-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LK1DGk1/C6ER3cjflypZkeUdb+VGOk9Jie8oswvZ2XmiojxJfs2lO8YGfKvXBdUr phnEmnP9HYtYi6RsCXBL0w== /in/edgar/work/20000814/0000950123-00-007628/0000950123-00-007628.txt : 20000921 0000950123-00-007628.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950123-00-007628 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLICARD INC CENTRAL INDEX KEY: 0000081050 STANDARD INDUSTRIAL CLASSIFICATION: [3577 ] IRS NUMBER: 230991870 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72411 FILM NUMBER: 699815 BUSINESS ADDRESS: STREET 1: 620 FIFTH AVENUE ROCKEFELLER CENTER STREET 2: 7TH FLOORR CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2126513102 MAIL ADDRESS: STREET 1: 620 FIFTH AVENUE ROCKEFELLER CENTER STREET 2: FIFTH FLOOR CITY: NEW YORK STATE: NY ZIP: 10020 FORMER COMPANY: FORMER CONFORMED NAME: PUBLICKER INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 e10-q.txt PUBLICARD INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-29794 PUBLICARD, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-0991870 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 620 FIFTH AVENUE, 7TH FLOOR, NEW YORK, NY 10020 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 651-3102 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ No / /. Number of shares of Common Stock outstanding as of July 31, 2000: 23,474,400 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PUBLICARD, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 --------- --------- (unaudited) ASSETS Current assets: Cash, including short-term investments of $24,625 in 2000 and $17,541 in 1999 $ 25,041 $ 18,236 Trade receivables, less allowance for doubtful accounts of $82 in 2000 and $92 in 1999 1,536 1,720 Inventories 1,548 903 Net assets of discontinued operations -- 10,832 Other 668 613 --------- --------- Total current assets 28,793 32,304 --------- --------- Equipment and leasehold improvements, net 1,415 1,063 Goodwill 10,189 11,508 Other assets 637 613 --------- --------- $ 41,034 $ 45,488 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 2,321 $ 2,413 Accrued liabilities 10,134 6,002 --------- --------- Total current liabilities 12,455 8,415 Other non-current liabilities 5,723 6,675 --------- --------- Total liabilities 18,178 15,090 --------- --------- Shareholders' equity: Common shares, $0.10 par value, Authorized - 40,000,000 Issued - 27,491,701 in 2000 and 26,191,189 in 1999 2,749 2,619 Additional paid-in capital 115,700 111,476 Accumulated deficit (84,871) (74,611) Common shares held in treasury, at cost (10,468) (8,649) Unearned compensation (254) (437) --------- --------- Total shareholders' equity 22,856 30,398 --------- --------- $ 41,034 $ 45,488 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-1 3 PUBLICARD, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales $ 1,091 $ 71 $ 2,642 $ 78 Cost of sales 621 38 1,359 34 ------------ ------------ ------------ ------------ Gross margin 470 33 1,283 44 ------------ ------------ ------------ ------------ Operating expenses: General and administrative 1,679 1,244 3,472 2,536 Sales and marketing 1,954 490 3,797 1,001 Product development 1,373 209 2,175 453 Stock compensation 183 302 608 690 Goodwill amortization 660 405 1,319 808 ------------ ------------ ------------ ------------ 5,849 2,650 11,371 5,488 ------------ ------------ ------------ ------------ Loss from operations (5,379) (2,617) (10,088) (5,444) ------------ ------------ ------------ ------------ Other income (expenses): Interest income 111 106 299 256 Interest expense (20) (40) (58) (93) Cost of pensions - non-operating (201) (185) (413) (420) Other costs -- (115) -- (68) ------------ ------------ ------------ ------------ (110) (234) (172) (325) ------------ ------------ ------------ ------------ Loss from continuing operations (5,489) (2,851) (10,260) (5,769) Loss from discontinued operations -- (391) -- (3,586) Loss on disposition of discontinued operations -- (2,100) -- (2,100) ------------ ------------ ------------ ------------ Net Loss $ (5,489) $ (5,342) $ (10,260) $ (11,455) ============ ============ ============ ============ Basic loss per common share: Continuing operations $ (.24) $ (.15) $ (.45) $ (.32) Discontinued operations -- (.14) -- (.32) ------------ ------------ ------------ ------------ $ (.24) $ (.29) $ (.45) $ (.64) ============ ============ ============ ============ Weighted average shares outstanding 23,192,500 18,250,274 22,917,886 17,825,907 ============ ============ ============ ============
The accompanying notes to the consolidated financial statements are an integral part of these statements. F-2 4 PUBLICARD, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
COMMON SHARES ADDITIONAL COMMON SHARE- SHARES PAID-IN ACCUMULATED TREASURY UNEARNED HOLDERS' ISSUED AMOUNT CAPITAL DEFICIT SHARES(1) COMPENSATION EQUITY ---------- ------ ---------- ----------- -------- ------------ -------- Balance - December 31, 1999 26,191,189 $2,619 $111,476 $(74,611) $ (8,649) $(437) $ 30,398 Common shares issued: Stock options plans 1,091,679 109 2,668 -- (1,819) -- 958 Shares pursuant to employment and separation agreements 82,500 8 644 -- -- -- 652 Business acquisition 66,333 7 688 -- -- -- 695 Pension plan contribution 60,000 6 224 -- -- -- 230 Amortization of unearned compensation -- -- -- -- -- 183 183 Net loss -- -- -- (10,260) -- -- (10,260) ---------- ------ -------- -------- -------- ----- -------- Balance - June 30, 2000 27,491,701 $2,749 $115,700 $(84,871) $(10,468) $(254) $ 22,856 ========== ====== ======== ======== ======== ===== ========
(1) Represents common shares held in treasury of 4,058,297 as of June 30, 2000 and 3,725,024 as of December 31, 1999. The accompanying notes to the consolidated financial statements are an integral part of this statement. F-3 5 PUBLICARD, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS) (UNAUDITED)
2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Loss from continuing operations $(10,260) $ (5,769) Adjustments to reconcile loss to net cash used in continuing operations: Goodwill amortization 1,319 808 Stock compensation expense 608 690 Depreciation 123 63 Changes in operating assets and liabilities (2,317) (424) -------- -------- Net cash used in continuing operations (10,527) (4,632) Loss from discontinued operations -- (5,686) Loss on disposition -- 2,100 Non-cash charges 914 4,104 Change in net assets of discontinued operations (4,101) (1,601) -------- -------- Net cash used in discontinued operations (3,187) (1,083) -------- -------- Net cash used in operating activities (13,714) (5,715) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures from continuing operations (475) (212) Acquisition of businesses, net of cash acquired -- (692) -------- -------- Net cash used in continuing operations (475) (904) Proceeds from discontinued operations 21,143 14 Capital expenditures from discontinued operations (167) (400) Acquisition of businesses, net of cash acquired -- (2,192) -------- -------- Net cash provided by (used in) discontinuing operations 20,976 (2,578) -------- -------- Net cash provided by (used in) investing activities 20,501 (3,482) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common shares pursuant to stock option exercises 958 509 Repayment of notes payable from discontinued operations (940) (74) Purchase of redeemable shares -- (503) -------- -------- Net cash provided by (used in) financing activities 18 (68) -------- -------- NET INCREASE (DECREASE) IN CASH 6,805 (9,265) CASH - BEGINNING OF PERIOD 18,236 18,482 -------- -------- CASH - END OF PERIOD $ 25,041 $ 9,217 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 6 PUBLICARD, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF THE BUSINESS PubliCARD, Inc. ("PubliCARD" or the "Company") was incorporated in the Commonwealth of Pennsylvania in 1913. PubliCARD entered the smart card industry in early 1998, and began to develop solutions for the conditional access, security, payment system and data storage needs of industries utilizing smart card technology. The Company made a series of acquisitions to enhance its position in the smart card industry. In March 2000, PubliCARD's Board of Directors, together with its management team, determined to integrate its operations and focus on deploying infrastructure products and end-to-end solutions utilizing chip (smart card) technology in the broadband market. To effect this new business strategy, in March 2000, the Board of Directors adopted a plan of disposition pursuant to which the Company is divesting its non-core operations. See Note 4 for a discussion on the disposition plan. The Company will pursue its new business strategy through the integration of its remaining operations. As a result of this integration, the Company's product range includes application specific integrated circuits, also known as ASICs, for television set-top boxes, secure electronic commerce, Internet security and software copy protection. In addition, the Company is developing point-of-deployment applications, also known as PODs, which scramble and unscramble data entering and exiting set-top boxes. PubliCARD will continue to design closed environment solutions, including small value electronic cash systems and database management solutions. The Company provides systems for closed populations to allow individual user access, unique rights and monitoring. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly the financial position of the Company and its subsidiary companies as of June 30, 2000 and the results of their operations and cash flows for the three and six months ended June 30, 2000 and 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999, as amended. EARNINGS (LOSS) PER COMMON SHARE Basic net income (loss) per common share is based on net income divided by the weighted average number of common shares outstanding during each year. Diluted net income (loss) per common share assumes issuance of the net incremental shares from stock options and warrants at the later of the beginning of the year or date of issuance. Diluted net income (loss) per share was not computed for 2000 and 1999 as the effect of stock options and warrants were antidilutive. INVENTORIES Inventories are recorded at cost, determined on a first-in, first-out, or FIFO, basis and do not exceed net realizable values. Inventories at June 30, 2000 and December 31, 1999 consisted of the following (in thousands):
2000 1999 ------ ---- Raw materials and supplies $ 585 $599 Work in process 40 48 Finished goods 923 256 ------ ---- $1,548 $903 ====== ====
1 7 PUBLICARD, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - ACQUISITIONS On November 16, 1999, the Company acquired 100% of the common stock of Absec Ltd., a Northern Ireland company ("Absec") that designs closed end environment solutions, including small value electronic cash systems and database management solutions. The aggregate purchase price was approximately $5.5 million and included the issuance of 388,209 shares of common stock and options to purchase a total of 300,000 shares of common stock at an exercise price of $6.19 per share. The amount and components of the estimated purchase price along with the preliminary allocation of the estimated purchase price are as follows (in thousands): Purchase price: Value of common stock and stock options $3,455 Cash paid 1,561 Acquisition expenses 525 ------ $5,541 ====== Allocation of purchase price: Net assets $ 498 Goodwill 5,043 ------ $5,541 ======
The assets and liabilities of Absec were recorded at their estimated fair values as of the acquisition date and could be subject to adjustment pending the finalization of certain acquisition costs and related expenses. The aggregate fair value of Absec's research and development efforts that had not reached technological feasibility and had no alternative future uses was determined by an appraisal to be insignificant and resulted in no charge to the Company's financial statements. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible assets acquired and is amortized using the straight-line method over its estimated life of five years. The Absec acquisition has been accounted for as a purchase and, accordingly, the results are included in the consolidated financial statements of the Company since the date of acquisition. The following summarized unaudited pro forma financial information for the six months ended June 30, 1999 assumes that the acquisition occurred as of January 1, 1999 (in thousands except per share data): Net sales $ 2,620 Net loss from continuing operations (6,226) Net loss per share from continuing operations (.34)
The pro forma information is not necessarily indicative of the results that would have been reported had such event actually occurred on the date specified, nor is it intended to project the Company's results of operations or financial position for any future period or date. During 1999, the Company acquired Amazing! Smart Card Technologies, Inc. ("Amazing") and Greystone Peripherals, Inc. ("Greystone") and increased its ownership interest in Greenwald Intellicard, Inc. ("Greenwald Intellicard"). In March 2000, the Company's Board of Directors adopted a plan to dispose of these businesses. See Note 4. On February 11, 1999, the Company acquired 100% of the common stock of Amazing, a California company that 2 8 PUBLICARD, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS develops smart card solutions and manufactures smart cards. The aggregate purchase price was approximately $5.9 million and included the issuance of 350,000 shares of common stock and options to purchase a total of 457,503 shares of common stock. On February 22, 1999, the Company acquired 100% of the common stock of Greystone, a California company that principally develops and distributes hard disk duplicators. The aggregate purchase price was approximately $9.1 million and included the issuance of 746,401 shares of common stock and options to purchase a total of 132,388 shares of common stock. The amount and components of the purchase price along with the allocation of the purchase price are as follows (in thousands):
Amazing Greystone ------- --------- Purchase price: Value of common stock and stock options $ 5,327 $ 8,729 Acquisition expenses 597 414 --------- --------- $ 5,924 $ 9,143 ========= ========= Allocation of purchase price: Net assets (liabilities) of acquired businesses $ (1,371) $ 306 In-process research and development 1,509 1,410 Goodwill 5,786 7,427 --------- --------- $ 5,924 $ 9,143 ========= =========
The assets and liabilities of Amazing and Greystone were recorded at their fair values as of the respective acquisition dates. The aggregate fair value of research and development efforts that had not reached technological feasibility and had no alternative future uses was determined by appraisal to be $1.5 million and $1.4 million for Amazing and Greystone, respectively, and was expensed at the respective acquisition dates. Goodwill represents the excess of the purchase price over the fair value of identifiable tangible assets acquired and is amortized using the straight-line method over its estimated life of five years. The acquisitions of Amazing and Greystone have been accounted for under the purchase method of accounting and, accordingly, their results are included in the consolidated financial statements of the Company since the respective acquisition dates. In February 1998, the Company purchased, through a joint venture arrangement in Greenwald Intellicard, the assets and intellectual property of Intellicard Systems, Ltd. Greenwald Intellicard develops, manufactures and markets smart card systems for the commercial laundry appliance industry. The initial cash investment in Greenwald Intellicard, all of which was provided by the Company, was $314,000. The Company had two fixed price options aggregating $150,000 plus 66,333 shares of common stock to increase its ownership to 100%. The Company exercised these options in February 1999 and February 2000. NOTE 3 - SEGMENT DATA As a result of the disposition plan (See Note 4) and because the Company predominantly operates in one industry, that being the deployment of solutions for the broadband marketplace, the Company reports as a single segment. Sales by geographical areas for the six months ended June 30, 2000 and 1999 are as follows (in thousands):
2000 1999 ------ ------ United States $ 302 $78 Europe 2,173 -- Far East 31 -- Rest of world 136 -- ------ --- $2,642 $78 ====== ===
3 9 PUBLICARD, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has operations in the United States and United Kingdom. Identifiable assets by country as of June 30, 2000 and December 31, 1999 are as follows (in thousands):
2000 1999 ------- ------- United States $27,877 $30,804 United Kingdom 2,968 3,176 ------- ------- $30,845 $33,980 ======= =======
NOTE 4 - DISCONTINUED OPERATIONS In March 2000, the Company's Board of Directors adopted a plan to dispose of the operations of the Company's Greenwald Industries Inc. ("Greenwald"), Greenwald Intellicard, Greystone and Amazing subsidiaries. These subsidiaries design, manufacture and distribute mechanical and smart card laundry solutions, hard disk duplicators and smart cards. In the fourth quarter of 1999, the Company recorded a loss of $2.0 million related to the disposition plan, net of the expected gain on the disposition of these businesses. The loss provision was based on estimates of the proceeds expected to be realized on the dispositions and the results of operations through the disposition or wind-down dates. The amounts the Company will ultimately realize could differ from the amounts assumed in arriving at the charge recorded. On June 29, 2000, the Company completed the sale of substantially all of the assets of its Greenwald and Greenwald Intellicard subsidiaries to The Eastern Company ("Eastern") for $22.5 million in cash less $1.75 million held in escrow to secure the payment of certain indemnification obligations. As part of the transaction, Eastern assumed certain liabilities of Greenwald and Intellicard, including certain contractual liabilities, accounts payable and accrued liabilities. Pending resolution of the final disposition of the Company's remaining discontinued operations, no gain on the sale of Greenwald and Greenwald Intellicard has been recognized. The Company is actively seeking a purchaser for Greystone and is winding-down the operations of Amazing. In March 1999, the Company's Board of Directors adopted a plan to dispose of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates ("OSM"). During 1999, the Company revised its estimates of expected operating results and wind-down costs and recorded a loss provision of $3.0 million, of which $2.1 million was recorded in the second quarter of 1999. Approximately $1.2 million related to the write-off of OSM's goodwill. The wind-down of OSM has been substantially completed. The results of the operations of Greenwald, Greenwald Intellicard, Amazing, Greystone and OSM have been reflected as discontinued operations. Certain operating information with respect to discontinued operations for the six months ended June 30, 2000 or through their disposition dates of June 29, 2000 for Greenwald and Intellicard, are summarized as follows (in thousands): Net sales $ 11,717 Cost of sales 7,438 Operating expenses 4,449 Goodwill amortization 694 Interest expense, net 10 Loss from discontinued operations (874)
4 10 PUBLICARD, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The loss from discontinued operations for the six months ended June 30, 2000 of $874,000 has been deferred since it is anticipated that the income from the disposal of these operations will be utilized to offset any potential losses through their expected disposition dates. Summarized balance sheet information with respect to the discontinued operations as of June 30, 2000 is as follows (in thousands): Current assets $ 4,471 Non-current assets 583 Current liabilities and disposition reserves (10,362) Non-current liabilities (14) --------- Net liabilities of discontinued operations $ (5,322) ==========
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION Changes in operating assets and liabilities are net of acquisitions of businesses and consisted of the following for the six months ended June 30, 2000 and 1999:
2000 1999 ------- ------- (in thousands) Trade receivables $ 184 $ 16 Inventories (645) (64) Other current assets (55) 1 Other assets (24) 31 Trade accounts payable (92) 229 Accrued liabilities (963) 407 Other non-current liabilities (722) (1,044) ------- ------- $(2,317) $ (424) ======= =======
Acquisition of businesses in the consolidated statement of cash flows is net of cash acquired and includes debt assumed and immediately repaid. Cash paid for interest during 2000 and 1999 was $134,000 and $191,000, respectively. No income taxes were paid in 2000 and 1999. Non-cash investing activities include the acquisitions of Amazing, Greystone and Greenwald Intellicard for shares of common stock and options valued at $696,000 and $14.1 million in 2000 and 1999, respectively, as described in Note 2. 5 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PUBLICARD, INC. AND SUBSIDIARY COMPANIES THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements, including (without limitation) statements concerning possible or assumed future results of operations of PubliCARD preceded by, followed by or that include the words "believes," "expects," "anticipates," "estimates," "intends," "plans" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. You should understand that such statements made under "Factors That May Affect Future Results" and elsewhere in this document could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements. OVERVIEW PubliCARD entered the smart card industry in early 1998, and began to develop solutions for the conditional access, security, payment system and data storage needs of industries utilizing smart card technology. PubliCARD made a series of acquisitions to enhance its position in the smart card industry: - In February 1998, PubliCARD acquired, through a joint venture arrangement in Greenwald Intellicard, the assets and intellectual property of Intellicard Systems, Ltd. Greenwald Intellicard provides smart cards, smart card readers, value transfer stations, card management software and machine interface boards for the commercial laundry appliance industry. PubliCARD initially owned 50% of Greenwald Intellicard, and acquired the remaining 50% in February 1999 and February 2000. - In November 1998, PubliCARD acquired Tritheim Technologies, Inc. ("Tritheim"), which develops conditional access and security products for the software industry, computers and the electronic information and digital video broadcast, also known as DVB, industry. - In February 1999, PubliCARD acquired Amazing, a developer of consumer smart card solutions and a manufacturer of customized smart cards. - In February 1999, PubliCARD acquired Greystone, a developer of hard disk duplicators. - In November 1999, PubliCARD acquired Absec, a designer of closed environment solutions, including small value electronic cash systems and database management solutions. Through Absec, PubliCARD provides systems for closed populations to allow individual user access, unique rights and monitoring. While PubliCARD developed a number of successful smart card products and solutions, its operations were fragmented throughout a variety of markets. PubliCARD's Board of Directors, together with its management team, determined to integrate its operations and focus on a single market in which: 6 12 PUBLICARD, INC. AND SUBSIDIARY COMPANIES - high growth potential exists; - PubliCARD has established relationships; - PubliCARD has already deployed products and gained credibility; and - PubliCARD possesses core technologies and competencies. PubliCARD determined that it could leverage its existing chip (smart card) technology for deployment in the rapidly growing broadband market, which it had already penetrated and which PubliCARD believes exhibits each of the characteristics identified above. PubliCARD currently is positioning itself to be a leading provider of end-to-end solutions to enable access and secure content and transactions for the broadband market. PubliCARD's broadband initiative is driven by its proprietary technology and proven engineering and design talent. PubliCARD's proprietary technologies facilitate content protection and transaction security. To effect this new business strategy, in March 2000, the Board of Directors of PubliCARD adopted a plan of disposition pursuant to which PubliCARD is divesting its non-core operations. As a result of this plan, on June 29, 2000, the Company completed the sale of substantially all of the assets of its Greenwald and Greenwald Intellicard subsidiaries to Eastern for a sale price of $22.5 million. As part of the transaction, Eastern assumed certain liabilities of Greenwald and Greenwald Intellicard, including certain contractual liabilities, accounts payable and accrued liabilities. Greenwald and Greenwald Intellicard manufacture, market and distribute mechanical coin handling systems and smart card solutions for the commercial laundry industry. PubliCARD has engaged a broker to assist in the sale of its Greystone subsidiary. Finally, as part of this plan, PubliCARD is also winding-down the operations of Amazing. PubliCARD will pursue its new business strategy through the integration of its remaining operations. As a result of this integration, PubliCARD's product range includes ASICs for television set-top boxes, secure electronic commerce, Internet security and software copy protection. PubliCARD's ASICs incorporate multiple chip set functionality into a single integrated circuit board. In addition, PubliCARD is developing PODs, which scramble and unscramble data entering and exiting set-top boxes. In addition, PubliCARD will continue to design closed environment solutions, including small value electronic cash systems and database management solutions. PubliCARD provides systems for closed populations to allow individual user access, unique rights and monitoring. Presentation The results of operations for the three months and six months ended June 30, 1999 have been restated to reflect Greenwald, Greenwald Intellicard, Amazing and Greystone as discontinued operations. In addition, the results of operations for Absec have been reflected in the financial statements from its acquisition date of November 16, 1999. Sales Revenues are generated from infrastructure product sales, licenses of software products, maintenance contracts and software development services. Revenue from product sales is recorded upon shipment of the product. Provisions are recorded for estimated warranty repairs, returns and bad debts at the time the product is shipped. Software license fees are recognized upon shipment if a signed contract exists, the fee is fixed and determinable and the collection of the resulting receivable is probable. Revenue from 7 13 PUBLICARD, INC. AND SUBSIDIARY COMPANIES maintenance and support fees are recognized ratably over the contract period. Cost of sales and operating expenses Cost of sales consists primarily of third-party contract manufacturing costs, material, personnel costs and overhead. Sales and marketing expenses consist primarily of personnel and travel costs, public relations, trade shows and marketing materials. Sales and marketing expenses are expected to increase significantly over the next year due to increased headcount and geographic expansion. Product development expenses consist primarily of personnel and travel costs, independent consultants and contract engineering services. The Company believes that a significant level of development expenditures are required in order to enable it to quickly introduce new solutions that incorporate the latest technological advances and to develop and maintain close relationships with key suppliers of components and technologies. The Company's future success will depend upon its ability to develop and to introduce new solutions on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance and accounting, human resources, risk management and legal. Expenses are expected to increase due to additional hires. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1999 SALES. Consolidated sales increased to $1.1 million in 2000 compared to $71,000 for 1999. The increase in the second quarter sales is primarily attributable to the Company's acquisition of Absec in late 1999. SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.0 million in 2000 compared to $490,000 in 1999. The increase was due to the Absec acquisition in late 1999 and additional headcount increases throughout 1999 and 2000. As of June 30, 2000 the Company had approximately 48 sales and marketing personnel versus nine as of June 30, 1999. PRODUCT DEVELOPMENT EXPENSES. Product development expenses include expenses associated with the development of new products and enhancements to existing products. Product development expenses amounted to $1.4 million in 2000 compared to $209,000 in 1999. Expenses increased in 2000 primarily due to the Absec acquisition in late 1999 and headcount additions for the ongoing ASICs, reader and software solution development efforts. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the quarter ended June 30, 2000 increased by approximately 35% to $1.7 million from $1.2 million for 1999. The increase was due to higher corporate expenditures, primarily legal, consulting and professional fees, and $158,000 of expenses, mainly salaries and benefits, associated with the Absec acquisition in late 1999. STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and 1999 principally relates to the issuance of stock awards and below market stock option grants to executives hired in 1999 and the issuance of stock options for consulting services. 8 14 PUBLICARD, INC. AND SUBSIDIARY COMPANIES GOODWILL AMORTIZATION. Goodwill and other intangibles associated with the Tritheim and Absec acquisitions are being amortized over a five year period. Amortization amounted to $660,000 and $405,000 in 2000 and 1999, respectively. OTHER INCOME AND EXPENSE. Interest income increased slightly to $111,000 for 2000 from $106,000 for 1999 principally due to higher interest rates. Interest expense, which principally relates to interest on the remaining environmental obligation (see below), decreased to $20,000 in 2000 compared to $40,000 in 1999. Other expense in 1999 of $115,000 includes a charge associated with a stock sale price guarantee. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999 SALES. Consolidated sales increased to $2.6 million in 2000 compared to $78,000 for 1999. The increase in the second quarter sales is primarily attributable to the Company's acquisition of Absec in late 1999. SALES AND MARKETING EXPENSES. Sales and marketing expenses were $3.8 million in 2000 compared to $1.0 million in 1999. The increase was due to the Absec acquisition in late 1999 and additional headcount increases throughout 1999 and 2000. PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to $2.2 million in 2000 compared to $453,000 in 1999. Expenses increased in 2000 primarily due to the Absec acquisition in late 1999 and headcount additions for the ongoing ASICs, reader and software solution development efforts. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the quarter ended June 30, 2000 increased by approximately 37% to $3.5 million from $2.5 million for 1999. The increase was due to higher corporate expenditures, primarily legal, consulting and professional fees, and $324,000 of expenses, mainly salaries and benefits, associated with the Absec acquisition in late 1999. STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000 and 1999 principally relates to the change in terms of stock options awarded to two former employees of the Company, the issuance of stock awards and below market stock option grants to two executives hired in 1999 and the issuance of stock options for consulting services. GOODWILL AMORTIZATION. Goodwill and other intangibles associated with the Tritheim and Absec acquisitions are being amortized over a five year period. Amortization amounted to $1.3 million and $808,000 in 2000 and 1999, respectively. OTHER INCOME AND EXPENSE. Interest income increased slightly to $299,000 for 2000 from $256,000 for 1999 principally due to higher interest rates. Interest expense, which principally relates to interest on the remaining environmental obligation (see below), decreased to $58,000 in 2000 compared to $93,000 in 1999. Other expense in 1999 of $68,000 includes a charge associated with a stock sale price guarantee offset by a gain on real estate sold in January 1999. LIQUIDITY The Company has financed its operations over the last two years primarily through the sale of common stock and the sale of non-core businesses. During the six months ended June 30, 2000, cash, including short-term investments, increased by $6.8 million to $25.0 million as of June 30, 2000. Operating activities from continuing operations utilized cash of $10.5 million in 2000 and principally 9 15 PUBLICARD, INC. AND SUBSIDIARY COMPANIES consisted of the loss from continuing operations of $10.3 million and a increase in net operating assets and liabilities of $2.3 million offset by non-cash charges of $2.1 million for goodwill amortization, stock compensation expense and depreciation. Operating activities from discontinued operations utilized cash of $3.2 million. Investing activities generated cash of $20.5 million in 2000 and consisted principally of net proceeds from the sale of substantially all of the assets of the Company's Greenwald and Greenwald Intellicard subsidiaries. This was offset with capital expenditures from continuing and discontinuing operations of $475,000 and $167,000, respectively. Financing activities provided cash of $18,000 in 2000 and consisted of proceeds from the exercise of options to purchase common stock of $958,000 offset by the repayment of notes payable from discontinued operations of $940,000. During the first six months of 2000, the Company's capital expenditures from continuing operations totaled $475,000. The Company anticipates that its level of capital expenditures for 2000 will be greater than 1999 due to the expected growth in headcount and the expenditure requirements of Absec, which was acquired late in 1999. The Company has not entered into any material commitments for acquisitions or capital expenditures and has the ability to increase or decrease capital expenditure levels as required. The Company anticipates that it will be able to fund its capital expenditures during 2000 with its available cash resources as well as through capital equipment financing. The Company has experienced negative cash flow from operating activities in the past and expects to experience negative cash flow in 2000 and 2001. Future uses of cash include the following: - The Company expects to substantially increase expenditures to support the expansion of sales and marketing efforts, new product development, working capital growth and capital expenditures. Also, there will be a need to fund new initiatives in the broadband market before there is a reasonable expectation to derive any significant revenues from this market. - In April 1996, a consent decree(the "Consent Decree") among the Company, the United States Environmental Protection Agency and the Pennsylvania Department of Environmental Protection ("PADEP") was entered by the court which resolved all of the United States' and PADEP's claims against the Company for recovery of costs incurred in responding to releases of hazardous substances at a facility previously owned and operated by the Company. Pursuant to the Consent Decree, the Company will pay a total of $14.4 million plus interest to the United States and Commonwealth of Pennsylvania. Through June 30, 2000, the Company has made principal payments aggregating $12.7 million. Further payments totaling $1.7 million, including interest, will be made to the United States in the amounts of $862,000 due April 2001 and $823,000 due April 2002. - The Company sponsors a defined benefit pension plan, which was frozen in 1993. As of December 31, 1999, the actuarial present value of accrued liabilities exceeded the plan assets by approximately $5.5 million. The annual contribution to the plan is expected to be approximately $1 million in 2000 and beyond. The Company believes that its current cash balance will satisfy working capital, new product development, sales and marketing expansion and capital expenditures for at least the next 12 months. Although the Company has generated funds to meet its cash requirements in the past and expects to be able to generate funds to meet its obligations and other needs enumerated above, there can be no assurance that such funds will be available when required. 10 16 PUBLICARD, INC. AND SUBSIDIARY COMPANIES As of December 31, 1999, approximately $88 million of U.S. tax loss carryforwards (subject to review by the Internal Revenue Service), expiring from 2000 through 2019, were available to offset future taxable income. Due to the "change of ownership" provisions of the Internal Revenue Code of 1986, the availability of net operating loss carryforwards to offset federal taxable income in future periods could be subject to an annual limitation if a change in ownership for income tax purposes occur. FACTORS THAT MAY AFFECT FUTURE RESULTS WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, AND WE HAVE ONGOING FUNDING OBLIGATIONS. We have incurred losses and experienced negative cash flow from operating activities in the past, and we expect to incur losses and experience negative cash flow from operating activities in the foreseeable future. We incurred losses from continuing operations in 1997, 1998, 1999, and for the six months ended June 30, 2000, of approximately $4.6 million, $8.4 million, $16.7 million and $10.3 million, respectively. In addition, we experienced negative cash flow from continuing operating activities of $5.0 million, $5.6 million, $8.5 million and $10.6 million in 1997, 1998, 1999 and for the six months ended June 30, 2000, respectively. We also incurred a loss of $19.0 million from discontinued operations in 1999 and will incur additional losses from discontinued operations if we realize less from the disposition of those assets than we have estimated or if we are unable to dispose of all of our discontinued operations by the end of the third quarter of 2000, as we currently anticipate. We expect that our business will require on-going funding to support the expansion of sales and marketing efforts, new product development, working capital growth and capital expenditures. Also, we will need to fund our new initiatives in the broadband market before we can reasonably expect to derive any significant revenues from this market. We also have continuing obligations to fund payments due under the Consent Decree and an underfunded pension plan. As of June 30, 2000, we were required to make future aggregate payments of $1.7 million through April 2002 in connection with the Consent Decree. Consistent with the general practices of environmental enforcement agencies, the Consent Decree does not eliminate our potential liability for remediation of contamination that had not been known at the time of the settlement. We sponsor a defined benefit pension plan, which was frozen in 1993. As of December 31, 1999, the present value of the accrued benefit liabilities of our pension plan exceeded the plan's assets by approximately $5.5 million. In addition to the $1.0 million we expect to contribute to the plan in 2000, we are obligated to make continued contributions to the plan in accordance with the rules and regulations prescribed by the Employee Retirement Income Security Act of 1974. Future contribution levels depend in large measure on the mortality rate of plan participants and the investment return on the plan assets. OUR FUTURE PROFITABILITY DEPENDS LARGELY UPON PRODUCTS AND FUTURE PRODUCTS THAT HAVE NOT YET PRODUCED ANY REVENUES OR ARE NOT YET COMMERCIALLY VIABLE. We believe that certain of our products are viable, but have not yet generated any material sales. Our future revenues and earnings depend in large part on the success of these products. Our business is also based on products not yet developed. There are no assurances that these products will be developed into working products or that a market will develop for these products in the future. 11 17 PUBLICARD, INC. AND SUBSIDIARY COMPANIES WE HAVE LIMITED EXPERIENCE IN THE BROADBAND MARKET. We have only recently begun to penetrate the broadband market. We are therefore subject to the risks inherent in establishing a new business enterprise. Our business model is new and unproven and may not generate sufficient revenue for us to be successful. The volume of products and services distributed using our technology may be too small to support or grow our business. THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and market acceptance of, our products is subject to a high level of uncertainty due to rapidly changing technology, new product introductions and changes in customer requirements and preferences. The success of our products or any future products also depends upon our ability to enhance our existing products and to develop and introduce new products and technologies to meet customer requirements. We face the risk that our current and future products will not achieve market acceptance. Interactive television is a new and emerging business, and we cannot guarantee that it will attract widespread demand or market acceptance. Our success in this area depends upon, among other things, broad acceptance of the concept of interactive television by industry participants, including broadcast and pay-television networks and system operators and manufacturers of televisions and set-top boxes, including their ability to successfully market interactive television to television viewers and advertisers. There have been several well-financed, high-profile attempts in the U.S. to develop and deploy systems in the broad category of interactive television. None of these attempts has resulted in large scale deployment, and many key industry participants have avoided participating in interactive television for a variety of reasons, including: - inconsistent quality of service; - need for new and expensive hardware in homes; - inadequate transmission facilities and broadcast centers; - complicated and expensive processes for creating interactive content; and - inability to align the conflicting interests of various participants. Accordingly, such participants may perceive interactive television negatively and be reluctant to participate. In addition, other participants in the television industry must accept and support interactive television for it to be successful. For instance, broadcasters will need to add interactive features to their programming and commercial vendors will need to embrace e-commerce over interactive television. We cannot assure you that these parties will provide such support. WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR REVENUES. We rely on a limited number of customers in our business. The ASICs we provide to Motorola's General Instruments for inclusion in its set-top boxes accounted for 56% of our total revenue in 1999. We expect to continue to depend upon a relatively small number of customers for a majority of the revenues in our business. We generally do not enter into long-term supply commitments with our customers. Instead, we bid on a project basis and have supply contracts in place for each project. Significant reductions in sales to any 12 18 PUBLICARD, INC. AND SUBSIDIARY COMPANIES of our largest customers would have a material adverse effect on our business. In addition, we generate significant accounts receivable and inventory balances in connection with providing products to our customers. A customer's inability to pay for our products could have a material adverse effect on our results of operations. WE DEPEND ON THIRD PARTY MANUFACTURERS WHO ARE OUTSIDE OF OUR CONTROL. We outsource manufacturing needs of a significant portion of our products to third party contract manufacturers. Outsourcing of manufacturing involves risks with respect to quality assurance, cost and the absence of engineering support. In addition, financial, operational or supply problems encountered by the third party manufacturers we use or may use in the future, their subcontractors or their suppliers could result in our inability to obtain timely delivery, if at all, of finished products. Any such difficulties would adversely affect our financial results. OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL CHANGES AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER. The rate of technological change currently affecting the television industry is particularly rapid compared to other industries. The migration of television from analog to digital transmission, the convergence of television, the Internet, communications and other media and other emerging trends are creating a dynamic and unpredictable environment in which to operate. Our ability to anticipate these trends and adapt to new technologies is critical to our success. Because new product development commitments must be made well in advance of actual sales, new product decisions must anticipate future demand as well as the speed and direction of technological change. Our ability to remain competitive will depend upon our ability to develop in a timely and cost effective manner new and enhanced products at competitive prices. New product introductions or enhancements by our competitors could cause a decline in sales or loss of market acceptance of our existing products and lower profit margins. Our success in developing, introducing and selling new and enhanced products depends upon a variety of factors, including: - product selections; - timely and efficient completion of product design and development; - timely and efficient implementation of manufacturing processes; - effective sales, service and marketing; - price; and - product performance in the field. Our ability to develop new products also depends upon the success of our research and development efforts. Our research and development expenditures for the six months ended June 30, 2000 were $2.2 million and we plan to increase this substantially in the near term. We cannot assure you that these expenditures will lead to the development of viable products. We may need to devote substantially more resources to our research and development efforts in the future. The market for digital rights management solutions is fragmented and marked by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles and changes in customer demands. To succeed, we must develop and introduce, in response to customer and market demands, software that offers features and functionality that are not currently available in the 13 19 PUBLICARD, INC. AND SUBSIDIARY COMPANIES market. Any delays in our ability to develop and release products will materially harm our business and operating results. In the past, we have experienced delays in new product releases, and we may experience similar delays in the future. THE HIGHLY COMPETITIVE MARKETS IN WHICH WE OPERATE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS. The markets in which we operate are intensely competitive and characterized by rapidly changing technology. We compete against numerous companies, many of which have greater resources than we do, and we believe that competition is likely to intensify. We believe that the principal competitive factors affecting the broadband market are: - the extent to which products support industry standards and are capable of being operated or integrated with other products; - technical features and level of security; - strength of distribution channels; - price; - product reputation, reliability, quality, performance and customer support; - product features such as adaptability, functionality and ease of use; and - competitor reputation, positioning and resources. We cannot assure you that competitive pressures will not have a material adverse effect on our business and operating results. Many of our current and potential competitors have longer operating histories in the broadband industry and significantly greater financial, technical, sales, customer support, marketing and other resources, as well as greater name recognition and a larger installed base of their products and technologies than our company. Additionally, there can be no assurance that new competitors will not enter the broadband market. Increased competition would likely result in price reductions, reduced margins and loss of market share, any of which would have a material adverse effect on our business and operating results. The market for broadband solutions is new, intensely competitive and rapidly evolving. We expect competition to continue to increase with both our existing competitors and new market entrants. Our primary competition currently comes from or is anticipated to come from: - companies offering payment solutions, including Trintech and VeriFone; - companies offering chip technology infrastructures, including Gemplus, Philips and SCM Microsystems; - companies offering closed environment solutions, including small value electronic cash systems and database management solutions, such as CyberMark and Danyl Schlumberger; and - companies that offer digital rights management solutions, such as InterTrust, Wave Systems, Preview Systems, Aladdin, IBM, Xerox and Microsoft. 14 20 PUBLICARD, INC. AND SUBSIDIARY COMPANIES Many of our current and potential competitors have longer operating histories and significantly greater financial, technical, sales, customer support, marketing and other resources, as well as greater name recognition and a larger installed base of their products and technologies than we do. Many of these companies have broader customer relationships that could be leveraged, including relationships with many of our customers. These companies also have more established customer support and professional services organizations than we do. In addition, a number of companies with significantly greater resources than we have could attempt to increase their presence in the broadband market by acquiring or forming strategic alliances with our competitors, resulting in increased competition. OUR LONG PRODUCT SALES CYCLES SUBJECT US TO RISK. Our products fall into two categories, those that are standardized and ready to install and use and those that require significant development efforts to implement within the purchasers' own systems. Those products requiring significant development efforts tend to be newly developed technologies and software applications that can represent major investments for customers. We rely on potential customers' internal review processes and systems requirements. The implementation of some of our products involves deliveries of small quantities for pilot programs and significant testing by the customers before firm orders are received for production volumes, or lengthy beta testing of software solutions. For these more complex products, the sales process may take one year or longer, during which time we may expend significant financial, technical and management resources, without any certainty of a sale. WE MAY BE LIMITED IN OUR USE OF OUR FEDERAL NET OPERATING LOSS CARRYFORWARDS. As of December 31, 1999, we had federal net operating loss carryforwards, subject to review by the Internal Revenue Service, totaling approximately $88.0 million for federal income tax purposes, approximately $12.0 million of which will expire at the end of 2000, $9.0 million of which will expire at the end of 2001 and $25.0 million of which will expire at the end of 2002. We do not expect to earn any significant taxable income prior to 2002, and may not do so until later. A federal net operating loss can generally be carried back two or three years and then forward fifteen or twenty years (depending on the year in which the loss was incurred), and used to offset taxable income earned by a company (and thus reduce its income tax liability). Section 382 of the Internal Revenue Code provides that when a company undergoes an "ownership change," the corporation's use of its net operating losses is limited in each subsequent year. An "ownership change" occurs when, as of any testing date, the sum of the increases in ownership of each shareholder that owns five percent or more of the value of a company's stock as compared to that shareholder's lowest percentage ownership during the preceding three-year period exceeds fifty percentage points. For purposes of this rule, certain shareholders who own less than five percent of a company's stock are aggregated and treated as a single five-percent shareholder. We intend to issue a substantial number of shares of our common stock in connection with public and private offerings in the future. In addition, the exercise of outstanding warrants and options to purchase shares of our common stock may require us to issue additional shares of our common stock. The issuance of a significant number of shares of common stock could result in an "ownership change." If we were to experience such an "ownership change," we estimate that we would not be able to use a substantial amount of our available federal net operating loss carryforwards to reduce our taxable income. The extent of the actual future use of our federal net operating loss carryforwards is subject to inherent uncertainty because it depends on the amount of otherwise taxable income we may earn. We cannot give any assurance that we will have sufficient taxable income in future years to use any of our federal net operating loss carryforwards before they would otherwise expire. OUR PROPRIETARY TECHNOLOGY IS DIFFICULT TO PROTECT AND MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. Our success depends significantly upon our proprietary technology. We rely on a 15 21 PUBLICARD, INC. AND SUBSIDIARY COMPANIES combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We currently have a number of patent applications pending. We cannot assure you that any of our applications will be approved, that any new patents will be issued, that we will develop proprietary products or technologies that are patentable, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties. Furthermore, we cannot assure you that the patents of others will not have a material adverse effect on our business and operating results. If our technology or products is determined to infringe upon the rights of others, and we were unable to obtain licenses to use the technology, we could be required to cease using the technology and stop selling the products. We may not be able to obtain a license in a timely manner on acceptable terms or at all. Any of these events would have a material adverse effect on our financial condition and results of operations. Patent disputes are common in technology-related industries. We cannot assure you that we will have the financial resources to enforce or defend a patent infringement or proprietary rights action. As the number of products and competitors in the broadband market grows, the likelihood of infringement claims also increases. Any claim or litigation may be time-consuming and costly, cause product shipment delays or require us to redesign our products or require us to enter into royalty or licensing agreements. Any of these events would have a material adverse effect on our business and operating results. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to use our proprietary information and software. In addition, the laws of some foreign countries do not protect proprietary and intellectual property rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary and intellectual property rights may not be adequate. There is a risk that our competitors will independently develop similar technology, duplicate our products or design around patents or other intellectual property rights. IF THIRD PARTIES DO NOT DEPLOY OUR TECHNOLOGY AND CREATE A MARKET FOR DIGITAL COMMERCE, OUR BUSINESS WILL BE HARMED. Relationships with leading content, technology and commerce service providers are critical to our success. Our business and operating results would be harmed to the extent our strategic partnerships fail, in whole or in part, to: - deploy our technology; - develop an infrastructure for the sale and delivery of digital goods and services; - generate transaction fees from the sale of digital content and services; and - develop and deploy new applications. THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS. Our customers may rely on certain of our current products and products in development to prevent unauthorized access to digital content, computer networks, digital video broadcasting and real property. A malfunction of or design defect in certain of our products could result in tort or warranty claims. Although we attempt to reduce the risk of exposure from such claims through warranty disclaimers and liability limitation clauses in our sales agreements and by maintaining product liability insurance, we cannot assure you that these measures will be effective in limiting our liability for any damages. Any liability for damages resulting from security breaches could be substantial and could have a material adverse effect on our business and operating results. In addition, a well-publicized actual or perceived security breach involving our conditional access or security products could adversely affect the market's perception of our products in general, regardless of 16 22 PUBLICARD, INC. AND SUBSIDIARY COMPANIES whether any breach is attributable to our products. This could result in a decline in demand for our products, which would have a material adverse effect on our business and operating results. WE MAY HAVE DIFFICULTY RETAINING OR RECRUITING PROFESSIONALS FOR OUR BUSINESS. Our future success and performance is dependent on the continued services and performance of our senior management and other key personnel. There is a shortage of qualified marketing, technical and financial personnel in our industry, and the competition for such personnel is intense. Accordingly, the loss of the services of any of our executive officers or other key employees could materially adversely affect our business. Our business requires experienced software programmers, creative designers and application developers, and our success depends on identifying, hiring, training and retaining such experienced, knowledgeable professionals. If a significant number of our current employees or any of our senior technical personnel resign, or for other reasons are no longer employed by us, we may be unable to complete or retain existing projects or bid for new projects of similar scope and revenues. In addition, former employees may compete with us in the future. Even if we retain our current employees, our management must continually recruit talented professionals in order for our business to grow. There is currently a shortage of qualified senior technical personnel in the software development field, and this shortage is likely to continue. Furthermore, there is significant competition for employees with the skills required to perform the services we offer. We cannot assure you that we will be able to attract a sufficient number of qualified employees in the future to sustain and grow our business, or that we will be successful in motivating and retaining the employees we are able to attract. If we cannot attract, motivate and retain qualified professionals, our business, financial condition and results of operations will suffer. IF STANDARDS FOR DIGITAL RIGHTS MANAGEMENT ARE NOT ADOPTED, CONFUSION AMONG CONTENT PROVIDERS, DISTRIBUTORS AND CONSUMERS MAY DEPRESS THE LEVEL OF DIGITAL COMMERCE, WHICH WOULD REDUCE OUR REVENUES. If standards for digital rights management are not adopted or complied with, content providers may delay distributing content until they are confident that the technology by which the content is to be distributed will be commercially accepted. Standards for the distribution of various digital content might not develop or might be found to violate antitrust laws or fair use of copyright policies. In addition, the failure to develop a standard among device manufacturers may affect the market for digital goods and services. As a result, consumers may delay purchasing products and services that include our technology if they are uncertain of commercial acceptance of the standards with which our technology complies. Consequently, if a standard format for the secure delivery of content on the Internet is not adopted, or if the standards are not compatible with our digital rights management technology, our business and operating results would likely be harmed. OUR ARTICLES OF INCORPORATION AND BY-LAWS, CERTAIN CHANGE OF CONTROL AGREEMENTS, OUR RIGHTS PLAN AND PROVISIONS OF PENNSYLVANIA LAW COULD DETER TAKEOVER ATTEMPTS. Blank check preferred stock. Our board of directors has the authority to issue up to 136,566 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the holders of our common stock. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of our common stock. The issuance of preferred stock could make it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change of control. Such preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, the issuance of the preferred stock could limit the price that investors might be 17 23 PUBLICARD, INC. AND SUBSIDIARY COMPANIES willing to pay in the future for shares of our common stock and could have a material adverse effect on the market value of our common stock. Rights plan. Our rights plan entitles the registered holders of rights to purchase shares of our class A preferred stock upon the occurrence of certain events, and may have the effect of delaying, deferring or preventing a change of control. Change of control agreements. We are a party to change of control agreements which provide for payments to certain of our directors and executive officers under certain circumstances following a change of control. Since the change of control agreements require large cash payments to be made by any person effecting a change of control, these agreements may discourage takeover attempts. The change of control agreements provide that, if the services of any person party to a change of control agreement are terminated within three years following a change of control, that individual will be entitled to receive, in a lump sum within 10 days of the termination date, a payment equal to 2.99 times that individual's average annual compensation for the shorter of the five years preceding the change of control and the period the individual received compensation from us for personal services. Assuming a change of control were to occur at the present time, payments in the following amounts would be required: Mr. Harry I. Freund -- $972,000; and Mr. Jay S. Goldsmith -- $972,000. If any such payment, either alone or together with others made in connection with the individual's termination, is considered to be an excess parachute payment under the Internal Revenue Code, the individual will be entitled to receive an additional payment in an amount which, when added to the initial payment, would result in a net benefit to the individual, after giving effect to excise taxes imposed by Section 4999 of the Internal Revenue Code and income taxes on such additional payment, equal to the initial payment before such additional payment. We would not be able to deduct these payments for income tax purposes. Pennsylvania law. We are a Pennsylvania corporation. Anti-takeover provisions of Pennsylvania law could make it difficult for a third party to acquire control of us, even if such change of control would be beneficial to our shareholders. WE ARE SUBJECT TO GOVERNMENT REGULATION. The telecommunications, media, broadcast and cable television industries are subject to extensive regulation by governmental agencies. These governmental agencies continue to oversee and adopt legislation and regulation over these industries, which may affect our business, market participants with which we have relationships or the acceptance of interactive television in general. In addition, future legislation or regulatory requirements regarding privacy issues could be enacted to require notification to users that captured data may be used by marketing entities to target product promotion and advertising to that user. Any of these developments may materially adversely affect our business. Federal, state and local regulations impose various environmental controls on the discharge of chemicals and gases, which may be used in our present or future assembly processes. Moreover, changes in such environmental rules and regulations may require us to invest in capital equipment and implement compliance programs in the future. Any failure by our company to comply with environmental rules and regulations, including the discharge of hazardous substances, would subject us to liabilities and would materially adversely affect our operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk primarily through its short-term investments. The Company's investment policy calls for investment in short-term, low risk instruments. As of June 30, 18 24 PUBLICARD, INC. AND SUBSIDIARY COMPANIES 2000, short-term investments (principally treasury bills) were $24.6 million. Due to the nature of these investments, any decrease in rates would not have a material impact on the Company's financial condition and results of operations. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 26, 2000, at a special meeting of the shareholders of the Company, the shareholders voted to approve the plan of asset transfer authorizing the sale of the Company's Greystone, Greenwald, Greenwald Intellicard and Amazing subsidiaries or the property or assets thereof on such terms and conditions (including the consideration to be received by PubliCARD) as may be determined by the PubliCARD Board of Directors, in its sole discretion. The voting results were as follows: For 15,709,772 Against 1,193,651 Abstain 12,505
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by item 601 of regulation S-K: Exhibit 27: Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K: Form 8-K dated July 10, 2000, containing the pro forma information and exhibits related to the June 29, 2000 disposition of Greenwald and Greenwald Intellicard. 19 25 PUBLICARD, INC. AND SUBSIDIARY COMPANIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PUBLICARD, INC. (Registrant) Date: August 14, 2000 /s/ Jan-Erik Rottinghuis --------------------------------------- Jan-Erik Rottinghuis, President and Chief Executive Officer /s/ Antonio L. DeLise --------------------------------------- Antonio L. DeLise, Chief Financial Officer, Secretary and Principal Accounting Officer 20 EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 25,041 0 1,618 82 1,548 28,793 1,992 577 41,034 12,455 0 0 0 2,749 20,107 41,034 2,642 2,642 1,359 11,371 114 0 58 (10,260) 0 (10,260) 0 0 0 (10,260) (.45) (.45)
-----END PRIVACY-ENHANCED MESSAGE-----