UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Quarterly Period Ended December 31, 2007
LASERCARD
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
0-6377
|
77-0176309
|
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
(Commission
File Number)
|
(I.R.S.
Employer Identification No.)
|
1875
North Shoreline
Boulevard, Mountain View, California 94043-1319
(Address
of principal executive offices) (Zip Code)
(650)
969-4428
(Registrant's
telephone number, including area code)
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. x Yes o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes x
No
Number
of
outstanding shares of common stock, $.01 par value, at February 5,
2008: 11,976,469
Exhibit
Index is on Page 44
Total
number of pages is 121
TABLE
OF CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
Page
Number
|
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements (Unaudited)
|
2
|
|
|
Condensed
Consolidated Balance Sheets (Unaudited)
|
3
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
32
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
33
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
33
|
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
41
|
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
41
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
41
|
|
|
|
|
|
Item
5.
|
Other
Information
|
41
|
|
|
|
|
|
Item
6.
|
Exhibits
|
41
|
|
|
|
|
SIGNATURES
|
|
43
|
|
|
|
|
EXHIBIT
INDEX
|
44
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
ITEM
1.
|
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
LASERCARD
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
|
March
31,
|
|
|
|
(Unaudited)
|
|
|
2007*
|
|
ASSETS
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
1,920 |
|
|
$ |
3,026 |
|
Restricted
Cash
|
|
|
167 |
|
|
|
- |
|
Short-term
investments
|
|
|
16,500 |
|
|
|
17,500 |
|
Accounts
receivable, net of
allowance of $88 at December 31, 2007
|
|
|
5,218 |
|
|
|
3,489 |
|
and
$144 at March 31,
2007
|
|
|
|
|
|
|
|
|
Inventories,
net of reserve of
$821 at December 31, 2007
|
|
|
11,367 |
|
|
|
11,462 |
|
and
$837 at March 31,
2007
|
|
|
|
|
|
|
|
|
Deferred
contract
costs
|
|
|
92 |
|
|
|
233 |
|
Prepaid
and other current
assets
|
|
|
1,266 |
|
|
|
1,594 |
|
Total
current
assets
|
|
|
36,530 |
|
|
|
37,304 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
12,092 |
|
|
|
12,988 |
|
Deferred
long-term contract
costs
|
|
|
561 |
|
|
|
721 |
|
Equipment
held for
resale
|
|
|
6,552 |
|
|
|
6,340 |
|
Patents
and other intangibles,
net
|
|
|
389 |
|
|
|
411 |
|
Notes
receivable
|
|
|
247 |
|
|
|
227 |
|
Other
non-current
assets
|
|
|
109 |
|
|
|
109 |
|
Total
assets
|
|
$ |
56,480 |
|
|
$ |
58,100 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
EQUITY
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,180 |
|
|
$ |
2,284 |
|
Accrued
liabilities
|
|
|
2,576 |
|
|
|
2,989 |
|
Deferred
income tax
liability
|
|
|
390 |
|
|
|
388 |
|
Advance
payments from
customers
|
|
|
2,353 |
|
|
|
1,838 |
|
Deferred
revenue
|
|
|
897 |
|
|
|
1,584 |
|
Capital
lease
obligation
|
|
|
28 |
|
|
|
- |
|
Total
current
liabilities
|
|
|
8,424 |
|
|
|
9,083 |
|
|
|
|
|
|
|
|
|
|
Capital
lease obligation, net of
current portion
|
|
|
76 |
|
|
|
- |
|
Advance
payments from
customers
|
|
|
23,554 |
|
|
|
23,554 |
|
Deferred
revenue
|
|
|
2,356 |
|
|
|
2,000 |
|
Long-term
deferred
rent
|
|
|
1,094 |
|
|
|
864 |
|
Total
liabilities
|
|
|
35,504 |
|
|
|
35,501 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
120 |
|
|
|
119 |
|
Additional
paid-in
capital
|
|
|
63,317 |
|
|
|
61,068 |
|
Accumulated
deficit
|
|
|
(42,598 |
)
|
|
|
(38,722 |
)
|
Accumulated
other comprehensive
income
|
|
|
137 |
|
|
|
134 |
|
Total
stockholders'
equity
|
|
|
20,976 |
|
|
|
22,599 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders’ equity
|
|
$ |
56,480 |
|
|
$ |
58,100 |
|
|
|
|
|
|
|
|
|
|
*Amounts
derived from audited
consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an
integral part of these condensed consolidated financial
statements.
|
|
LASERCARD
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In
thousands, except per share amounts)
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
11,159 |
|
|
$ |
6,184 |
|
|
$ |
29,753 |
|
|
$ |
23,032 |
|
Cost
of sales (includes $105 and
$244 stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
in the three and nine
month periods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
December 31, 2007 and $90
and $258 in the three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nine month periods ended
December 31, 2006, respectively)
|
|
|
7,670 |
|
|
|
5,397 |
|
|
|
21,414 |
|
|
|
17,252 |
|
Gross
profit
|
|
|
3,489 |
|
|
|
787 |
|
|
|
8,339 |
|
|
|
5,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and
administrative expenses (includes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$527
and $1,178 stock-based
compensation in the three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nine month periods ended
December 31, 2007 and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$334
and $805 in the three and
nine month periods ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006,
respectively)
|
|
|
4,056 |
|
|
|
3,294 |
|
|
|
10,826 |
|
|
|
9,712 |
|
Research
and development expenses
(includes $69 and $190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation in the
three and nine month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
periods
ended December 31, 2007
and $83 and $291 in the three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
nine month periods ended
December 31, 2006, respectively)
|
|
|
719 |
|
|
|
763 |
|
|
|
2,212 |
|
|
|
2,308 |
|
Total
operating
expenses
|
|
|
4,775 |
|
|
|
4,057 |
|
|
|
13,038 |
|
|
|
12,020 |
|
Operating
loss
|
|
|
(1,286 |
)
|
|
|
(3,270 |
)
|
|
|
(4,699 |
)
|
|
|
(6,240 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income,
net
|
|
|
225 |
|
|
|
267 |
|
|
|
655 |
|
|
|
706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income
taxes
|
|
|
(1,061 |
)
|
|
|
(3,003 |
)
|
|
|
(4,044 |
)
|
|
|
(5,534 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
(benefit)
|
|
|
19 |
|
|
|
(25 |
)
|
|
|
(106 |
)
|
|
|
(96 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,080 |
)
|
|
$ |
(2,978 |
)
|
|
$ |
(3,938 |
)
|
|
$ |
(5,438 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.09 |
)
|
|
$ |
(0.25 |
)
|
|
$ |
(0.33 |
)
|
|
$ |
(0.46 |
)
|
Diluted
|
|
$ |
(0.09 |
)
|
|
$ |
(0.25 |
)
|
|
$ |
(0.33 |
)
|
|
$ |
(0.46 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
in computing net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,971 |
|
|
|
11,827 |
|
|
|
11,912 |
|
|
|
11,803 |
|
Diluted
|
|
|
11,971 |
|
|
|
11,827 |
|
|
|
11,912 |
|
|
|
11,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an
integral part of these condensed consolidated financial
statements.
|
|
LASERCARD
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
thousands)
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating
activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,938 |
)
|
|
$ |
(5,438 |
)
|
Adjustments
to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
2,226 |
|
|
|
2,034 |
|
Gain
(loss) on disposal of
equipment
|
|
|
(10 |
)
|
|
|
63 |
|
Provision
for doubtful accounts
receivable
|
|
|
15 |
|
|
|
19 |
|
Provision
for excess and obsolete
inventory
|
|
|
53 |
|
|
|
130 |
|
Provision
for warranty
reserve
|
|
|
96 |
|
|
|
97 |
|
Stock-based
compensation
|
|
|
1,612 |
|
|
|
1,354 |
|
Changes
in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts
receivable
|
|
|
(1,594 |
)
|
|
|
2,935 |
|
Increase
(decrease) in
inventories
|
|
|
206 |
|
|
|
(1,756 |
)
|
Decrease
(increase) in deferred
contract costs
|
|
|
454 |
|
|
|
(1,973 |
)
|
Decrease
(increase) in prepaid and
other current assets
|
|
|
363 |
|
|
|
(329 |
)
|
Increase
in equipment held for
resale
|
|
|
(212 |
)
|
|
|
(371 |
)
|
Decrease
(increase) in
other non-current assets
|
|
|
(152 |
)
|
|
|
49 |
|
Decrease
in accounts payable and
accrued
|
|
|
(676 |
)
|
|
|
(2,581 |
)
|
Decrease
in deferred income
tax
|
|
|
(31 |
)
|
|
|
(55 |
)
|
(Decrease)
increase in deferred
revenue
|
|
|
(360 |
)
|
|
|
213 |
|
Increase
in long-term deferred
rent
|
|
|
230 |
|
|
|
191 |
|
Increase
in advance payments from
customers
|
|
|
421 |
|
|
|
2,120 |
|
Net
cash used in operating
activities
|
|
|
(1,297 |
)
|
|
|
(3,298 |
)
|
Cash
flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and
equipment
|
|
|
(953 |
)
|
|
|
(2,538 |
)
|
Acquisition
of patents and other
intangibles
|
|
|
(71 |
)
|
|
|
(109 |
)
|
Purchases
of short-term
investments
|
|
|
(7,000 |
)
|
|
|
(15,600 |
)
|
Proceeds
from maturities of
short-term investments
|
|
|
8,000 |
|
|
|
22,150 |
|
Net
cash provided by (used in)
investing activities
|
|
|
(24 |
)
|
|
|
3,903 |
|
Cash
flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
through stock plans
|
|
|
639 |
|
|
|
867 |
|
Principal
payments on capital
lease obligation
|
|
|
(9 |
)
|
|
|
- |
|
Net
cash provided by financing
activities
|
|
|
630 |
|
|
|
867 |
|
Effect
of exchange rate changes on
cash and cash equivalents
|
|
|
(248 |
)
|
|
|
(123 |
)
|
Net
decrease in cash and cash
equivalents
|
|
|
(939 |
)
|
|
|
1,349 |
|
Cash
and cash
equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of
period
|
|
|
3,026 |
|
|
|
2,121 |
|
End
of
period
|
|
$ |
2,087 |
|
|
$ |
3,470 |
|
|
|
|
|
|
|
|
|
|
Supplemental
schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
Equipment
acquired under capital
lease
|
|
$ |
113 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an
integral part of these condensed consolidated financial
statements.
|
|
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
Basis of Presentation
The
unaudited condensed consolidated financial statements contained herein include
the accounts of LaserCard Corporation (the “Company” and “we”) and its wholly
owned subsidiaries. All significant intercompany accounts and transactions
have
been eliminated upon consolidation. The consolidated balance sheet data as
of
March 31, 2007 was derived from audited consolidated financial statements,
but
does not include all disclosures required by U.S. generally accepted accounting
principles.
The
condensed consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made herein are adequate to make
the
information presented not misleading. Further, the condensed
consolidated financial statements reflect, in the opinion of management,
all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations as of and
for
the periods indicated.
These
condensed consolidated financial statements should be read in conjunction
with
the audited consolidated financial statements and the notes thereto for the
fiscal year ended March 31, 2007, included in the Company's Annual Report
on Form 10-K, filed with the SEC on June 12, 2007.
The
results of operations for the three and nine-month periods ended December
31,
2007 are not necessarily indicative of results to be expected for the entire
fiscal year ending March 31, 2008 or future interim periods.
Recently
Adopted Accounting
Pronouncements: In June 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in the Company’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income
Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The first step is recognition:
The
Company determines whether it is “more-likely-than-not” that a tax position will
be sustained upon examination, including resolution of any related appeals
or
litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the “more-likely-than-not” recognition
threshold, the Company presumes that the position will be examined by the
appropriate taxing authority that would have full knowledge of all relevant
information. The second step is measurement: A tax position that meets the
“more-likely-than-not” recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent
likely
to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
beginning after December 15, 2006 which for the Company was the fiscal year
commencing on April 1, 2007.
Upon
adoption of FIN 48 on April 1, 2007, the Company recognized a cumulative
effect
adjustment of $62,000, decreasing its income tax liability for unrecognized
tax
benefits, and decreasing the March 31, 2007 accumulated deficit balance.
At
December 31, 2007, the Company has unrecognized tax benefits of
$202,000. The Company does not expect any material change in its
unrecognized tax benefits over the next twelve months.
The
Company recognizes interest and penalties accrued on any unrecognized tax
benefits as a component of its provision for income taxes. As of December
31,
2007, the Company has accrued $48,000 for payment of interest and penalties
related to unrecognized tax benefits.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
table
below shows the changes in the accumulated deficit as of December 31, 2007
(in
thousands):
Balance
at March 31, 2007, as
reported
|
|
$ |
(38,722 |
) |
FIN
48 adjustments to beginning
balance
|
|
|
62 |
|
Net
loss during the
period
|
|
|
(3,938 |
)
|
Balance
at December 31,
2007
|
|
$ |
(42,598 |
)
|
Although
the Company files U.S. federal, various state, and foreign tax returns, the
Company’s only major tax jurisdictions are the United States, California and
Germany. Tax years 1993 – 2007 remain subject to examination by the
appropriate governmental agencies, mainly the United States, due to tax loss
carryovers from those years.
Recently
Issued Accounting
Pronouncements: In June 2007, EITF Issue No. 07-3 (EITF 07-3) Accounting for
Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, was issued that requires companies to defer and capitalize
prepaid, nonrefundable research and development payments to third parties
and
recognize such amounts over the period that the research and development
activities are performed or the services are provided, subject to an assessment
of recoverability. The guidance is effective for new contracts entered into
in
fiscal years beginning after December 15, 2007, including interim periods
within
those fiscal years. Earlier application is not
permitted. The Company believes that application of this guidance
would not have a material impact on its condensed consolidated financial
statements.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in U.S. generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 is intended
to
be applied in conjunction with other accounting pronouncements that require
or
permit fair value measurements. Although SFAS No. 157 does not require any
new
fair value measurements, its application may change current practice for
some
entities. The definition of fair value contained in SFAS No. 157 retains
the
exchange price notion inherent in earlier definitions of fair value. SFAS
No.
157 clarifies that the exchange price is the price in an orderly transaction
between market participants to sell an asset or transfer a liability in the
principal (or most advantageous) market for the asset or liability. Accordingly,
the definition focuses on the price that would be received to sell the asset
or
paid to transfer the liability at the measurement date (an exit price), not
the
price that would be paid to acquire the asset or received to assume the
liability at the measurement date (an entry price). SFAS No. 157 emphasizes
that
fair value is a market-based measurement, not an entity-specific measurement.
Therefore, SFAS No. 157 prescribes that a fair value measurement be determined
based on the assumptions that market participants would use in pricing the
asset
or liability. The Company has not yet determined what impact this statement
will
have on its condensed consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides
entities with an option to report selected financial assets and liabilities
at
fair value, with the objective to reduce both the complexity in accounting
for
financial instruments and the volatility in earnings caused by measuring
related
assets and liabilities differently. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company has not
yet determined what impact this statement will have on its condensed
consolidated financial statements.
2.
Summary of Significant Accounting Policies
(1.)
Principles of Consolidation and
Basis of Presentation. The accompanying condensed consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. The condensed consolidated financial statements
include the accounts of LaserCard Corporation and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated
upon
consolidation.
(2.)
Use of
Estimates. The preparation of condensed consolidated financial
statements in conformity with U. S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3.)
Fiscal
Period. For purposes of presentation, the Company labels its
annual accounting period end as March 31 and its quarterly accounting
period ends as June 30, September 30 and December 31. The Company, in
fact, operates and reports based on quarterly periods ending on the Friday
closest to month end. The 13-week third quarter of fiscal year 2008
ended on December 28, 2007, and the 13-week third quarter of fiscal year
2007
ended on December 29, 2006.
(4.)
Foreign
Currency
Transactions. The
functional currency of the Company's foreign subsidiary is generally the
local
currency. The financial statements of this subsidiary are translated to United
States dollars using period-end rates of exchange for assets and liabilities
and
average rates of exchange for the period for revenues and expenses. Translation
gains (losses) are recorded in accumulated other comprehensive income as
a
component of stockholders' equity. Net gains and losses resulting from foreign
exchange transactions are included in selling, general and administrative
expenses and were not significant during the periods presented.
(5.)
Derivative Financial
Instruments. The Company uses short-term foreign exchange forward
contracts to mitigate foreign currency risk associated primarily with
inter-company receivables and payables, and loan receivables (denominated
in
Euros) with its German subsidiary. Our foreign exchange forward contracts
are
not designated for accounting purposes as hedging instruments under SFAS
No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Accordingly,
any gains or losses resulting from changes in the fair value of the forward
contracts are reported in other income. The gains and losses on these forward
contracts generally offset gains and losses associated with the underlying
foreign currency denominated inter-company receivables and payables, and
loans
receivable. At December 31, 2007, we had foreign exchange forward
contracts with a maturity of less than 30 days to purchase 1.3 million
euros. The fair value of the forward contracts was not material at
December 31, 2007 and March 31, 2007.
(6.)
Concentrations
of Risk.Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash, cash equivalents, short-term
investments, long-term investments and accounts receivable. The Company places
its cash, cash equivalents, and short-term and long-term investments in
high-credit quality financial institutions. The Company is exposed to credit
risk in the event of default by these institutions to the extent of the amount
recorded on the condensed consolidated balance sheet. As of December 31, 2007,
the Company’s short-term investments
consist of auction rate securities and there were no long-term
investments. Accounts receivable
are derived from revenue earned from customers primarily located in the
United States,
Italy,
Middle East and Germany.
The Company performs ongoing credit
evaluations of its customers’ financial condition and generally does not require
collateral. The Company maintains reserves for potential credit losses and
historically, such losses have been immaterial.
(7.)
Major Customers. The
following customers accounted for more than 10% of revenues for the periods
shown below. The revenue from these customers was attributable to
both the optical memory card and the drive, system and services
segments. No other customer accounted for more than 10% of revenues
during these periods.
|
Three
Months
Ended
|
|
Nine
Months
Ended
|
|
December
31,
|
|
December
31,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Customer
A
|
21%
|
|
41%
|
|
29%
|
|
34%
|
Customer
B
|
17%
|
|
―
|
|
21%
|
|
―
|
Customer
C
|
<10%
|
|
―
|
|
<10%
|
|
11%
|
Customer
D
|
33%
|
|
<10%
|
|
15%
|
|
<10%
|
Three
customers accounted for 35%, 20%, and 12%, respectively, of accounts receivable
at December 31, 2007. Two customers accounted for 31% and 17%,
respectively, of accounts receivable at March 31, 2007.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(8.)
Cash and Cash Equivalents,
Short-term Investments and Long-term Investments. The Company
considers all highly liquid investments, consisting primarily of commercial
paper, discount notes and U.S. government bonds, with maturities of three
months
or less at the date of purchase, to be cash equivalents. Cash and
cash equivalents were $2.1 million at December 31, 2007 and $3 million at
March
31, 2007. As of December 31, 2007 and March 31, 2007, the Company
held auction rate securities which were accounted for as available-for-sale
and
classified as short-term investments. The fair values of the auction
rate securities, based on quoted market prices, were substantially equal to their
carrying costs due to the frequency of the reset dates. Short-term
investments also include investments with maturities at date of purchase
of more
than three months and investments with remaining maturities of less than
one
year. All investments with maturities at date of purchase greater
than one year are classified as long-term investments. Management
determines the appropriate classification of debt securities at the time
of
purchase and re-evaluates the classification of investments as of each balance
sheet date.
All
short-term investments, except for auction rate securities which are recorded
at
fair value, and long-term investments are classified as held-to-maturity
and are
stated in the condensed consolidated balance sheet at amortized
cost. As such investments are classified as held-to-maturity, no
unrealized gains or losses are recorded. The carrying amounts of
individual held-to-maturity securities are reviewed at the condensed
consolidated balance sheet date for potential impairment. As of
December 31, 2007 and March 31, 2007, there are no short-term or long-term
investments other than auction rate securities.
The
carrying amounts of short-term investments in the form of auction rate
securities as of December 31, 2007 and March 31, 2007 are $16.5 million and
$17.5 million, respectively.
(9.)
Fair Value of Financial
Instruments. The carrying amounts of the Company’s financial
instruments including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities, approximate
their
fair values due to their short maturities.
(10.)
Accounts Receivable, Net.
We maintain allowances for doubtful accounts and product return reserves
for anticipated losses resulting from the inability of our customers to make
required payments and in-process product returns. We generally compute our
allowances based on specifically identifying accounts that are past due and
that
are likely not collectible. Interest receivable is accrued from
investments in auction rate securities and other interest-bearing
securities. Other receivables are comprised of value added tax
refunds and miscellaneous items. The components of accounts
receivable as of December 31, 2007 and March 31, 2007 are (in
thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Trade
receivables
|
|
$ |
5,066 |
|
|
$ |
3,383 |
|
Allowance
for doubtful
accounts
|
|
|
(88 |
)
|
|
|
(66 |
)
|
Product
return
reserves
|
|
|
- |
|
|
|
(78 |
)
|
Interest
receivable
|
|
|
42 |
|
|
|
34 |
|
Other
receivables
|
|
|
198 |
|
|
|
216 |
|
Total
accounts receivable,
net
|
|
$ |
5,218 |
|
|
$ |
3,489 |
|
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(11.)
Inventories, Net.
Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis and
market based on replacement cost or estimated realizable value less cost to
sell. The components of inventories as of December 31, 2007 and March 31,
2007
are (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Raw
materials
|
|
$ |
7,825 |
|
|
$ |
7,763 |
|
Work-in-process
|
|
|
882 |
|
|
|
860 |
|
Finished
goods
|
|
|
2,660 |
|
|
|
2,839 |
|
Total
inventory,
net
|
|
$ |
11,367 |
|
|
$ |
11,462 |
|
The
Company establishes lower of cost or market reserves, aged inventory reserves
and obsolescence reserves. Inventory reserves are generally recorded when
management determines that an item is not readily saleable. Inventory reserves
are not relieved until the related inventory has been sold or scrapped.
For the
three and nine-month periods ended December 31, 2007, the Company recorded
inventory reserve expense of $3,000 and $53,000, respectively. For the
three and
nine-month periods ended December 31, 2006, the Company recorded inventory
reserve expense of $6,000 and $139,000, respectively. We did not record
any
lower of cost or market adjustments in our condensed consolidated statements
of
operations for the three and nine-month periods ended December 31, 2007
and
2006.
(12.)
Equipment Held for
Resale. Equipment held for resale consists primarily of parts,
labor costs and other costs incurred to build equipment under a contract
assigned to Prevent in March 2007. Direct incremental costs
associated with the purchase or construction of these items are deferred
until
revenue is recognized. The components of equipment held for resale as
of December 31, 2007 and March 31, 2007 are (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Parts
|
|
$ |
5,318 |
|
|
$ |
5,297 |
|
Labor
costs
|
|
|
1,121 |
|
|
|
931 |
|
Other
|
|
|
113 |
|
|
|
112 |
|
Total
equipment held for
resale
|
|
$ |
6,552 |
|
|
$ |
6,340 |
|
(13.)
Property and Equipment,
Net. The components of property and equipment as of December
31, 2007 and March 31, 2007 are (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Building
and
land
|
|
$ |
967 |
|
|
$ |
885 |
|
Equipment
and
furniture
|
|
|
25,503 |
|
|
|
24,334 |
|
Construction
in progress,
including
|
|
|
|
|
|
|
|
|
purchased
equipment
|
|
|
264 |
|
|
|
774 |
|
Leasehold
improvements
|
|
|
5,193 |
|
|
|
4,701 |
|
|
|
|
31,927 |
|
|
|
30,694 |
|
Less:
accumulated depreciation and
amortization
|
|
|
(19,835 |
)
|
|
|
(17,706 |
)
|
Total
property and equipment,
net
|
|
$ |
12,092 |
|
|
$ |
12,988 |
|
Property
and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives which currently are four to seven years for equipment and furniture
using the straight-line method and twenty-five years for the building using
the
straight-line method. Leasehold improvements are amortized over the shorter
of
the life of the asset or the life of the lease using the straight-line method.
Depreciation and leasehold amortization expense for the three and nine-month
periods ended December 31, 2007 was $731,000 and $2,132,000, respectively.
Depreciation and leasehold amortization expense for the three and nine-month
periods ended December 31, 2006 was $675,000 and $1,930,000, respectively.
Maintenance and minor repairs and replacements are expensed when incurred.
Disposition or retirement of property and equipment related gains and losses
are
charged to other income and expenses.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Certain
costs incurred in connection with acquisition of software for internal use
are
capitalized following Statement of Position (SOP) 98-1, Accounting for the Costs
of Computer
Software Developed or Obtained for Internal Use and EITF Issue No. 97-13,
Accounting for
Costs Incurred
in Connection with a Consulting Contract or an Internal Project That Combines
Business Process Reengineering and Information Technology
Transformation. Capitalized software costs are included in the
equipment and furniture account and are amortized over four to seven
years. Software costs that do not meet capitalization criteria are
expensed immediately.
(14.)
Goodwill and Other Intangible
Assets. Goodwill represents the excess of the purchase price
over the fair value of identifiable net tangible and intangible assets acquired
in a business combination. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company does not amortize goodwill. Instead, the
Company evaluates goodwill for impairment annually in the fourth quarter
and
whenever events or changes in circumstances indicate that it is more likely
than
not that an impairment loss has been incurred. At March 31, 2007, the
Company determined that estimated future cash flows were insufficient to
justify
the carrying value of goodwill and other intangible assets based on management’s
decision to suspend optical memory card production in Germany. As such, in
the
fourth quarter of fiscal year 2007, the Company recorded a non-cash impairment
charge of approximately $3.8 million for the full amount of remaining goodwill
and other intangible assets related to the Company’s purchase of Challenge Card
Design Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of
Ratingen, Germany on March 31, 2004. We intend to continue to use the
facility and equipment to produce specialty cards although plans to use the
facility to produce LaserCard® optical memory cards in Germany have been
suspended.
Definite
life intangible assets capitalized and accumulated amortization as of December
31, 2007 and March 31, 2007 are as follows (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Patent
expenditures
|
|
$ |
3,625 |
|
|
$ |
3,554 |
|
Technology
transfer
expenditures
|
|
|
545 |
|
|
|
545 |
|
Total
patent and other intangible
expenditures
|
|
|
4,170 |
|
|
|
4,099 |
|
|
|
|
|
|
|
|
|
|
Patent
accumulated
amortization
|
|
|
(3,236 |
)
|
|
|
(3,149 |
)
|
Technology
transfer accumulated
amortization
|
|
|
(545 |
)
|
|
|
(539 |
)
|
|
|
|
(3,781 |
)
|
|
|
(3,688 |
)
|
Patents
and other intangibles,
net
|
|
$ |
389 |
|
|
$ |
411 |
|
Patent
and technology transfer amortization expense for the three and nine-month
periods ended December 31, 2007 was $30,000 and $94,000,
respectively. Patent and technology transfer amortization expense for
the three and nine-month periods ended December 31, 2006 was $36,000 and
$104,000, respectively.
(15.)
Assessment of Impairment of
Tangible and Intangible Long-Lived Assets. In accordance with
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company assesses
the impairment of long-lived assets whenever events or changes in circumstances
indicate that their carrying value may not be recoverable from the estimated
future cash flows expected to result from their use and eventual
disposition. The Company’s long-lived assets subject to this
evaluation include property and equipment and amortizable intangible
assets. If the Company’s estimate of future undiscounted net cash
flows is insufficient to recover the carrying value of the assets, the Company
will record an impairment loss in the amount by which the carrying value
of the
assets exceeds the fair value. If assets are determined to be
recoverable but the useful lives are shorter than originally estimated, the
Company depreciates or amortizes the net book value of the asset over the
newly
determined remaining useful lives. As of December 31, 2007 and March
31, 2007, the fair value of long-lived assets exceeds their book
value. Therefore, no impairment loss has been
recognized.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(16.)
Accrued
Liabilities. The components of accrued liabilities as of
December 31, 2007 and March 31, 2007 are (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Accrued
payroll and fringe
benefits
|
|
$ |
481 |
|
|
$ |
497 |
|
Accrued
compensated
absences
|
|
|
533 |
|
|
|
855 |
|
Warranty
reserves
|
|
|
603 |
|
|
|
743 |
|
Other
accrued
liabilities
|
|
|
959 |
|
|
|
894 |
|
Total
accrued
liabilities
|
|
$ |
2,576 |
|
|
$ |
2,989 |
|
Where
appropriate, provision is made at the time of shipment for estimated warranty
costs. We provide a limited warranty for the replacement of defective products.
Our limited warranty requires us to repair or replace defective products
at no
cost to the customer within a specified time period after sale. We estimate
the
costs that may be incurred under our limited warranty and record a liability
in
the amount of such costs at the time product revenue is recognized. Factors
that
affect our estimate of warranty liability include the number of units sold,
and
historical and anticipated rates of warranty claims. We assess the adequacy
of
our recorded warranty liability and adjust the amount as necessary. We
utilize
historical trends and information received from our customers to assist
in
determining the appropriate estimated warranty accrual levels. The Company’s product warranty claims
are settled through the return of defective products and the shipment of replacement
products.
The adequacy
of the warranty reserve
is reviewed quarterly
to verify that it properly reflects the remaining obligations based on
the
anticipated warranty costs
over
the balance of the
obligation period. Adjustments are made when actual return claim experience
differs from estimates. Warranty activities
for the three and
nine-month periods ended December 31, 2007 and 2006 are as follow (in
thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Beginning
balance
|
|
$ |
607 |
|
|
$ |
679 |
|
|
$ |
743 |
|
|
$ |
699 |
|
Accruals
for products
sold
|
|
|
5 |
|
|
|
(1 |
)
|
|
|
92 |
|
|
|
97 |
|
Costs
incurred
|
|
|
(9 |
)
|
|
|
(4 |
)
|
|
|
(232 |
)
|
|
|
(122 |
)
|
Ending
balance
|
|
$ |
603 |
|
|
$ |
674 |
|
|
$ |
603 |
|
|
$ |
674 |
|
(17.)
Software Development
Costs. Development costs incurred in the research and
development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been
established. To date, the Company’s software development has been
completed concurrent with the establishment of technological feasibility
and,
accordingly, all software development costs have been charged to research
and
development expenses in the accompanying condensed consolidated statements
of
operations.
(18.)
Advance Payments from
Customers. The Company routinely receives advance payments on
orders placed by its customers. The advance payments are recorded as
a liability in the condensed consolidated balance sheets until the related
orders are shipped or services are performed or revenue would otherwise be
recognized.
(19.)
Revenue
Recognition. Product sales primarily consist of optical card
sales, sales of drives, systems and services and sales of specialty cards
and
card printers. The Company recognizes revenue from product sales when
the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. The
Company recognizes revenue on product sales at the time of shipment when
shipping terms are F.O.B. shipping point, orders are placed pursuant to a
pre-existing sales arrangement and there are no post-shipment obligations
other
than customer acceptance criteria or, in the case of a U.S. government contract,
warehousing. Where appropriate, provision is made at the time of
shipment for estimated warranty costs and estimated returns.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Orders
for Permanent Resident and Border Crossing Cards for the U.S. government
require
delivery into a secure Company-controlled vault. Shipments are later
made from the vault to a U.S. government site. The bill and hold
procedures also provide that at the end of any one-year contract term when
a
renewal option is not exercised, the U.S. government is to take final delivery
of any and all of its remaining inventory within six months. At the
time the cards are delivered into the vault, title to the cards is transferred
to the U.S. government and all risks of ownership are transferred as
well. The prime contractor is invoiced, with payment due within
thirty days and the purchase orders do not contain any return (other than
for
warranty) or cancellation provisions. Pursuant to the provisions of SEC Staff
Accounting Bulletin No. 104 ―Revenue
Recognition (“SAB
104”), revenue is recognized on delivery into the vault as the Company has
fulfilled its contractual obligations and the earnings process is
complete.
The
Company applies the provisions of the Emerging Issues Task Force Issue No.
00-21, Revenue Arrangements
with Multiple Deliverables (“EITF 00-21”), to revenue arrangements with
multiple deliverables. EITF 00-21 provides criteria governing how to
identify whether goods or services that are to be delivered separately in
a
bundled sales arrangement should be accounted for separately. Deliverables
are
accounted for separately if they meet all of the following criteria: a) the
delivered items have stand-alone value to the customer; b) the fair value
of any
undelivered items can be reliably determined; and c) if the arrangement includes
a general right of return, delivery of the undelivered items is probable
and
substantially controlled by the seller. In situations where the deliverables
fall within higher-level literature as defined by EITF 00-21, the Company
applies the guidance in that higher-level literature. Deliverables that do
not
meet these criteria are combined with one or more other
deliverables.
The
Company applies the provisions of Statement of Position 81-1, Accounting for Performance
of
Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), in
applicable contracts. Revenues on time and materials contracts are recognized
as
services are rendered at contract labor rates plus material and other direct
costs incurred. Revenues on fixed price contracts are recognized on
the percentage of completion method based on the ratio of total costs incurred
to date compared to estimated total costs to complete the
contract. Estimates of costs to complete include material, direct
labor, overhead and allowable general and administrative expenses. In
circumstances where estimates of costs to complete a project cannot be
reasonably estimated, but it is assured that a loss will not be incurred,
the
percentage-of-completion method based on a zero profit margin, rather than
the
completed-contract method, is used until more precise estimates can be made.
The
full amount of an estimated loss is charged to operations in the period it
is
determined that a loss will be realized from the performance of a
contract. The Company recognized approximately $123,000 and $169,000
of revenues for the three and nine-month periods ended December 31, 2007,
respectively, and $1,000 and $10,000 for the three and nine-month periods
ended
December 31, 2006, respectively, based on a zero profit margin related to
a
long-term contract.
In
the
fourth quarter of fiscal year 2006, the Company entered into a subcontract
covering product and services with a prime contractor for a Middle Eastern
country to provide them with card personalization workstation integration
for
use in that country’s personalized national ID program with decentralized card
issuance which includes optical memory cards, hardware, and software. The
contract called for multiple deliverables, installation, and certain client
acceptance criteria, as defined in the agreement. In applying the
guidance within EITF 00-21, the Company determined the deliverables are not
to
be accounted for as separate units, but rather as a bundled arrangement as
the
fair value of the undelivered items cannot be readily determined.
Therefore, revenue recognition on this contract and the associated contract
costs were deferred until the predominant undelivered element, the card
personalization, was delivered and accepted, commencing when the installation
and acceptance of the card personalization system was complete. The Company
determined that once the card personalization system was accepted, contract
revenue would be recognized ratably based on actual cards personalized and
accepted. As the card personalization system was accepted during the
quarter ended March 31, 2007, the Company began recognizing revenue under
this
contract during that period on cards that had been accepted by
customer. On June 23, 2007, the Company and the prime contractor
entered into an amendment agreement whereby the Company will provide cards
and
supplies according to a delivery schedule for the balance of this fiscal
year. In addition, the Company no longer has obligations pertaining
to the installation of equipment, card personalization workstation integration
or card personalization. As a result of this amendment, the Company
will ratably recognize revenue upon receipt of the customer’s certificate of
acceptance of cards delivered. Also under the amendment and
associated sales incentives, new prices per card have been
established. During the three and nine-month periods ended December
31, 2007, we recognized revenue of approximately $1.9 million and $6.2 million,
respectively. The Company has completed the initial orders under the
subcontract at December 31, 2007; however, the subcontract allows for optional
orders at customer request over a four-year period through December 2010,
valued
at up to another approximately $35 million in cards based on the new agreed
upon
price per card under the amendment. We anticipate smaller orders for
this program during calendar year 2008.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company applies the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition,
as amended by Statement of Position 98-9, Modification of SOP 97-2,
Software
Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the sale of software products. Revenue from
the license of the Company’s software products is recognized when persuasive
evidence of an arrangement exists, the software product has been delivered,
the
fee is fixed or determinable and collectibility is probable, and, if applicable,
upon acceptance when acceptance criteria are specified or upon expiration
of the
acceptance period. There was no software revenue recognized for the
nine-month period ended December 31, 2007. Software revenue was immaterial
for
the nine-month period ended December 31, 2006.
License
revenue, which may consist of up-front license fees and long-term royalty
payments, is recognized as revenue when earned. There were no license
revenues recorded for the three and nine-month periods ended December 31,
2007
and 2006.
The
Company entered into license and optical memory card equipment purchase and
support agreements, effective April 3, 2004, with Global Investments Group
(GIG), based in Auckland, New Zealand, for optical memory card manufacturing
in
Slovenia. GIG transferred the license and other agreements, with our
approval, to Prevent Global družba za upravljanje, investicije in razvoj d.d
(“Prevent”) in March 2007. The agreements provide for payments (other
than interest on late payments) to the Company of about $25.6 million which
were fully paid as of March 31, 2007, for a 20-year license, the required
manufacturing equipment for a targeted initial manufacturing capacity of
10
million optical cards annually and installation support, and a four-year
training and support package. Of the $25.6 million we received, $23.6
million was recorded as advance payments from customer and $2 million for
the
licensing fee was recorded as deferred revenue. Both were classified
as long term liabilities in the condensed consolidated balance
sheets. As of December 31, 2007, the Company had $6.6 million of
acquired equipment, plus direct and incremental expenses, classified as
equipment held for resale on our condensed consolidated balance
sheets. The Company is to ship this equipment to Prevent upon request
for installation in a facility. At this time, the Company does not
know when Prevent will initiate such a request. Beginning in the
fourth year of the contract, Prevent is to pay $3 million for a three-year
support package, and has options for thirteen additional years of support
for
payments of $1 million annually. In addition to the $41.6 million
discussed above, Prevent is to pay royalties of $0.60 per card for each card
produced under the license. The territories covered by the license include
most of the European Union and Eastern European regions. Prevent has
exclusive marketing rights in certain territories, with performance goals
to
maintain these rights. The Company retains rights to utilize up to
20% of the new facility capacity as backup and a capacity buffer to augment
our
own card manufacturing facilities in Mountain View, California and possibly
at
the Company’s German subsidiary. The granting of this license to
Prevent establishes a potential second source supplier of optical memory
cards
for existing and prospective customers who may request multiple sources for
cards. The agreement contains various elements including a card
manufacturing license, sale and installation of equipment, training and ongoing
support, and contingent payments for support, materials, and royalty payments
for cards manufactured. In accordance with EITF 00-21 Revenue Arrangements with
Multiple
Deliverables, the card manufacturing license, sale and installation of
equipment, training and support package, have been accounted for as one unit
of
accounting, since we were unable to determine evidence of the fair value
for the
undelivered items other than ongoing support. The Company is able to
determine evidence of fair value for the last predominant item to be delivered,
which is the ongoing annual support of the manufacturing
equipment. Accordingly, revenues for the arrangement have been
deferred and will be recognized when the equipment is installed and accepted,
with the exception of the value of the ongoing annual support of the
manufacturing equipment which will be recognized quarterly as earned, beginning
when the equipment is accepted and training has been completed, which date
is
dependent on Prevent establishing a suitable facility in
Slovenia. Pursuant to FTB 90-1, Accounting for Separately
Priced
Extended Warranty and Product Maintenance Contracts, the support revenue
will be recognized ratably over the remaining term of the
agreement.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(20.)
Research and Development
Expenses. Costs related to research, design and development of
products are charged to research and development expense as
incurred. Research and development costs include salaries, contractor
fees, building and utility costs, and depreciation.
(21.)
Shipping and Handling
Costs. Shipping
and handling costs are recorded
in cost of sales.
(22.)
Advertising
Costs.Advertising costs
consist of development and placement costs of the Company’s advertising
campaigns and are charged to expense when incurred. There
was no recorded advertising
expense for the three-month period ended December 31, 2007, and 2006.
Advertising expense
was approximately
$202,000
and $188,000 for the
nine-month
periods ended December
31,
2007, and 2006, respectively.
(23.)
Stock-based
Compensation. Effective April 1, 2006, the Company adopted
Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, which
requires share-based payment transactions to be accounted for using a fair
value
based method and the recognition of the related expense in the results of
operations.
The
Company adopted SFAS No. 123(R) using the modified prospective method of
transition which requires compensation expense related to share based payments
to be recognized beginning on the adoption date over the requisite service
period, generally the vesting period, for awards granted after April 1,
2006, and over the remaining service period for the unvested portion of awards
granted prior to April 1, 2006. The condensed consolidated
financial statements for prior fiscal years have not been restated to reflect
the impact of adopting SFAS No. 123(R).
2004
Equity Incentive Compensation
Plan (the “2004 Plan”): The 2004 Plan provides for the grant of
restricted share awards, options, stock units and stock appreciation rights,
any
of which may or may not require the satisfaction of performance objectives,
with
respect to shares of our common stock to directors, officers, employees and
consultants of the Company and its subsidiaries. The exercise price
of stock options may not be less than 100% of the fair market value of the
common stock as of the date of grant (110% of the fair market value if the
grant
is of an incentive stock option to an employee who owns more than 10% of
the
total combined voting power of all classes of the Company’s capital
stock). Options granted may not be exercised more than 10 years after
the date of grant (five years after the date of grant if the grant is an
incentive stock option to an employee who owns more than 10% of the total
combined voting power of all classes of the Company’s capital stock). The Board
of Directors specifies the term of options, typically 7 years, and the vesting
schedule for exercise of options, generally 25% after one year and 6.25%
quarterly for the next 3 years.
Stock
Options: Under the
provisions of SFAS No. 123(R), stock-based compensation cost is estimated
at the grant date based on the fair value of the award and compensation cost
is
recognized as an expense over the requisite service period of the award,
generally the vesting period. The fair value of non-vested stock awards was
determined by reference to the fair market value of the Company’s common stock
on the date of grant. Consistent with the valuation method the Company used
for
disclosure-only purposes under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company uses the Black-Scholes valuation model to
estimate the fair value of option awards. Determining the appropriate
fair value model and related assumptions requires judgment, including estimating
stock price volatility, forfeiture rates and expected terms.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following assumptions were utilized to estimate the fair value of the Company’s
stock option awards during the three and nine-month periods ended December
31,
2007 and 2006:
|
Three
Months
Ended
|
|
Nine
Months
Ended
|
|
December
31,
|
|
December
31,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Expected
stock price
volatility
|
55%
|
|
55%
|
|
55%
|
|
55%
|
Risk-free
interest
rates
|
3.62%
|
|
4.52%
|
|
3.62%
to
4.93%
|
|
4.40%
to
4.96%
|
Expected
life of
options
|
4.4
to 5
years
|
|
4.4
to 5
years
|
|
4.4
to 5
years
|
|
4.4
to 5
years
|
Expected
annual
dividends
|
―
|
|
―
|
|
―
|
|
―
|
The
expected volatility rate was based on the historical volatility of the Company’s
common stock. The expected life represents the average time options that
vest
are expected to be outstanding based on the vesting provisions and the Company’s
historical exercise, cancellation and expiration patterns. The Company estimated
forfeitures based on historical rates when recognizing compensation
expense. Forfeitures were estimated based on voluntary termination
behavior, as well as an analysis of actual option forfeitures.
The
risk-free interest rate was based on U.S. Treasury zero-coupon issues with
a
maturity approximating the expected life as of the week of the grant
date. There was no annual dividend rate assumed as a cash dividend is
not expected to be declared and paid in the foreseeable future. The
Company updates these assumptions at least on an annual basis and on an interim
basis if significant changes to the assumptions are warranted.
The
Company recognized the full amount of the stock-based employee compensation
expense of its equity incentive plans in the condensed consolidated statements
of operations for the three and nine-month periods ended December 31, 2007
and
2006, and did not capitalize any such costs in the condensed consolidated
balance sheets other than in the general overhead pool for inventory
costs.
Stock-based
compensation expense related to stock options and restricted shares were
recorded in the Company’s condensed consolidated statements of operations was
allocated as follows (in thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
of
sales
|
|
$ |
105 |
|
|
$ |
90 |
|
|
$ |
244 |
|
|
$ |
258 |
|
Selling,
general and
administrative expense (excludes ESPP)
|
|
|
487 |
|
|
|
303 |
|
|
|
1,083 |
|
|
|
726 |
|
Research
and development
expense
|
|
|
69 |
|
|
|
83 |
|
|
|
190 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
before income tax
|
|
|
661 |
|
|
|
476 |
|
|
|
1,517 |
|
|
|
1,275 |
|
Less:
income tax
benefit
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
Net
stock-based compensation
expense after income tax
|
|
$ |
661 |
|
|
$ |
476 |
|
|
$ |
1,517 |
|
|
$ |
1,275 |
|
Restricted
Shares and Restricted
Stock Units: On September 21, 2007, restricted shares and restricted
stock units were awarded to certain Company employees and directors under
the
provisions of the 2004 Plan. These shares and units are subject to time-based
vesting provisions, and were awarded at no cost to the recipients, and cannot
be
sold, assigned, transferred, or pledged during the restriction period.
Recipients of the restricted shares have the right to vote such shares and
receive dividends, whereas the recipients of restricted stock units do not
have
these same benefits.
Restricted
shares were awarded to officers and directors of the Company. The fair value
of
the shares at the time of the award is expensed on a straight-line basis,
primarily in selling, general and administrative expenses over the vesting
period. For officers, 25% of these restricted shares shall vest
subject to continuous common-law employment with the Company on each of the
first, second, third, and fourth anniversaries of the date of grant of their
award with no expiration. For directors, the restricted shares will
vest in full on the eleventh month after the date of their award. For
officers, as the shares vest, the Company will affect tax withholding by
retaining that number of shares having a fair market value equal to the taxes
being withheld.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restricted
stock units were awarded to certain employees of the Company. The fair value
at
the time of the award is expensed on a straight-line basis over the vesting
period. Subject to the employee’s continuous common-law employment with the
Company, 25% of these restricted units vest on each of the first, second,
third,
and fourth anniversaries of the date of their award. As the units
vest, shares will be issued in settlement, net of shares retained to satisfy
withholding obligations.
As
of
December 31, 2007, about $5.2 million of total unrecognized compensation
cost
related to unvested stock options, restricted share awards and restricted
stock
units is expected to be recognized over the remaining vesting period through
December 31, 2012. As of December 31, 2006, there was approximately
$4.3 million of total unrecognized compensation cost related to unvested
share-based compensation arrangements granted under our stock incentive plans
which was expected to be recognized over the remaining vesting period through
December 31, 2011.
The
Company recorded no income tax benefit on stock-based compensation expense
for
the three and nine-month periods ended December 31, 2007 and 2006, as the
Company has cumulative operating loss carryforwards, for which a full valuation
allowance has been established.
The
FASB
Staff Position ("FSP") No. 123R-3, Transition Election Related
to
Accounting for the Tax Effects of Share-Based Payment Awards, requires an
entity to follow either the transition guidance for the
additional-paid-in-capital (APIC) pool as prescribed in SFAS No. 123(R) or
the
alternative transition method described in FSP No. 123R-3. An entity that
adopts SFAS No. 123(R) using the modified prospective application may make
a
one-time election to adopt the transition method described in the FSP No.
123R-3, and may take up to one year from the latter of its initial adoption
of
SFAS No. 123(R) or the effective date of the FSP No. 123R-3 to evaluate the
available transition alternatives and make its one-time election. We have
elected to use the simplified method provided for in FSP FAS 123R-3 to calculate
our APIC pool effective April 1, 2007. The adoption of the FSP did not have
a
material impact on our consolidated financial position, results of operations
or
cash flows.
Employee
Stock Purchase
Plan. The Company has an Employee Stock Purchase Plan (ESPP),
under which eligible employees may designate from 2% to 6% of their compensation
to be withheld for the purchase of shares of common stock at 67% of the average
price over the three-day period prior to the purchase date. The
differential between fair market value and the average price of the shares
sold
under the ESPP is charged to operations as a compensation expense and is
taxed
to the employee as income. For the three and nine-month periods ended
December 31, 2007 and 2006, the stock-based compensation expense relating
to the
ESPP which was included in the Company’s condensed consolidated statements of
operations in selling, general and administrative expenses is as follows
(in
thousands):
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(24)
Comprehensive Income
(Loss). Under SFAS No. 130, Reporting Comprehensive
Income, comprehensive income (loss) is defined as the changes in equity
of an enterprise except for those resulting from stockholders’ transactions. For
the three and nine-month periods ended December 31, 2007 and 2006, comprehensive
loss is as follows (in thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(1,080 |
)
|
|
$ |
(2,978 |
)
|
|
$ |
(3,938 |
)
|
|
$ |
(5,438 |
)
|
Net
change in cumulative
foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency
translation
adjustments
|
|
|
(23 |
)
|
|
|
63 |
|
|
|
3 |
|
|
|
160 |
|
Comprehensive
loss
|
|
$ |
(1,103 |
)
|
|
$ |
(2,915 |
)
|
|
$ |
(3,935 |
)
|
|
$ |
(5,278 |
)
|
(25)
Indemnification. The Company’s major sales agreements provide
remedies to customers, such as defense, settlement, or payment of judgment
for
intellectual property claims related to the use of the Company’s products. The
Company also has indemnified various vendors for certain potential
claims. The Company has also entered into indemnification agreements
with its directors and officers and the Company’s bylaws contain similar
indemnification obligations. To date, there have been no claims made
under such indemnification provisions and as a result the associated estimated
fair value of the liability is not material.
3. Net
Loss per Share
Basic
net
loss per share and diluted net loss per share are computed by dividing net
loss
by the weighted average number of shares of common stock outstanding during
the
three and nine-month periods ended December 31, 2007. Diluted net
income per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding
during
the three and nine-month periods ended December 31, 2007. Common
stock equivalents consist of stock options and warrants using the treasury
stock
method.
The
reconciliation of the denominators
of the basic and diluted net loss per share computation for the three and
nine-month periods ended December 31, 2007 and 2006 is shown in the following
table (in thousands, except per share data):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,080 |
)
|
|
$ |
(2,978 |
)
|
|
$ |
(3,938 |
)
|
|
$ |
(5,438 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
|
|
|
11,971 |
|
|
|
11,827 |
|
|
|
11,912 |
|
|
|
11,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net loss per
share
|
|
$ |
(0.09 |
)
|
|
$ |
(0.25 |
)
|
|
$ |
(0.33 |
)
|
|
$ |
(0.46 |
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
|
|
|
11,971 |
|
|
|
11,827 |
|
|
|
11,912 |
|
|
|
11,803 |
|
Weighted
average common stock
equivalent outstanding
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Weighted
average common shares and
common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
outstanding
|
|
|
11,971 |
|
|
|
11,827 |
|
|
|
11,912 |
|
|
|
11,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net loss per
share
|
|
$ |
(0.09 |
)
|
|
$ |
(0.25 |
)
|
|
$ |
(0.33 |
)
|
|
$ |
(0.46 |
)
|
All
stock
options and warrants were excluded from the calculation of diluted net loss
per
share since their effect would be anti-dilutive.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Segments
Segment
Reporting.
The
Company operates in three reportable segments: (1) optical memory cards,
(2)
drives, systems and services (which we formerly called the “optical memory card
drives” segment), including read/write drives, maintenance, systems and enabling
services, and (3) specialty cards and card printers. The segments
were determined based on the information used by the chief operating decision
maker. The optical memory cards and drives, systems and services
reportable segments are not strategic business units which offer unrelated
products and services; rather these reportable segments utilize compatible
technology and are marketed jointly. Specialty cards and printers is
a strategic business unit offering at times unrelated products and at times
related products with the other reportable segments.
The
accounting policies used to derive reportable segment results are the same
as
those described in the "Summary of Significant Accounting
Policies." Resources are allocated to the optical memory card and
drive, system and services segments in a manner that optimizes optical memory
card revenues and to the specialty card and printers segment in a manner
that
optimizes consolidated income as determined by the chief operating decision
maker. Segment revenues are comprised of sales to external
customers. Segment gross profit (loss) includes all segment revenues
less the related cost of sales. Accounts receivable, cash, deferred
income taxes, prepaid expenses, fixed assets and inventory are not separately
reported by segment to the chief operating decision maker. Therefore,
the amount of assets by segment is not meaningful. There are no
inter-segment sales or transfers. All of the Company’s long-lived
assets are attributable to the United States except for $3.4 million and
$3.7
million at December 31, 2007, and March 31, 2007, respectively, that are
located
in Germany.
The
Company's chief operating decision maker is currently the Company's Chief
Executive Officer. The chief operating decision maker reviews
financial information presented on a consolidated basis that is accompanied
by
disaggregated information about revenues and gross profit (loss) by
segment.
LASERCARD
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
table
below presents information for optical memory cards, drives, systems and
services, and specialty cards and card printers and a reconciliation of segment
results to amounts included in the Company’s condensed consolidated financial
statements for the three and nine-month periods ended December 31, 2007 and
2006
(in thousands):
|
|
T
h r e e M o n t h
s E n d e d Dece m b e r 3 1 ,
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
Drives,
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
|
Systems
&
|
|
|
Cards
&
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
Cards
|
|
|
Services
|
|
|
Printers
|
|
|
Total
|
|
|
Other
(a)
|
|
|
Total
|
|
Revenue
|
|
$ |
7,924 |
|
|
$ |
174 |
|
|
$ |
3,061 |
|
|
$ |
11,159 |
|
|
$ |
- |
|
|
$ |
11,159 |
|
Cost
of
sales
|
|
|
4,656 |
|
|
|
392 |
|
|
|
2,622 |
|
|
|
7,670 |
|
|
|
- |
|
|
|
7,670 |
|
Gross
profit
(loss)
|
|
|
3,268 |
|
|
|
(218 |
)
|
|
|
439 |
|
|
|
3,489 |
|
|
|
- |
|
|
|
3,489 |
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
469 |
|
|
|
46 |
|
|
|
80 |
|
|
|
595 |
|
|
|
165 |
|
|
|
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T
h r e e M o n t h s
E n d e d Decemb e r 31 , 2 0 0
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
Drives,
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
|
Systems
&
|
|
|
Cards
&
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
Cards
|
|
|
Services
|
|
|
Printers
|
|
|
Total
|
|
|
Other
|
|
|
Total
|
|
Revenue
|
|
$ |
3,086 |
|
|
$ |
182 |
|
|
$ |
2,916 |
|
|
$ |
6,184 |
|
|
$ |
- |
|
|
$ |
6,184 |
|
Cost
of
sales
|
|
|
2,745 |
|
|
|
258 |
|
|
|
2,394 |
|
|
|
5,397 |
|
|
|
- |
|
|
|
5,397 |
|
Gross
profit
(loss)
|
|
|
341 |
|
|
|
(76 |
)
|
|
|
522 |
|
|
|
787 |
|
|
|
- |
|
|
|
787 |
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
441 |
|
|
|
45 |
|
|
|
83 |
|
|
|
569 |
|
|
|
142 |
|
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
i n e M o n t h
s E n d e d Dece m b e r 3 1 ,
2 0 0 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
Drives,
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
|
Systems
&
|
|
|
Cards
&
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
Cards
|
|
|
Services
|
|
|
Printers
|
|
|
Total
|
|
|
Other
|
|
|
Total
|
|
Revenue
|
|
$ |
19,178 |
|
|
$ |
1,261 |
|
|
$ |
9,314 |
|
|
$ |
29,753 |
|
|
$ |
- |
|
|
$ |
29,753 |
|
Cost
of
sales
|
|
|
12,087 |
|
|
|
1,813 |
|
|
|
7,514 |
|
|
|
21,414 |
|
|
|
- |
|
|
|
21,414 |
|
Gross
profit
(loss)
|
|
|
7,091 |
|
|
|
(552 |
)
|
|
|
1,800 |
|
|
|
8,339 |
|
|
|
- |
|
|
|
8,339 |
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
1,373 |
|
|
|
139 |
|
|
|
234 |
|
|
|
1,746 |
|
|
|
480 |
|
|
|
2,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
i n e M o n t h
s E n d e d Decemb e r 31 ,
2 0 0 6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical
|
|
|
Drives,
|
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
|
Systems
&
|
|
|
Cards
&
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
Cards
|
|
|
Services
|
|
|
Printers
|
|
|
Total
|
|
|
Other
|
|
|
Total
|
|
Revenue
|
|
$ |
13,860 |
|
|
$ |
481 |
|
|
$ |
8,691 |
|
|
$ |
23,032 |
|
|
$ |
- |
|
|
$ |
23,032 |
|
Cost
of
sales
|
|
|
9,631 |
|
|
|
861 |
|
|
|
6,760 |
|
|
|
17,252 |
|
|
|
- |
|
|
|
17,252 |
|
Gross
profit
(loss)
|
|
|
4,229 |
|
|
|
(380 |
)
|
|
|
1,931 |
|
|
|
5,780 |
|
|
|
- |
|
|
|
5,780 |
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
expense
|
|
|
1,258 |
|
|
|
134 |
|
|
|
247 |
|
|
|
1,639 |
|
|
|
395 |
|
|
|
2,034 |
|
|
(a)
|
Other
depreciation and amortization expense represents amounts charged
to
selling, general and administrative expense and research and development
expense.
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis of the Company's financial condition, results
of operations and critical accounting policies should be read in conjunction
with the condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q Report and the consolidated financial statements
and
notes thereto for the fiscal year ended March 31, 2007, included in the
Company's fiscal 2007 Annual Report on Form 10-K.
FORWARD-LOOKING
STATEMENTS
All
statements contained in this report that are not historical facts are
forward-looking statements. The forward-looking statements in this report
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. They are not historical facts or
guarantees of future performance or events. Rather, they are based on current
expectations, estimates, beliefs, assumptions, and goals and objectives and
are
subject to uncertainties that are difficult to predict. As a result,
our actual results may differ materially from the statements
made. Often such statements can be identified by their use of words
such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,”
“visualizes,” “expects,” and “estimates.” Forward-looking statements
made in this report include statements as to our beliefs as to current and
potential market segments, customers, and applications for and deployment
of our
products; the advantages of, potential income from, and duties to be performed
under the sale of a second-source card manufacturing license to Prevent Global;
our intent to retain the Prevent Global equipment until Prevent Global is
ready
to receive the equipment; future scheduled payments and contingent royalties
under the Prevent Global contract, Prevent Global’s planned production capacity,
and that we will sell equipment to Prevent Global and provide Prevent Global
with installation support; production quantities, delivery rates and expected
delivery schedule, backlog, and revenue recognition for our products for
U.S. or
foreign government ID card programs, potential annual revenues being $40
to $50
million at full implementation from the Italy programs with expected revenues
unable to be determined until the prime contractor issues follow-on orders;
our
expectation that Poligrafico will request us to supply 1,300 encoders via
a
separate solicitation if Poligrafico moves forward with its workstation RFP;
revenue potential of up to $90 million over five years from the Angolan program;
our expectation for no future growth from the U.S. Green Card program, with
steady state revenue to average $8 million if the option years are elected
but
with a short-term decrease followed by an increase in orders as the government
transitions to a new card design; plans to increase card production capacity
for
anticipated increases in orders including possibly $10 million in capital
equipment and leasehold improvements during the next twelve months; and
expecting growth of less than 10% in the specialty card and printer segment
and
expecting negative gross profit from the drive, system and services market;
our
intent to update our SFAS No. 123(R), Shared-Based Payments,
assumptions at least annually; that the Middle Eastern country will exercise
its
option to place orders over a four-year period of up-to another approximately
$35 million in cards under the amended contract, with expected orders during
fiscal 2009 to be less than during fiscal 2008; our intent to find another
photographic film supplier should Kodak cease supplying such film and to
take
advantage of any last-buy opportunity which Kodak may choose to provide;
our
intent to pursue patent infringers by litigation, arbitration, or negotiation;
the need for, expected success of, and potential benefits from our research
and
development efforts, including our attempts to develop other forms of optical
recording media for use in optical memory cards and the potential benefits
derived therefrom; expectations regarding revenues (overall and by segment
and
by customer), margins, profit (including likely losses in the future if full
implementation of the Italian program is further delayed), and our deferred
income tax asset and related valuation allowance; our expectation that fiscal
2008 fourth quarter SG&A expenses will be higher than those in third quarter
and that R&D expenses will increase 15% in the fiscal 2008 fourth quarter
over the previous quarter; that we do not expect any material change in our
unrecognized tax benefits over the next twelve months; our expectations that
examination of open tax years by the appropriate governmental agencies due
to
the tax loss carryovers from those years will pose no material change in
our tax
position; our
expectation that our interest income during the fourth quarter will decline
due
to the lower interest rates resulting from recent cuts in the Federal funds
rate
by the Federal Reserve Board; our belief that our current five major
programs, plus maybe one or two others, will be the basis for
a majority of our revenues in the near term; estimates of optical
card production capacity, our ability to expand production capacity, and
our
plans and expectations regarding the growth and associated capital costs
of such
capacity; estimates that revenues and advance payments will be sufficient
to
generate cash from operating activities over the next twelve months and fund
our
actual capital expenditures despite expected quarterly fluctuations;
expectations regarding market growth, product demand, and the continuation
of
current programs; and our long-term revenue growth objectives, and drive
pricing
strategy.
These
forward-looking statements are based upon our assumptions about and assessment
of the future, which may or may not prove true, and involve a number of risks
and uncertainties including, but not limited to, whether there is a market
for
cards for homeland security in the U.S. and abroad, and if so whether such
market will utilize optical memory cards as opposed to other technology;
customer concentration and reliance on continued U.S. and Italian government
business; risks associated with doing business in and with foreign countries;
whether we will be successful in assisting Prevent Global with factory startup
and training; whether Prevent Global will obtain the financial resources
to make
the balance of its required payments to us and to operate the facility; whether
the facility will efficiently produce high quality optical memory cards in
volume and that meet our standards; lengthy sales cycles and changes in and
dependence on government policy-making; reliance on value-added resellers
and
system integrators to generate sales, perform customer system integration,
develop application software, integrate optical card systems with other
technologies, test products, and work with governments to implement card
programs; risks and difficulties associated with development, manufacture,
and
deployment of optical cards, drives, and systems; our ability or our customers’
ability to initiate and develop new programs utilizing our card products;
risks
and difficulties associated with development, manufacture, and deployment
of
optical cards, drives, and systems; potential manufacturing difficulties
and
complications associated with increasing manufacturing capacity of cards
and
drives, implementing new manufacturing processes, and outsourcing manufacturing;
our ability to produce and sell read/write drives in volume; the
unpredictability of customer demand for products and customer issuance and
release of corresponding orders; government rights to withhold order releases,
reduce the quantities released, and extend shipment dates; the impact of
technological advances, general economic trends, and competitive products;
the
impact of changes in the design of the cards; and the possibility that optical
memory cards will not be purchased for the full implementation of card programs
in Italy, a Middle Eastern country and India, or for Department of Homeland
Security (DHS) programs in the U.S., or will not be selected for other
government programs in the U.S. and abroad; whether we will be successful
in
developing alternative optical recording media; and the risks set
forth in the section entitled “Risks” and elsewhere in this report; and other
risks detailed from time to time in our SEC filings. These
forward-looking statements speak only as to the date of this report, and,
except
as required by law, we undertake no obligation to publicly release updates
or
revisions to these statements whether as a result of new information, future
events, or otherwise.
CRITICAL
ACCOUNTING POLICIES
Except
for the adoption of the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), as
described in Note 1 of the notes to condensed consolidated financial statements,
our critical accounting policies in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2007 have not changed materially.
RESULTS
OF OPERATIONS
Overview
We
are
headquartered in Mountain View, California where we manufacture LaserCard®
optical memory cards and card related products, including chip-ready
Optical/Smart™ cards. In addition, we operate a wholly owned German
subsidiary, Challenge Card Design Plastikkarten GmbH (“CCD”), with offices in
Rastede and Ratingen, Germany, which manufactures advanced-technology cards,
can
provide manufacturing capacity for certain steps of optical memory card
production, and markets cards, system solutions, and thermal card
printers.
We
sell
our products and services through partners such as value added resellers
(VARs),
system integrators and card distribution licensees, who generally have knowledge
in specific markets, for the development of markets and applications for
LaserCard products. We have sales staff located in California, New
York, the Washington D.C. area, and Germany, whose principal role is developing
and supporting the reseller channel. Revenue consists primarily of optical
memory cards, drives, systems and services, and specialty cards and card
printers. Our partner customers provide country-specific or
market-specific services necessary for contract negotiation and also may
add
application software, personal computers, and other peripherals, and then
resell
these products as integrated solutions. We are continuing our efforts to
recruit
new VARs and eliminate nonproductive VARs.
The
table
below presents condensed consolidated revenues, excluding inter-company
transactions, recorded by our U.S. and German operations (in
thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
U.S.
operations
|
|
$ |
8,098 |
|
|
$ |
3,277 |
|
|
$ |
20,438 |
|
|
$ |
14,365 |
|
German
operations
|
|
|
3,061 |
|
|
|
2,907 |
|
|
|
9,315 |
|
|
|
8,667 |
|
|
|
$ |
11,159 |
|
|
$ |
6,184 |
|
|
$ |
29,753 |
|
|
$ |
23,032 |
|
Revenues
recorded by our U.S. operations are generally derived from a small number
of
government customers located throughout the world. Revenues recorded
by our German operations are generally from a relatively large number of
commercial customers, including universities in Germany for student
identification cards and organizers of sporting events for secure access
cards.
Major
near term growth potential for LaserCard® optical memory cards is in
government-sponsored identification programs in several
countries. Since governmental card programs typically rely on
policy-making, which in turn is subject to technical requirements, budget
approvals, and political considerations, there is no assurance that these
programs will be implemented as expected or that they will include optical
cards. Our objectives for long-term revenue growth include: (1)
contracting for the supply of complete, integrated ID Management Solutions
with
a focus on optical memory card-based systems (2) winning new optical memory
card
programs in newly rapidly developing markets (3) realizing incremental revenues
from a more diversified customer based outside of traditional card programs,
and
(4) diversifying OM products into, and effectively penetrating, industrial
and
commercial markets.
We
are
currently dependent on revenues from the following programs; the U.S. Department
of Homeland Security (DHS) Permanent Resident Card (Green Card) program,
the
U.S. Department of State (DOS) Laser Visa Border Crossing Card program, the
Canadian government Permanent Resident Card program, a national ID card for
a
Middle Eastern country, and emerging programs such as the national citizens
ID
card program in Italy, the foreign
resident ID
card program in
Italy, and the recently
announced national ID card program in Angola.
Our
major
government programs are shown below as a percentage of total
revenues:
|
|
Three
Months
Ended
|
|
Nine
Months
Ended
|
|
|
December
31,
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
National
ID Cards in a Middle
Eastern Country
|
|
38%
|
|
―
|
|
29%
|
|
―
|
U.S.
Green Cards & Laser
Visas
|
|
11%
|
|
33%
|
|
20%
|
|
28%
|
Canadian
Permanent Resident
Cards
|
|
9%
|
|
7%
|
|
7%
|
|
5%
|
Vehicle
Registration in
India
|
|
12%
|
|
8%
|
|
9%
|
|
6%
|
Italian
Carta d'Identita
Elettonica (CIE) Cards
|
|
―
|
|
―
|
|
1%
|
|
1%
|
Italian
Permesso di Soggiorno
Elettronico (PSE) Cards
|
|
|
|
|
|
|
and
Carta di Soggiorno Elettronico
(CSE) Cards
|
|
―
|
|
―
|
|
―
|
|
10%
|
The
national
citizen ID (CIE) card
program
has been largely stalled since
January 2006 following a change of government
and the instigation
of a review designed to reduce cost and improve efficiency of the
program. If
the CIE
and foreign resident ID card (PSE)
systems
function
as designed, CIE and PSE card
orders could ramp toward their full implementation level which could
potentially result
in annual revenues of $40 to $50 million. We received and shipped
a small order
for foreign language versions of the CIE card during the nine-month period
ended
December 31, 2007. We have previously supplied
approximately $17 million
worth of optical
memory cards and 440 encoders for this program.
On
January 4, 2008, a Request for
Proposal (RFP) was issued by Italy's state printer, Istituto Poligrafico
e Zecca
dello Stato S.p.A. (Poligrafico), inviting interested parties to submit their qualifications
to bid
on an anticipated follow-on RFP for up to 60 million euros (approximately
$88 million) in key
components and installation and support services for the national infrastructure
required to roll out the CIE card
program. The
RFP specifies a requirement for more
than 9,000 enrollment workstations to be installed and supported nationwide
in
regional and city-based service centers. The workstations will be employed
in
gathering personal information of citizens prior to issuance of their
CIE
ID cards. The RFP also specifies
installation and support services for about 1,300 secure optical memory card
encoders. While
we do not provide these workstations and
services, this is a key step for
building the infrastructure needed to move the
program to full
implementation. We believe that
Poligrafico
will request us to
supply the 1,300 encoders
via
a separate
solicitation.
The
issuance system for PSE cards
in Italy is
in place and operating with about 1 million
applications received
and
the government is in
possession of a substantial card inventory for personalization. Backlog
for the CIE and PSE programs
at December 31,
2007 was immaterial. We
believe that follow-on orders for
both programs will be received and significant card revenue
will be realized
during fiscal 2009 although it remains unclear when the prime contractor
will
issue follow-on orders.
U.S.
Green Cards for the U.S. Department
of Homeland Security (DHS),
and to a lesser extent Laser Visa
Border Crossing Cards (BCCs) are
an important part of our revenue
base. For these programs, we recorded card revenues of $1.2 million
and $6.1 million
for the three and nine-month
periods ended December 31, 2007, respectively, and we recorded card revenues
of
$2 million and
$6.1 million
for the three and nine-month
periods ended December 31, 2006, respectively. We received a
five-year follow-on U.S.
government
subcontract in
March 2007 covering these
programs with an initial
one-year term and four one-year extension options. There was no backlog
for these programs at December 31, 2007. DHS has tasked us to support
the redesign of the Green Cards. The transition to a redesigned card
could cause delays in future orders as DHS reduces its inventory of current
cards that
were designed in
1997. However, we anticipate that this decrease will be followed by
an increase in orders of the newly designed cards to replenish the strategic
reserve, although no assurance can be given. We anticipate that the
Border Crossing Card (BCC)
design will be reconfigured to include an RFID chip in keeping with the
requirements of the Western Hemisphere Travel Initiative as specified for
Department of State’s
new
U.S. Passport Card. Recently it was
announced that GDIT won the U.S. Passport Card contract. We bid two types of
cards to
GDIT for this program. One
type was a polycarbonate card
with an
RFID feature
but without our optical memory feature. This
conformed with the Department of State bid
request.
We also bid a card
with our
optical memory feature
in addition to the RFID feature. We
were the exclusive bidder to GDIT for
the card with the optical memory feature. We were not the exclusive bidder
to GDIT for the card without the optical feature. The
Department of State has
selected the
card
without the optical feature and
GDIT may or may not subcontract the order to us. We anticipate that
any future BCC will follow the U.S. Passport Card model. We have recorded about
$1 million in
revenue for the BCC program this fiscal year.
Under
a
subcontract for Canada’s Permanent Resident Cards, we recorded revenue of about
$1 million and $2.2 million for the three and nine-month periods ended December
31, 2007, respectively compare with $0.4 million and $1.2 million for the
three
and nine-month periods ended December 31, 2006, respectively. The backlog
at
December 31, 2007, was $0.6 million originally scheduled for delivery through
June 2008. The delivery quantity is subject to fluctuation at
customer request.
During
the three and nine-month periods ended December 31, 2007, we recorded revenue
under purchase orders and a subcontract for the supply of secure national
ID
cards and supporting hardware, software, and integration services to a Middle
Eastern government of approximately $4.2 million and $8.5 million, respectively,
in addition to the $4 million recognized in fiscal year 2007. The
cards are being issued to adult citizens for national identity purposes and
feature the latest advancements in identity fraud protection provided by
Optical
IDLock™, a combination of the highly-secure LaserCard® optical memory technology
and Embedded HologramHD™, the new high-definition “photographic quality” etched
image security feature. As of December 31, 2007, there was no backlog
for this program. The subcontract continues to allow for optional orders
at
customer request over a four-year period ending December 2010, potentially
valued at up to another approximately $35 million in cards. We
anticipate smaller orders for this program during calendar year
2008. See Note 2, Item 19 of the notes to condensed consolidated
financial statements for a further discussion of the subcontract.
Effective
April 3, 2004, we sold a second-source card-manufacturing license, including
equipment, training, and support, to Global Investments Group (GIG), based
in
Auckland, New Zealand, for card manufacturing in Slovenia and began receiving
associated cash payments. Recently, and with our approval, GIG
transferred the license to Prevent Global of Slovenia. We will begin
to recognize revenue on this arrangement over the remaining term of the
agreement starting when the equipment has been accepted and the training
has
been completed, which date is in turn dependent on Prevent establishing a
suitable facility in Slovenia. Refer to Note 2, Item 19 of the notes
to condensed consolidated financial statements for further disclosure of
the
Prevent agreement.
On
November 6, 2007, our subsidiary, CCD, signed a 5.9 million euros ($8.5 million)
contract with a company based in Saudi Arabia to deliver a turnkey card
manufacturing facility by the end of calendar year 2008. The contract
includes the supply and installation of state-of-the-art plastic card production
equipment, transfer of manufacturing know-how, training, and production
support. It does not include constructing or preparing the building
that will house the equipment. The new factory will be used to
produce and personalize high quality scratch-off cards, loyalty cards, SIM
cards
and credit cards for the telecommunication and banking
sectors. Rights to optical memory card technology or manufacturing
are not included in the arrangement. Revenue and costs will be
deferred until the primary deliverables are completed.
On
December 20, 2007, we have signed an agreement with the government of Costa
Rica
valued at approximately $1.7 million for the supply of an ID Management System
for the country’s Foreign Resident program. Under the terms of the
agreement, we will supply a suite of demographic and biometric data collection
and card issuance equipment and software solutions to assist the Costa Rican
government to manage the issuing of highly secure optical memory based Foreign
Resident Cards. The applications include the centralized enrollment of legal
foreign residents, automatic fingerprint identification to prevent the issuance
of duplicate cards, optical memory encoding and card printing servers, quality
assurance and card issuance controlled by our biometric verification system.
The
issuance process will also include biometric identification of workstation
operators and strict card auditing processes. The contract terms
include a limited supply of Foreign Resident ID Cards, which incorporate
a
number of security features in addition to our secure optical memory. The
card’s
optical memory will store cardholder information including high resolution
color
facial image, fingerprint images and templates (for automatic one-to-one
identity verification), digitized signature and biographic data. In addition,
the optical stripe will also feature our unique Embedded HologramHD, a
personalized optical variable device which, like the digital data, cannot
be
fraudulently altered. Installation of the system is expected to be
completed in the spring of 2008. Revenues from the contract will be deferred
until the customer’s acceptance of the equipment, software, and cards which is
anticipated to be during the spring or summer of 2008.
On
January 17, 2008 we announced that we are on the winning team for a national
ID
card project in Angola. We will provide optical memory cards, card
personalization systems, printer consumables, installation and
training. This is our first national-level optical memory card
program in the African continent. Revenues could reach $90 million
over five years if the prime contract is fully implemented.
We
may
invest up to $10 million in additional capital equipment and leasehold
improvement expenditures for optical memory card production capacity and
manufacturing enhancement at our facilities when orders and forecasts justify
the investment. Additional capital expenditures could be made for
production capacity for new products in the specialty cards and printers
segment
as well as information technology infrastructure. These expenditures
could occur throughout the next twelve months, as more fully discussed under
“Management’s Discussion and Analysis--Liquidity and Capital Resources,” of the
Form 10-K for the fiscal year ended March 31, 2007.
Revenues
Product
Revenues. Our total revenues consisted of sales in our three
segments of (1) optical memory cards, (2) drives, systems and services, and
(3)
specialty cards and card printers, as well as, at times, other miscellaneous
items. Product revenues for the three and nine-month periods ended
December 31, 2007 were $11.2 million and $29.8 million, respectively. The
optical card drive segment was renamed as drives, systems and services segment
this quarter to better report the related activities. Product revenues for
the
three and nine-month periods ended December 31, 2006 were $6.2 million and
$23
million, respectively.
The
following table presents our product revenue by segment (in thousands, except
for percentages):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Optical
memory
cards
|
|
$ |
7,924 |
|
|
$ |
3,086 |
|
|
$ |
19,178 |
|
|
$ |
13,860 |
|
%
of total
revenues
|
|
|
71 |
%
|
|
|
50 |
%
|
|
|
64 |
%
|
|
|
60 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drives,
systems and
services
|
|
|
174 |
|
|
|
182 |
|
|
|
1,261 |
|
|
|
481 |
|
%
of total
revenues
|
|
|
2 |
%
|
|
|
3 |
%
|
|
|
4 |
%
|
|
|
2 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
cards and card
printers
|
|
|
3,061 |
|
|
|
2,916 |
|
|
|
9,314 |
|
|
|
8,691 |
|
%
of total
revenues
|
|
|
27 |
%
|
|
|
47 |
%
|
|
|
31 |
%
|
|
|
38 |
%
|
Total
revenues
|
|
$ |
11,159 |
|
|
$ |
6,184 |
|
|
$ |
29,753 |
|
|
$ |
23,032 |
|
The
following table presents our optical memory card (OMC) revenue by major program
(in thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
U.S.
Green Cards & Laser
Visas
|
|
$ |
1,235 |
|
|
$ |
2,022 |
|
|
$ |
6,065 |
|
|
$ |
6,359 |
|
Italian
National ID Card
Programs
|
|
|
15 |
|
|
|
- |
|
|
|
198 |
|
|
|
2,408 |
|
Canadian
Permanent Resident
Cards
|
|
|
967 |
|
|
|
404 |
|
|
|
2,177 |
|
|
|
1,226 |
|
National
ID Cards in a Middle
Eastern Country
|
|
|
4,105 |
|
|
|
- |
|
|
|
7,650 |
|
|
|
53 |
|
Vehicle
Registration in
India
|
|
|
1,375 |
|
|
|
511 |
|
|
|
2,609 |
|
|
|
1,285 |
|
Sports
Event
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,125 |
|
All
other
programs
|
|
|
227 |
|
|
|
149 |
|
|
|
479 |
|
|
|
404 |
|
Total
OMC
revenue
|
|
$ |
7,924 |
|
|
$ |
3,086 |
|
|
$ |
19,178 |
|
|
$ |
13,860 |
|
Optical
memory card revenue increased for the three-month period ended December 31,
2007
by 157% as compared with the three-month period ended December 31, 2006 due
to
the increase in card unit volume for a Middle Eastern country ID card program,
Canadian Permanent Resident card program, and the vehicle registration card
in
India. Optical memory card revenue increased for the nine-month period ended
December 31, 2007 by 38% as compared with the nine-month period ended December
31, 2006 due to the increase in card unit volume for a Middle Eastern country
ID
card program, Canadian Permanent Resident card program, and the vehicle
registration card in India.
Revenue
in the drives, systems and services did not materially change during the
three-month period ended December 31, 2007 as compared with the three-month
period ended December 31, 2006. However, revenue during the
nine-month period ended December 31, 2007 grew about $0.8 million as compared
with the nine-month period ended December 31, 2006, largely due to the activity
in the ID card program for a Middle Eastern country. We do not
anticipate that we will derive significant profits in the near term on drive
sales as prices are set near the manufacturing cost in order to promote optical
memory card sales.
Specialty
cards and printers revenue was approximately $3.1 million for the three-month
period ended December 31, 2007 or an increase of 5% from the $2.9 million
for
the three-month period ended December 31, 2006; and $9.3 million for the
nine-month period ended December 31, 2007 or an increase of 7% from the $8.7
million recorded in the nine-month period ended December 31, 2006 primarily
due to the effect of the Euro-Dollar exchange rate.
License
Fees and Other
Revenues. There were no license revenues for the three and
nine-month periods ended December 31, 2007, and 2006. We entered into
a license and optical memory card equipment purchase and support agreements,
effective April 3, 2004, for optical memory card manufacturing in Slovenia
which
were transferred with our approval to Prevent Global in March
2007. On November 6, 2007, we have entered into an agreement totaling
5.9 million euros ($8.5 million) with a company based in Saudi Arabia to
deliver
a turnkey card manufacturing facility by end of calendar year
2008. Refer to Note 2, Item 19 of the notes to condensed consolidated
financial statements for further disclosure of the Prevent
agreement.
Backlog
As
of
December 31, 2007, the backlog for LaserCard® optical memory cards totaled $1.5
million, which is scheduled for delivery through June 2008, as compared with
$5.7 million at March 31, 2007. We have only a few customers who generally
place
orders for a period of several months to a year or more so that variations
in
order placement from a single customer can materially affect
backlog. As a result, the relative size of our backlog has not been a
reliable indicator of future sales revenue trends.
The
backlog as of December 31, 2007, for specialty cards and printers totaled
0.9
million euros (approximately $1.4 million) compared with 0.6 million euros
(approximately $0.8 million) at March 31, 2007. In addition, the
contract to deliver a turnkey card manufacturing facility by the end of calendar
year 2008 has a backlog of 5.9 million euros (approximately $8.6 million)
at
December 31, 2007 and the contract to develop a conventional non-optical
card
production facility totaled 0.6 million euros (approximately $0.8 million)
at
December 31, 2007 and 0.7 million euros (approximately $0.9 million) at March
31, 2007.
At
December 31, 2007, our backlog in the drives, systems and services was $1
million due largely to the Costa Rica contract for an ID Management System
for
the country’s Foreign Resident program. We had no significant backlog
for read/write drives at March 31, 2007.
Gross
Margin
The
following table represents our gross margin in absolute amount and as a
percentage of revenue by segment (in thousands, except for
percentages):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Optical
memory
cards
|
|
$ |
3,268 |
|
|
$ |
341 |
|
|
$ |
7,091 |
|
|
$ |
4,229 |
|
%
of optical memory card
revenues
|
|
|
41 |
%
|
|
|
11 |
%
|
|
|
37 |
%
|
|
|
31 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drives,
systems and
services
|
|
|
(218 |
)
|
|
|
(76 |
)
|
|
|
(552 |
)
|
|
|
(380 |
)
|
%
of optical card drive
revenues
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty
cards and card
printers
|
|
|
439 |
|
|
|
522 |
|
|
|
1,800 |
|
|
|
1,931 |
|
%
of specialty cards and card
printers revenues
|
|
|
14 |
%
|
|
|
18 |
%
|
|
|
19 |
%
|
|
|
22 |
%
|
Total
gross
margin
|
|
$ |
3,489 |
|
|
$ |
787 |
|
|
$ |
8,339 |
|
|
$ |
5,780 |
|
Optical
Memory
Cards. Optical memory card gross margin can vary significantly
based upon changes in average selling price, production and sales volumes,
mix
of card types, production efficiency and yields, and changes in fixed
costs. Unit volume greatly affects gross margin due to the absorption
of fixed manufacturing costs. The increase in optical memory card
gross margin to 41% of revenue for the three-month period ended December
31,
2007, as compared with 11% of revenue for the three-month period ended December
31, 2006, is mainly due to the 91% increase in sales unit volume and the
resultant gain of production efficiencies. The increase in optical memory
card
gross margin to 37% of revenue for the nine-month period ended December 31,
2007, as compared with 31% of revenue for the nine-month period ended December
31, 2006, is due to the 16% increase in sales unit volume.
Drives,
Systems and
Services. Drives, systems and services gross margin has been
negative over the past three years, inclusive of fixed overhead costs, due
to
low sales volume and our policy to price drives close to manufacturing cost
to
promote card sales. This segment also includes enabling services,
also with lower margins than optical memory cards. We anticipate that
drives, systems and services negative gross margins will continue in the
future
unless sales volume is sufficient to cover fixed costs.
Specialty
Cards and Card
Printers. The gross margin on specialty cards and card printers was
14% and 18% in the three-month periods ended December 31, 2007, and 2006,
respectively. During the three-month period ended December 31, 2007 we
accepted orders at low margin in order to load the factory. We do not
anticipate future margins will drop to this level based upon projected order
growth. During the nine-month periods ended December 31, 2007, and
2006, the gross margin on specialty cards and card printers was 19% and 22%,
respectively. Over the past three years, the quarterly gross margins
have generally been in the low to mid 20% range.
Operating
Expenses
The
following table presents operating expenses for the three and nine-month
periods
ended December 31, 2007 and 2006 (in thousands, except for
percentage):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Selling,
general and
administrative expenses
|
|
$ |
4,056 |
|
|
$ |
3,294 |
|
|
$ |
10,826 |
|
|
$ |
9,712 |
|
Percent
of change from prior
year
|
|
|
23 |
%
|
|
|
|
|
|
|
11 |
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
expenses
|
|
$ |
719 |
|
|
$ |
763 |
|
|
$ |
2,212 |
|
|
$ |
2,308 |
|
Percent
of change from prior
year
|
|
|
(6 |
%)
|
|
|
|
|
|
|
(4 |
%)
|
|
|
|
|
Selling,
General, and Administrative
Expenses (SG&A). The $762,000 increase in SG&A
expenses for the three-month period ended December 31, 2007 as compared with
the
three-month period ended December 31, 2006 was due to the increase of $184,000
in stock-based compensation expenses, $191,000 of consulting work for marketing
and lobbying efforts, $94,000 increase of legal, accounting and director’s fees,
and the balance attributable to the CEO’s retirement agreement described in the
next paragraph and increased sales effort. The $1.1 million increase
in SG&A expenses for the nine-month period ended December 31, 2007 as
compared with the nine-month period ended December 31, 2006 was due to $356,000
increase in stock-based compensation, $228,000 of consulting, $80,000 increase
in depreciation due to the ERP implementation, $132,000 of legal, accounting
and
director’s fees, and the balance due to the CEO’s retirement agreement and other
miscellaneous costs.
On
November 28, 2007, we entered into a Planned Retirement Agreement and an
Age
Discrimination Release Agreement with our Chief Executive Officer (CEO) and
President. Provided that prior to his retirement date of March 31, 2008
(referred to below as the Retirement Date), the CEO is not terminated for
cause
and does not resign without good reason, these agreements provide for the
CEO to
receive two years of separation pay at the per annum rate of $350,002;
consulting retainer of $18,000 for nine months of consulting availability
and
services; and bonus of up to $100,000, of which $50,000 is discretionary
to be
paid based on recommendations from the Chairman and Vice Chairman and we
will
continue to pay our portion of his health care insurance premium should he
elect
COBRA coverage for up to 18 months. His stock options will cease
vesting on the Retirement Date, other than the 18,750 options scheduled to
vest
on May 24, 2008, which will vest if he is then consulting for us. He
owns 3,125 restricted shares which will vest on September 21, 2008 if he
is then
a consultant with LaserCard and his other restricted shares will be
forfeited. We have allocated the costs of the postretirement payments
and the bonus using the discounted cash-flow basis over the remaining months
of
total expected service. The options were remeasured using the
Black-Scholes method. During the three-month period ended December 31, 2007,
we
expensed $255,000, charged to SG&A. For the three-month period
ending March 31, 2008, we will expense approximately $575,000 for future
post-retirement payments, which along with recruiting expenses will result
in
increased SG&A expenses for that quarter.
Research
and Development Expenses
(R&D). The decrease in R&D expenses during the three
and nine-month periods ended December 31, 2007 as compared with the three
and
nine-month periods ended December 31, 2006 was mainly due to share-based
expenses and the closure of some R&D projects such as the employee badging
system and the optical chip project. We are continuing our efforts to develop
new optical memory card features and structures, including various composite
card structures to allow the insertion of contactless chips with radio frequency
(RF) capability, dual-interface (contact-contactless) with optical memory,
OVD
(optically variable device) products, and other market-driven
requirements. We are also performing optical media development to
allow new form factors for more flexibility in card layouts and integrated
security features; enhanced optical memory card read/write drives for both
increased reliability and ease of use and integration; new versions of read-only
drives (readers) to meet various operational requirements such as office
desktop
units or handheld field units with integrated displays, biometrics, and RFID
capability; and new software products in an effort to provide new products
that
can stimulate optical memory card sales growth. Additionally, after a
year of in-house evaluation of our OpticalProximity system for building access
control, we completed installation during May 2007 at our first customer
location, as a test and evaluation site. In our German subsidiary, we
recently completed the development of a new integrated card personalization
system and have shipped several systems to customers in the past year. We
anticipate that these ongoing research and development efforts should result
in
enhanced card features and capabilities, new versions of read-only drives,
and
drives with advanced security features and/or lower manufacturing costs;
however, there is no assurance that such product development efforts will
be
successful. These features are important for our existing and future
optical memory card markets. We anticipate the R&D expenditures
will increase about 15% from the previous quarter in the next
quarter.
Other
Income,
Net. The decrease in interest income was mainly due to a lower
amount of invested funds. The decrease in interest expense was due to
improved management of the forward contracts. We expect interest income to
decrease in the near-term due to the declining short-term interest rates
resulting from the recent actions of the Federal Reserve Bank in lowering
the
Federal funds rate.
The
following table presents other income, net for the three and nine-month periods
ended December 31, 2007 and 2006 (in thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
243 |
|
|
$ |
246 |
|
|
$ |
689 |
|
|
$ |
762 |
|
Other
income
|
|
|
- |
|
|
|
26 |
|
|
|
18 |
|
|
|
40 |
|
Interest
expense
|
|
|
(16 |
)
|
|
|
(13 |
)
|
|
|
(50 |
)
|
|
|
(95 |
)
|
Other
income
(expense)
|
|
|
(2 |
)
|
|
|
8 |
|
|
|
(2 |
)
|
|
|
(1 |
)
|
|
|
$ |
225 |
|
|
$ |
267 |
|
|
$ |
655 |
|
|
$ |
706 |
|
Income
Taxes. The
tax benefit in the nine-month period ended December 31, 2007 was largely
due to
$100,000 credit for our foreign subsidiary’s assimilation of the new reduction
in tax rate.
The
following table presents income taxes for the three and nine-month periods
ended
December 31, 2007 and 2006 (in thousands):
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
U.S.
income
taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Foreign
income
tax
|
|
|
19 |
|
|
|
(25 |
)
|
|
|
(106 |
)
|
|
|
(96 |
)
|
|
|
$ |
19 |
|
|
$ |
(25 |
)
|
|
$ |
(106 |
)
|
|
$ |
(96 |
)
|
LIQUIDITY
AND CAPITAL RESOURCES
The
following table summarizes cash,
cash equivalents and investments as of December 31, 2007 and March 31, 2007
(in
thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Cash
and cash
equivalents
|
|
$ |
2,087 |
|
|
$ |
3,026 |
|
Cash,
cash equivalents and
short-term investments
|
|
$ |
18,587 |
|
|
$ |
20,526 |
|
The
following table displays the sources and uses of cash by activity (in
thousands):
|
|
Nine
Months
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Net
cash used in operating
activities
|
|
$ |
(1,297 |
)
|
|
$ |
(3,298 |
)
|
Net
cash provided by (used in)
investing activities
|
|
$ |
(24 |
)
|
|
$ |
3,903 |
|
Net
cash provided by financing
activities
|
|
$ |
630 |
|
|
$ |
867 |
|
Cash
used
in operations of $1.3 million for the nine-month period ended December 31,
2007
consists mainly of $0.9 million for increases in operating assets and $0.4
million for decreases in operating liabilities. Cash used in
operations of $3.3 million for the nine-month period ended December 31, 2006
was
due to the $5.4 million loss less non-cash items $1.7 million and the $1.4
million decrease in operating assets.
For
investing activities in the nine-month period ended December 31, 2007, was
due
to $1 million from net proceeds provided from investments, offset by capital
and
patent expenditures of slightly over $1 million. Net cash provided by
investing activities for the nine-month period ended December 31, 2006, was
due
to $6.5 million of net proceeds from maturing investments offset by $2.5
million
in purchases of property and equipment.
Net
cash
provided by financing activities for the nine-month period ended December
31,
2007 was $0.6 million, which primarily consisted of net proceeds from the
sale
of common stock under our employee stock plans. Net cash provided by
financing activities for the nine-month period ended December 31, 2006 was
$0.9
million, which primarily consisted of net proceeds from the sale of common
stock
under our employee stock plans.
We
believe that the estimated level of revenues and customer advance payments
over
the next twelve months will be sufficient to generate cash from operating
activities over the same period. However, quarterly fluctuations are
expected, especially in the March 2008 quarter where we expect to have a
decrease in revenue. Operating cash flows could be negatively
impacted to a significant degree if either of our largest U.S. government
programs were to be delayed, reduced, canceled, or not extended, or if the
Italian CIE and Angolan card programs do not grow as planned, and if these
programs are not replaced by other card orders or other sources of income,
or if
increases in product revenues or licenses do not keep pace with anticipated
increases in marketing and R&D expenditures.
Our
agreement with the government of Costa Rica signed on December 20, 2007 required
us to issue a completion bond of about $167,000, equivalent to 10% of the
contract price. Our cash deposit is classified as restricted cash at December
31, 2007. The bond shall remain in effect for one year (12 months) after
the
final acceptance date of delivery of the last batch of shipment.
We
have
not established a line of credit. We may negotiate a line of credit,
although no assurance can be made that such financing would be available
on
favorable terms or at all, if needed.
As
a
result of our net loss for the nine-month period ended December 31, 2007,
our
accumulated deficit increased from $38.7 million to $42.6
million. Upon adoption of FIN 48, the Company recognized a cumulative
effect adjustment of $62,000, decreasing its income tax liability for
unrecognized tax benefits, and decreasing the March 31, 2007 accumulated
deficit
balance. Stockholders’ equity at December 31, 2007 decreased to $21 million from
$22.6 million at March 31, 2007 as a result of the net loss partially offset
by
the cumulative effect upon adoption of FIN 48 and issuance of common stock
under
our employee stock plans.
We
consider all highly liquid investments, consisting primarily of commercial
paper, discount notes, and U.S. government bonds, with original or remaining
maturities of three months or less at the date of purchase, to be cash
equivalents. All investments with original or remaining maturities of
more than three months but not more than one year at the date of purchase
are
classified as short-term. Investments with original or remaining
maturities of more than one year at the date of purchase are classified as
long-term. We determine the length of our investments after
considering our cash requirements and yields available for the type of
investment considered by our Company. We determine the appropriate
classification of debt and equity securities at the time of purchase and
reevaluate the classification of investments as of each balance sheet
date. As of December 31, 2007, we had $16.5 million of short-term
investments, compared with $17.5 million of short-term investments at March
31,
2007. These investments were in the form of auction rate
securities. All auction rate securities are accounted for as
available-for-sale and all other interest-bearing securities are accounted
for
as held-to-maturity.
We
made
capital equipment and leasehold improvement purchases of approximately $1
million for the nine-month period ended December 31, 2007 compared with
approximately $2.5 million for the nine-month period ended December 31,
2006. We have an annual production capacity of 10 million
roll-process cards in conjunction with approximately 9 million sheet-process
cards depending upon the optimum mix of features. We plan to purchase
additional production equipment in a series of steps when we deem appropriate
based in part upon orders and forecasts. We may use cash on hand and
cash generated from operations or debt financing to fund possible capital
expenditures of possibly $10 million for equipment and leasehold improvements
for card production as customer orders justify the investment. These
expenditures could occur throughout the next twelve months.
During
the nine-month
period ended December 31,
2007, we entered into a lease
agreement with a four-year term to acquire equipment. This was
recorded as a capitalized lease in the amount of about $113,000 (80,000
euros) in accordance with SFAS 13, Accounting
for
Leases. We
had
no other debt financing
activities.
OFF-BALANCE
SHEET ARRANGEMENTS
We
have
no off-balance sheet arrangement as of December 31, 2007 and March 31, 2007,
that has or is reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources
that is material to investors.
RECENT
ACCOUNTING PRONOUNCEMENTS
Recent
accounting pronouncements are disclosed in Note 1 of the notes to condensed
consolidated financial statements.
ITEM
3. |
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS |
Interest
Rate
Risk. We invest our cash, beyond that needed for daily
operations, in high quality debt securities. In doing so, we seek
primarily to preserve the value and liquidity of our capital and, secondarily,
to safely earn income from these investments. To accomplish these
goals, we invest only in debt securities issued by (a) the U.S. Treasury
and
U.S. government agencies, state agencies and corporations and (b) debt
instruments that meet the following criteria:
|
●
|
Commercial
paper rated A1/P1 or debt instruments rated AAA, as rated by the
major
rating services
|
|
●
|
Can
readily be sold for cash
|
Investments
in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk. Fixed
rate securities may have their
fair market value adversely impacted because of a rise in interest rates,
while
floating rate securities may produce less income than expected if interest
rates
fall. Due in part to these factors, our future investment income may fall
short
of expectations because of changes in interest rates or we may suffer losses
in
principal if forced to sell securities that have seen a decline in market
value
because of changes in interest rates. We expect our income from cash
investments to decline over the next quarter due to lower interest rates
resulting from recent decreases in the Federal fund rates.
There
were no material changes for the nine-month period ended December 31, 2007
in
our exposure to market risk for changes in interest rates.
The
following summarizes short-term investments at fair value (in thousands),
weighted average yields and maturity dates:
|
|
December
31,
2007
|
|
|
March
31,
2007
|
|
Auction
rate
securities
|
|
$ |
16,500 |
|
|
$ |
17,500 |
|
Weighted
average
yield
|
|
|
6.46 |
%
|
|
|
5.29 |
%
|
Total
investments
|
|
$ |
16,500 |
|
|
$ |
17,500 |
|
Maturity
dates
|
|
January
1 - 25,
2008
|
|
|
October
3 - 27,
2006
|
|
There
were no long-term investments
as of December 31, 2007.
Foreign
Currency
Exchange Rate Risk. Our U.S.
operations
sell products in various
international markets. For the nine-month
period
ended
December
31, 2007, revenue by
our German subsidiary
of approximately $9.3
million
was denominated in
foreign currency. In addition, some raw material purchases and purchased
services are denominated in foreign currency. Cash
provided by/used in CCD operating
activities has been immaterial.
We
use
short-term foreign exchange forward contracts to mitigate foreign currency
risk
associated primarily with inter-company receivables and payables, and loans
receivable (denominated in Euros) to our German subsidiary. Our
foreign exchange forward contracts are not designated for accounting purposes
as
hedging instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. Accordingly,
any gains or losses resulting from changes in the fair value of the forward
contract are reported in other income, net of expenses. The gains and
losses on these forward contracts generally offset gains and losses associated
with the underlying foreign currency denominated inter-company receivables
and
payables, and loans receivable. At December 31, 2007, we had a
foreign exchange forward contract with a maturity of less than 30 days to
purchase 1.3 million euros. The fair value of the forward contract was not
material at December 31, 2007.
ITEM
4. |
CONTROLS
AND PROCEDURES |
(a)
Evaluation of Disclosure
Controls and Procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
by us in reports that we file or submit under the Securities Exchange Act
of
1934 is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that
such
information is accumulated and communicated to our management, including
our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating
our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and
procedures have been designed to meet, and management believes that they
meet,
reasonable assurance standards. Additionally, in designing disclosure
controls and procedures, our management necessarily was required to apply
its
judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.
Based
on
their evaluation as of the end of the period covered by this Form 10-Q, our
Chief Executive Officer and Chief Financial Officer have concluded that,
subject
to the limitations noted above, as of such date, our disclosure controls
and
procedures were effective at the reasonable assurance level.
(b)
Changes in Internal Control
over Financial Reporting. There were no significant changes in
our internal control over financial reporting that occurred during the
three-month period ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II. OTHER
INFORMATION
Item
1. Legal
Proceedings
From
time
to time we are a party to litigation matters and pending or threatened claims
and assessments that are normal in the course of our operations. While we
believe that the ultimate outcome of these matters will not have a material
adverse effect on our financial position, results of operations or cash flows,
the outcome of these matters is not determinable and negative outcomes may
adversely affect our financial position, liquidity, or results of
operations.
Item
1A. Risk
Factors
A
revised
description of the risk factors associated with our business is set forth
below.
This description includes any material changes to and supersedes the description
of the risk factors associated with our business previously disclosed in
Part
II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2007. Because of these risk factors, as well as other
factors affecting the Company’s business and operating results and financial
condition, including those set forth elsewhere in this report, our actual
future
results could differ materially from the results contemplated by the
forward-looking statements contained in this report and our past financial
performance should not be considered to be a reliable indicator of future
performance, so that investors should not use historical trends to anticipate
results or trends in future periods.
RISK
FACTORS
OUR
CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO
LOSSES. During our nine-month period ended December 31, 2007 and each
of the previous three fiscal years, we derived more than 60% of our revenues
from six programs ―
two U.S.
government programs and four foreign government
programs. Due to the lengthy sales cycles, we believe that these
programs, with perhaps the addition of a few other foreign programs, will
be the
basis for a majority of our revenues in the near-term. The loss of or
reductions in purchases by any one customer due to program cutbacks,
competition, or other reasons would materially reduce our revenue base. Annual
or quarterly losses occur when there are material reductions, gaps or delays
in
card orders from our largest U.S. or foreign government programs or if such
programs were to be reduced in scope, delayed, canceled, or not extended
and not
replaced by other card orders or other sources of income.
WE
INCURRED NET LOSSES DURING ALL BUT THREE OF THE PREVIOUS NINETEEN QUARTERS
AND
MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO REGAIN
PROFITABILITY. Although we generated $3.3 million of profit during the three
quarters from October 1, 2005 through June 30, 2006, we incurred a loss for
our
last six quarters and we had incurred losses as well for the ten quarters
preceding the quarter ended October 1, 2005. Our loss for the
nine-month period ended December 31, 2007, was $3.9 million and for our fiscal
year 2007 our loss was $12.4 million, and we had an accumulated deficit of
$42.6
million at December 31, 2007. There can be no assurance that we will
generate enough revenues in the near term to achieve
profitability. We are relying upon our optical memory card technology
to generate future product revenues, earnings, and cash flows. If
alternative technologies emerge or if we are otherwise unable to compete,
we may
not be able to achieve or sustain profitability on a quarterly or annual
basis. Annual or quarterly losses would also continue if increases in
product revenues or license revenues do not keep pace with increased
expenses.
OUR
PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE ONE OF OUR LARGEST CUSTOMERS
ONCE
FULLY IMPLEMENTED, MAY BE FURTHER DELAYED OR CANCELLED FOR REASONS OUTSIDE
OUR
CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN PLANNED AND WOULD
LIKELY
LEAD US TO CONTINUED OPERATING LOSSES IF OTHER EXPECTED BUSINESS DOES NOT
MATERIALIZE. We believe that the Italian government will be our
largest customer when the CIE program is fully implemented. We expect
that CIE and PSE card programs may comprise a significant portion of future
revenues. Sales of cards and drives for the Italian government’s CIE
and PSE card programs have been a small portion of our total revenue for
the
past year. However, during fiscal year 2007, we increased card
manufacturing capacity to meet anticipated demand and we have expected a
large
order since the first quarter of fiscal year 2007. This order has not
yet been placed and there can be no assurance that the order will be placed
in
the near-term or that demand will increase or be sustained as we
anticipate. We would most likely continue to incur losses if orders
are further delayed, or if the program is not implemented at the level foreseen
or if the government was to change its technology decision and no longer
use
optical memory cards and other new programs do not materialize as
expected. While selected Italian cities have issued cards and tested
the distributed card issuing process and the Italian government has recently
solicited interested parties to provide their qualifications for expansion
of
the data collection and issuance infrastructure, full implementation is
dependent upon regionalized and further decentralized card issuance
infrastructure developments being successfully undertaken and the national
ID
card system functioning as designed, of which there can be no assurance.
Overcoming some of these issues may be difficult and complex and involve
third
parties, which could be time consuming and expensive and lead to further
delays
for implementation.
THE
U.S.
GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY
ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN
ORDER
DELAYS AND POSSIBLY IN OPERATING LOSSES. For the nine-month period ended
December 31, 2007 revenues included sales of approximately $6.1 million of
Green
Cards and Laser Visa BCCs, and comprised 20% of our total revenue. For the
nine-month period ended December 31, 2006, revenues included sales of
approximately $6.4 million of Green Cards and Laser Visa BCCs, and comprised
28%
of our total revenue. These revenues could average approximately $10
million annually ($8 million for Green Cards and $2 million for Laser Visa
BCCs)
if the U.S. government continues to use our cards in these programs, continues
to personalize cards at that rate and continues to maintain an inventory
level
equal to six-months of usage. On April 2, 2007, we announced a
subcontract with General Dynamics Information Technology (GDIT) for the
manufacture and supply of Green Cards and Laser Visas. The
subcontract is for an initial 12-month period with optional extensions up
to a
total of five years. Under U.S. government procurement regulations,
even with a contract in place, the government reserves certain rights, such
as
the right to withhold releases, to reduce the quantities released, extend
delivery dates, reduce the rate at which cards are issued, and cancel all
or
part of its unfulfilled purchase orders. At December 31, 2007 we have
no backlog for these programs.
The
U.S.
government recently announced that it had awarded the Passport Card program
to GDIT for a non-optical card which we expect would replace the Laser Visa
BCCs
if and when implemented unless the technology decision
changes. Therefore, we may not receive further orders for Laser Visa
BCCs as the government has a substantial inventory on hand. Over the past
nine
months, we have recorded revenues of $1 million for Laser Visa
BCC's.
Also,
the Green Card is currently
undergoing a redesign process. It is possible that our revenue will
be reduced during the period of transition from the current card to the
new
design after which we would expect orders to increase as their inventory
is
rebuilt to their desired safety-stock level. Our revenues for Green
Cards could average approximately $8 million annually if the U.S. government
continues to use our cards in this program, continues to personalize cards
at
that rate and continues to maintain an inventory level equal to six–months of
usage. We would most likely have reduced operating results if the
Green Card program were to be delayed, canceled, or not extended or if
the
government were to change its technology decision and no longer use optical
memory cards. Over the past nine months, we have recorded revenues of
$5 million for Green Cards.
OUR
OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
IN THE U.S. OR ABROAD OR IF THE ITALIAN AND ANGOLAN NATIONAL ID PROGRAMS
ARE NOT
IMPLEMENTED AS ANTICIPATED. Quarterly OMC revenues from April 1, 2006
through December 31, 2007 from our core programs have been $5.3 million,
$3.2
million, $2.9 million, $4.9 million, $4.4 million, $6.6 million, and $7.7
million, respectively. These programs include the U.S. Green Card, the
Laser Visa BCC, the Canadian Permanent Resident Card, the vehicle registration
cards used by three states in India, and a national ID card used in a Middle
Eastern country. During full implementation, we expect our revenues
from programs in Italy will reach approximately $40 to $50 million per
year. On January 17, 2008, we announced that we were part of the
winning team for a national ID card project in Angola. Revenues could
total $90 million over five years for this project. We also are
working on potential secure ID card business in more than ten countries around
the world. In order for us to achieve our overall revenue growth
goal, we will need the Italian programs to continue and reach their anticipated
levels, of which there can be no assurance, and we will also need to win
some of
the new business opportunities we see in the U.S. and
abroad. Emerging optical memory card programs or prospective
applications include permanent resident cards and national identification
cards
in several countries such as in Angola as well as secure identification cards
for governmental agencies. There can be no assurance that we will
receive sizable future orders for any of these programs, nor any assurance
that
we will be able to win any other new business in the U.S. or abroad which
is
necessary to grow our business to the level we desire.
SINCE
THE
SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE
DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE
GROWTH. Obtaining substantial orders usually involves a lengthy sales
cycle, requiring marketing and technical time and expense with no guarantee
that
substantial orders will result. This long sales cycle results in uncertainties
in predicting operating results, particularly on a quarterly basis. In addition,
since our major marketing programs involve the U.S. and various foreign
governments and quasi-governmental organizations, additional uncertainties
and
extended sales cycles can result. Factors which increase the length of the
sales
cycle include government regulations, bidding procedures, budget cycles,
and
other government procurement procedures, as well as changes in governmental
policy.
WE
COULD
EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME. There can be no
assurance that we will be able to meet our projected card manufacturing capacity
if and when customer orders reach higher levels. We have made and intend
to
continue to make significant capital expenditures to expand our card
manufacturing capacity. For example, we may invest up to $10 million of capital
expenditures during the next twelve months for optical memory card production
capacity assuming certain business developments. However, since customer
demand
is difficult to predict, and we generally wait for such demand to materialize
prior to making capital expenditure commitments, we may be unable to ramp
up our
production quickly enough to fill new customer orders in a timely fashion.
This
could cause us to lose new business and possibly existing business. In addition,
if we overestimate customer demand, we could incur significant costs from
creating excess capacity which was the case during fiscal years 2005 and
2007. We may experience manufacturing complications associated with
increasing our manufacturing capacity of cards and drives, including the
adequate production capacity for sheet-lamination process cards to meet order
requirements and delivery schedules. We may also experience difficulties
implementing new manufacturing processes, meeting customers’ quality or
standards requirements, or outsourcing some of our manufacturing. The addition
of fixed overhead costs increases our breakeven point and results in lower
profit margins unless compensated for by increased product sales. When
purchasing raw materials for our anticipated optical card demand, we take
into
consideration the order-to-delivery lead times of vendors and the economic
purchase order quantity for such raw materials. If we over-estimate customer
demand, excess raw material inventory can result.
WE
ARE
CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE
STEPS
IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN
REDUNDANCY. THEREFORE, WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS,
INCLUDING IF CERTAIN MACHINERY WERE TO BREAK DOWN. MUCH OF OUR
MACHINERY IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY SOME OF WHICH IS MORE
THAN 20 YEARS OLD. Unless and until Prevent Global comes on line as a
second source, of which there can be no assurance, we are the only source
of our
optical memory cards, making them in our Mountain View facility using a
proprietary manufacturing process, with our German subsidiary capable of
performing a few key steps in certain instances. There is no
assurance that the Prevent facility, if and when operational, will be an
acceptable second source to some of our key government accounts. For
example, the Prevent facility as currently designed would not be capable
of
producing cards for most of our key government programs. We are
susceptible to supply interruptions or yield decreases when our line goes
down
or malfunctions. Much of our machinery is comprised of customized
versions of machinery which has long lead times to replace and may be difficult
to maintain or repair, requiring us to be self-reliant. Some of the
machinery we use is more than 20 years old and is no longer manufactured
for
others, which would require us to adapt a newer version to our needs, which
would involve additional effort on our part.
IF
WE ARE
UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS,
WE
WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE
US
TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE. We depend on sole
source and limited source suppliers for optical card raw materials. Such
materials include plastic films used in optical memory card production, which
are available from one supplier in the U.S. and from multiple foreign suppliers.
Processing chemicals, inks, and bonding adhesives are obtained from various
U.S.
and foreign suppliers. Certain photographic films are commercially available
solely from Eastman Kodak Company, of the United States. We do not
expect any difficulty in obtaining the film necessary for orders projected
over
the next nine to fifteen months considering the inventory currently on hand
and
on order. No assurance can be given that Kodak will continue to
supply such photographic films on a satisfactory basis and in sufficient
quantities although we believe Kodak will continue to supply such films for
several years. If Kodak were to announce that it was no longer going
to sell film, we would request that Kodak provide us with a last-buy opportunity
which we would plan to take maximum advantage of in order to purchase from
Kodak
sufficient supply of films to continue our card production until an appropriate
substitute can be found or developed, although no assurance can be given
that
Kodak would provide us with such an opportunity. Also we have ongoing
R&D efforts in the area of alternate media, designed to develop an alternate
to the current Kodak film-based media, though there is no assurance that
those
efforts will be successful.
AN
INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED
IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF DRIVES
AND
OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY
AFFECT
OUR OPERATING RESULTS. Several major components of our read/write
drives are designed specifically for that unit. For example, the optical
recording head for the current drive is a part obtained from one supplier;
and
at current production volumes, it is not economical to have more than one
supplier for this custom component. The ability to produce read/write drives
in
high-volume, if required, will be dependent upon maintaining or developing
sources of supply of components that meet our requirements for high volume,
quality, and cost. In addition, we could encounter quality control or other
production problems at high-volume production of read/write drives. We are
also
investing in research and development in an effort to develop new drive
products.
IF
WE ARE
UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE
AND
ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS. The
price of our read/write drive product line ranges from $1,800 to approximately
$2,500 depending on features and quantity purchased. We believe the
price of our drives is competitive in applications requiring a large number
of
cards per drive, because the relatively low cost for our cards offsets the
high
cost per drive when compared with our major competition, IC card systems.
In
addition, we have undertaken a product development program for a portable
read-only drive that has been sampled in limited quantities at prices less
than
$1,000, which we believe would increase our prospects for winning future
business. However, there can be no assurance that our development
program will be successful, that volume production of any new design will
occur
in the near term, or that significantly lower manufacturing costs or increased
sales will result.
WE
MAY
NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS
WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT. THIS WOULD
LIMIT THE FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE
LACK OF
DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION. We are
exploring commercial applications for our optical memory products in order
to
lessen our dependence upon the government sector. Our efforts to
develop applications for OpticalProximity™ access cards are one
example. We may be unsuccessful in these efforts in which case we
would not obtain the diversity of revenues we are seeking for the
future. If our customer base remains limited to secure ID card
applications for government use, then we are more susceptible to other
technologies and products making in-roads or to political pressures or changing
laws.
IF
WE ARE
UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE SECURE ID CARD INDUSTRY AND
IN
THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY
COMPETE FOR FUTURE BUSINESS. The secure ID technology industry is
characterized by rapidly changing technology and continuing product evolution.
The future success and growth of our business will require the ability to
maintain and enhance the technological capabilities of the LaserCard® product
line. There can be no assurance that our products currently sold or under
development will remain competitive or provide sustained revenue
growth.
SEVERAL
OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
TECHNOLOGIES OF THIRD PARTIES. SOMETIMES THESE THIRD PARTY
TECHNOLOGIES ARE INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER
OR
SUBCONTRACTOR. WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE
OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY
ISSUES WHICH ARE DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS
COULD
CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL
CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS
NOT
THE ROOT CAUSE. In certain of our current foreign programs such as
Italy, India, and a Middle Eastern country, and possibly in future other
programs, various third party technologies such as contact or contactless
chips
will be added to our cards. The embedding or addition of other
technologies to the LaserCard® optical memory card, especially when contracted
to independent third parties, could potentially lead to technical, compatibility
and other issues. In such circumstances, it may be difficult to
determine whether a fault originated with our technology or that of a
co-supplier or the person embedding or adding the third party technology
to our
cards. If such faults occur, they could be difficult, expensive, and
time-consuming to resolve. Such difficulties could lead to our
ultimate customers, the foreign governments, switching to other technologies
even though optical technology is not the root cause of the
fault(s). The resulting loss of customers would adversely affect our
revenues.
WE
ARE
LARGELY DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS
AND
THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR
COST. We sell to VARs and system integrators who in turn sell
solutions to the end customer. The integrators may not follow the
recommendations we provide for the handling, possible incorporation of smart
or
RFID chips, processing, and/or printing on our cards and working with the
end-user in the card issuing process. This could lead to low quality
or high costs or both resulting in damage to our reputation and/or loss of
the
contract. We work to train the integrators to avoid such situations,
but cannot control their work. Also, we can step in to demonstrate
how to successfully implement an optical memory card issuing
system. We plan to continue to offer this support then transition the
card issuing process to local resources once the program is running
successfully.
OUR
OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE
OF
TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
REQUIREMENTS. WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN
CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED
STANDARDS. THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT
IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER. MANY CUSTOMERS
MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS
RISK. There can be no assurance that we will be able to meet
customers’ quality or standards requirements consistently. This could lead
to high manufacturing costs due to low product yields or unexpected product
returns. We employ a rigorous quality control procedure, are ISO 9000
certified and we strive to deliver product that meets published standards
and
customer expectations. Even so, we cannot give assurance that our products
will meet customer expectations in all cases. We have in the past, and we
may in the future, replace product held by the customer or give credit for
products previously delivered.
IF
WE
FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
TO USE
OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES,
OR INCREASE COSTS. We use a combination of patent, trademark, and
trade secret laws, confidentiality procedures, and licensing arrangements
to
establish and protect our proprietary rights. Our existing and future patents
may not be sufficiently broad to protect our proprietary technologies. Despite
our efforts to protect proprietary rights, we cannot be certain that the
steps
we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
proprietary rights as fully as U.S. law. Any patents we may obtain may not
be
adequate to protect our proprietary rights. Our competitors may independently
develop similar technology, duplicate our products, or design around any
of our
issued patents or other intellectual property rights. Litigation may be
necessary to enforce our intellectual property rights or to determine the
validity or scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and may not ultimately
be
successful. We cannot predict whether the expiration or invalidation of our
patents would result in the introduction of competitive products that would
affect our future revenues adversely. However, since our technology is now
in
the commercial stage, our know-how and experience in volume card production,
system development and software capabilities, brand-name recognition within
our
card markets, and dominant-supplier status for optical memory cards are of
far
greater importance than our patents. At this time, we believe that our existing
patent portfolio is helpful but is no longer essential for maintaining the
LaserCard®'s market position.
THE
MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW. Our optical
memory cards may compete with optical memory cards that can be manufactured
and
sold by three of our licensees (although none is currently doing so) and
with
other types of portable data storage cards and technologies used for the
storage
and transfer of digital information. These may include contact or
contactless integrated circuit (IC) chip cards; holographic optical storage
cards, 2-dimensional bar code cards and symbology cards; thick, rigid CD
or DVD
read-only cards or recordable cards; radio frequency, or RFID cards; and
small,
digital devices such as data-storage keys, tokens, and small cards and
tags. The financial and marketing resources of some of the competing
companies are greater than our resources. Competitive product factors
include system/card portability, interoperability, price-performance ratio
of
cards and associated equipment, durability, environmental tolerance, and
card
security. Although we believe our cards offer key technological and security
advantages for certain applications, the current price of optical card
read/write drives is a competitive disadvantage in some of our targeted
markets. However, we believe the price of our drives is competitive
in applications requiring a large number of cards per drive, because the
relatively low cost for our cards offsets the high cost per drive when compared
with our major competition, IC card systems. In countries where the
telecommunications infrastructure is extensive and low cost, centralized
databases and wide-area networks may limit the penetration of optical memory
cards. These trends toward Internet, intranet, and remote wireless
networks will in some cases preclude potential applications for our
cards.
THE
PRICE
OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY. The price
of our common stock is subject to significant volatility, which may be due
to
fluctuations in revenues, earnings, liquidity, press coverage, financial
market
interest, trading volume, and stock market conditions, as well as changes
in
technology and customer demand and preferences. As a result, our
stock price might be low at the time a stockholder wants to sell the stock.
Also, since we have a relatively low number of shares outstanding (approximately
12 million shares) there will be more volatility in our stock if one or two
major holders, for example, large institutional holders, attempt to sell
a large
number of shares in the open market. Furthermore, our trading volume
is often small, meaning that a few trades may have disproportionate influence
on
our stock price. In addition, someone seeking to liquidate a sizeable
position in our stock may have difficulty doing so except over an extended
period or privately at a discount. Thus, if one or more stockholders
were to sell or attempt to sell a large number of its shares within a short
period of time, such sale or attempt could cause our stock price to
decline. There can be no guarantee that stockholders will be able to
sell the shares that they acquired at a price per share equal to the price
they
paid for the stock.
WE
ARE
SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES. Part of the manufacturing process of certain LaserCard
products that we sell outside the U.S.A. takes place in our operations in
Germany. Also, some of the raw materials we use to manufacture
optical memory cards are sourced in Europe. These costs are
denominated in euros, the currency used in much of Europe. However,
when we sell our finished products, the prices that we charge are denominated
in
United States dollars. Accordingly, we are subject to exposure when
the exchange rate for euros increases in relation to the United States
dollar. Recent declines in the U.S. dollar/euro exchange rate, if not
reversed, will eventually result in increases in raw material
costs. As of December 31, 2007, we had not entered into a forward
exchange contract to hedge against or potentially minimize the foreign currency
exchange risk related to transactions other than those related to inter-company
payables and receivables. The losses on foreign currency exchange
related to purchase transactions and intercompany receivables for both fiscal
year 2007 and the nine-month period ended December 31, 2007 were
immaterial.
WE
SOLD A
SECOND-SOURCE CARD MANUFACTURING LICENSE THAT WAS SUBSEQUENTLY TRANSFERRED
TO
PREVENT GLOBAL (PREVENT), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP
AND
TRAINING SERVICES. IF WE ARE NOT SUCCESSFUL OR IF PREVENT GLOBAL IS
UNABLE TO FINANCE THIS OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS
WILL
NOT MATERIALIZE. IF WE AND PREVENT GLOBAL ARE SUCCESSFUL, THE
SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS. We will be obligated
to deliver the contracted manufacturing equipment and installation support
to
Prevent Global for its to-be-built new card manufacturing facility in Slovenia,
to provide a targeted initial manufacturing capacity of 10 million optical
cards
annually. If Prevent Global is successful, Prevent Global would
become a second source for certain types of optical memory cards. We
will also be assigning personnel to be on site during the license term, if
such
option is elected by Prevent Global, to assist with quality, security, and
operational procedures, with a mutual goal that the facility and the cards
made
in Slovenia conform to our standards. If cards are not produced in
conformance with our quality standards, the reputation and marketability
of
optical memory card technology could be damaged. If the factory does
not become operational and produce quality cards in high volume, or if Prevent
Global is unable to raise sufficient capital to build, equip and operate
this
facility, we would not obtain the hoped-for benefits--including ongoing
royalties, sales of raw materials to Prevent Global, expansion of the European
market, and a bona fide second source for certain types of optical memory
cards. On the other hand, if and when the factory is successfully
manufacturing the cards in high volume, it will compete against us for business
in certain territories, which could reduce our potential card revenues if
the
market does not expand. Revenue on the contract will be recognized
when the equipment has been accepted and training completed, which date is
dependent on Prevent Global providing a facility in Slovenia. We
could incur greater expenses than we anticipate for the purchase and
installation of the required manufacturing equipment, thereby reducing cash
and
anticipated profits. If Prevent Global is not successful, but current
and potential customers require a second source of optical memory cards (which
is a common business practice), they could decide to use alternate technology
cards, such as chip cards, that have multiple-source suppliers.
WE
MAY
NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT
US
FROM SUCCEEDING. IN PARTICULAR, OUR CEO IS RETIRING AFTER MORE THAN
25 YEARS OF SERVICE ON MARCH 31, 2008, AND WE MAY NOT BE ABLE TO RECRUIT
OUR
LONG-TERM CEO BY THEN, IN WHICH CASE WE WOULD NEED TO HAVE AN INTERIM
CEO. SUCH A FAILURE TO HAVE A SMOOTH TRANSITION COULD NEGATIVELY
IMPACT OUR OPERATIONS AND IMPEDE OUR ABILITY TO MAKE MAJOR DECISIONS AS COULD
RECRUITING AN INADEQUATE CEO. We may not be able to retain our key
personnel or attract other qualified personnel in the future. Our success
will
depend upon the continued service of key management personnel. The
loss of services of any of the key members of our management team, including
our
chief executive officer, chief operating officer, the managing directors
of our
German operations, vice president of business development or our vice president
of finance and CFO, or our failure to attract and retain other key personnel
could disrupt operations and have a negative effect on employee productivity
and
morale, thus decreasing production and harming our financial
results. In addition, the competition to attract, retain and motivate
qualified personnel is intense. We are currently in the process of
conducting a nationwide recruiting search to replace our chief executive
officer
who is retiring effective March 31, 2008. We may not be able to
recruit our long-term CEO by then, in which case we would need to have an
interim CEO. Such a failure to have a smooth transition could
negatively impact our operations and impede our ability to make major decisions
as could recruiting an inadequate CEO.
OUR
CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS
COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER
DISASTER. Our card manufacturing, corporate headquarters, and drive
assembly operations, administrative, and product development activities are
located near major earthquake fault lines. In the event of a major
earthquake, we could experience business interruptions, destruction of
facilities and/or loss of life, all of which could materially adversely affect
us. Likewise, fires, floods, or other events could similarly disrupt
our operations and interrupt our business.
FOREIGN
GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS. Economic, political and other risks associated with
foreign operations could adversely affect our international sales. We
sell our products worldwide and therefore, our business could be subject
to
risks due to changes in a country’s or region’s political or economic
conditions. Differing tax laws and changes in those laws may also
affect future results of our operations.
PANDEMICS
THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS. The
occurrence of a pandemic such as the Bird Flu coupled with the lack of
government readiness and support in those countries where we do business
could
temporarily impede our revenue growth.
ACTS
OF
TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS. Acts of
terrorism, acts of war, and other events may cause damage or disruption to
our
properties, business, employees, suppliers, distributors, resellers, and
customers, which could have an adverse effect on our business, financial
condition, and operating results. Such events may also result in an economic
slowdown in the United States or elsewhere, which could adversely affect
our
business, financial condition, and operating results.
AS
A
RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION,
WHICH COULD HARM OUR REPUTATION. We have completed the evaluation of
our internal controls over financial reporting as required by Section 404
of the
Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2007 and
2006.
Although our assessment, testing and evaluation resulted in our conclusion
that
as of March 31, 2007 and 2006, our internal controls over financial reporting
were effective, we cannot predict the outcome of our testing in future periods.
Because of the inherent limitation of disclosure controls, no evaluation
of such
controls can provide absolute assurance that all control issues and instances
of
fraud, if any, within our Company have been detected. If our internal
controls are found to be ineffective in future periods, our reputation could
be
harmed. We may incur additional expenses and commitment of management’s time in
connection with further evaluations, both of which could materially increase
our
operating expenses and accordingly reduce our net income.
BEGINNING
WITH OUR FISCAL YEAR 2007, WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE
FOR
STOCK OPTIONS, THEREBY REDUCING OUR EARNINGS. THIS COULD LEAD TO
REDUCED ENTERPRISE VALUE AND TO OUR GRANTING FEWER OPTIONS WHICH HURTS OUR
ABILITY TO RECRUIT AND RETAIN EMPLOYEES. In December 2004, the
Financial Accounting Standards Board (“FASB”) issued Financial Accounting
Standard 123(R) (SFAS No. 123(R)) that requires the fair value of all
equity-based awards granted to employees be recognized in the statement of
operations as compensation expense, for fiscal years beginning after December
15, 2005, rather than just to disclose such expense in a footnote as we have
done in the previous years. The adoption of this accounting standard
reduced our profitability as measured by generally accepted accounting
principles (GAAP) due to our outstanding options and our current intention
to
continue to grant options in the future as an incentive and retention tool
for
our employees. This may adversely affect our stock price. For
example, for the nine-month periods ended December 31, 2007 and 2006, we
recognized approximately $1.5 million and $1.3 million, respectively, of
additional expenses due to SFAS No. 123(R) which we would not otherwise
have recognized. Such adoption has also led us to reduce our use of
stock options and to award restricted shares and restricted stock
units. While all of these equity awards help align our employees’
long-term interests with increasing our enterprise value, options provide
more
of a reward if enterprise value substantially increases. Our reduced
use of options could hurt our ability to recruit employees and retain existing
employees and directors.
Item
2. – Unregistered Sales of
Equity Securities and Use of Proceeds
None
Item
3. - Defaults Upon Senior Securities
None
Item
4. - Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a
vote of security holders during the period for which this report is
filed.
Item
5. - Other Information
None.
Item
6. - Exhibits
|
Exhibit
No.
|
Exhibit
Description
|
|
|
|
|
3(I)
|
Certificate
of Incorporation; previously filed as Exhibit 3.1 to Annual Report
on Form
10-K for the fiscal year ended March 31, 2005, filed with the SEC
on June
15, 2005, and incorporated herein by reference
|
|
|
|
|
3(II)
|
Amended
Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q
for
period ended September 30, 2006 and incorporated herein by
reference
|
|
|
|
|
10.1
|
Building
lease agreement with Renault & Handley Employees Investment Co. for
2644-2648 Bayshore Parkway, Mountain View, CA; previously filed
as Exhibit
10.1 to Report on Form 10-Q for period ended December 31, 2003
and
incorporated herein by reference
|
|
|
|
|
10.2
|
Building
lease agreement with Shoreline Park LLC for 1395 Charleston Road,
Mountain
View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
View,
CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
fiscal
year ended March 31, 2004 and incorporated herein by
reference
|
|
|
|
|
10.3*
|
Amended
and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
to
Report on Form 10-Q for period ended September 30, 2002 and
incorporated herein by reference
|
|
|
|
|
10.7
|
Stock
and Warrant Purchase Agreement (as amended); previously filed as
Exhibit
99.2 to Report on Form 10-Q for period ended December 31, 2003
and
incorporated herein by reference
|
|
|
|
|
10.8
|
Optical
Card Manufacturing License Agreement with Global Investments Group;
previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
year
ended March 31, 2004 and incorporated herein by
reference**
|
|
10.9*
|
2004
Equity Incentive Compensation Plan, as Amended; previously filed
as
Appendix C to Schedule 14A Proxy Statement for 2006 Annual Stockholders
Meeting filed with the SEC on August 11, 2006, and incorporated
herein by
reference
|
|
|
|
|
10.10
|
June
29, 2006 Amendment to License and Equipment Agreement with Global
Investments Group and Prevent LOK; previously filed as Exhibit
10.10 to
Report on Form 10-Q for period ending June 30, 2006, and incorporated
herein by reference**
|
|
|
|
|
10.11
|
October
27, 2006 Modified Third Amendment to License and Equipment Agreements
with
Global Investments Group and Prevent LOK; previously filed as Exhibit
10.11 to Form 8-K dated October 30, 2006, which was filed with
the SEC on
November 1, 2006, and incorporated herein by reference
|
|
|
|
|
10.12*
|
Employee
Stock Purchase Plan, as Amended; previously filed as Appendix A
to amended
Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting
filed
with the SEC on August 3, 2007, and incorporated herein by
reference
|
|
|
|
|
10.13*
|
November
28, 2007, Planned Retirement Agreement and Age Discrimination Release
Agreement with Richard M. Haddock are filed herewith
|
|
|
|
|
10.14*
|
January
4, 2008, Executive Employment Agreements with Christopher J. Dyball
and
Steven G. Larson are filed herewith
|
|
|
|
|
31.1
|
Rule
13a-14(a) Certification of Richard M. Haddock, chief executive
officer is
filed herewith
|
|
|
|
|
31.2
|
Rule
13a-14(a) Certification of Steven G. Larson, chief financial officer
is
filed herewith
|
|
|
|
|
32.1
|
Section
1350 Certification of Richard M. Haddock, chief executive officer
is filed
herewith
|
|
|
|
|
32.2
|
Section
1350 Certification of Steven G. Larson, chief financial officer
is filed
herewith
|
Exhibits
31.1, 31.2, 32.1, and 32.2 are filed herewith while the other exhibits are
incorporated by reference. No other exhibits are included in this
report as the contents of the required exhibits are either not applicable
to
Registrant, to be provided only if Registrant desires, or contained elsewhere
in
this report.
*
Indicates management contract or compensatory plan or arrangement
**
Portions were omitted pursuant to a request for confidential
treatment
SIGNATURES
Pursuant
to the requirements of
Section 13 or 15(d) 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:
LASERCARD
CORPORATION
(Registrant)
Signature
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/
Richard M. Haddock
|
|
Chief
Executive Officer
|
|
February
5, 2008
|
Richard
M. Haddock
|
|
|
|
|
|
|
|
|
|
/s/
Steven G. Larson
|
|
Chief
Financial Officer
|
|
February
5, 2008
|
Steven
G. Larson
|
|
|
|
|
INDEX
TO EXHIBITS
[ITEM
14(c)]
Exhibit
|
|
Number
|
Description
|
|
|
3(I)
|
Certificate
of Incorporation; previously filed as Exhibit 3.1 to Annual Report
on Form
10-K for the fiscal year ended March 31, 2005, filed with the SEC
on June
15, 2005, and incorporated herein by reference
|
|
|
3(II)
|
Amended
and Restated Bylaws (to add new Section 4.6.5 re Vice Chairman)
are filed
herewith
|
|
|
10.1
|
Building
lease agreement with Renault & Handley Employees Investment Co. for
2644-2648 Bayshore Parkway, Mountain View, CA; previously filed
as Exhibit
10.1 to Report on Form 10-Q for period ended December 31, 2003
and
incorporated herein by reference
|
|
|
10.2
|
Building
lease agreement with Shoreline Park LLC for 1395 Charleston Road,
Mountain
View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
View,
CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
fiscal
year ended March 31, 2004 and incorporated herein by
reference
|
|
|
10.3*
|
Amended
and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
to
Report on Form 10-Q for period ended September 30, 2002 and
incorporated herein by reference
|
|
|
10.7
|
Stock
and Warrant Purchase Agreement (as amended); previously filed as
Exhibit
99.2 to Report on Form 10-Q for period ended December 31, 2003
and
incorporated herein by reference
|
|
|
10.8
|
Optical
Card Manufacturing License Agreement with Global Investments Group;
previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
year
ended March 31, 2004 and incorporated herein by
reference**
|
|
|
10.9*
|
2004
Equity Incentive Compensation Plan, as Amended; previously filed
as
Appendix C to Schedule 14A Proxy Statement for 2005 Annual Stockholders
Meeting filed with the SEC on August 11, 2006, and incorporated
herein by
reference
|
|
|
10.10
|
June
29, 2006 Amendment to License and Equipment Agreement with Global
Investments Group and Prevent LOK; previously filed as Exhibit
10.10 to
Report on Form 10-Q for period ending June 30, 2006, and incorporated
herein by reference**
|
|
|
10.11
|
October
27, 2006 Modified Third Amendment to License and Equipment Agreements
with
Global Investments Group and Prevent LOK; previously filed as Exhibit
10.11 to Form 8-K dated October 30, 2006, which was filed with
the SEC on
November 1, 2006, and incorporated herein by reference
|
|
|
10.12*
|
Employee
Stock Purchase Plan, as Amended; previously filed as Appendix A
to
Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting
filed
with the SEC on August 3, 2007, and incorporated herein by
reference
|
|
|
10.13*
|
November
28, 2007, Planned Retirement Agreement and Age Discrimination Release
Agreement with Richard M. Haddock are filed herewith
|
|
|
10.14*
|
January
4, 2008, Executive Employment Agreements with Christopher J. Dyball
and
Steven G. Larson are filed herewith
|