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 SEPTEMBER 30, 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 November 1, 2001: 24,153,402
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash, including short-term investments of $5,969 in 2001 and $16,820 in 2000 $ 6,047 $ 17,049
Trade receivables, less allowance for doubtful accounts (2001 - $148, 2000 - $89) 1,607 1,632
Inventories 809 1,617
Other 1,031 461
--------- ---------
Total current assets 9,494 20,759
--------- ---------
Equipment and leasehold improvements, net 790 1,623
Goodwill 3,055 8,766
Other assets 6,574 6,031
--------- ---------
$ 19,913 $ 37,179
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 830 $ 1,080
Accrued liabilities 5,300 6,511
--------- ---------
Total current liabilities 6,130 7,591
Other non-current liabilities 4,026 6,010
--------- ---------
Total liabilities 10,156 13,601
--------- ---------
Shareholders' equity:
Class A Preferred Stock, Second Series, no par value: 1,000 shares authorized; 780 and 790
issued and outstanding as of September 30, 2001 and December 31, 2000, respectively 3,900 3,950
Common shares, $0.10 par value: 40,000,000 shares authorized; 24,153,402 and
24,237,402 shares issued as of September 30, 2001 and December 31, 2000, respectively 2,415 2,424
Additional paid-in capital 107,098 107,300
Accumulated deficit (103,478) (90,010)
Other comprehensive loss (178) --
Unearned compensation -- (86)
--------- ---------
Total shareholders' equity 9,757 23,578
--------- ---------
$ 19,913 $ 37,179
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
1
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 1,575 $ 1,573 $ 4,434 $ 4,215
Cost of sales 721 770 2,214 2,129
------------ ------------ ------------ ------------
Gross margin 854 803 2,220 2,086
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 1,177 1,531 3,703 5,002
Sales and marketing 496 2,197 2,996 5,993
Product development 389 1,296 2,229 3,471
Stock compensation 28 422 86 1,032
Goodwill amortization 252 658 1,572 1,978
Repositioning charge 1,232 -- 7,317 --
------------ ------------ ------------ ------------
3,574 6,104 17,903 17,476
------------ ------------ ------------ ------------
Loss from operations (2,720) (5,301) (15,683) (15,390)
------------ ------------ ------------ ------------
Other income (expenses):
Interest income 128 333 445 632
Interest expense (11) (22) (51) (79)
Cost of pensions - non-operating (207) (210) (588) (623)
Other income 11 28 59 28
------------ ------------ ------------ ------------
(79) 129 (135) (42)
------------ ------------ ------------ ------------
Net loss from continuing operations (2,799) (5,172) (15,818) (15,432)
------------ ------------ ------------ ------------
Discontinued operations -- 4,275 2,350 4,275
------------ ------------ ------------ ------------
Net loss $ (2,799) $ (897) $ (13,468) $ (11,157)
============ ============ ============ ============
Basic loss per common share:
Continuing operations $ (.12) $ (.22) $ (.66) $ (.67)
Discontinued operations -- .18 .10 .19
------------ ------------ ------------ ------------
$ (.12) $ (.04) $ (.56) $ (.48)
============ ============ ============ ============
Weighted average shares outstanding 24,140,902 23,479,903 24,198,802 23,089,836
============ ============ ============ ============
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
2
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
Common Shares Other
Class A ----------------------- Additional Comprehen-
Preferred Shares Paid-in Accumulated sive
Stock Issued Amount Capital Deficit loss
----------- ----------- ----------- ----------- ----------- -----------
Balance -- December 31, 2000 $ 3,950 24,237,402 $ 2,424 $ 107,300 $ (90,010) $ --
Repurchase of Common Shares (109,000) (11) (207) -- --
Conversion of Preferred Stock (50) 25,000 2 48 -- --
Private placement costs -- -- -- (43) -- --
Amortization of unearned compensation -- -- -- -- -- --
Comprehensive Income:
Net loss -- -- -- -- (13,468) --
Foreign currency translation adjustment -- -- -- -- -- (178)
----------- ----------- ----------- ----------- ----------- -----------
Balance -- September 30, 2001 $ 3,900 24,153,402 $ 2,415 $ 107,098 $ (103,478) $ (178)
=========== =========== =========== =========== =========== ===========
Unearned Share- Comprehen-
Compensa- holders' sive
tion Equity loss
----------- ----------- -----------
Balance -- December 31, 2000 $ (86) $ 23,578 $ --
Repurchase of Common Shares -- (218) --
Conversion of Preferred Stock -- -- --
Private placement costs -- (43) --
Amortization of unearned compensation 86 86 --
Comprehensive Income:
Net loss -- (13,468) (13,468)
Foreign currency translation adjustment -- (178) (178)
----------- ----------- -----------
Balance -- September 30, 2001 $ -- $ 9,757 $ (13,646)
=========== =========== ===========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(15,818) $(15,432)
Adjustments to reconcile loss to net cash used in continuing operations:
Goodwill amortization 1,572 1,978
Stock compensation expense 86 1,032
Depreciation 274 263
Non-cash repositioning charge 6,458 --
Changes in operating assets and liabilities (3,349) (3,135)
-------- --------
Net cash used in continuing operations (10,777) (15,294)
Income from discontinued operations 2,350 4,275
Adjustments to reconcile income to net cash used in discontinued operations:
Non-cash gain for discontinued operations (2,350) (4,275)
Change in net assets of discontinued operations (332) (2,212)
-------- --------
Net cash used in discontinued operations (332) (2,212)
-------- --------
Net cash used in operating activities (11,109) (17,506)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64) (678)
Other (6) --
-------- --------
Net cash used in continuing operations (70) (678)
Proceeds from discontinued operations 222 21,805
Capital expenditures of discontinued operations -- (168)
-------- --------
Net cash provided by discontinued operations 222 21,637
-------- --------
Net cash provided by operating activities 152 20,959
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares pursuant to stock option exercises -- 982
Costs incurred from private placement of Class A Preferred Stock (43) --
Repayment of notes payable from discontinued operations -- (940)
-------- --------
Net cash (used in) provided by financing activities (43) 42
-------- --------
Effect of exchange rate changes on cash and cash equivalents (2) --
-------- --------
Net (decrease) increase in cash (11,002) 3,495
Cash - beginning of period 17,049 18,236
-------- --------
Cash - end of period $ 6,047 $ 21,731
======== ========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
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 (the "Board"), 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 adopted a plan of disposition pursuant to which the
Company divested its non-core operations. See Note 6 for a discussion on the
disposition plan.
At present, PubliCARD, through its Infineer Ltd. subsidiary
("Infineer"), designs smart card platform solutions for educational and
corporate sites. The Company also licenses industry compliant smart card reader
solutions and application specific integrated circuits to an affiliated company.
In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remains confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products has
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests will be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings. See Note 2 for a discussion on the repositioning charge
associated with this action.
In September 2001, the Company announced the formation of a new
minority-owned affiliate, MAKO Technologies LLC ("Mako"), a Delaware limited
liability company, to market its smart card reader and chip technologies. This
decision substantially eliminates the cash funding requirements of the Company
while retaining an upside potential in the form of royalties to be paid over the
next two years for the use of certain intellectual property rights of Infineer
and a 46% ownership interest in Mako.
The Company's future plans revolve around an acquisition strategy
focused on businesses in areas outside the high technology sector while
continuing to support the expansion of the Infineer business.
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, 2001 and the results of their
operations and cash flows for the three and nine months ended September 30, 2001
and 2000. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States 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.
5
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141") and Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142").
SFAS No. 141 addresses financial accounting and reporting for business
combinations. This new statement requires that all business combinations be
accounted for using one method (the purchase method), intangible assets be
recognized apart from goodwill if they meet certain criteria and disclosure of
the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed by major
balance sheet caption. The provisions of this statement apply to all business
combinations initiated after June 30, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under this new statement, goodwill and
intangible assets that have indefinite useful lives will not be amortized, but
rather will be tested at least annually for impairment based on the specific
guidance of this statement. In addition, this statement requires disclosure of
information about goodwill and other intangible assets in the years subsequent
to their acquisition that was not previously required. The provisions of this
statement are required to be applied starting with fiscal years beginning after
December 15, 2001. However, goodwill and intangible assets acquired after June
30, 2001 will be subject immediately to the non-amortization and amortization
provisions of this statement. The Company will adopt this statement on January
1, 2002. The Company is in the process of determining the impact of this
pronouncement, if any, on the Company's financial position and results of
operations.
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 management's estimates
related to the Company's production schedules, customer demand, possible
alternative uses and the ultimate realization of potentially excess inventory.
Inventories as of September 30, 2001 and December 31, 2000 consisted of the
following (in thousands):
2001 2000
------ ------
Raw materials and supplies $ 532 $ 750
Finished goods 277 867
------ ------
$ 809 $1,617
====== ======
NOTE 2 - REPOSITIONING CHARGE
As discussed in Note 1, in July 2001, after evaluating the timing of
potential future revenues, PubliCARD's Board decided to shift the Company's
strategic focus. The Board authorized management to pursue strategic alliances
with one or more companies that have the resources to capitalize more fully on
PubliCARD's smart card reader and chip-related technologies. Accordingly, the
Company recorded a charge aggregating $7.3 million in the second and third
quarters of 2001. The charge consisted of write-offs of goodwill of $4.1 million
and fixed assets of $554,000, an inventory realizability
6
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustment of $1.7 million as a result of the business closure, and severance
and other costs of $1.0 million principally related to the termination of 36
employees. As of September 30, 2001, the remaining repositioning reserve was
$601,000. Management expects the repositioning activities to be completed by
March 2002.
NOTE 3 - INVESTMENTS
In September 2001, the Company formed a new minority-owned affiliate,
Mako, to market its smart card reader and related integrated circuit
technologies. The move is consistent with the Company's previously announced
decision to explore strategic transactions that would enable the Company to
reduce or eliminate its ongoing cash funding requirements for its smart card
reader and chip business while retaining an interest in the upside potential for
these technologies. The Company contributed certain inventories and equipment
valued at $104,000 and is committed to make an additional contribution of
$152,000 in the form of inventory or cash by March 24, 2002, in exchange for an
initial 46% ownership interest in Mako. The remaining 54% ownership interest,
invested in cash, is held by the owners of Asian Identification Systems, Ltd.
and a sister company, which were the Company's smart card reader contract
manufacturing and distribution partners in the Asia-Pacific and Latin America
regions. In addition, Mako's employees have been granted the right to receive,
in the aggregate, a 27 percent equity stake after two years. The Company will
account for its investment in Mako on the equity basis.
The Company has also granted a perpetual license of its reader and chip
technology to Mako in exchange for royalties based on sales over the next two
years. Mako will continue to sell the existing Infineer lines of smart card
readers and chips for keyboard and set-top box readers. It will also provide
support services for Infineer products and continue its product development
activities.
In December 2000, the Company acquired an ownership interest in TecSec,
Incorporated, a Virginia corporation ("TecSec"), for $5.1 million. TecSec
develops and markets encryption products and solutions, which are designed to
enable the next generation information security for the enterprise,
multi-enterprise e-business and other markets. The TecSec investment, amounting
to a 5% ownership interest on a fully diluted basis, 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 4 - STOCK MATTERS
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 per share. In
return, the Company granted a total of approximately 3.1 million replacement
stock options on August 20, 2001. The replacement stock options generally
contain the same terms and conditions of the cancelled stock options and have an
exercise price of $.39 per share, the closing price of the Company's common
stock on August 20, 2001.
In August 2001, 10 shares of Class A Preferred Stock were converted into
25,000 shares of PubliCARD's common stock.
NOTE 5 - SEGMENT DATA
As a result of the disposition of certain operations (See Note 6) 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 nine months ended September 30, 2001 and 2000 are as follows (in
thousands):
7
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
------ ------
United States $1,510 $ 696
Europe 2,686 3,238
Rest of world 238 281
------ ------
$4,434 $4,215
====== ======
The Company has operations in the United States and United Kingdom.
Identifiable assets by country as of September 30, 2001 and December 31, 2000
are as follows (in thousands):
2001 2000
------- -------
United States $14,061 $25,547
United Kingdom 2,797 2,866
------- -------
$16,858 $28,413
======= =======
NOTE 6 - DISCONTINUED OPERATIONS
In March 2000, the Company's Board 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 designed, manufactured and distributed
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. In the third quarter of 2000, the Company recognized a gain of $4.3
million principally related to the sale of Greenwald and Greenwald Intellicard.
In the second quarter of 2001, the Company revised its estimates of proceeds
and expenses associated with the wind-down of Amazing and Greystone, which has
been substantially completed, and recognized a gain of $2.4 million, which had
been previously deferred pending resolution of certain contingencies. 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 September
30, 2001 is as follows (in thousands):
Current assets (primarily cash held in escrow) $ 2,253
Current liabilities and disposition reserves (1,458)
-------
Net assets of discontinued operations $ 795
=======
8
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities reflected in the Consolidated
Statements of Cash Flows are net of acquisitions and disposals of businesses and
consisted of the following for the nine months ended September 30, 2001 and 2000
(in thousands):
2001 2000
------- -------
Trade receivables $ (59) $ (201)
Inventories (918) (801)
Other current assets 86 (53)
Other assets (491) (48)
Trade accounts payable (516) (685)
Accrued liabilities 531 (555)
Other non-current liabilities (1,982) (792)
------- -------
$(3,349) $(3,135)
======= =======
Cash paid for interest for the nine months ended September 30, 2001 and 2000
was $102,000 and $135,000, respectively. No income taxes were paid in 2001 and
2000. 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.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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
At present, PubliCARD, through its Infineer subsidiary, designs smart
card platform solutions for educational and corporate sites. The Company also
licenses industry compliant smart card reader solutions and application specific
integrated circuits to an affiliated company.
In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remains confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products has
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests will be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings. See Note 2 to the financial statements for a discussion on
the repositioning charge associated with this action.
In September 2001, the Company announced the formation of a new
minority-owned affiliate, Mako, to market its smart card reader and chip
technologies. This decision substantially eliminates the cash funding
requirements of the Company while retaining an upside potential in the form of
royalties to be paid over the next two years for the use of certain intellectual
property rights of Infineer and a 46% ownership interest in Mako.
The Company's future plans revolve around an acquisition strategy
focused on businesses in areas outside the high technology sector while
continuing to support the expansion of the Infineer business, which represented
77% of consolidated revenues for the first nine months of 2001.
ACQUISITION AND DIVESTITURES--1998-2000
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
10
provided 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 Ltd. ("Absec"), a designer of
closed environment solutions, including small value electronic cash
systems and database management solutions. Through Absec (now known as
Infineer Ltd.), 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, 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 enterprise 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 adopted a
plan to dispose of the operations of the Company's Greenwald, Greenwald
Intellicard, Greystone and Amazing subsidiaries. These subsidiaries designed,
manufactured and distributed 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 an ownership interest in TecSec
for $5.1 million. TecSec develops and markets encryption products and solutions,
which are designed to enable the next generation information security for the
enterprise, multi-enterprise e-business and other markets. The TecSec
investment, amounting to a 5% ownership interest on a fully diluted basis, has
been accounted for at cost.
11
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
is recognized ratably over the contract period.
Cost of sales and operating expenses
Cost of sales consists primarily of material, personnel costs, overhead and
third-party contract manufacturing costs.
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 and include
expenses associated with the development of new products and enhancements to
existing products. 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 SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
SALES. Consolidated net sales of $1.6 million for 2001 were flat compared to
2000. Increased smart card solution sales to the education and corporate market
were offset by lower shipments of smart card readers and integrated circuits in
the United States.
GROSS MARGIN. Gross margin as a percentage of net sales increased slightly
to 54% in 2001 from 51% in 2000. The increase is attributed to higher margins on
Infineer's smart card solution sales to educational and corporate sites.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $496,000 in
2001 compared to $2.2 million in 2000. The decrease in expense is primarily
attributed to the workforce reductions and other cost containment measures
associated with the Company's July 2001 strategic repositioning action.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses were $389,000 in
2001 compared to $1.3 million in 2000. The decrease in expense is primarily
attributed to the repositioning action.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarter ended September 30, 2001 decreased to $1.2 million from $1.5 million
for 2000. The decrease in expense is primarily attributed to the repositioning
action.
12
STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and
2001 principally relates to the issuance of stock awards and below market stock
option grants to two executives hired in 2000 and 1999.
GOODWILL AMORTIZATION. Amortization of goodwill amounted to $252,000 in 2001
compared to $658,000 in 2000. The decrease is attributed to the write off of
goodwill associated with the Tritheim acquisition in the second quarter of 2001.
REPOSITIONING CHARGE. As discussed in Note 1, in July 2001, after evaluating
the timing of potential future revenues, PubliCARD's Board decided to shift the
Company's strategic focus. The Board authorized management to pursue strategic
alliances with one or more companies that have the resources to capitalize more
fully on PubliCARD's smart card reader and chip-related technologies.
Accordingly, the Company recorded a charge aggregating $7.3 million in the
second and third quarters of 2001. The charge consisted of write-offs of
goodwill of $4.1 million and fixed assets of $554,000, an inventory
realizability adjustment of $1.7 million as a result of the business closure,
and severance and other costs of $1.0 million principally related to the
termination of 36 employees. As of September 30, 2001, the repositioning reserve
was $601,000. Management expects the remaining repositioning activities to be
completed by March 2002.
OTHER INCOME AND EXPENSE. Interest income decreased to $128,000 for 2001
from $333,000 for 2000 due to lower interest rates and investment balances.
Interest expense, which principally relates to interest on the remaining
environmental obligation (see below), decreased to $11,000 in 2001 compared to
$22,000 in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
SALES. Consolidated net sales for the nine months ended September 30, 2001
increased to $4.4 million compared to $4.2 million for 2000. The increase is
primarily attributed to sales of smart card readers for security applications.
GROSS MARGIN. Gross margin as a percentage of net sales increased slightly
in 2001 to 50% from 49% in 2000. The increase is principally due to improved
margins on smart card reader sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $3.0 million
in 2001 compared to $6.0 million in 2000. The decrease is attributed to the July
2001 repositioning actions, additional headcount reductions throughout 2000 and
early 2001 and lower consulting expenses for market research and corporate
branding.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to $2.2
million in 2001 compared to $3.5 million in 2000. The decrease in expense is
attributed to the July 2001 repositioning action, headcount reductions
throughout 2000 and early 2001 and lower contract engineering services costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $3.7 million for 2001 from $5.0 million for 2000. The decrease in
expense is attributed to the July 2001 repositioning action and lower corporate
expenditures, which consisted primarily of legal, consulting and professional
fees.
STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and
2001 principally relates to the issuance of stock awards and below market stock
option grants to two executives hired in 2000 and 1999.
GOODWILL AMORTIZATION. Goodwill and other intangibles are associated with
the Tritheim and Absec
13
acquisitions. Amortization decreased to $1.6 million in 2001 from $2.0 million
in 2000 due to the write-off of goodwill associated with the Tritheim
acquisition in the second quarter of 2001.
OTHER INCOME AND EXPENSE. Interest income decreased to $445,000 for 2001
from $632,000 for 2000 due to a lower interest rates and investment balances.
Interest expense, which principally relates to interest on the remaining
environmental obligation (see below), decreased to $51,000 in 2001 compared to
$79,000 in 2000.
LIQUIDITY
The Company has financed its operations over the last two years primarily
through the sale of its common and preferred stock and the sale of its non-core
businesses. Cash, including short-term investments, decreased by $11.0 million
during the nine months ended September 30, 2001, to $6.0 million.
Operating activities from continuing operations utilized cash of $10.8
million for the nine months ended September 30, 2001 and principally consisted
of the loss from continuing operations of $15.8 million and an increase in net
operating assets and liabilities of $3.4 million offset by non-cash charges of
$8.4 million for the repositioning charge, goodwill amortization, stock
compensation expense and depreciation. Operating activities from discontinued
operations utilized $332,000 of cash.
Investing activities provided cash of $152,000 in 2001 and consisted
principally of proceeds from the sale of discontinued operations offset in part
by capital expenditures.
Financing activities utilized cash of $43,000 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 $2,000.
During the first nine months of 2001, the Company's capital expenditures
from continuing operations totaled $64,000. 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 has experienced negative cash flow from operating activities in
the past and expects to experience negative cash flow for the remainder of 2001
and 2002. The Company believes that its current cash balance and expected cash
flows will satisfy working capital, and product development, sales and marketing
activities, and capital expenditures at their currently reduced levels, for the
next 12 months. The Company will need to obtain additional sources of liquidity
to finance its working capital needs, and to maintain its product development,
sales and marketing activities, and capital expenditure requirements beyond the
next 12 months. Future uses of cash include the following:
- 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, 2001, the
Company has made principal payments aggregating $13.6 million. A final
payment of $823,000, including interest, is scheduled to be made to the
United States Environmental Protection Agency in 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 $1.6
million in 2002.
14
The success of our repositioning strategy significantly depends on our
ability to raise additional financing to fund acquisitions. We cannot assure you
that any financing required for such acquisitions will be available on
acceptable terms or at all, or that any future acquisitions will not materially
adversely affect our results of operations and financial condition.
As of September 30, 2001, the value of the Company's investment in TecSec, a
privately held company, was $5.1 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. If TecSec is
not successful in executing its business plan or 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 $84 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 nine months ended September 30, 2001, of approximately $8.4
million, $16.7 million, $19.7 million and $15.8 million, respectively. In
addition, we experienced negative cash flow from continuing operating activities
of $5.6 million, $8.5 million, $18.7 million and $10.8 million in 1998, 1999,
2000 and for the nine months ended September 30, 2001, respectively.
We also have continuing obligations to fund payments due under the
Consent Decree and an underfunded pension plan. We are scheduled to make a final
payment of $823,000 in 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
$1.6 million we expect to contribute to the plan in 2002, 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 FACE RISKS ASSOCIATED WITH ACQUISITIONS. An important element of our
new strategic plan involves the acquisition of businesses in areas outside the
technology sectors in which we have has recently been engaged, so as to
diversify our asset base. Acquisitions would require us to invest financial
resources and may have a dilutive effect on our earnings or book value per share
of common stock. We cannot assure you that we will consummate any acquisitions
in the future, that any financing required for such acquisitions will be
available on acceptable terms or at all, or that any past or future acquisitions
will not materially adversely affect our results of operations and financial
condition.
Our acquisition strategy generally presents a number of significant
risks and uncertainties, including the risks that:
15
- we will not be able to retain the employees or business relationships of
the acquired company;
- we will fail to realize any synergies or other cost reduction objectives
expected from the acquisition;
- we will not be able to integrate the operations, products, personnel and
facilities of acquired companies;
- management's attention will be diverted to pursuing acquisition
opportunities and integrating acquired products, technologies or
companies and will be distracted from performing its regular
responsibilities;
- we will incur or assume liabilities, including liabilities that are
unknown or not fully known to us at the time of the acquisition; and
- we will enter markets in which we have no direct prior experience.
We cannot assure you that any of the foregoing will not materialize, which could
have an adverse effect on our results of operations and financial condition.
THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and
market acceptance of, our smart card reader 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 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 future revenues and earnings depend in large part on the success of
these products, and if the benefits are not perceived sufficient or if
alternative technologies are more widely accepted, 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 nine months ended September
30, 2001, one customer represented approximately 16% of our net sales and 12% of
our accounts receivable balance as of September 30, 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.
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:
16
- 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. We may need to devote additional 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
- 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 companies offering closed environment
solutions, including small value electronic cash systems and database management
solutions, such as Girovend, MARS, Diebold, CyberMark and Schlumberger.
17
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 $84.0 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 "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 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
18
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.
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 as effectively as do the laws of the United States. Our means of
protecting our proprietary and intellectual property rights may not be adequate.
There is a risk that our competitors will independently develop similar
technology, duplicate our products or design around patents or other
intellectual property rights.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS. Our
customers may rely on certain of our current products and products in
development to prevent unauthorized access to digital content for financial
transactions, computer networks, 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. If we
fail to meet our operating and financial objectives this may make it more
difficult to retain and reward our senior management and key personnel. 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
19
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 74% and 66% of total sales for the
three and nine months ended September 30, 2001, respectively. 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;
- 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.
20
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 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.
OUR STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET. On August 6,
2001, we received notice from The Nasdaq Stock Market ("Nasdaq") that our common
stock had failed to maintain a minimum closing bid price of $1.00 over the last
30 consecutive trading days as required by The Nasdaq National Market Rules.
Therefore, in accordance with such rules, we were to be provided 90 calendar
days,
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or until November 5, 2001, to regain compliance with this rule. On September 27,
200l, Nasdaq implemented a moratorium on the minimum bid price and market value
of public float requirements. The moratorium applies to all companies that were
previously subject to these requirements and suspends the compliance requirement
until January 2, 2002. Accordingly, the matter referenced in Nasdaq's letter
dated August 6, 2001 was deemed closed.
At the present time, the Company's common stock has continued to trade
below $1.00. If the minimum bid price of the Company's common stock is below
$1.00 on January 2, 2002, the compliance time-frames and notice periods
indicated above would be triggered. If we are unable to demonstrate compliance
with the minimum bid price rule and the Nasdaq provides written notification
that our securities would be delisted, we may appeal the decision to a Nasdaq
Listing Qualification Panel. We cannot assure you that we will continue to meet
Nasdaq's other quantitative or qualitative listing criteria, that any appeal in
the event of non-compliance will be successful or that our common stock will not
be delisted.
Should our common stock be delisted, the liquidity of our common stock
would be adversely affected. This could impair our ability to raise capital in
the future. If we are not successful in raising additional capital when required
in sufficient amounts and on terms acceptable to us or at all, we may be
required to scale back the scope of our business plan, which would have a
material adverse effect on our financial condition and results of operations. We
cannot make any assurances that we 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 our business plan or at all.
WE ARE SUBJECT TO GOVERNMENT REGULATION. 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 September 30, 2001, short-term investments (principally U.S. Treasury
bills) were $6.0 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 September 30, 2001, the value of our investment in TecSec, a
privately held company, was $5.1 million. This investment has been accounted for
at cost and could be subject to write-downs in future periods if it is
determined that the investment is permanently impaired and is not recoverable.
If TecSec is not successful in executing its business plan or in obtaining
sufficient capital on acceptable terms or at all, our investment could be
permanently impaired and subject to a significant write-down.
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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: November 14, 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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