<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 SEPTEMBER 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 incorporation or organization) (I.R.S. Employer 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 October 31, 2000: 23,590,900
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash, including short-term investments of $21,190 in 2000 and
$17,541 in 1999 $ 21,731 $ 18,236
Trade receivables, less allowance for doubtful accounts of $65 in
2000 and $92 in 1999 1,921 1,720
Inventories 1,704 903
Net assets of discontinued operations - 10,832
Other 666 613
--------- ---------
Total current assets 26,022 32,304
--------- ---------
Equipment and leasehold improvements, net 1,478 1,063
Goodwill 9,426 11,508
Other assets 661 613
--------- ---------
$ 37,587 $ 45,488
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,728 $ 2,413
Accrued liabilities 7,799 6,002
--------- ---------
Total current liabilities 9,527 8,415
Other non-current liabilities 5,653 6,675
--------- ---------
Total liabilities 15,180 15,090
--------- ---------
Shareholders' equity:
Common shares, $0.10 par value,
Authorized - 40,000,000
Issued - 27,625,023 in 2000 and 26,191,189 in 1999 2,762 2,619
Additional paid-in capital 116,148 111,476
Accumulated deficit (85,768) (74,611)
Common shares held in treasury, at cost (10,572) (8,649)
Unearned compensation (163) (437)
--------- ---------
Total shareholders' equity 22,407 30,398
--------- ---------
$ 37,587 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,573 $ 761 $ 4,215 $ 855
Cost of sales 770 312 2,129 363
------------ ------------ ------------ ------------
Gross margin 803 449 2,086 492
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 1,531 1,403 5,002 3,938
Sales and marketing 2,197 554 5,993 1,555
Product development 1,296 292 3,471 745
Stock compensation 422 302 1,032 992
Goodwill amortization 658 407 1,978 1,215
------------ ------------ ------------ ------------
6,104 2,958 17,476 8,445
------------ ------------ ------------ ------------
Loss from operations (5,301) (2,509) (15,390) (7,953)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 333 74 632 330
Interest expense (22) (35) (79) (128)
Cost of pensions - non-operating (210) (166) (623) (586)
Other, net 28 (147) 28 (216)
------------ ------------ ------------ ------------
129 (274) (42) (600)
------------ ------------ ------------ ------------
Loss from continuing operations (5,172) (2,783) (15,432) (8,553)
Discontinued operations:
Loss from discontinued operations - (705) - (4,291)
Gain (loss) on disposition 4,275 - 4,275 (2,100)
------------ ------------ ------------ ------------
Net loss $ (897) $ (3,488) $ (11,157) $ (14,944)
============ ============ ============ ============
Basic loss per common share:
Continuing operations $ (.22) $ (.15) $ (.67) $ (.48)
------------ ------------ ------------ ------------
Discontinued operations .18 (.04) .19 (.35)
------------ ------------ ------------ ------------
$ (.04) $ (.19) $ (.48) $ (.83)
============ ============ ============ ============
Weighted average shares outstanding 23,479,903 18,389,708 23,089,836 18,004,778
============ ============ ============ ============
</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 NINE MONTHS ENDED SEPTEMBER 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 1,165,001 116 2,789 - (1,923) - 982
Shares pursuant to employment
and separation agreements 142,500 14 970 - - - 984
Business acquisition 66,333 7 689 - - - 696
Pension plan contribution 60,000 6 224 - - - 230
Amortization of unearned
compensation - - - - - 274 274
Net loss - - - (11,157) - - (11,157)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance - September 30, 2000 27,625,023 $ 2,762 $ 116,148 $ (85,768) $ 10,572) $ (163) $ 22,407
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Represents common shares held in treasury of 4,089,121 as of September 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(15,432) $ (8,553)
Adjustments to reconcile loss to net cash
used in continuing operations:
Goodwill amortization 1,978 1,215
Stock compensation expense 1,032 993
Depreciation 263 91
Changes in operating assets and liabilities (3,135) (272)
-------- --------
Net cash used in continuing operations (15,294) (6,526)
Income (loss) from discontinued operations 4,275 (6,391)
(Gain) loss on disposition (4,275) 2,100
Non-cash charges - 5,147
Change in net assets of discontinued operations (2,212) (3,235)
-------- --------
Net cash used in discontinued operations (2,212) (2,379)
-------- --------
Net cash used in operating activities (17,506) (8,905)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures from continuing operations (678) (264)
Acquisition of businesses, net of cash acquired - (294)
-------- --------
Net cash used in continuing operations (678) (558)
Proceeds from discontinued operations 21,805 21
Capital expenditures from discontinued operations (168) (619)
Acquisition of businesses, net of cash acquired - (2,592)
-------- --------
Net cash provided by (used in) discontinued operations 21,637 (3,190)
-------- --------
Net cash provided by (used in) investing activities 20,959 (3,748)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares pursuant to stock option exercises 982 672
Repayment of notes payable from discontinued operations (940) (108)
Purchase of redeemable shares - (503)
-------- --------
Net cash provided by financing activities 42 61
-------- --------
NET INCREASE (DECREASE) IN CASH 3,495 (12,592)
CASH - BEGINNING OF PERIOD 18,236 18,482
-------- --------
CASH - END OF PERIOD $ 21,731 $ 5,890
======== ========
</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 divested 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 embedded and peripheral smart card reader
solutions and application specific integrated circuits, also known as ASICs, for
television set-top boxes and electronic commerce. 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 September 30, 2000 and the results of their
operations and cash flows for the three and nine months ended September 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 as of September
30, 2000 and December 31, 1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials and supplies $ 795 $ 599
Work in process - 48
Finished goods 909 256
-------- -------
$ 1,704 $ 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 $5.4 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 purchase price along with the allocation of
the 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 423
-------
$ 5,439
=======
Allocation of purchase price:
Net assets $ 498
Goodwill 4,941
-------
$ 5,439
=======
</TABLE>
The assets and liabilities of Absec were recorded at their estimated fair
values as of the acquisition date. 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 nine months ended September 30, 1999 assumes that
the acquisition occurred as of January 1, 1999 (in thousands except per share
data):
Net sales $4,655
Net loss from continuing operations (9,103)
Net loss per share from continuing operations (.49)
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 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
2
<PAGE> 8
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 smart card
solutions for the broadband marketplace, the Company reports as a single
segment. Sales by geographical areas for the nine months ended September 30,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
United States $ 696 $ 741
Europe 3,238 114
Rest of world 281 -
------- --------
$ 4,215 $ 855
======= ========
</TABLE>
The Company has operations in the United States and United Kingdom.
Identifiable assets by country as of September 30, 2000 and December 31, 1999
are as follows (in thousands):
3
<PAGE> 9
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
United States $24,859 $ 30,804
United Kingdom 3,302 3,176
------- --------
$28,161 $ 33,980
======= ========
</TABLE>
NOTE 4 - 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").
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.
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.
On June 29, 2000, the Company completed the sale of substantially all of the
assets of Greenwald and Greenwald Intellicard 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. The
Company has substantially completed the wind-down of the operations of Amazing
and Greystone including the sale of certain assets and the licensing of certain
intellectual property.
Following the substantial completion of the disposition plans, the Company
revised its estimates of proceeds and expenses and recognized a gain of $4.3
million in the third quarter of 2000. The amounts the Company will ultimately
realize from these actions could differ from the amounts estimated and could
therefore result in additional charges or gains in future periods.
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 nine
months ended September 30, 2000, are summarized as follows (in thousands):
<TABLE>
<S> <C>
Net sales $13,238
Cost of sales 8,290
Operating expenses 5,137
Goodwill amortization 695
Interest expense, net 7
Loss from discontinued operations (891)
</TABLE>
The loss from discontinued operations for the nine months ended September
30, 2000 of $891,000 was charged against the income from the disposal of these
operations.
4
<PAGE> 10
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized balance sheet information with respect to the discontinued
operations as of September 30, 2000 is as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 480
Non-current assets 2,212
Current liabilities and disposition reserves (5,375)
-------
Net liabilities of discontinued operations $(2,683)
========
</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 nine months ended September
30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Trade receivables $ (201) $ (537)
Inventories (801) (93)
Other current assets (53) 47
Other assets (48) 146
Trade accounts payable (685) 228
Accrued liabilities (555) 847
Other non-current liabilities (792) (910)
---------- --------
$ (3,135) $ (272)
========== ========
</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 $135,000 and $193,000, 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.
NOTE 6 - SUBSEQUENT EVENTS
On November 10, 2000, the Company executed a stock purchase agreement under
which it will invest $5.0 million in TecSec Incorporated ("TecSec"), a
Virginia company that develops and markets products and solutions enabling next
generation information security for the enterprise, multi-enterprise e-Business,
and other markets. The Company has agreed to purchase TecSec convertible
preferred stock representing a 3.5% ownership interest. Consummation of the
investment is subject to customary closing conditions. The Company expects to
finance this investment through private placement sources.
In October 2000, the Board of Directors approved the suspension of further
development and marketing the Company's VirtualTokens solution. The decision to
exit this business was attributed to the delay in the market acceptance of
digital rights management solutions, in general, and the considerable
expenditures necessary to bring the Company's solution to market. The costs
associated with this action, principally severance associated with the
termination of eight employees, is approximately $225,000 and will be recorded
as a charge in the fourth quarter of 2000.
5
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
THREE AND NINE MONTHS ENDED SEPTEMBER 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.
6
<PAGE> 12
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
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:
- 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 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
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 transaction security.
To affect this new business strategy, in March 2000, the Board of Directors
of PubliCARD adopted a plan of disposition pursuant to which PubliCARD divested
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 Greenwald and Greenwald
Intellicard to Eastern for a sales 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. The Company has substantially completed the
wind-down of the operations of Amazing and Greystone including the sale of
certain assets and the licensing of certain intellectual property.
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 embedded and peripheral card reader solutions and ASICs
for television set-top boxes and electronic commerce. PubliCARD's ASICs
incorporate multiple chip set functionality into a single integrated circuit
board. PubliCARD is developing 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. 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 nine months ended
September 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
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is fixed and determinable and the collection of the resulting receivable is
probable. Revenue from 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.
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
SALES. Consolidated sales increased to $1.6 million in 2000 compared to
$761,000 for 1999. The increase in the third quarter sales is primarily
attributable to the Company's acquisition of Absec in late 1999 offset by lower
ASIC sales.
GROSS MARGIN. Gross margin as a percentage of sales was 51% for 2000 compared
to 59% for 1999. The decrease in gross margin is attributed to lower ASIC sales,
which carry a higher gross margin, in the third quarter of 2000 compared to
1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.2 million
in 2000 compared to $554,000 in 1999. The increase was due to the Absec
acquisition in late 1999 and additional headcount increases throughout 1999 and
2000. As of September 30, 2000 the Company had approximately 46 sales and
marketing personnel versus twelve as of September 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 $1.3 million in 2000 compared
to $292,000 in 1999. Expenses increased in 2000 primarily due to the Absec
acquisition in late 1999 and headcount additions for the ongoing ASICs, reader
and other development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarter ended September 30, 2000 increased to $1.5 million from $1.4 million
for 1999. The increase was due to higher expenditures associated with headcount
increases and expenses, mainly salaries and benefits, associated with the Absec
acquisition in late 1999.
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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 2000 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 $658,000 and $407,000 in 2000 and 1999, respectively.
OTHER INCOME AND EXPENSE. Interest income increased to $333,000 for 2000 from
$74,000 for 1999 due to proceeds received from the sale of Greenwald and
Greenwald Intellicard. Interest expense, which principally relates to interest
on the remaining environmental obligation (see below), decreased to $22,000 in
2000 compared to $35,000 in 1999. Other expense in 1999 of $147,000 includes a
charge associated with a stock sale price guarantee.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
SALES. Consolidated sales increased to $4.2 million in 2000 compared to
$855,000 for 1999. The increase in the second quarter sales is primarily
attributable to the Company's acquisition of Absec in late 1999 offset by lower
ASIC sales.
GROSS MARGIN. Gross margin as a percentage of sales was 49% for 2000 compared
to 57% for 1999. The decrease in gross margin is attributed to lower ASIC sales,
which carry a higher gross margin, in 2000 compared to 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.0 million
in 2000 compared to $1.6 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 $3.5
million in 2000 compared to $745,000 in 1999. Expenses increased in 2000
primarily due to the Absec acquisition in late 1999 and headcount additions for
the ongoing ASICs, reader and other development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the nine months ended September 30, 2000 increased to $5.0 million from $3.9
million for 1999. The increase was due to higher expenditures associated with
headcount increases throughout 1999 and 2000 and $494,000 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 executives hired in 1999 and 2000 and the issuance of
stock options for consulting services.
GOODWILL AMORTIZATION. Amortization amounted to $2.0 million and $1.2 million
in 2000 and 1999, respectively.
OTHER INCOME AND EXPENSE. Interest income increased to $632,000 for 2000 from
$330,000 for 1999 due to proceeds received from the sale of Greenwald and
Greenwald Intellicard. Interest expense, decreased to $79,000 in 2000 compared
to $128,000 in 1999. Other expense in 1999 of $216,000 includes a charge
associated with a stock sale price guarantee offset by a gain on real estate
sold in January 1999.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
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
nine months ended September 30, 2000, cash, including short-term investments,
increased by $3.5 million to $21.7 million as of September 30, 2000.
Operating activities from continuing operations utilized cash of $15.3
million in 2000 and principally consisted of the loss from continuing operations
of $15.4 million and a increase in net operating assets and liabilities of $3.2
million offset by non-cash charges of $3.3 million for goodwill amortization,
stock compensation expense and depreciation. Operating activities from
discontinued operations utilized cash of $2.2 million.
Investing activities generated cash of $21.0 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
$678,000 and $168,000, respectively.
Financing activities provided cash of $42,000 in 2000 and consisted of
proceeds from the exercise of options to purchase common stock of $982,000
offset by the repayment of notes payable from discontinued operations of
$940,000.
During the first nine months of 2000, the Company's capital expenditures from
continuing operations totaled $610,000. 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 will incur 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 September 30, 2000, the
Company has made principal payments aggregating $12.8 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.
- On November 10, 2000, the Company executed a stock purchase agreement
under which it will invest $5.0 million in TecSec Incorporated
("TecSec"), a Virginia company that develops and markets products and
solutions enabling next generation information security for the
enterprise, multi-enterprise e-Business, and other markets. The Company
has agreed to purchase TecSec convertible preferred stock representing a
3.5% ownership interest. Consummation of the investment is subject to
customary closing conditions. The Company expects to finance this
investment through private placement sources.
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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.
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 nine months ended September 30, 2000, of approximately $4.6
million, $8.4 million, $16.7 million and $15.4 million, respectively. In
addition, we experienced negative cash flow from continuing operating activities
of $5.0 million, $5.6 million, $8.5 million and $15.4 million in 1997, 1998,
1999 and for the nine months ended September 30, 2000, respectively.
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 September 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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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
WE HAVE LIMITED EXPERIENCE IN THE BROADBAND MARKET. We have only
recently begun to provide smart card infrastructure products and solutions to
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 smart card reader, ASIC and electronic commerce
solutions are 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.
Smart card reader and ASIC solutions are designed to provide secure
electronic commerce, access control and security for various digital platforms.
The market for smart card security applications is still emerging and if the
benefits are not perceived sufficient or if alternative technologies are more
widely accepted then the demand for our solutions may not grow.
Electronic commerce for the broadband marketplace 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.
If the market for the products described above or any other products of
ours fails to develop or develops more slowly than expected, or if any of the
technologies developed by us do not achieve market acceptance, our business and
operating results would be materially and adversely effected.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
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 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.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS. We rely on a
limited number of suppliers for key components for our products. For example, we
purchase embedded chips for ASICs exclusively from the Atmel Corporation. Our
reliance on one supplier could impose several risks, including an inadequate
supply of chips, price increases, long lead times, late deliveries and poor
quality. Disruption or termination of the supply of these chips could delay the
delivery of our products, which could have a material adverse effect on business
and operating results. These delays could damage our relationship with current
and prospective customers.
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 broadbrand market 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;
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- 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 nine months ended September 30, 2000 were $3.5 million and we plan to
increase this 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 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.
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AND SUBSIDIARY COMPANIES
The market for smart card products and 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 smart card technology solutions, including
Gemplus, Philips and SCM Microsystems;
- companies offering closed environment solutions, including small
value electronic cash systems and database management solutions,
such as Girovend, MARS, Diebold, CyberMark and Schlumberger.
Many of our current and potential competitors 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
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AND SUBSIDIARY COMPANIES
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 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.
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AND SUBSIDIARY COMPANIES
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 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.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISK ASSOCIATED WITH
OPERATING IN FOREIGN MARKETS, INCLUDING FLUCTUATIONS IN CURRENCY EXCHANGE RATES,
WHICH COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL CONDITION.
International sales represent approximately 83% of total sales for the nine
months ended September 30, 2000. Because we derive a substantial portion of our
business outside the United States, we are subject to certain risks associated
with operating in foreign markets including the following:
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- currency exchange risks;
- export controls related to encryption technology;
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- unexpected changes in regulatory requirements;
- changes in economic and political conditions;
- potentially adverse tax consequences; and
- burdens of complying with a variety of foreign laws.
Any of the foregoing could adversely impact the success of our
international operations. We cannot assure you that such factors will not have a
material adverse effect on our future international sales and, consequently, on
our business, operating results and financial condition. In addition,
fluctuations in exchange rates could have a material adverse effect on our
business, operating results and financial condition. To date, we have not
engaged in currency hedging.
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 700,000 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.
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.
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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.
OUR STOCK PRICE IS EXTREMELY VOLATILE. The stock market has recently
experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. The market price of our common stock has
been highly volatile and is likely to continue to be volatile. The future
trading price for our common stock will depend on a number of factors,
including:
- variations in our annual or quarterly financial results or those
of our competitors;
- general economic conditions, in particular, the technology
service sector;
- the volume of activity for our common stock is minimal and
therefore a large number of shares placed for sale or purchase
could increase its volatility;
- our ability to effectively manage our business;
- expected or announced relationships with other companies;
- announcements of technological advances innovations or new
products by us or our competitors;
- patents or other proprietary rights or patent litigation; and
- product liability or warranty litigation.
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.
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.
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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 September 30, 2000, short-term investments
(principally treasury bills) were $21.2 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.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 26, 2000, an annual meeting of shareholders of the Company
was held at which directors were elected to serve until their successors shall
have been elected and shall have qualified. The appointment of the Company's
outside auditors for the year ending December 31, 2000 was also ratified. The
voting results were as follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Election of directors
Harry I. Freund 17,058,436 - 685,522
Jay S. Goldsmith 17,058,436 - 685,522
Clifford B. Cohn 17,656,386 - 87,572
Jan-Erik Rottinghuis 17,657,786 - 86,172
L.G. Schafran 17,656,386 - 87,572
Hatim A. Tyabji 17,657,786 - 86,172
Ratification of auditors 17,698,321 33,720 11,917
</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: November 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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