exercise price of $2.00 per
share (subject to anti-dilution adjustments). These PubliCARD options are
exercisable from the Closing Date until the fifth anniversary of the Closing
Date. Furthermore, pursuant to the Merger Agreement, PubliCARD issued on the
Closing Date options to purchase 250,000 shares of PubliCARD common stock to all
of the salaried employees of Tritheim to encourage them to remain in the employ
of Tritheim. These options have an exercise price of $2.00 per share (subject to
anti-dilution adjustments) and will be exercisable from the third anniversary of
the Closing Date until the eighth anniversary of the Closing Date. Pursuant to
the Merger Agreement, PubliCARD satisfied Tritheim's indebtedness, including
accrued interest, to a bank in the amount of $102,000 and to former shareholders
of Tritheim in the amount of $531,000.
F-55
<PAGE> 131
- ------------------------------------------------------
- ------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, sales person or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
PUBLICARD, INC.
4,848,309 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated, except for the SEC
registration fee, the National Association of Securities Dealers, Inc. (the
"NASD") filing fee and the Nasdaq National Market listing fee, fees and
expenses, other than underwriting discounts and commissions, in connection with
the offering described in this registration statement:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,936
Printing and engraving costs................................ 80,000
Legal fees and expenses..................................... 225,000
Accounting fees and expenses................................ 50,000
Miscellaneous............................................... 16,064
--------
Total.................................................. $385,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The PBCL permits a corporation to indemnify its directors and officers
against expenses, judgments, fines and amounts paid in settlement incurred by
them in connection with any pending, threatened or completed action or
proceeding, other than an action by or in the right of the corporation (other
than an action by or in the right of the corporation, a "derivative action"),
and permits such indemnification against expenses incurred in connection with
any pending, threatened or completed derivative action, if the director or
officer has acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation; and, with respect
to any criminal proceeding in a third-party action, had no reasonable cause to
believe his or her conduct was unlawful. The PBCL provides that expenses
incurred in defending any action or proceeding may be paid by the corporation in
advance of the final disposition upon receipt of an undertaking by or on behalf
of the director or officer to repay the amount if it is ultimately determined
that the director or officer is not entitled to be indemnified by the
corporation under Pennsylvania law.
Under the PBCL, the statutory provisions for indemnification and
advancement of expenses are non-exclusive with respect to any other rights, such
as contractual rights, to which a person seeking indemnification or advancement
of expenses may be entitled under PubliCARD's By-laws or otherwise. Such
contractual or other rights may require indemnification against judgments, fines
and amounts paid in settlement incurred by the indemnified person both in
connection with derivative actions and third-party actions, except where the act
or failure to act giving rise to the claim for indemnification is determined by
a court to have constituted willful misconduct or recklessness.
The PBCL permits a corporation to purchase and maintain insurance on behalf
of any director or officer of the corporation against any liability asserted
against the director or officer and incurred in such capacity, whether or not
the corporation would have the power to indemnify the director or officer
against such liability.
Under Section 1713 of the PBCL, if a By-law adopted by the shareholders so
provides, a director shall not be personally liable, as such, for monetary
damages for any action taken or omitted unless the director both (a) breached or
failed to perform the duties of his or her office under Pennsylvania law and (b)
the breach or failure constituted self dealing, willful misconduct or
recklessness.
Article V of PubliCARD's By-laws provides for both the limitation of the
monetary liability of the directors of PubliCARD and for the mandatory
indemnification of directors and officers.
Under Article V of PubliCARD's By-laws, a director will not be held
personally liable to PubliCARD, its shareholders or third parties for monetary
damages as a consequence of any act or
II-1
<PAGE> 133
omission unless the director both (a) breached or failed to perform the duties
of his or her office under Pennsylvania law and (b) the breach or failure
constituted self dealing, willful misconduct or recklessness.
In addition, under Article V of PubliCARD's By-laws, a director, officer
or, at the board of directors' discretion, employee or other person who is or
was serving in any capacity at the request of or for the benefit of PubliCARD,
will be indemnified and held harmless by PubliCARD for all actions taken by him
or her and for all failure to take action to the fullest extent permitted by
Pennsylvania law against all expense, liability and loss, including, without
limitation, attorneys' fees, judgments, fines, taxes, penalties and amounts paid
or to be paid in settlement, actually and reasonably incurred by such director,
officer, employee or other person in connection with any threatened, pending or
completed action, suit or proceeding, including, without limitation, an action,
suit or proceeding by or in the right of PubliCARD, whether civil, criminal,
administrative or investigative. No indemnification is permitted where the act
or failure to act by the person seeking to be indemnified constitutes willful
misconduct or recklessness as determined by a court of competent jurisdiction.
PubliCARD currently maintains directors' and officers' liability insurance
providing for coverage of up to $15,000,000. PubliCARD's assets and equity,
however, may be called upon to provide indemnification to officers and directors
to the extent any indemnified amount exceeds PubliCARD's liability insurance
limit, or to the extent any matter required to be indemnified by PubliCARD's
By-laws falls outside the scope of the policy's coverage.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers pursuant to the foregoing provisions,
PubliCARD has been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
3.1 Amended and Restated Articles of Incorporation, amended and
restated through November 2, 1998, of PubliCARD.
Incorporated by reference to PubliCARD's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998,
dated November 9, 1998.
3.2 By-laws of PubliCARD. Incorporated by reference to
PubliCARD's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, dated March 28, 1991.
3.3 Certificate of Designation, Preferences and Rights of Class
A Preferred Stock, First Series. Incorporated by reference
from PubliCARD's Registration Statement on Form 8-A, dated
September 26, 1988.
4.1 Form of option to purchase common stock of PubliCARD issued
in connection with the Stock Purchase Agreement, dated April
12, 1985, among PubliCARD, Balfour Securities Corporation
and the Purchasers. Incorporated by reference from
PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1994, dated March 31, 1995.
4.2 Form of Warrant Agreement, dated 1986, between PubliCARD and
J. Henry Schroder Bank & Trust Company, as Warrant Agent.
Incorporated by reference from PubliCARD's Registration
Statement on Form S-1, dated October 8, 1986.
4.3 Form of Amendment No. 1 to Warrant Agreement, dated August
13, 1997, between PubliCARD and Publicker Industries Inc.,
successor to J. Henry Schroder Bank & Trust Company, as
Warrant Agent. Incorporated by reference from PubliCARD's
Current Report on Form 8-K, filed on August 15, 1997.
4.4 Form of Warrant Agreement, dated 1986, between PubliCARD and
Drexel Burnham Lambert Incorporated. Incorporated by
reference from PubliCARD's Registration Statement on Form
S-1, dated October 8, 1986.
</TABLE>
II-2
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
4.5 Form of Amendment No. 1 to Warrant Agreement, dated August
13, 1997, between PubliCARD and Harry I. Freund and Jay S.
Goldsmith. Incorporated by reference from PubliCARD's
Current Report on Form 8-K, filed on August 15, 1997.
4.6 Amended and Restated Rights Agreement, dated as of August 7,
1998, between PubliCARD and Continental Stock Transfer &
Trust Company, as Rights Agent. Incorporated by reference
from PubliCARD's Current Report on Form 8-K, filed on
September 17, 1998.
5.1 Opinion of Schnader, Harrison, Segal & Lewis with respect to
legality of securities being registered.*
10.1 Agreements, dated as of August 1987, between PubliCARD and
Harry I. Freund, Jay S. Goldsmith, David L. Herman and James
J. Weis concerning a change of control of PubliCARD.
Incorporated by reference from PubliCARD's Form 8 Amendment
to PubliCARD's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1987, filed on December 18, 1987.
10.2 PubliCARD 1991 Stock Option Plan. Incorporated by reference
from PubliCARD's Form 8 Amendment to PubliCARD's Annual
Report on Form 10-K for the year ended December 31, 1991,
dated August 14, 1992.
10.3 Employment Agreement between PubliCARD and James J. Weis,
dated February 17, 1987. Incorporated by reference from
PubliCARD's Form 8 Amendment to PubliCARD's Annual Report on
Form 10-K for the year ended December 31, 1991, dated August
14, 1992.
10.4 PubliCARD 1993 Long Term Incentive Plan. Incorporated by
reference from PubliCARD's Annual Report on Form 10-K for
the year ended December 31, 1993, dated March 29, 1994.
10.5 PubliCARD Non-employee Director Stock Option Plan.
Incorporated by reference from PubliCARD's Annual Report on
Form 10-K for the year ended December 31, 1993, dated March
29, 1994.
10.6 Asset Purchase Agreement, dated August 16, 1996, among
Masterview Window Company, Inc., PubliCARD, Hanten
Acquisition Co. and Masterview Acquisition Corp.
Incorporated by reference from PubliCARD's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, dated
November 14, 1996.
10.7 Agreement and Plan of Merger, dated as of October 30, 1998,
among PubliCARD, Publicker Smart Card Acquisition Co.,
Tritheim Technologies, Inc. and the Security Holders of
Tritheim Technologies, Inc. Incorporated by reference from
PubliCARD's Current Report on Form 8-K, filed on December 7,
1998.
23.1 Consent of Arthur Andersen LLP, Stamford, Connecticut.
23.2 Consent of Arthur Andersen LLP, San Jose, California.
23.3 Consent of Arthur Andersen LLP, Tampa, Florida.
23.4 Consent of Schnader, Harrison, Segal & Lewis (included in
Exhibit 5.1).*
24.1 Power of Attorney*
* Previously filed.
</TABLE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement.
(b) The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
II-3
<PAGE> 135
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned registrant hereby undertakes to remove from
registration by means of a post-effective amendment any of the securities being
registered which remain unsold at the termination of the offering.
(d) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fairfield, State of Connecticut, on August 16, 1999.
PUBLICARD, INC.
By: /s/ JAMES J. WEIS
------------------------------------
Name: James J. Weis
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES J. WEIS Director, Chief Executive Officer August 16, 1999
- --------------------------------------------- and President (principal executive
James J. Weis officer)
* Director and Chairman
- ---------------------------------------------
Harry I. Freund
* Director and Vice Chairman
- ---------------------------------------------
Jay S. Goldsmith
* Director
- ---------------------------------------------
Clifford B. Cohn
* Director
- ---------------------------------------------
David L. Herman
* Director
- ---------------------------------------------
L.G. Schafran
* Director
- ---------------------------------------------
Hatim A. Tyabji
/s/ ANTONIO L. DELISE Vice President, Chief Financial August 16, 1999
- --------------------------------------------- Officer and Secretary (principal
Antonio L. DeLise financial and accounting officer)
*By: /s/ ANTONIO L. DELISE August 16, 1999
- --------------------------------------------
Antonio L. DeLise
Attorney-in-fact
</TABLE>
II-5
<PAGE> 137
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE NO.
- ----------- ------- --------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation, amended and
restated through November 2, 1998, of PubliCARD.
Incorporated by reference to PubliCARD's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998,
dated November 9, 1998.
3.2 By-laws of PubliCARD. Incorporated by reference to
PubliCARD's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, dated March 28, 1991.
3.3 Certificate of Designation, Preferences and Rights of Class
A Preferred Stock, First Series. Incorporated by reference
from PubliCARD's Registration Statement on Form 8-A, dated
September 26, 1988.
4.1 Form of option to purchase common stock of PubliCARD issued
in connection with the Stock Purchase Agreement, dated April
12, 1985, among PubliCARD, Balfour Securities Corporation
and the Purchasers. Incorporated by reference from
PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1994, dated March 31, 1995.
4.2 Form of Warrant Agreement, dated 1986, between PubliCARD and
J. Henry Schroder Bank & Trust Company, as Warrant Agent.
Incorporated by reference from PubliCARD's Registration
Statement on Form S-1, dated October 8, 1986.
4.3 Form of Amendment No. 1 to Warrant Agreement, dated August
13, 1997, between PubliCARD and Publicker Industries Inc.,
successor to J. Henry Schroder Bank & Trust Company, as
Warrant Agent. Incorporated by reference from PubliCARD's
Current Report on Form 8-K, filed on August 15, 1997.
4.4 Form of Warrant Agreement, dated 1986, between PubliCARD and
Drexel Burnham Lambert Incorporated. Incorporated by
reference from PubliCARD's Registration Statement on Form
S-1, dated October 8, 1986.
4.5 Form of Amendment No. 1 to Warrant Agreement, dated August
13, 1997, between PubliCARD and Harry I. Freund and Jay S.
Goldsmith. Incorporated by reference from PubliCARD's
Current Report on Form 8-K, filed on August 15, 1997.
4.6 Amended and Restated Rights Agreement, dated as of August 7,
1998, between PubliCARD and Continental Stock Transfer &
Trust Company, as Rights Agent. Incorporated by reference
from PubliCARD's Current Report on Form 8-K, filed on
September 17, 1998.
5.1 Opinion of Schnader, Harrison, Segal & Lewis with respect to
legality of securities being registered.*
10.1 Agreements, dated as of August 1987, between PubliCARD and
Harry I. Freund, Jay S. Goldsmith, David L. Herman and James
J. Weis concerning a change of control of PubliCARD.
Incorporated by reference from PubliCARD's Form 8 Amendment
to PubliCARD's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1987, filed on December 18, 1987.
10.2 PubliCARD 1991 Stock Option Plan. Incorporated by reference
from PubliCARD's Form 8 Amendment to PubliCARD's Annual
Report on Form 10-K for the year ended December 31, 1991,
dated August 14, 1992.
10.3 Employment Agreement between PubliCARD and James J. Weis,
dated February 17, 1987. Incorporated by reference from
PubliCARD's Form 8 Amendment to PubliCARD's Annual Report on
Form 10-K for the year ended December 31, 1991, dated August
14, 1992.
</TABLE>
<PAGE> 138
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT PAGE NO.
- ----------- ------- --------
<S> <C> <C>
10.4 PubliCARD 1993 Long Term Incentive Plan. Incorporated by
reference from PubliCARD's Annual Report on Form 10-K for
the year ended December 31, 1993, dated March 29, 1994.
10.5 PubliCARD Non-employee Director Stock Option Plan.
Incorporated by reference from PubliCARD's Annual Report on
Form 10-K for the year ended December 31, 1993, dated March
29, 1994.
10.6 Asset Purchase Agreement, dated August 16, 1996, among
Masterview Window Company, Inc., PubliCARD, Hanten
Acquisition Co. and Masterview Acquisition Corp.
Incorporated by reference from PubliCARD's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, dated
November 14, 1996.
10.7 Agreement and Plan of Merger, dated as of October 30, 1998,
among PubliCARD, Publicker Smart Card Acquisition Co.,
Tritheim Technologies, Inc. and the Security Holders of
Tritheim Technologies, Inc. Incorporated by reference from
PubliCARD's Current Report on Form 8-K, filed on December 7,
1998.
23.1 Consent of Arthur Andersen LLP, Stamford, Connecticut.
23.2 Consent of Arthur Andersen LLP, San Jose, California.
23.3 Consent of Arthur Andersen LLP, Tampa, Florida.
23.4 Consent of Schnader, Harrison, Segal & Lewis (included in
Exhibit 5.1).*
24.1 Power of Attorney*
* Previously filed.
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the reference to
our Firm under the captions "Prospectus Summary -- Summary Financial Data,"
"Selected Consolidated Financial Data" and "Experts" and to the use of our
report on the consolidated financial statements of PubliCARD, Inc. dated March
26, 1999, included in Post-Effective Amendment No. 1 to the Form S-1
Registration Statement on Form S-3 and the related Prospectus of PubliCARD, Inc.
dated August 16, 1999.
/s/ ARTHUR ANDERSEN LLP
Stamford, Connecticut
August 16, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the reference to
our Firm under the caption "Experts" and to the use of our reports on the
financial statements of Amazing! Smart Card Technologies Inc. and Greystone
Peripherals, Inc. dated April 16, 1999 and April 23, 1999, respectively,
included in Post-Effective Amendment No. 1 to the Form S-1 Registration
Statement on Form S-3 and the related Prospectus of PubliCARD, Inc. dated August
16, 1999.
/s/ ARTHUR ANDERSEN LLP
San Jose, California
August 16, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the reference to
our Firm under the caption "Experts" and to the use of our report on the
financial statements of Tritheim Technologies, Inc. dated November 6, 1998,
included in Post-Effective Amendment No. 1 to the Form S-1 Registration
Statement on Form S-3 and the related Prospectus of PubliCARD, Inc. dated August
16, 1999.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida
August 16, 1999
