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Gemplus Posts Loss Amid Turmoil

The troubled French smart card maker posted a third-quarter net loss of US$38.3 million, as board battle drags on.
Nov 01, 2002Nov. 1, 2002 - This year continues to be one French smart card maker Gemplus International (Nasdaq: GEMP) will want to forget. Yesterday, the company posted a third-quarter net loss of EUR38.8 million (US$38.3 million), compared to a second-quarter net profit of EUR6.6 million (US$6.5 million) in the third quarter of 2001. And the infighting among board members continues.

On Wednesday, Gemplus International said it would make another attempt next month to oust founder Marc Lassus and Ziad Takieddine from the board. The U.S. investment fund Texas Pacific Group, the largest holder of Gemplus shares, has been trying unsuccessfully to kick the two off the board for almost a year. The Luxembourg-based company will put the issue to a vote at a special meeting of shareholders on Nov. 21.

One issue is Lassus's alleged failure to provide "assurance of his willingness and ability" to repay a EUR78 million (US$77 million) loan, which was made to him by an indirect subsidiary of the company. Takieddine is alleged to have disclosed confidential information about the appointment of former AT&T executive Alex Mandl as CEO.

"It's now time to let the shareholders decide how to resolve the functional difficulties faced by the board," said Gemplus chairman Dominique Vignon.

Gemplus is the world's largest maker of smart cards. Its products are used in a wide variety of applications, including credit cards, electronic wallets, set-top boxes and cell phones. Last year, it spun off its RFID unit into a separate company called TagSys.

Gemplus has been hit with a general downturn in the smart card market as demand for cards used in cell phones has become flat and the demand for chip cards in the financial industry has fallen. Gemplus's third-quarter revenue was down 9 percent from the third quarter of 2001.

Still, the news wasn't all bad. The company has begun switching to value-added cards that use RFID technology. It was recently awarded a contract to supply more than 1.2 million smart ID cards for a national identity program in the Sultanate of Oman.

Gemplus has also undertaken an extensive restructuring program that has reduced expenses and limited the company's operating lost to EUR6.5 million (US$6.4 million). And the company's cash position remained virtually unchanged in the third quarter, with EUR401 million ($396 million) on hand.

The company said it is on target to reach annualized savings of EUR110 million from restructuring and cost-cutting initiatives. It has set a target of reducing the number of employees by 1,140. During the third quarter, it cut 239 jobs, bringing the total so far to 854.

"Although the company is making progress in the reduction of operating expenses, the improvement in gross margin in the third quarter has been boosted by lower chip prices, which may not continue into the fourth quarter," said CEO Alex Mandl. "Despite the fact that revenue seems to have stabilized, the environment remains uncertain. As a consequence, an earlier forecast of break-even at the operating income level in the fourth quarter will not be achieved."

Mandl said that 2003 would be "a year of rebuilding and refocusing." He added the uncertain conditions made it impossible to give any specific financial guidance for the coming year.
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