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UNITED STATES
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 MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
COMMISSION FILE NUMBER 0-29794
PUBLICARD, INC.
(Exact name of registrant as specified in its charter)
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)
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 May 11, 2001: 24,237,402
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash, including short-term investments of $12,899 in
2001 and $16,820 in 2000 $ 13,138 $ 17,049
Trade receivables, less allowance for doubtful accounts
(2001 - $108, 2000 - $89) 1,512 1,632
Inventories 2,194 1,617
Other 440 461
--------- ---------
Total current assets 17,284 20,759
--------- ---------
Equipment and leasehold improvements, net 1,540 1,623
Goodwill 8,111 8,766
Other assets 6,056 6,031
--------- ---------
$ 32,991 $ 37,179
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,157 $ 1,080
Accrued liabilities 6,108 6,511
--------- ---------
Total current liabilities 7,265 7,591
Other non-current liabilities 5,896 6,010
--------- ---------
Total liabilities 13,161 13,601
--------- ---------
Shareholders' equity:
Class A Preferred Stock, Second Series, no par value:
1,000 shares authorized; 790 issued and outstanding 3,950 3,950
Common shares, $0.10 par value: 40,000,000 shares
authorized; 24,237,402 shares issued as of
March 31, 2001 and December 31, 2000 2,424 2,424
Additional paid-in capital 107,265 107,300
Accumulated deficit (93,519) (90,010)
Other comprehensive loss (220) --
Unearned compensation (70) (86)
--------- ---------
Total shareholders' equity 19,830 23,578
--------- ---------
$ 32,991 $ 37,179
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
2001 2000
---- ----
Net sales $ 1,520 $ 1,551
Cost of sales 832 738
------------ ------------
Gross margin 688 813
------------ ------------
Operating expenses:
General and administrative 1,302 1,793
Sales and marketing 1,293 1,842
Product development 922 802
Stock compensation 15 426
Goodwill amortization 660 660
------------ ------------
4,192 5,523
------------ ------------
Loss from operations (3,504) (4,710)
------------ ------------
Other income (expenses):
Interest income 207 188
Interest expense (19) (38)
Cost of pensions - non-operating (216) (211)
Other income 23 --
------------ ------------
(5) (61)
------------ ------------
Net loss $ (3,509) $ (4,771)
============ ============
Basic loss per common share $ (.14) $ (.21)
============ ============
Weighted average shares outstanding 24,237,402 22,681,195
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
Common Shares Other
Class A ------------- Additional Comprehen- Unearned
Preferred Shares Paid-in Accumulated sive Compensa-
Stock Issued Amount Capital Deficit Income (loss) tion
--------- ---------- ------ --------- ----------- ------------- ---------
Balance - December 31, 2000 $3,950 24,237,402 $2,424 $ 107,300 $(90,010) $ -- $(86)
Private placement costs -- -- -- (35) -- -- --
Amortization of unearned compensation -- -- -- -- -- -- 16
Comprehensive Income:
Net loss -- -- -- -- (3,509) -- --
Foreign currency translation adjustment -- -- -- -- -- (220) --
------ ---------- ------ --------- -------- ----- ----
Balance - March 31, 2001 $3,950 24,237,402 $2,424 $ 107,265 $(93,519) $(220) $(70)
====== ========== ====== ========= ======== ===== ====
Other
Share- Comprehen-
holders' sive
Equity Income (loss)
-------- -------------
Balance - December 31, 2000 $ 23,578 $ --
Private placement costs (35) --
Amortization of unearned compensation 16 --
Comprehensive Income:
Net loss (3,509) (3,509)
Foreign currency translation adjustment (220) (220)
-------- -------
Balance - March 31, 2001 $ 19,830 $(3,729)
======== =======
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (3,509) $ (4,771)
Adjustments to reconcile loss to net cash
Used in continuing operations
Goodwill amortization 660 660
Stock compensation expense 16 426
Depreciation 70 81
Changes in operating assets and liabilities (1,154) (1,025)
-------- --------
Net cash used in continuing operations (3,917) (4,629)
Loss from discontinued operations
Non-cash charges -- 442
Change in net assets of discontinued operations (91) (1,549)
-------- --------
Net cash used in discontinued operations (91) (1,107)
-------- --------
Net cash used in operating activities (4,008) (5,736)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14) (151)
Investment in TecSec, Incorporated (25) --
-------- --------
Net cash used in continuing operations (39) (151)
Proceeds from discontinued operations 176 1
Capital expenditures from discontinued operations -- (159)
-------- --------
Net cash provided by (used in) discontinued operations 176 (158)
-------- --------
Net cash provided by (used in) operating activities 137 (309)
-------- --------
Cash flows from financing activities:
Issuance of common shares pursuant to stock option exercises -- 762
Costs incurred from private placement of Class A Preferred Stock (35) --
Repayment of notes payable from discontinued operations -- (43)
-------- --------
Net cash provided by (used in) financing activities (35) 719
-------- --------
Effect of exchange rate changes on cash and cash equivalents (5) --
-------- --------
Net decrease in cash (3,911) (5,326)
Cash - beginning of period 17,049 18,236
-------- --------
Cash - end of period $ 13,138 $ 12,910
======== ========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
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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. In 1998 and 1999, 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 smart card solutions which facilitate
secure access and transactions. 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 5 for a discussion on the
disposition plan.
PubliCARD, through its Infineer subsidiaries, is a smart card technology
company, which provides infrastructure products and solutions to facilitate
secure access and transactions. The Company's products and solutions include
integrated circuits, smart card readers and software systems. PubliCARD sells
its products and solutions to customers for deployment in enterprise and on-line
security and transactions management applications. In May of 2000, PubliCARD
unveiled its new corporate brand of Infineer bringing together its subsidiaries
located in Northern Ireland and the United States under a single focus in an
effort to capitalize on its core competencies and growth opportunities in smart
card technology.
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 March 31, 2001 and the results of their operations
and cash flows for the three months ended March 31, 2001 and 2000. 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, 2000, 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 period.
Diluted net income (loss) per common share assumes issuance of the net
incremental shares from stock options, warrants and convertible preferred stock
at the later of the beginning of the year or date of issuance. Diluted net
income (loss) per share was not computed for 2001 and 2000 as the effect of
stock options, warrants and convertible preferred stock were antidilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", subsequently
amended by SFAS Nos. 137 and 138. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. To date, the
Company has had no investments in derivative financial instruments and has not
engaged in hedging activities. Accordingly, the Company has determined the
application of SFAS No. 133 does not have an impact on its financial position,
results of operations or cash flows.
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market. The Company evaluates the need to record adjustments for impairment of
inventory on a quarterly basis. Inventory in excess of the Company's estimated
usage requirements is written down to its estimated net realizable value.
Inherent in the estimates of net realizable value are managements estimates
related to the Company's production schedules, customer demand, possible
alternative uses and the ultimate realization of potentially excess inventory.
Inventories as of March 31, 2001 and December 31, 2000 consisted of the
following (in thousands):
2001 2000
------ ------
Raw materials and supplies $ 696 $ 750
Finished goods 1,498 867
------ ------
$2,194 $1,617
====== ======
NOTE 2 - ACQUISITIONS
In December 2000, the Company acquired a 3.5% ownership interest in TecSec,
Incorporated ("TecSec") for $5.0 million. TecSec, a Virginia corporation,
develops and markets smart card-based encryption products and solutions, which
will enable the next generation information security for the enterprise,
multi-enterprise e-business and other markets. The TecSec investment has been
accounted for at cost and could be subject to write-down in future periods if it
is determined that the investment is impaired and not recoverable.
NOTE 3 - STOCK OPTIONS
In February 2001, the Company concluded a stock option re-pricing program
whereby a total of approximately 3.3 million stock options were cancelled.
Pursuant to the program, employees and directors voluntarily elected to cancel
stock options held with an exercise price that exceeded $4.81. In return, the
Company will grant an equal number of replacement stock options on August 20,
2001. The replacement stock options will generally contain the same terms and
conditions of the cancelled stock options and will have an exercise price equal
to the closing price of the Company's common stock on August 20, 2001.
NOTE 4 - SEGMENT DATA
As a result of the disposition of certain operations (See Note 5) and because
the Company predominantly operates in one industry, that being the deployment of
smart card solutions which facilitate secure access and transactions, the
Company reports as a single segment. Sales by geographical areas for the three
months ended March 31, 2001 and 2000 are as follows (in thousands):
2001 2000
------ ------
United States $ 635 $ 164
Europe 822 1,261
Far East 27 61
Rest of world 36 65
------ ------
$1,520 $1,551
====== ======
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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 March 31, 2001 and December 31, 2000 are as
follows (in thousands):
2001 2000
---- ----
United States $22,430 $25,547
United Kingdom 2,450 2,866
------- -------
$24,880 $28,413
======= =======
NOTE 5 - 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, Inc. (Greenwald Intellicard), Greystone Peripherals, Inc.
("Greystone") and Amazing Smart Card Technologies, Inc. ("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 Greenwald 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 primarily related to the sale of Greenwald
and Greenwald Intellicard. The amounts the Company will ultimately realize from
its discontinued operations 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
and Greystone have been reflected as discontinued operations. Summarized balance
sheet information with respect to the discontinued operations as of March 31,
2001 is as follows (in thousands):
Current assets $ 140
Non-current assets 2,223
Current liabilities and disposition (3,895)
-------
reserves
Net assets of discontinued operations $(1,532)
=======
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PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities reflected in the Consolidated
Statements of Cash Flows are net of acquisitions of businesses and consisted of
the following for the three months ended March 31, 2001 and 2000 (in thousands):
2001 2000
------- -------
Trade receivables $ 54 $ (267)
Inventories (618) (492)
Other current assets (120) 158
Other assets (5) (78)
Trade accounts payable 101 171
Accrued liabilities (457) (724)
Other non-current liabilities (109) 207
------- -------
$(1,154) $(1,025)
======= =======
Cash paid for interest during 2000 was $6,000 and no cash was paid for interest
in 2001. No income taxes were paid in 2000 and 1999. Non-cash investing
activities include the acquisition of the remaining interest in Greenwald
Intellicard for shares of common stock and options valued at $696,000 in 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q contains 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, through its Infineer subsidiaries, is a smart card technology
company, which provides infrastructure products and solutions to facilitate
secure access and transactions. The Company's products and solutions include
integrated circuits, smart card readers and software systems. PubliCARD sells
its products and solutions to customers for deployment in enterprise and on-line
security and transactions management applications. In May of 2000, PubliCARD
unveiled its new corporate brand of Infineer bringing together its subsidiaries
located in Northern Ireland and the United States under a single focus in an
effort to capitalize on its core competencies and growth opportunities in smart
card technology.
PubliCARD established its presence within the smart card industry
through a series of acquisitions:
- 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, 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
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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 enterprise and on-line
security, and transaction management market sectors, which PubliCARD had already
penetrated and which it believed exhibited each of the characteristics
identified above. To effect this new business strategy, in March 2000, the
Company's Board of Directors adopted a plan to dispose of the operations of the
Company's 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.
On June 29, 2000, the Company completed the sale of substantially
all of the assets of Greenwald and Greenwald Intellicard to 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 Greenwald 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.
In December 2000, the Company acquired a 3.5% ownership interest in TecSec
for $5.0 million. TecSec, a Virginia corporation, develops and markets smart
card-based encryption products and solutions, which will enable the next
generation information security for the enterprise, multi-enterprise e-business
and other markets.
Presentation
The results of operations for the three years ended December 31, 2000 reflect
Greenwald, Greenwald Intellicard, Amazing and Greystone as discontinued
operations. In addition, the results of operations for Tritheim and Absec have
been reflected in the financial statements from their respective acquisition
dates.
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 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
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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 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 MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
SALES. Consolidated net sales decreased slightly to $1.5 million in 2001
compared to $1.6 million for 2000. The decrease in the first quarter sales is
primarily attributed to lower closed environment solution sales in Europe offset
by increased shipments of smart card readers for security applications.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 45% in
2001 from 52% in 2000. The decrease is attributed to the a percentage of sales
derived from smart card reader solutions which generally command a lower gross
margin than closed environment solutions.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1.3 million
in 2001 compared to $1.8 million in 2000. The decrease is mainly due to
headcount reductions throughout 2000 and 2001 and lower consulting expenses for
market research and corporate branding.
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 $922,000 in 2001 compared to
$802,000 in 2000. Expenses increased in 2001 primarily due to contract
engineering services for the ongoing integrated circuits, reader and software
solution development efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarter ended March 31, 2001 decreased by approximately 27% to $1.3 million
from $1.8 million for 2000. The decrease was due to lower corporate
expenditures, which consisted primarily of legal, consulting and professional
fees, and headcount reductions.
STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and
2001 principally related to the change in terms of stock options awarded to two
former employees of the Company and the issuance of stock awards and below
market stock option grants to two executives hired in 1999.
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 in 2001 and 2000.
OTHER INCOME AND EXPENSE. Interest income increased slightly to $207,000 for
2001 from $188,000 for 2000 principally due to higher cash balances. Interest
expense, which principally relates to interest on the remaining environmental
obligation (see below), decreased to $19,000 in 2001 compared to $38,000 in
2000.
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LIQUIDITY
The Company has financed its operations over the last two years primarily
through the sale of common and preferred stock and the sale of non-core
businesses. During the quarter ended March 31, 2001, cash, including short-term
investments, decreased by $3.9 million to $13.1 million as of March 31, 2001.
Operating activities from continuing operations utilized cash of $3.9 million
for the three months ended March 31, 2001 and principally consisted of the loss
from continuing operations of $3.5 million and an increase in net operating
assets and liabilities of $1.2 million offset by non-cash charges of $746,000
for goodwill amortization, stock compensation expense and depreciation.
Operating activities from discontinued operations utilized $91,000 of cash.
Investing activities provided cash of $137,000 in 2001 and consisted
principally of proceeds from the sale of discontinued operations offset
partially by capital expenditures and closing costs associated with the
Company's December 2000 investment in TecSec.
Financing activities utilized cash of $35,000 in 2001 and consisted of
closing costs in connection with the Company's December 2000 private placement
of common and preferred stock. The effect of exchange rate changes on cash and
cash equivalents reduced cash by $5,000.
During the first quarter of 2001, the Company's capital expenditures from
continuing operations totaled $34,000. The Company anticipates that its level of
capital expenditures for 2001 will approximate the prior year. 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 2001 with its available cash resources.
The Company has experienced negative cash flow from operating activities in
the past and expects to experience negative cash flow in 2001 and 2002. 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 smart card 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 March 31, 2001, 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 Environmental
Protection Agency 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, 2000, the actuarial present value
of accrued liabilities exceeded the plan assets by approximately
$5.4 million. The annual contribution to the plan is expected to be
approximately $1.2 million in 2001 and beyond.
The Company believes that its current cash balance and expected cash flows
will satisfy working capital, new product development, sales and marketing
expansion and capital expenditures for at least the
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next 12 months. However, if during this period or thereafter, the Company is not
successful in generating sufficient cash flow from operations or in raising
additional capital when required in sufficient amounts and on terms acceptable
to the Company or at all, the Company may be required to scale back the scope of
its business plan, which would have a material adverse effect on the Company's
financial condition or results of operations. The Company cannot make any
assurances that it will generate sufficient cash flow from operations in the
future, that anticipated revenue growth will be realized or that future
borrowings or equity contributions will be available in amounts sufficient to
finance the Company's business plan or at all.
As of March 31, 2001, the value of the Company's investment in TecSec, a
privately held company, was $5.0 million. This investment has been accounted for
at cost and could be subject to write-down in future periods if it is determined
that the investment is permanently impaired and not recoverable. TecSec is
currently evaluating alternative sources of financing to meet ongoing capital
and operating needs. If TecSec is not successful in obtaining sufficient capital
on acceptable terms or at all, the Company's investment in TecSec could be
permanently impaired and subject to a significant write-down.
As of December 31, 2000, approximately $96 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
2001 through 2020, 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 occurs.
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 1998, 1999, 2000 and
for the three months ended March 31, 2001, of approximately $8.4 million, $16.7
million, $19.7 million and $3.5 million, respectively. In addition, we
experienced negative cash flow from continuing operating activities of $5.6
million, $8.5 million, $18.7 million and $3.9 million in 1998, 1999, 2000 and
for the three months ended March 31, 2001, respectively.
We expect that our businesses 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 March 31, 2001, 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, 2000, the present value of the accrued
benefit liabilities of our pension plan exceeded the plan's assets by
approximately $5.4 million. In addition to the $1.2 million we expect to
contribute to the plan in 2001, 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.
WE HAVE LIMITED EXPERIENCE IN THE SMART CARD MARKET. We have only recently
begun to provide smart card infrastructure products and solutions which
facilitate secure access and transactions. We are therefore subject to the risks
inherent in establishing a new business enterprise.
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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.
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.
THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and
market acceptance of, our smart card reader, application specific integrated
circuits ("ASICs") and software 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.
Our solutions are designed to provide secure electronic commerce, access
control and security for various digital platforms. The markets for secure
access and transaction management applications are 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 and our business
and operating results would be materially and adversely affected.
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. We expect to
continue to depend upon a relatively small number of customers for a majority of
the revenues in our business. For the three months ended March 31, 2001, two
customers represented approximately 22% of our net sales and no customer
represented more than 10% of our accounts receivable balance as of March 31,
2001.
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
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material adverse effect on our 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 smart card market is particularly rapid compared
to other industries. 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 three months ended March 31, 2001 were $922,000 and we may need to devote
substantially more resources to our research and development efforts in the
future. We cannot assure you that these expenditures will lead to the
development of viable products.
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 us 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
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- 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 and significantly greater
financial, technical, sales, customer support, marketing and other resources, as
well as greater name recognition and a larger installed base of their products
and technologies than our company. Additionally, there can be no assurance that
new competitors will not enter our markets. 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 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; and
- 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 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, 2000, we had federal net operating loss
carryforwards, subject to review by the Internal Revenue Service, totaling
approximately $96.0 million for federal income tax purposes, approximately $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 2003, 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," that company's use of its net operating losses
is limited in each subsequent year. An
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"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 may issue a substantial number of shares of our 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 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 smart card 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 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:
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- deploy our technology;
- develop an infrastructure to conduct business through e-commerce;
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, DVB 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 and technical 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 represented approximately 58% of total sales for the three months ended
March 31, 2001. 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;
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- export controls related to encryption technology;
- 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 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 -- $964,000; and Mr. Jay S. Goldsmith -- $964,000. 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
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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.
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 us 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
Foreign currency exchange rate risk
We conduct operations in the United Kingdom and sell products in several
different countries. Therefore, our operating results may be impacted by the
fluctuating exchange rates of foreign currencies, especially the British pound,
in relation to the U.S. dollar. We do not currently engage in hedging activities
with respect to our foreign currency exposure. We continually monitor our
exposure to currency fluctuations and may use financial hedging techniques when
appropriate to minimize the effect of these fluctuations. Even so, exchange rate
fluctuations may still have a material adverse effect on our business and
operating results.
Market Risk
We are exposed to market risk primarily through short-term investments.
Our investment policy calls for investment in short-term, low risk instruments.
As of March 31, 2001, short-term investments (principally U.S. Treasury bills)
were $12.9 million. Due to the nature of these investments, any decrease in
rates would not have a material impact on our financial condition or results of
operations.
Investment Risk
As of March 31, 2001, the value of our investment in TecSec, a privately
held company, was $5.0 million. This investment has been accounted for at cost
and could be subject to write-down in future periods if it is determined that
the investment is permanently impaired and not recoverable. TecSec is currently
evaluating alternative sources of financing to meet ongoing capital and
operating needs. If TecSec is not successful in obtaining sufficient capital on
acceptable terms or at all, our investment in TecSec could be permanently
impaired and subject to a significant write-down.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GENERAL LITIGATION
Various legal proceedings are pending against the Company. The Company considers
all such proceedings to be ordinary litigation incident to the character of its
business. Certain claims are covered by liability insurance. The Company
believes that the resolution of those claims to the extent not covered by
insurance will not, individually or in the aggregate, have a material adverse
effect on the financial position or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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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: May 11, 2001 /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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