<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-29794
PUBLICARD, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-0991870
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
620 FIFTH AVENUE, 7TH FLOOR, NEW YORK, NY 10020
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (212) 651-3102
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ No / /.
Number of shares of Common Stock outstanding as of July 31, 2000: 23,474,400
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash, including short-term investments of
$24,625 in 2000 and $17,541 in 1999 $ 25,041 $ 18,236
Trade receivables, less allowance for
doubtful accounts of $82 in 2000 and $92 in 1999 1,536 1,720
Inventories 1,548 903
Net assets of discontinued operations -- 10,832
Other 668 613
--------- ---------
Total current assets 28,793 32,304
--------- ---------
Equipment and leasehold improvements, net 1,415 1,063
Goodwill 10,189 11,508
Other assets 637 613
--------- ---------
$ 41,034 $ 45,488
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 2,321 $ 2,413
Accrued liabilities 10,134 6,002
--------- ---------
Total current liabilities 12,455 8,415
Other non-current liabilities 5,723 6,675
--------- ---------
Total liabilities 18,178 15,090
--------- ---------
Shareholders' equity:
Common shares, $0.10 par value,
Authorized - 40,000,000
Issued - 27,491,701 in 2000 and 26,191,189 in 1999 2,749 2,619
Additional paid-in capital 115,700 111,476
Accumulated deficit (84,871) (74,611)
Common shares held in treasury, at cost (10,468) (8,649)
Unearned compensation (254) (437)
--------- ---------
Total shareholders' equity 22,856 30,398
--------- ---------
$ 41,034 $ 45,488
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-1
<PAGE> 3
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,091 $ 71 $ 2,642 $ 78
Cost of sales 621 38 1,359 34
------------ ------------ ------------ ------------
Gross margin 470 33 1,283 44
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 1,679 1,244 3,472 2,536
Sales and marketing 1,954 490 3,797 1,001
Product development 1,373 209 2,175 453
Stock compensation 183 302 608 690
Goodwill amortization 660 405 1,319 808
------------ ------------ ------------ ------------
5,849 2,650 11,371 5,488
------------ ------------ ------------ ------------
Loss from operations (5,379) (2,617) (10,088) (5,444)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 111 106 299 256
Interest expense (20) (40) (58) (93)
Cost of pensions - non-operating (201) (185) (413) (420)
Other costs -- (115) -- (68)
------------ ------------ ------------ ------------
(110) (234) (172) (325)
------------ ------------ ------------ ------------
Loss from continuing operations (5,489) (2,851) (10,260) (5,769)
Loss from discontinued operations -- (391) -- (3,586)
Loss on disposition of discontinued operations -- (2,100) -- (2,100)
------------ ------------ ------------ ------------
Net Loss $ (5,489) $ (5,342) $ (10,260) $ (11,455)
============ ============ ============ ============
Basic loss per common share:
Continuing operations $ (.24) $ (.15) $ (.45) $ (.32)
Discontinued operations -- (.14) -- (.32)
------------ ------------ ------------ ------------
$ (.24) $ (.29) $ (.45) $ (.64)
============ ============ ============ ============
Weighted average shares outstanding 23,192,500 18,250,274 22,917,886 17,825,907
============ ============ ============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-2
<PAGE> 4
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL COMMON SHARE-
SHARES PAID-IN ACCUMULATED TREASURY UNEARNED HOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT SHARES(1) COMPENSATION EQUITY
---------- ------ ---------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 26,191,189 $2,619 $111,476 $(74,611) $ (8,649) $(437) $ 30,398
Common shares issued:
Stock options plans 1,091,679 109 2,668 -- (1,819) -- 958
Shares pursuant to employment
and separation agreements 82,500 8 644 -- -- -- 652
Business acquisition 66,333 7 688 -- -- -- 695
Pension plan contribution 60,000 6 224 -- -- -- 230
Amortization of unearned
compensation -- -- -- -- -- 183 183
Net loss -- -- -- (10,260) -- -- (10,260)
---------- ------ -------- -------- -------- ----- --------
Balance - June 30, 2000 27,491,701 $2,749 $115,700 $(84,871) $(10,468) $(254) $ 22,856
========== ====== ======== ======== ======== ===== ========
</TABLE>
(1) Represents common shares held in treasury of 4,058,297 as of June 30, 2000
and 3,725,024 as of December 31, 1999.
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
F-3
<PAGE> 5
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(10,260) $ (5,769)
Adjustments to reconcile loss to net cash
used in continuing operations:
Goodwill amortization 1,319 808
Stock compensation expense 608 690
Depreciation 123 63
Changes in operating assets and liabilities (2,317) (424)
-------- --------
Net cash used in continuing operations (10,527) (4,632)
Loss from discontinued operations -- (5,686)
Loss on disposition -- 2,100
Non-cash charges 914 4,104
Change in net assets of discontinued operations (4,101) (1,601)
-------- --------
Net cash used in discontinued operations (3,187) (1,083)
-------- --------
Net cash used in operating activities (13,714) (5,715)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures from continuing operations (475) (212)
Acquisition of businesses, net of cash acquired -- (692)
-------- --------
Net cash used in continuing operations (475) (904)
Proceeds from discontinued operations 21,143 14
Capital expenditures from discontinued operations (167) (400)
Acquisition of businesses, net of cash acquired -- (2,192)
-------- --------
Net cash provided by (used in) discontinuing operations 20,976 (2,578)
-------- --------
Net cash provided by (used in) investing activities 20,501 (3,482)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares pursuant to stock option exercises 958 509
Repayment of notes payable from discontinued operations (940) (74)
Purchase of redeemable shares -- (503)
-------- --------
Net cash provided by (used in) financing activities 18 (68)
-------- --------
NET INCREASE (DECREASE) IN CASH 6,805 (9,265)
CASH - BEGINNING OF PERIOD 18,236 18,482
-------- --------
CASH - END OF PERIOD $ 25,041 $ 9,217
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 6
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
PubliCARD, Inc. ("PubliCARD" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in 1913. PubliCARD entered the smart card industry
in early 1998, and began to develop solutions for the conditional access,
security, payment system and data storage needs of industries utilizing smart
card technology. The Company made a series of acquisitions to enhance its
position in the smart card industry. In March 2000, PubliCARD's Board of
Directors, together with its management team, determined to integrate its
operations and focus on deploying infrastructure products and end-to-end
solutions utilizing chip (smart card) technology in the broadband market. To
effect this new business strategy, in March 2000, the Board of Directors adopted
a plan of disposition pursuant to which the Company is divesting its non-core
operations. See Note 4 for a discussion on the disposition plan.
The Company will pursue its new business strategy through the
integration of its remaining operations. As a result of this integration, the
Company's product range includes application specific integrated circuits, also
known as ASICs, for television set-top boxes, secure electronic commerce,
Internet security and software copy protection. In addition, the Company is
developing point-of-deployment applications, also known as PODs, which scramble
and unscramble data entering and exiting set-top boxes. PubliCARD will continue
to design closed environment solutions, including small value electronic cash
systems and database management solutions. The Company provides systems for
closed populations to allow individual user access, unique rights and
monitoring.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of the Company and its
subsidiary companies as of June 30, 2000 and the results of their operations and
cash flows for the three and six months ended June 30, 2000 and 1999. 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
financial statements and notes thereto included in the Company's Form 10-K for
the year ended December 31, 1999, as amended.
EARNINGS (LOSS) PER COMMON 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.
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 2000 and 1999 as the effect of stock options and warrants were
antidilutive.
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 June 30,
2000 and December 31, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ----
<S> <C> <C>
Raw materials and supplies $ 585 $599
Work in process 40 48
Finished goods 923 256
------ ----
$1,548 $903
====== ====
</TABLE>
1
<PAGE> 7
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS
On November 16, 1999, the Company acquired 100% of the common stock of
Absec Ltd., a Northern Ireland company ("Absec") that designs closed end
environment solutions, including small value electronic cash systems and
database management solutions. The aggregate purchase price was approximately
$5.5 million and included the issuance of 388,209 shares of common stock and
options to purchase a total of 300,000 shares of common stock at an exercise
price of $6.19 per 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 $3,455
Cash paid 1,561
Acquisition expenses 525
------
$5,541
======
Allocation of purchase price:
Net assets $ 498
Goodwill 5,043
------
$5,541
======
</TABLE>
The assets and liabilities of Absec were recorded at their estimated fair
values as of the acquisition date and could be subject to adjustment pending the
finalization of certain acquisition costs and related expenses. The aggregate
fair value of Absec's research and development efforts that had not reached
technological feasibility and had no alternative future uses was determined by
an appraisal to be insignificant and resulted in no charge to the Company's
financial statements. Goodwill represents the excess of the purchase price over
the fair value of identifiable tangible assets acquired and is amortized using
the straight-line method over its estimated life of five years.
The Absec acquisition has been accounted for as a purchase and,
accordingly, the results are included in the consolidated financial statements
of the Company since the date of acquisition. The following summarized unaudited
pro forma financial information for the six months ended June 30, 1999 assumes
that the acquisition occurred as of January 1, 1999 (in thousands except per
share data):
<TABLE>
<S> <C>
Net sales $ 2,620
Net loss from continuing operations (6,226)
Net loss per share from continuing operations (.34)
</TABLE>
The pro forma information is not necessarily indicative of the results that
would have been reported had such event actually occurred on the date specified,
nor is it intended to project the Company's results of operations or financial
position for any future period or date.
During 1999, the Company acquired Amazing! Smart Card Technologies, Inc.
("Amazing") and Greystone Peripherals, Inc. ("Greystone") and increased its
ownership interest in Greenwald Intellicard, Inc. ("Greenwald Intellicard"). In
March 2000, the Company's Board of Directors adopted a plan to dispose of these
businesses. See Note 4.
On February 11, 1999, the Company acquired 100% of the common stock of
Amazing, a California company that
2
<PAGE> 8
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
develops smart card solutions and manufactures smart cards. The aggregate
purchase price was approximately $5.9 million 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 acquired 100% of the common
stock of Greystone, a California company that principally develops and
distributes hard disk duplicators. The aggregate purchase price was
approximately $9.1 million 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
amount and components of the purchase price along with the allocation of the
purchase price are as follows (in thousands):
<TABLE>
<CAPTION>
Amazing Greystone
------- ---------
<S> <C> <C>
Purchase price:
Value of common stock and stock options $ 5,327 $ 8,729
Acquisition expenses 597 414
--------- ---------
$ 5,924 $ 9,143
========= =========
Allocation of purchase price:
Net assets (liabilities) of acquired businesses $ (1,371) $ 306
In-process research and development 1,509 1,410
Goodwill 5,786 7,427
--------- ---------
$ 5,924 $ 9,143
========= =========
</TABLE>
The assets and liabilities of Amazing and Greystone were recorded at their
fair values as of the respective acquisition dates. 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 $1.5
million and $1.4 million for Amazing and Greystone, respectively, and was
expensed at the respective acquisition dates. Goodwill represents the excess of
the purchase price over the fair value of identifiable tangible assets acquired
and is amortized using the straight-line method over its estimated life of five
years. The acquisitions of Amazing and Greystone have been accounted for under
the purchase method of accounting and, accordingly, their results are included
in the consolidated financial statements of the Company since the respective
acquisition dates.
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 appliance industry. The
initial cash investment in Greenwald Intellicard, all of which was provided by
the Company, was $314,000. The Company had two fixed price options aggregating
$150,000 plus 66,333 shares of common stock to increase its ownership to 100%.
The Company exercised these options in February 1999 and February 2000.
NOTE 3 - SEGMENT DATA
As a result of the disposition plan (See Note 4) and because the Company
predominantly operates in one industry, that being the deployment of solutions
for the broadband marketplace, the Company reports as a single segment. Sales by
geographical areas for the six months ended June 30, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
United States $ 302 $78
Europe 2,173 --
Far East 31 --
Rest of world 136 --
------ ---
$2,642 $78
====== ===
</TABLE>
3
<PAGE> 9
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has operations in the United States and United Kingdom.
Identifiable assets by country as of June 30, 2000 and December 31, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
United States $27,877 $30,804
United Kingdom 2,968 3,176
------- -------
$30,845 $33,980
======= =======
</TABLE>
NOTE 4 - DISCONTINUED OPERATIONS
In March 2000, the Company's Board of Directors adopted a plan to dispose
of the operations of the Company's Greenwald Industries Inc. ("Greenwald"),
Greenwald Intellicard, Greystone and Amazing subsidiaries. These subsidiaries
design, manufacture and distribute mechanical and smart card laundry solutions,
hard disk duplicators and smart cards. In the fourth quarter of 1999, the
Company recorded a loss of $2.0 million related to the disposition plan, net of
the expected gain on the disposition of these businesses. The loss provision was
based on estimates of the proceeds expected to be realized on the dispositions
and the results of operations through the disposition or wind-down dates. The
amounts the Company will ultimately realize could differ from the amounts
assumed in arriving at the charge recorded.
On June 29, 2000, the Company completed the sale of substantially all of
the assets of its Greenwald and Greenwald Intellicard subsidiaries to The
Eastern Company ("Eastern") for $22.5 million in cash less $1.75 million held in
escrow to secure the payment of certain indemnification obligations. As part of
the transaction, Eastern assumed certain liabilities of Greenwald and
Intellicard, including certain contractual liabilities, accounts payable and
accrued liabilities. Pending resolution of the final disposition of the
Company's remaining discontinued operations, no gain on the sale of Greenwald
and Greenwald Intellicard has been recognized. The Company is actively seeking a
purchaser for Greystone and is winding-down the operations of Amazing.
In March 1999, the Company's Board of Directors adopted a plan to dispose
of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates
("OSM"). During 1999, the Company revised its estimates of expected operating
results and wind-down costs and recorded a loss provision of $3.0 million, of
which $2.1 million was recorded in the second quarter of 1999. Approximately
$1.2 million related to the write-off of OSM's goodwill. The wind-down of OSM
has been substantially completed.
The results of the operations of Greenwald, Greenwald Intellicard, Amazing,
Greystone and OSM have been reflected as discontinued operations. Certain
operating information with respect to discontinued operations for the six months
ended June 30, 2000 or through their disposition dates of June 29, 2000 for
Greenwald and Intellicard, are summarized as follows (in thousands):
<TABLE>
<S> <C>
Net sales $ 11,717
Cost of sales 7,438
Operating expenses 4,449
Goodwill amortization 694
Interest expense, net 10
Loss from discontinued operations (874)
</TABLE>
4
<PAGE> 10
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loss from discontinued operations for the six months ended June 30,
2000 of $874,000 has been deferred since it is anticipated that the income from
the disposal of these operations will be utilized to offset any potential losses
through their expected disposition dates.
Summarized balance sheet information with respect to the discontinued
operations as of June 30, 2000 is as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 4,471
Non-current assets 583
Current liabilities and disposition reserves (10,362)
Non-current liabilities (14)
---------
Net liabilities of discontinued operations $ (5,322)
==========
</TABLE>
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities are net of acquisitions of
businesses and consisted of the following for the six months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Trade receivables $ 184 $ 16
Inventories (645) (64)
Other current assets (55) 1
Other assets (24) 31
Trade accounts payable (92) 229
Accrued liabilities (963) 407
Other non-current liabilities (722) (1,044)
------- -------
$(2,317) $ (424)
======= =======
</TABLE>
Acquisition of businesses in the consolidated statement of cash flows is net of
cash acquired and includes debt assumed and immediately repaid. Cash paid for
interest during 2000 and 1999 was $134,000 and $191,000, respectively. No income
taxes were paid in 2000 and 1999. Non-cash investing activities include the
acquisitions of Amazing, Greystone and Greenwald Intellicard for shares of
common stock and options valued at $696,000 and $14.1 million in 2000 and 1999,
respectively, as described in Note 2.
5
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q 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 "Factors That May Affect Future Results" 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.
OVERVIEW
PubliCARD entered the smart card industry in early 1998, and began to
develop solutions for the conditional access, security, payment system and data
storage needs of industries utilizing smart card technology. PubliCARD made a
series of acquisitions to enhance its position in the smart card industry:
- In February 1998, PubliCARD acquired, through a joint venture
arrangement in Greenwald Intellicard, the assets and
intellectual property of Intellicard Systems, Ltd. Greenwald
Intellicard provides smart cards, smart card readers, value
transfer stations, card management software and machine
interface boards for the commercial laundry appliance
industry. PubliCARD initially owned 50% of Greenwald
Intellicard, and acquired the remaining 50% in February 1999
and February 2000.
- In November 1998, PubliCARD acquired Tritheim Technologies,
Inc. ("Tritheim"), which develops conditional access and
security products for the software industry, computers and
the electronic information and digital video broadcast, also
known as DVB, industry.
- In February 1999, PubliCARD acquired Amazing, a developer of
consumer smart card solutions and a manufacturer of
customized smart cards.
- In February 1999, PubliCARD acquired Greystone, a developer
of hard disk duplicators.
- In November 1999, PubliCARD acquired Absec, a designer
of closed environment solutions, including small value
electronic cash systems and database management solutions.
Through Absec, PubliCARD provides systems for closed
populations to allow individual user access, unique rights and
monitoring.
While PubliCARD developed a number of successful smart card products
and solutions, its operations were fragmented throughout a variety of markets.
PubliCARD's Board of Directors, together with its management team, determined to
integrate its operations and focus on a single market in which:
6
<PAGE> 12
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
- high growth potential exists;
- PubliCARD has established relationships;
- PubliCARD has already deployed products and gained
credibility; and
- PubliCARD possesses core technologies and competencies.
PubliCARD determined that it could leverage its existing chip (smart
card) technology for deployment in the rapidly growing broadband market, which
it had already penetrated and which PubliCARD believes exhibits each of the
characteristics identified above. PubliCARD currently is positioning itself to
be a leading provider of end-to-end solutions to enable access and secure
content and transactions for the broadband market. PubliCARD's broadband
initiative is driven by its proprietary technology and proven engineering and
design talent. PubliCARD's proprietary technologies facilitate content
protection and transaction security.
To effect this new business strategy, in March 2000, the Board of
Directors of PubliCARD adopted a plan of disposition pursuant to which PubliCARD
is divesting its non-core operations. As a result of this plan, on June 29,
2000, the Company completed the sale of substantially all of the assets of its
Greenwald and Greenwald Intellicard subsidiaries to Eastern for a sale price
of $22.5 million. As part of the transaction, Eastern assumed certain
liabilities of Greenwald and Greenwald Intellicard, including certain
contractual liabilities, accounts payable and accrued liabilities. Greenwald
and Greenwald Intellicard manufacture, market and distribute
mechanical coin handling systems and smart card solutions for the commercial
laundry industry. PubliCARD has engaged a broker to assist in the sale of its
Greystone subsidiary. Finally, as part of this plan, PubliCARD is also
winding-down the operations of Amazing.
PubliCARD will pursue its new business strategy through the integration
of its remaining operations. As a result of this integration, PubliCARD's
product range includes ASICs for television set-top boxes, secure electronic
commerce, Internet security and software copy protection. PubliCARD's ASICs
incorporate multiple chip set functionality into a single integrated circuit
board. In addition, PubliCARD is developing PODs, which scramble and unscramble
data entering and exiting set-top boxes. In addition, PubliCARD will continue
to design closed environment solutions, including small value electronic cash
systems and database management solutions. PubliCARD provides systems for
closed populations to allow individual user access, unique rights and
monitoring.
Presentation
The results of operations for the three months and six months ended June
30, 1999 have been restated to reflect Greenwald, Greenwald Intellicard, Amazing
and Greystone as discontinued operations. In addition, the results of operations
for Absec have been reflected in the financial statements from its acquisition
date of November 16, 1999.
Sales
Revenues are generated from infrastructure product sales, licenses of
software products, maintenance contracts and software development services.
Revenue from product sales is recorded upon shipment of the product. Provisions
are recorded for estimated warranty repairs, returns and bad debts at the time
the product is shipped. Software license fees are recognized upon shipment if a
signed contract exists, the fee is fixed and determinable and the collection of
the resulting receivable is probable. Revenue from
7
<PAGE> 13
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
maintenance and support fees are recognized ratably over the contract period.
Cost of sales and operating expenses
Cost of sales consists primarily of third-party contract manufacturing
costs, material, personnel costs and overhead.
Sales and marketing expenses consist primarily of personnel and travel
costs, public relations, trade shows and marketing materials. Sales and
marketing expenses are expected to increase significantly over the next year due
to increased headcount and geographic expansion.
Product development expenses consist primarily of personnel and travel
costs, independent consultants and contract engineering services. The Company
believes that a significant level of development expenditures are required in
order to enable it to quickly introduce new solutions that incorporate the
latest technological advances and to develop and maintain close relationships
with key suppliers of components and technologies. The Company's future success
will depend upon its ability to develop and to introduce new solutions on a
timely basis that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers.
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance and accounting,
human resources, risk management and legal. Expenses are expected to increase
due to additional hires.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
SALES. Consolidated sales increased to $1.1 million in 2000 compared to
$71,000 for 1999. The increase in the second quarter sales is primarily
attributable to the Company's acquisition of Absec in late 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.0 million
in 2000 compared to $490,000 in 1999. The increase was due to the Absec
acquisition in late 1999 and additional headcount increases throughout 1999 and
2000. As of June 30, 2000 the Company had approximately 48 sales and marketing
personnel versus nine as of June 30, 1999.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses include expenses
associated with the development of new products and enhancements to existing
products. Product development expenses amounted to $1.4 million in 2000 compared
to $209,000 in 1999. Expenses increased in 2000 primarily due to the Absec
acquisition in late 1999 and headcount additions for the ongoing ASICs, reader
and software solution development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarter ended June 30, 2000 increased by approximately 35% to $1.7 million
from $1.2 million for 1999. The increase was due to higher corporate
expenditures, primarily legal, consulting and professional fees, and $158,000 of
expenses, mainly salaries and benefits, associated with the Absec acquisition in
late 1999.
STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and
1999 principally relates to the issuance of stock awards and below market stock
option grants to executives hired in 1999 and the issuance of stock options for
consulting services.
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GOODWILL AMORTIZATION. Goodwill and other intangibles associated with the
Tritheim and Absec acquisitions are being amortized over a five year period.
Amortization amounted to $660,000 and $405,000 in 2000 and 1999, respectively.
OTHER INCOME AND EXPENSE. Interest income increased slightly to $111,000 for
2000 from $106,000 for 1999 principally due to higher interest rates. Interest
expense, which principally relates to interest on the remaining environmental
obligation (see below), decreased to $20,000 in 2000 compared to $40,000 in
1999. Other expense in 1999 of $115,000 includes a charge associated with a
stock sale price guarantee.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
SALES. Consolidated sales increased to $2.6 million in 2000 compared to
$78,000 for 1999. The increase in the second quarter sales is primarily
attributable to the Company's acquisition of Absec in late 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $3.8 million
in 2000 compared to $1.0 million in 1999. The increase was due to the Absec
acquisition in late 1999 and additional headcount increases throughout 1999 and
2000.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to $2.2
million in 2000 compared to $453,000 in 1999. Expenses increased in 2000
primarily due to the Absec acquisition in late 1999 and headcount additions for
the ongoing ASICs, reader and software solution development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarter ended June 30, 2000 increased by approximately 37% to $3.5 million
from $2.5 million for 1999. The increase was due to higher corporate
expenditures, primarily legal, consulting and professional fees, and $324,000 of
expenses, mainly salaries and benefits, associated with the Absec acquisition in
late 1999.
STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and
1999 principally relates to the change in terms of stock options awarded to two
former employees of the Company, the issuance of stock awards and below market
stock option grants to two executives hired in 1999 and the issuance of stock
options for consulting services.
GOODWILL AMORTIZATION. Goodwill and other intangibles associated with the
Tritheim and Absec acquisitions are being amortized over a five year period.
Amortization amounted to $1.3 million and $808,000 in 2000 and 1999,
respectively.
OTHER INCOME AND EXPENSE. Interest income increased slightly to $299,000 for
2000 from $256,000 for 1999 principally due to higher interest rates. Interest
expense, which principally relates to interest on the remaining environmental
obligation (see below), decreased to $58,000 in 2000 compared to $93,000
in 1999. Other expense in 1999 of $68,000 includes a charge associated with a
stock sale price guarantee offset by a gain on real estate sold in January 1999.
LIQUIDITY
The Company has financed its operations over the last two years primarily
through the sale of common stock and the sale of non-core businesses. During the
six months ended June 30, 2000, cash, including short-term investments,
increased by $6.8 million to $25.0 million as of June 30, 2000.
Operating activities from continuing operations utilized cash of $10.5
million in 2000 and principally
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consisted of the loss from continuing operations of $10.3 million and a
increase in net operating assets and liabilities of $2.3 million offset by
non-cash charges of $2.1 million for goodwill amortization, stock compensation
expense and depreciation. Operating activities from discontinued operations
utilized cash of $3.2 million.
Investing activities generated cash of $20.5 million in 2000 and consisted
principally of net proceeds from the sale of substantially all of the assets of
the Company's Greenwald and Greenwald Intellicard subsidiaries. This was offset
with capital expenditures from continuing and discontinuing operations of
$475,000 and $167,000, respectively.
Financing activities provided cash of $18,000 in 2000 and consisted of
proceeds from the exercise of options to purchase common stock of $958,000
offset by the repayment of notes payable from discontinued operations of
$940,000.
During the first six months of 2000, the Company's capital expenditures from
continuing operations totaled $475,000. The Company anticipates that its level
of capital expenditures for 2000 will be greater than 1999 due to the expected
growth in headcount and the expenditure requirements of Absec, which was
acquired late in 1999. The Company has not entered into any material commitments
for acquisitions or capital expenditures and has the ability to increase or
decrease capital expenditure levels as required. The Company anticipates that it
will be able to fund its capital expenditures during 2000 with its available
cash resources as well as through capital equipment financing.
The Company has experienced negative cash flow from operating activities in
the past and expects to experience negative cash flow in 2000 and 2001. Future
uses of cash include the following:
- The Company expects to substantially increase expenditures to support
the expansion of sales and marketing efforts, new product development,
working capital growth and capital expenditures. Also, there will be a
need to fund new initiatives in the broadband market before there is a
reasonable expectation to derive any significant revenues from this
market.
- In April 1996, a consent decree(the "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 $14.4 million plus interest
to the United States and Commonwealth of Pennsylvania. Through
June 30, 2000, the Company has made principal payments aggregating
$12.7 million. Further payments totaling $1.7 million, including
interest, will be made to the United States in the amounts of
$862,000 due April 2001 and $823,000 due April 2002.
- The Company sponsors a defined benefit pension plan, which was frozen
in 1993. As of December 31, 1999, the actuarial present value of
accrued liabilities exceeded the plan assets by approximately $5.5
million. The annual contribution to the plan is expected to be
approximately $1 million in 2000 and beyond.
The Company believes that its current cash balance will satisfy working
capital, new product development, sales and marketing expansion and capital
expenditures for at least the next 12 months. Although the Company has generated
funds to meet its cash 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.
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As of December 31, 1999, approximately $88 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
2000 through 2019, were available to offset future taxable income. 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 occur.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 1997, 1998,
1999, and for the six months ended June 30, 2000, of approximately $4.6 million,
$8.4 million, $16.7 million and $10.3 million, respectively. In addition, we
experienced negative cash flow from continuing operating activities of $5.0
million, $5.6 million, $8.5 million and $10.6 million in 1997, 1998, 1999 and
for the six months ended June 30, 2000, respectively. We also incurred a loss of
$19.0 million from discontinued operations in 1999 and will incur additional
losses from discontinued operations if we realize less from the disposition of
those assets than we have estimated or if we are unable to dispose of all of our
discontinued operations by the end of the third quarter of 2000, as we currently
anticipate.
We expect that our business will require on-going funding to support
the expansion of sales and marketing efforts, new product development, working
capital growth and capital expenditures. Also, we will need to fund our new
initiatives in the broadband market before we can reasonably expect to derive
any significant revenues from this market.
We also have continuing obligations to fund payments due under the
Consent Decree and an underfunded pension plan. As of June 30, 2000, we were
required to make future aggregate payments of $1.7 million through April 2002
in connection with the Consent Decree. 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. We sponsor a defined benefit pension plan, which
was frozen in 1993. As of December 31, 1999, the present value of the accrued
benefit liabilities of our pension plan exceeded the plan's assets by
approximately $5.5 million. In addition to the $1.0 million we expect to
contribute to the plan in 2000, 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.
OUR FUTURE PROFITABILITY DEPENDS LARGELY UPON PRODUCTS AND FUTURE
PRODUCTS THAT HAVE NOT YET PRODUCED ANY REVENUES OR ARE NOT YET COMMERCIALLY
VIABLE. We believe that certain of our products are viable, but have not yet
generated any material sales. Our future revenues and earnings depend in large
part on the success of these products. Our business is also based on products
not yet developed. There are no assurances that these products will be developed
into working products or that a market will develop for these products in the
future.
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WE HAVE LIMITED EXPERIENCE IN THE BROADBAND MARKET. We have only
recently begun to penetrate the broadband market. We are therefore subject to
the risks inherent in establishing a new business enterprise.
Our business model is new and unproven and may not generate sufficient
revenue for us to be successful. The volume of products and services distributed
using our technology may be too small to support or grow our business.
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 or any future
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 our current and future products will not
achieve market acceptance.
Interactive television is a new and emerging business, and we cannot
guarantee that it will attract widespread demand or market acceptance. Our
success in this area depends upon, among other things, broad acceptance of the
concept of interactive television by industry participants, including broadcast
and pay-television networks and system operators and manufacturers of
televisions and set-top boxes, including their ability to successfully market
interactive television to television viewers and advertisers. There have been
several well-financed, high-profile attempts in the U.S. to develop and deploy
systems in the broad category of interactive television. None of these attempts
has resulted in large scale deployment, and many key industry participants have
avoided participating in interactive television for a variety of reasons,
including:
- inconsistent quality of service;
- need for new and expensive hardware in homes;
- inadequate transmission facilities and broadcast centers;
- complicated and expensive processes for creating interactive
content; and
- inability to align the conflicting interests of various
participants.
Accordingly, such participants may perceive interactive television
negatively and be reluctant to participate.
In addition, other participants in the television industry must accept
and support interactive television for it to be successful. For instance,
broadcasters will need to add interactive features to their programming and
commercial vendors will need to embrace e-commerce over interactive television.
We cannot assure you that these parties will provide such support.
WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF
OUR REVENUES. We rely on a limited number of customers in our business. The
ASICs we provide to Motorola's General Instruments for inclusion in its
set-top boxes accounted for 56% of our total revenue in 1999. We expect to
continue to depend upon a relatively small number of customers for a majority of
the revenues in our business.
We generally do not enter into long-term supply commitments with our
customers. Instead, we bid on a project basis and have supply contracts in place
for each project. Significant reductions in sales to any
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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 THIRD PARTY MANUFACTURERS WHO ARE OUTSIDE OF OUR CONTROL.
We outsource manufacturing needs of a significant portion of our products to
third party contract manufacturers. Outsourcing of manufacturing involves risks
with respect to quality assurance, cost and the absence of 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 rate of
technological change currently affecting the television industry is particularly
rapid compared to other industries. The migration of television from analog to
digital transmission, the convergence of television, the Internet,
communications and other media and other emerging trends are creating a dynamic
and unpredictable environment in which to operate. Our ability to anticipate
these trends and adapt to new technologies is critical to our success. 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
for the six months ended June 30, 2000 were $2.2 million and we plan to increase
this substantially in the near term. We cannot assure you that these
expenditures will 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 market for digital rights management solutions is fragmented and
marked by rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles and changes in customer demands. To
succeed, we must develop and introduce, in response to customer and market
demands, software that offers features and functionality that are not currently
available in the
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market. Any delays in our ability to develop and release products will
materially harm our business and operating results. In the past, we have
experienced delays in new product releases, and we may experience similar
delays in the future.
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
broadband 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
broadband 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 the broadband market. 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.
The market for broadband solutions is new, intensely competitive and
rapidly evolving. We expect competition to continue to increase with both our
existing competitors and new market entrants. Our primary competition currently
comes from or is anticipated to come from:
- companies offering payment solutions, including Trintech and
VeriFone;
- companies offering chip technology infrastructures, including
Gemplus, Philips and SCM Microsystems;
- companies offering closed environment solutions, including
small value electronic cash systems and database management
solutions, such as CyberMark and Danyl Schlumberger; and
- companies that offer digital rights management solutions, such
as InterTrust, Wave Systems, Preview Systems, Aladdin, IBM,
Xerox and Microsoft.
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AND SUBSIDIARY COMPANIES
Many of our 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 we do. Many of
these companies have broader customer relationships that could be leveraged,
including relationships with many of our customers. These companies also have
more established customer support and professional services organizations than
we do. In addition, a number of companies with significantly greater resources
than we have could attempt to increase their presence in the broadband market by
acquiring or forming strategic alliances with our competitors, resulting in
increased competition.
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 and software applications 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, or lengthy beta testing of software solutions. 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 December 31, 1999, we had federal net operating loss
carryforwards, subject to review by the Internal Revenue Service, totaling
approximately $88.0 million for federal income tax purposes, approximately $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 2002, 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 public
and private offerings in the future. In addition, the exercise of outstanding
warrants and 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
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AND SUBSIDIARY COMPANIES
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 is 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 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 the broadband market 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.
IF THIRD PARTIES DO NOT DEPLOY OUR TECHNOLOGY AND CREATE A MARKET FOR
DIGITAL COMMERCE, OUR BUSINESS WILL BE HARMED. Relationships with leading
content, technology and commerce service providers are critical to our success.
Our business and operating results would be harmed to the extent our strategic
partnerships fail, in whole or in part, to:
- deploy our technology;
- develop an infrastructure for the sale and delivery of digital
goods and services;
- generate transaction fees from the sale of digital content and
services; and
- develop and deploy new applications.
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 digital content, computer
networks, digital video broadcasting 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
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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 HAVE DIFFICULTY RETAINING OR RECRUITING PROFESSIONALS FOR OUR
BUSINESS. Our future success and performance is dependent on the continued
services and performance of our senior management and other key personnel. There
is a shortage of qualified marketing, technical and financial personnel in our
industry, and the competition for such personnel is intense. Accordingly, the
loss of the services of any of our executive officers or other key employees
could materially adversely affect our business.
Our business requires experienced software programmers, creative
designers and application developers, and our success depends on identifying,
hiring, training and retaining such experienced, knowledgeable professionals. If
a significant number of our current employees or any of our senior technical
personnel resign, or for other reasons are no longer employed by us, we may be
unable to complete or retain existing projects or bid for new projects of
similar scope and revenues. In addition, former employees may compete with us in
the future.
Even if we retain our current employees, our management must
continually recruit talented professionals in order for our business to grow.
There is currently a shortage of qualified senior technical personnel in the
software development field, and this shortage is likely to continue.
Furthermore, there is significant competition for employees with the skills
required to perform the services we offer. We cannot assure you that we will be
able to attract a sufficient number of qualified employees in the future to
sustain and grow our business, or that we will be successful in motivating and
retaining the employees we are able to attract. If we cannot attract, motivate
and retain qualified professionals, our business, financial condition and
results of operations will suffer.
IF STANDARDS FOR DIGITAL RIGHTS MANAGEMENT ARE NOT ADOPTED, CONFUSION
AMONG CONTENT PROVIDERS, DISTRIBUTORS AND CONSUMERS MAY DEPRESS THE LEVEL OF
DIGITAL COMMERCE, WHICH WOULD REDUCE OUR REVENUES. If standards for digital
rights management are not adopted or complied with, content providers may delay
distributing content until they are confident that the technology by which the
content is to be distributed will be commercially accepted. Standards for the
distribution of various digital content might not develop or might be found to
violate antitrust laws or fair use of copyright policies. In addition, the
failure to develop a standard among device manufacturers may affect the market
for digital goods and services. As a result, consumers may delay purchasing
products and services that include our technology if they are uncertain of
commercial acceptance of the standards with which our technology complies.
Consequently, if a standard format for the secure delivery of content on the
Internet is not adopted, or if the standards are not compatible with our digital
rights management technology, our business and operating results would likely be
harmed.
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
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AND SUBSIDIARY COMPANIES
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.
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 are 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 -- $972,000; and Mr. Jay S. Goldsmith -- $972,000. 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.
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.
WE ARE SUBJECT TO GOVERNMENT REGULATION. The telecommunications, media,
broadcast and cable television industries are subject to extensive regulation by
governmental agencies. These governmental agencies continue to oversee and adopt
legislation and regulation over these industries, which may affect our business,
market participants with which we have relationships or the acceptance of
interactive television in general. In addition, future legislation or regulatory
requirements regarding privacy issues could be enacted to require notification
to users that captured data may be used by marketing entities to target product
promotion and advertising to that user. Any of these developments may materially
adversely affect our business.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily through its short-term
investments. The Company's investment policy calls for investment in short-term,
low risk instruments. As of June 30,
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
2000, short-term investments (principally treasury bills) were $24.6 million.
Due to the nature of these investments, any decrease in rates would not have a
material impact on the Company's financial condition and results of operations.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 26, 2000, at a special meeting of the shareholders of the Company, the
shareholders voted to approve the plan of asset transfer authorizing the sale of
the Company's Greystone, Greenwald, Greenwald Intellicard and Amazing
subsidiaries or the property or assets thereof on such terms and conditions
(including the consideration to be received by PubliCARD) as may be determined
by the PubliCARD Board of Directors, in its sole discretion. The voting results
were as follows:
<TABLE>
<S> <C>
For 15,709,772
Against 1,193,651
Abstain 12,505
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by item 601 of regulation S-K:
Exhibit 27: Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K:
Form 8-K dated July 10, 2000, containing the pro forma information and
exhibits related to the June 29, 2000 disposition of Greenwald
and Greenwald Intellicard.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PUBLICARD, INC.
(Registrant)
Date: August 14, 2000 /s/ Jan-Erik Rottinghuis
---------------------------------------
Jan-Erik Rottinghuis, President
and Chief Executive Officer
/s/ Antonio L. DeLise
---------------------------------------
Antonio L. DeLise, Chief Financial
Officer, Secretary and Principal
Accounting Officer
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