UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2005
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from ___ to ___.
Commission
file number 0-29794
PUBLICARD,
INC.
(Exact
name of registrant as specified in its charter)
|
|
Pennsylvania
|
23-0991870
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
One
Rockefeller Plaza, 14th Floor, New York, NY
|
10020
|
(Address
of principal executive offices)
|
(Zip
code)
|
Registrant's
telephone number, including area code: (212)
651-3102
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes x
No o
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Yes o
No x
Number
of
shares of Common Stock outstanding as of August 12, 2005: 24,690,902
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
CONDENSED
CONSOLIDATED BALANCE SHEETS AS OF
JUNE
30, 2005 AND DECEMBER 31, 2004
(in
thousands, except share data)
|
|
June
30,
2005
|
|
December
31,
2004
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash,
including short-term investments of $1,116 and $1,837 in 2005
|
|
|
|
|
|
|
|
and
2004, respectively
|
|
$
|
1,173
|
|
$
|
1,943
|
|
Trade
receivables, less allowance for doubtful accounts of $17 and $48
|
|
|
|
|
|
|
|
in
2005 and 2004, respectively
|
|
|
710
|
|
|
827
|
|
Inventories
|
|
|
367
|
|
|
558
|
|
Prepaid
insurance and other
|
|
|
628
|
|
|
440
|
|
Total
current assets
|
|
|
2,878
|
|
|
3,768
|
|
|
|
|
|
|
|
|
|
Equipment
and leasehold improvements, net
|
|
|
81
|
|
|
127
|
|
Goodwill
|
|
|
782
|
|
|
782
|
|
Other
assets
|
|
|
|
|
|
396
|
|
|
|
$
|
3,741
|
|
$
|
5,073
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
accounts payable and overdraft
|
|
$
|
1,258
|
|
$
|
1,358
|
|
Accrued
liabilities
|
|
|
1,071
|
|
|
1,005
|
|
Total
current liabilities
|
|
|
2,329
|
|
|
2,363
|
|
|
|
|
|
|
|
|
|
Note
payable
|
|
|
7,501
|
|
|
7,501
|
|
Other
non-current liabilities
|
|
|
215
|
|
|
368
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,045
|
|
|
10,232
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
deficiency:
|
|
|
|
|
|
|
|
Class
A Preferred Stock, Second Series, no par value: 1,000 shares authorized;
565
|
|
|
|
|
|
|
|
shares
issued
and outstanding as of June 30, 2005 and December 31, 2004
|
|
|
2,825
|
|
|
2,825
|
|
Common
shares, $0.10 par value: 40,000,000 shares authorized; 24,690,902
|
|
|
|
|
|
|
|
shares
issued
and outstanding as of June 30, 2005 and December 31, 2004
|
|
|
2,469
|
|
|
2,469
|
|
Additional
paid-in capital
|
|
|
108,119
|
|
|
108,119
|
|
Accumulated
deficit
|
|
|
(119,648
|
)
|
|
(118,476
|
)
|
Other
comprehensive loss
|
|
|
(69
|
)
|
|
(96
|
)
|
Total
shareholders’ deficiency
|
|
|
(6,304
|
)
|
|
(5,159
|
)
|
|
|
$
|
3,741
|
|
$
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in
thousands, except share data)
(unaudited)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenues
|
|
$
|
909
|
|
$
|
1,028
|
|
$
|
1,660
|
|
$
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
424
|
|
|
480
|
|
|
792
|
|
|
886
|
|
Gross
margin
|
|
|
485
|
|
|
548
|
|
|
868
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
492
|
|
|
609
|
|
|
1,022
|
|
|
1,272
|
|
Sales
and marketing
|
|
|
284
|
|
|
406
|
|
|
682
|
|
|
825
|
|
Product
development
|
|
|
163
|
|
|
171
|
|
|
339
|
|
|
349
|
|
Amortization
of intangibles
|
|
|
|
|
|
10
|
|
|
|
|
|
20
|
|
|
|
|
939
|
|
|
1,196
|
|
|
2,043
|
|
|
2,466
|
|
Loss
from operations
|
|
|
(454
|
)
|
|
(648
|
)
|
|
(1,175
|
)
|
|
(1,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7
|
|
|
6
|
|
|
14
|
|
|
12
|
|
Interest
expense
|
|
|
(6
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
(10
|
)
|
Cost
of pensions - non-operating
|
|
|
|
|
|
(130
|
)
|
|
|
|
|
(264
|
)
|
Gain
on insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
Other
expenses
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
(5
|
)
|
|
|
|
1
|
|
|
(135
|
)
|
|
3
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(453
|
)
|
$
|
(783
|
)
|
$
|
(1,172
|
)
|
$
|
(1,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(.02
|
)
|
$
|
(.03
|
)
|
$
|
(.05
|
)
|
$
|
(.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
24,690,902
|
|
|
24,690,902
|
|
|
24,690,902
|
|
|
24,690,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to unaudited condensed consolidated financial
statements are an integral part of these statements.
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
FOR
THE SIX MONTHS ENDED JUNE 30, 2005
(in
thousands, except share data)
(unaudited)
|
|
Class
A
|
|
Common
Shares
|
|
Additional
|
|
|
|
Other
Comprehen-
|
|
Total
Share-
|
|
|
|
Preferred
|
|
Shares
|
|
|
|
Paid-in
|
|
Accumulated
|
|
sive
|
|
holders’
|
|
|
|
Stock
|
|
Issued
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- January 1, 2005
|
|
$
|
2,825
|
|
|
24,690,902
|
|
$
|
2,469
|
|
$
|
108,119
|
|
$
|
(118,476
|
)
|
$
|
(96
|
)
|
$
|
(5,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,172
|
)
|
|
|
|
|
(1,172
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
27
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- June 30, 2005
|
|
$
|
2,825
|
|
|
24,690,902
|
|
$
|
2,469
|
|
$
|
108,119
|
|
$
|
(119,648
|
)
|
$
|
(69
|
)
|
$
|
(6,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to unaudited condensed consolidated financial
statements are an integral part of this statement.
|
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in
thousands)
(unaudited)
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,172
|
)
|
$
|
(1,286
|
)
|
Adjustments
to reconcile net loss to net cash used
|
|
|
|
|
|
|
|
in
operating activities:
|
|
|
|
|
|
|
|
Gain
on insurance recoveries
|
|
|
|
|
|
(477
|
)
|
Loss
on disposal of fixed assets
|
|
|
|
|
|
5
|
|
Amortization
of intangibles
|
|
|
|
|
|
20
|
|
Depreciation
and amortization
|
|
|
43
|
|
|
68
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
73
|
|
|
111
|
|
Inventories
|
|
|
165
|
|
|
(17
|
)
|
Prepaid
insurance and other current assets
|
|
|
107
|
|
|
(21
|
)
|
Other
assets
|
|
|
-
|
|
|
100
|
|
Trade
accounts payable and overdraft
|
|
|
(54
|
)
|
|
(7
|
)
|
Accrued
liabilities
|
|
|
9
|
|
|
1,088
|
|
Other
non-current liabilities
|
|
|
(9
|
)
|
|
(805
|
)
|
Net
cash used in operating activities
|
|
|
(838
|
)
|
|
(1,221
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
|
|
(38
|
)
|
Proceeds
from insurance recoveries
|
|
|
68
|
|
|
477
|
|
Other
|
|
|
(1
|
)
|
|
(5
|
)
|
Net
cash provided by investing activities
|
|
|
67
|
|
|
434
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(770
|
)
|
|
(786
|
)
|
Cash
- beginning of period
|
|
|
1,943
|
|
|
3,580
|
|
Cash
- end of period
|
|
$
|
1,173
|
|
$
|
2,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
11
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to the unaudited condensed consolidated financial
statements are an integral part of these statements.
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY AND GOING CONCERN
CONSIDERATIONS
Description
of the business
PubliCARD,
Inc. (“PubliCARD” or the “Company”) was incorporated in the Commonwealth of
Pennsylvania in 1913. PubliCARD entered the smart card industry in early
1998,
and began to develop solutions for the conditional access, security, payment
system and data storage needs of industries utilizing smart card technology.
In
1998 and 1999, the Company made a series of acquisitions to enhance its position
in the smart card industry. In March 2000, PubliCARD’s Board of Directors (the
“Board”), together with its management team, determined to integrate its
operations and focus on deploying smart card solutions, which facilitate
secure
access and transactions. To effect this new business strategy, in March 2000,
the Board adopted a plan of disposition pursuant to which the Company divested
its non-core operations.
In
July
2001, after evaluating the timing of potential future revenues, PubliCARD’s
Board decided to shift the Company’s strategic focus. While the Board remained
confident in the long-term prospects of the smart card business, the timing
of
public sector and corporate initiatives in wide-scale, broadband environments
utilizing the Company’s smart card reader and chip products had become more
uncertain. Given the lengthened time horizon, the Board did not believe it
would
be prudent to continue to invest the Company’s current resources in the ongoing
development and marketing of these technologies. Accordingly, the Board
determined that shareholders' interests would be best served by pursuing
strategic alliances with one or more companies that have the resources to
capitalize more fully on the Company's smart card reader and chip-related
technologies. In connection with this shift in the Company’s strategic focus,
workforce reductions and other measures were implemented to achieve cost
savings.
At
present, PubliCARD’s sole operating activities are conducted through its
Infineer Ltd. subsidiary (“Infineer”), which designs smart card solutions for
educational and corporate sites. The Company’s future plans revolve around a
potential acquisition strategy that would focus on businesses in areas outside
the high technology sector while continuing to support the expansion of the
Infineer business. However, the Company will not be able to implement such
plans
unless it is successful in obtaining funding, as to which no assurance can
be
given.
Liquidity
and Going Concern Considerations
These
unaudited condensed consolidated financial statements contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred operating losses, a substantial decline
in
working capital and negative cash flow from operations for a number of years.
The Company has also experienced a substantial reduction in its cash and
short
term investments, which declined from $17.0 million at December 31, 2000
to $1.2
million at June 30, 2005. The Company also had a shareholders’ deficiency of
$6.3 million at June 30, 2005.
The
Company sponsored a defined benefit pension plan (the “Plan”) that was frozen in
1993. In January 2003, the Company filed a notice with the Pension Benefit
Guaranty Corporation (the “PBGC”) seeking a “distress termination” of the Plan.
In September 2004, the PBGC proceeded to terminate the Plan and was appointed
as
the Plan’s trustee. See Note 3 for further information on the Plan termination.
As a result of the Plan termination, the Company’s 2003 and 2004 funding
requirements due to the Plan amounting to $3.4 million through September
15,
2004 were eliminated. As such, management believes that existing cash and
short
term investments may be sufficient to meet the Company’s operating and capital
requirements at the currently anticipated levels through December 31, 2005.
However, additional capital will be necessary in order to operate beyond
December 31, 2005 and to fund the current business plan and other obligations.
While the Company is considering various funding alternatives, the Company
has
not secured or entered into any arrangements to obtain additional funds.
There
can be no assurance that the Company will be able to obtain additional funding
on acceptable terms or at all. If the Company cannot raise additional capital
to
continue its present level of operations it is not likely to be able to meet
its
obligations, take advantage of future acquisition opportunities or further
develop or enhance its product offering, any of which would have a material
adverse effect on its business and results of operations and is likely to
lead
the Company to seek bankruptcy protection. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The independent auditors’ reports
on the Company’s Consolidated Financial Statements for the years ended December
31, 2004, 2003 and 2002 contained emphasis paragraphs concerning substantial
doubt about the Company’s ability to continue as a going concern.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Principles
of consolidation
The
consolidated financial statements include the accounts of PubliCARD and its
wholly-owned subsidiaries. All intercompany transactions are eliminated in
consolidation.
Basis
of presentation
The
accompanying unaudited consolidated financial statements reflect all normal
and
recurring adjustments that are, in the opinion of management, necessary to
present fairly the financial position of the Company and its subsidiary
companies as of June 30, 2005 and the results of their operations and cash
flows
for the three and six months ended June 30, 2005. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2004.
Earnings
(loss) per common share
Basic
net
income (loss) per common share is based on net income (loss) divided by the
weighted average number of common shares outstanding during each period.
Diluted
net income (loss) per common share assumes issuance of the net incremental
shares from stock options and convertible preferred stock at the later of
the
beginning of the year or date of issuance. For the six months ended June
30,
2005, diluted net income (loss) per share was the same as basic net income
(loss) per share since the effect of stock options and convertible preferred
stock were antidilutive. Shares issuable pursuant to stock options and
convertible preferred stock were 3,749,850 and 4,057,475 as of June 30, 2005
and
2004, respectively.
Revenue
recognition and accounts receivable.
Revenue
from product sales and technology and software license fees is recorded upon
shipment if a signed contract exists, the fee is fixed and determinable,
the
collection of the resulting receivable is probable and the Company has no
obligation to install the product or solution. If the Company is responsible
for
installation, revenue from product sales and license fees is deferred and
recognized upon client acceptance or “go live” date. Maintenance and support
fees are deferred and recognized as revenue ratably over the contract period.
Provisions are recorded for estimated warranty repairs and returns at the
time
the products are shipped. Should changes in conditions cause management to
determine that revenue recognition criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
The
Company performs ongoing credit evaluations of its customers and adjusts
credit
limits based upon payment history and the customer's credit worthiness. The
Company continually monitors collections and payments from its customers
and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that it has identified.
While such credit losses have historically been within management’s expectations
and the provisions established, there is no assurance that the Company will
continue to experience the same credit loss rates as in the past.
Inventories
Inventories
are stated at lower of cost (first-in, first-out method) or market. The Company
periodically evaluates the need to record adjustments for impairment of
inventory. Inventory in excess of the Company’s estimated usage requirements is
written down to its estimated net realizable value. Inherent in the estimates
of
net realizable value are management’s estimates related to the Company’s
production schedules, customer demand, possible alternative uses and the
ultimate realization of potentially excess inventory. Inventories as of June
30,
2005 and December 31, 2004 consisted of the following (in
thousands):
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Raw
materials and work-in-process
|
|
$
|
291
|
|
$
|
468
|
|
Finished
goods
|
|
|
76
|
|
|
90
|
|
|
|
$
|
367
|
|
$
|
558
|
|
Goodwill
and intangibles
Goodwill
is the excess of the purchase price and related costs over the value assigned
to
the net tangible and intangible assets relating to the November 1999 acquisition
of Infineer. Through December 31, 2001, goodwill had been amortized over
a five
year life. Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). In accordance
with the guidelines of this statement, goodwill and indefinite lived intangible
assets are no longer amortized but will be assessed for impairment on at
least
an annual basis. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives
and reviewed for impairment.
The
Company determines the fair value of its sole reporting unit primarily using
two
approaches: a market approach technique and a discounted cash flow valuation
technique. The market approach relies primarily on the implied fair value
using
a multiple of revenues for several entities with comparable operations and
economic characteristics. Significant assumptions used in the discounted
cash
flow valuation include estimates of future cash flows, future short-term
and
long-term growth rates and estimated cost of capital for purposes of arriving
at
a discount factor. The Company performs its annual goodwill impairment test
during the fourth quarter absent any interim impairment indicators. The carrying
value of goodwill as of June 30, 2005 and December 31, 2004 was
$782,000.
Stock-Based
Compensation
The
Company accounts for employee stock-based compensation cost using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion
No.
25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The Company has
adopted the disclosure-only provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for
Stock-Based Compensation—Transition and Disclosure” (“SFAS No. 148”).
At
June
30, 2005, the Company had four fixed stock-based compensation plans.
The
exercise price of each option granted pursuant to these plans is equal to
the
market price of the Company’s common stock on the date of grant. Accordingly,
pursuant to APB No. 25, no
compensation cost has been recognized for such grants. Had compensation cost
been determined based on the fair value at the grant dates for such awards
consistent with the method prescribed by SFAS No. 123, the Company's net
(loss)
income and (loss) income per share for the three and six months ended June
30,
2005 and 2004 would have been as follows (in thousands except per share
data):
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(453
|
)
|
$
|
(783
|
)
|
$
|
(1,172
|
)
|
$
|
(1,286
|
)
|
Deduct:
Total stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
determined under fair value based method
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
(60
|
)
|
Pro
forma net loss
|
|
$
|
(453
|
)
|
$
|
(813
|
)
|
$
|
(1,172
|
)
|
$
|
(1,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(.02
|
)
|
$
|
(.03
|
)
|
$
|
(.05
|
)
|
$
|
(.05
|
)
|
Pro
forma
|
|
$
|
(.02
|
)
|
$
|
(.03
|
)
|
$
|
(.05
|
)
|
$
|
(.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
weighted-average fair value of each stock option included in the preceding
pro
forma amounts was estimated using the Black-Scholes option-pricing model
and is
amortized over the vesting period of the underlying options.
Use
of Estimates
The
preparation of these financial statements required the use of certain estimates
by management in determining the Company’s assets, liabilities, revenues and
expenses. Certain of the Company’s accounting policies require the application
of significant judgment by management in selecting the appropriate assumptions
for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty. The Company considers certain
accounting policies related to revenue recognition, estimates of reserves
for
receivables and inventories and valuation of goodwill to be critical policies
due to the estimation processes involved. While all available information
has
been considered, actual amounts could differ from those reported.
Fair
Value of Financial Instruments and Concentration of Credit
Risk
The
carrying amount of financial instruments, including cash and short-term
investments, accounts receivable, accounts payable and accrued liabilities,
approximates fair value. The fair value of long-term debt is estimated based
on
current rates which could be offered to the Company for debt of the same
remaining maturity. The estimated fair value of the Company’s long term debt as
of June 30, 2005 was approximately $1.9 million.
Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash and short-term investments and accounts
receivable. The
Company maintains all of its cash and short-term investments with high-credit
quality financial institutions. The Company’s customer base consists of
businesses principally in Europe (with a concentration in the United Kingdom)
and the United States. For the year ended December 31, 2004 and the six months
ended June 30, 2005, no one customer accounted for more than 10% of revenues.
In
addition, no one customer accounted for more than 10% of the accounts receivable
balance as of June 30, 2005.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
Payment.” This statement requires compensation costs related to
share-based payment transactions to be recognized in financial
statements.
Generally, compensation cost will be measured based on the grant-date
fair
value of the equity or liability instruments issued. In addition,
liability awards will be remeasured each reporting period. Compensation
cost will be recognized over the requisite service period, generally
as
the award vests. The Company will adopt SFAS No. 123R in the first
quarter
of 2006. SFAS No. 123R applies to all awards granted after the
effective
date and to previously-granted awards unvested as of the adoption
date.
The adoption of the statement is not expected to have a material
impact on
Company’s
consolidated financial position, results of operations and cash
flows.
|
|
In November 2004, the FASB issued SFAS No. 151, “Inventory Cost, an
amendment of ARB No. 43, Chapter 4.” This statement amends Accounting Research
Bulletin No. 43 to clarify the accounting for abnormal amounts
of idle
facility expense, freight, handling costs and wasted material (spoilage).
The
provision of the statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of the statement
is not expected to have a material effect on the Company’s consolidated
financial position, results of operations and cash flows.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29.” This statement amends APB
No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the
exception for nonmonetary exchanges of similar productive assets under
APB No. 29 and replaces it with a general exception for exchanges
of
nonmonetary assets that do not have commercial substance. The statement is
effective for financial statements for fiscal years beginning after
June 15, 2005. The adoption of the statement is not expected to have
a
material effect on the Company’s consolidated financial position, results of
operations and cash flows.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,
a
replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
provides guidance on the accounting for and reporting of accounting changes
and
error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to
the
newly adopted accounting principle. This statement also provides guidance
for
determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. SFAS No. 154 is effective for accounting changes
and correction of errors made in fiscal years beginning after December 15,
2005.
The
adoption of the statement is not expected to have a material effect on the
Company’s consolidated financial position, results of operations and cash flows.
Note
2 - SEGMENT DATA
The
Company’s sole operating activities involve the deployment of smart card
solutions for educational and corporate sites. As such, the Company reports
as a
single segment. Sales by geographical areas for the three and six months
ended
June 30, 2005 and 2004 are as follows (in thousands):
|
|
Three
months ended
June
30
|
|
Six
months ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
151
|
|
$
|
111
|
|
$
|
238
|
|
$
|
171
|
|
Europe
|
|
|
728
|
|
|
816
|
|
|
1,376
|
|
|
1,525
|
|
Rest
of world
|
|
|
30
|
|
|
101
|
|
|
46
|
|
|
160
|
|
|
|
$
|
909
|
|
$
|
1,028
|
|
$
|
1,660
|
|
$
|
1,856
|
|
The
Company has operations in the United States and United Kingdom. Identifiable
tangible assets by country as of June 30, 2005 and December 31, 2004 are
as
follows (in thousands):
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,806
|
|
$
|
2,770
|
|
United
Kingdom
|
|
|
1,153
|
|
|
1,521
|
|
|
|
$
|
2,959
|
|
$
|
4,291
|
|
Note
3 - TERMINATED PENSION PLAN
The
Company sponsored a defined benefit pension plan that was frozen in 1993.
In
January 2003, the Company filed a notice with the PBGC seeking a “distress
termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee
and Termination of Plan between the PBGC and the Company, effective September
30, 2004, the PBGC proceeded to terminate the Plan and was appointed as the
Plan’s trustee. As a result, the PBGC has assumed responsibility for paying the
obligations to Plan participants. Under the terms of the Settlement Agreement,
effective September 23, 2004, between the PBGC and the Company (the “Settlement
Agreement”), the Company is liable to the PBGC for the unfunded guaranteed
benefit payable by the PBGC to Plan participants in the amount of $7.5 million.
The Company satisfied this liability by issuing a non-interest bearing note
(the
“Note”), dated September 23, 2004, payable to the PBGC with a face amount of
$7.5 million. A loss on the termination of the Plan of $2.7 million was recorded
in the third quarter of 2004.
Pursuant
to the Security Agreement and Pledge Agreement, both dated September 23,
2004,
the Note is secured by (a) all presently owned or hereafter acquired real
or
personal property and rights to property of the Company and (b) the common
and
preferred stock of Infineer and TecSec Incorporated (“TecSec”) owned by the
Company. Infineer is a wholly-owned subsidiary of the Company. The Company
has
an approximately 5% ownership interest in TecSec, on a fully diluted basis.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Note
matures on September 23, 2011. The first payment will be equal to $1.0 million
and will become due 30 days after the Company has received a total of $4.0
million in Net Recoveries (as defined below). Thereafter, on each anniversary
of
the first payment, the Company is required to pay the PBGC an amount equal
to
25% of the Net Recoveries in excess of $4.0 million (less the sum of all
prior
payments made in accordance with this sentence in prior years). Net Recoveries,
as defined in the Settlement Agreement, is the net cash proceeds received
by the
Company with respect to transactions consummated after March 31, 2003 from
(a)
the sale of the Company’s interest in Infineer and TecSec, real property in
Louisiana and any other real or personal property assets and (b) any recoveries
from the Company’s historic insurance program. As of June 30, 2005, Net
Recoveries was approximately $3.5 million.
In
the
event of default by the Company under the Settlement Agreement, the PBGC
may
declare the outstanding amount of the Note to be immediately due and payable,
proceed with foreclosure of the liens granted in favor of the PBGC and exercise
any other rights available under applicable law.
As
a
result of the termination of the Plan, net periodic pension cost will be
zero
prospectively. Cost of retirement benefits - non-operating of $264,000 for
the
six
months ended June 30, 2004 included
the net periodic pension cost and other Plan related expenses. The components
of
the net periodic pension cost for the six months ended June 30, 2004 were
as
follows (in thousands):
Interest
cost |
|
$ |
$232 |
|
Expected
return on plan assets |
|
|
(58 |
) |
Amortization
of net loss |
|
|
56 |
|
Net
periodic pension cost |
|
$ |
230 |
|
Note
4 - COMMITMENTS AND CONTINGENCIES
Grants
and bank financing
The
Company has received grants from several government agencies in the United
Kingdom. These grants have been used for marketing, research and development
and
other governmental business incentives such as general employment. Such grants
require the Company to maintain certain levels of operations and employment
in
Northern Ireland. As of June 30, 2005, the Company has a contingent liability
to
repay, in whole or in part, grants received of approximately $270,000 in
the
event the Company becomes insolvent or otherwise violates the terms of such
grants. As of June 30, 2005, the Company is in compliance with the terms
of the
grants.
Infineer
has an overdraft facility with a bank in Northern Ireland, which allows for
the
maximum borrowing of 320,000 British pounds. This facility is secured by
all of
Infineer’s assets and bears an interest rate at the bank’s base rate plus 2%
(approximately 6.75% at June 30, 2005). As of June 30, 2005, Infineer had
borrowings outstanding under this facility totaling 293,000 British pounds
(or
the equivalent of $531,000).
Legal
On
May
28, 2002, a lawsuit was filed against the Company and four of its current
and
former directors and executive officers in the Superior Court of the State
of
California, in the County of Los Angeles by Leonard M. Ross and affiliated
entities alleging, among other things, misrepresentation and securities fraud
(the “Lawsuit”). The plaintiffs sought compensatory and punitive damages for
alleged actions of the defendants in order to induce the plaintiff to purchase,
hold or refrain from selling shares of the Company’s common stock. The
plaintiffs alleged that the defendants made a series of material
misrepresentations, misleading statements, omissions and concealments,
specifically and directly to the plaintiffs concerning the nature, existence
and
status of contracts with certain purchasers, the nature and existence of
investments in the Company by third parties, the nature and existence of
business relationships and investments by the Company.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
November 2002, the Company and the individual defendants served with the
Lawsuit
filed a demurrer seeking the dismissal of six of the plaintiffs’ nine purported
causes of action. In January 2003, the court ruled in favor of the demurrer
and
dismissed the entire complaint. The plaintiffs were granted the right to
replead
and subsequently filed an amended complaint in February 2003. The Company
and
individual defendants filed a second demurrer in March 2003. In June 2003,
the
court ruled in favor of the demurrer and dismissed, without leave to amend,
six
of the eleven purported causes of action in the amended complaint. The parties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
The
parties to the Lawsuit agreed to engage in non-binding mediation and on July
20,
2005,
reached an agreement to settle
the
Lawsuit. Pursuant to this agreement, in exchange for a payment, the plaintiffs
have agreed to dismiss the case with prejudice and the parties have agreed
to
execute mutual general releases. The Company’s primary directors and officers
liability insurance carriersreparties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
has
agreed to fund the full cost of the settlement.
The
Company incurred approximately $200,000 in defense costs in 2002. No additional
costs have been incurred in 2005, 2004 and 2003. The
Company’s primary directors and officers liability insurance carriersreparties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
funded
the additional costs of defending this Lawsuit.
Various
other legal proceedings are pending against the Company. The Company considers
all such other proceedings to be ordinary litigation incident to the character
of its businesses. Certain claims are covered by liability insurance. The
Company believes that the resolution of those claims, to the extent not covered
by insurance, will not, individually or in the aggregate, have a material
adverse effect on the financial position or results of operations of the
Company.
Insurance
recoveries
During
2003, the Company entered into three binding settlements with various historical
insurers that resolved certain claims (including certain future claims) under
policies of insurance issued to the Company by those insurers. As a result
of
the settlements, after allowance for associated expenses, offsetting adjustments
and amounts held in escrow, the Company received net proceeds of approximately
$4.1 million in 2003. Pursuant to one of the settlements, an additional net
amount of approximately $470,000 was placed in escrow to secure the payment
of
certain indemnification obligations. Absent any indemnity claims, amounts
will
be released from escrow beginning September 30, 2004 and ending June 30,
2006.
During 2005 and 2004, net cash released from escrow amounted to approximately
$68,000 and $84,000, respectively. The Company recognized a gain from these
settlements of approximately $4.6 million in 2003.
In
February 2004, the Company entered into a binding agreement to assign to
a third
party certain insurance claims against a group of historic insurers. In July
2004, the assignment was supplemented to include several additional insurers.
The claims involve several historic general liability policies of insurance
issued to the Company. As a result of the assignment, after allowance for
associated expenses and offsetting adjustments, the Company received net
proceeds of approximately $647,000 in 2004. The Company recognized a gain
from
this assignment of $477,000 in the first quarter of 2004 and $170,000 in
the
third quarter of 2004.
The
Company is also in discussions with other insurance markets regarding the
status
of certain policies of insurance. It cannot be determined whether any additional
amounts may be recovered from these other insurers nor can the timing of
any
such additional recoveries be determined.
Leases
The
Company leases certain office space, vehicles and office equipment under
operating leases that expire over the next four years. Minimum payments for
operating leases having initial or remaining non-cancelable terms in excess
of
one year aggregates approximately $665,000.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note
5- COMPREHENSIVE LOSS
Comprehensive
loss for the Company includes foreign currency translation adjustments, as
well
as the net loss reported in the Company's Condensed Consolidated Statements
of
Operations. Comprehensive loss for the three and six months ended June 30,
2005
and 2004 was as follows (in thousands):
|
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(453
|
)
|
$
|
(783
|
)
|
$
|
(1,172
|
)
|
$
|
(1,286
|
)
|
Foreign
currency translation adjustments
|
|
|
16
|
|
|
|
|
|
27
|
|
|
(2
|
)
|
Comprehensive
loss
|
|
$
|
(437
|
)
|
$
|
(783
|
)
|
$
|
(1,145
|
)
|
$
|
(1,288
|
)
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
other sections of this Form 10-Q contain forward-looking statements, including
(without limitation) statements concerning possible or assumed future results
of
operations of PubliCARD preceded by, followed by or that include the words
“believes,”“expects,”“anticipates,”“estimates,”“may,”“should,”“would,”“could,”“intends,”“plans”
or similar expressions. For those statements, we claim the protection of
the
safe harbor for forward-looking statements contained in the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
not
guarantees of future performance. They involve risks, uncertainties and
assumptions. You should understand that the possible consequences of such
statements made under “Factors That May Affect Future Results” and elsewhere in
this document could affect our future results and could cause those results
to
differ materially from those expressed in such forward-looking
statements.
Overview
PubliCARD
was incorporated in the Commonwealth of Pennsylvania in 1913. PubliCARD entered
the smart card industry in early 1998, and began to develop solutions for
the
conditional access, security, payment system and data storage needs of
industries utilizing smart card technology. In 1998 and 1999, the Company
made a
series of acquisitions to enhance its position in the smart card industry.
In
March 2000, PubliCARD’s Board, together with its management team, determined to
integrate its operations and focus on deploying smart card solutions, which
facilitate secure access and transactions. To effect this new business strategy,
in March 2000, the Board adopted a plan of disposition pursuant to which
the
Company divested its non-core operations.
In
July
2001, after evaluating the timing of potential future revenues, PubliCARD’s
Board decided to shift the Company’s strategic focus. While the Board remained
confident in the long-term prospects of the smart card business, the timing
of
public sector and corporate initiatives in wide-scale, broadband environments
utilizing the Company’s smart card reader and chip products had become more
uncertain. Given the lengthened time horizon, the Board did not believe it
would
be prudent to continue to invest the Company’s current resources in the ongoing
development and marketing of these technologies. Accordingly, the Board
determined that shareholders' interests will be best served by pursuing
strategic alliances with one or more companies that have the resources to
capitalize more fully on the Company's smart card reader and chip-related
technologies. In connection with this shift in the Company’s strategic focus,
workforce reductions and other measures were implemented to achieve cost
savings.
At
present, PubliCARD’s sole operating activities are conducted through its
Infineer subsidiary, which designs smart card solutions for educational and
corporate sites. The Company’s future plans revolve around a potential
acquisition strategy that would focus on businesses in areas outside the
high
technology sector while continuing to support the expansion of the Infineer
business. However, the Company will not be able to implement such plans unless
it is successful in obtaining additional funding, as to which no assurance
can
be given.
PubliCARD’s
consolidated financial statements contemplate the realization of assets and
the
satisfaction of liabilities in the normal course of business. The Company
has
incurred operating losses, a substantial decline in working capital and negative
cash flow from operations for a number of years. The Company has also
experienced a substantial reduction in its cash and short term investments,
which declined from $17.0 million at December 31, 2000 to $1.2 million at
June
30, 2005. The Company also had a shareholders’ deficiency of $6.3 million at
June 30, 2005.
The
Company’s defined benefit pension plan was frozen in 1993. In January 2003, the
Company filed a notice with the PBGC seeking a “distress termination” of the
Plan. In September 2004, the PBGC proceeded to terminate the Plan and was
appointed as the Plan’s trustee. See Note 3 to the Unaudited Notes to Condensed
Consolidated Financial Statements for further information on the Plan
termination. As a result of the Plan termination, the Company’s 2003 and 2004
funding requirements due to the Plan amounting to $3.4 million through September
15, 2004 were eliminated. As such, management believes that existing cash
and
short term investments may be sufficient to meet the Company’s operating and
capital requirements at the currently anticipated levels through December
31,
2005. However, additional capital will be necessary in order to operate beyond
December 31, 2005 and to fund the current business plan and other obligations.
While the Company is considering various funding alternatives, the Company
has
not secured or entered into any arrangements to obtain additional funds.
There
can be no assurance that the Company will be able to obtain additional funding
on acceptable terms or at all. If the Company cannot raise additional capital
to
continue its present level of operations it is not likely to be able to meet
its
obligations, take advantage of future acquisition opportunities or further
develop or enhance its product offering, any of which would have a material
adverse effect on its business and results of operations and is likely to
lead
the Company to seek bankruptcy protection. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The independent auditors’ reports
on the Company’s Consolidated Financial Statements for the years ended December
31, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial
doubt
about the Company’s ability to continue as a going concern.
Results
of Operations
The
following table is derived from the Unaudited Condensed Consolidated Financial
Statements and sets forth the Company’s consolidated results of operations for
the three and six months ended June 30, 2005 and 2004 (in
thousands):
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
909
|
|
$
|
1,028
|
|
$
|
1,660
|
|
$
|
1,856
|
|
Cost
of revenues
|
|
|
424
|
|
|
480
|
|
|
792
|
|
|
886
|
|
Gross
margin
|
|
|
485
|
|
|
548
|
|
|
868
|
|
|
970
|
|
Gross
margin percentage
|
|
|
53
|
%
|
|
53
|
%
|
|
52
|
%
|
|
52
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
492
|
|
|
609
|
|
|
1,022
|
|
|
1,272
|
|
Sales
and marketing
|
|
|
284
|
|
|
406
|
|
|
682
|
|
|
825
|
|
Product
development
|
|
|
163
|
|
|
171
|
|
|
339
|
|
|
349
|
|
Amortization
of intangibles
|
|
|
-
|
|
|
10
|
|
|
|
|
|
20
|
|
|
|
|
939
|
|
|
1,196
|
|
|
2,043
|
|
|
2,466
|
|
Loss
from operations
|
|
|
(454
|
)
|
|
(648
|
)
|
|
(1,175
|
)
|
|
(1,496
|
)
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7
|
|
|
6
|
|
|
14
|
|
|
12
|
|
Interest
expense
|
|
|
(6
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
(10
|
)
|
Cost
of pensions - non-operating
|
|
|
|
|
|
(130
|
)
|
|
|
|
|
(264
|
)
|
Gain
on insurance recoveries
|
|
|
|
|
|
|
|
|
|
|
|
477
|
|
Other
income (expenses), net
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
(5
|
)
|
|
|
|
1
|
|
|
(135
|
)
|
|
3
|
|
|
210
|
|
Net
loss
|
|
$
|
(453
|
)
|
$
|
(783
|
)
|
$
|
(1,172
|
)
|
$
|
(1,286
|
)
|
|
Results
of Operations
Three
Months Ended June 30, 2005 Compared to Three Months Ended June 30,
2004
Revenues.
Revenues
are generated from product sales, technology and software license fees,
installation and maintenance contracts. Consolidated revenues decreased to
$909,000 in 2005 compared to $1.0 million for 2004. Foreign currency changes
had
the effect of increasing revenues by 2%. Excluding the impact of foreign
currency changes, sales in 2005 decreased by 13% driven by a decline of $93,000
in direct sales to customers located in the United Kingdom as well as a $66,000
decline in shipments to distribution partners located outside of the United
Kingdom (other than the U.S.). In the first half of 2005, Infineer reduced
sales
and customer support headcount by a total of eight people to reduce operating
expenses and reflect lower revenue expectations.
Gross
margin. Cost
of
sales consists primarily of material, personnel costs and overhead. Gross
margin, as a percentage of net revenues, was 53% in both 2005 and 2004.
Sales
and marketing expenses. Sales
and
marketing expenses consist primarily of personnel and travel costs, public
relations, trade shows and marketing materials. Sales and marketing expenses
were $284,000 in 2005 compared to $406,000 in 2004. The decrease in expenses
is
mainly attributable to a $119,000 decline in wages, benefits and employee
business expense associated with headcount reductions.
Product
development expenses. Product
development expenses include costs associated with the development of new
products and enhancements to existing products. Product development expenses
consist primarily of personnel and travel costs and contract engineering
services. Product development expenses amounted to $163,000 in 2005 compared
to
$171,000 in 2004.
General
and administrative expenses. General
and administrative expenses consist primarily of personnel and related costs
for
general corporate functions, including finance and accounting, human resources,
risk management and legal. General and administrative expenses were $492,000
in
2005 compared to $609,000 in 2004. The decrease in expenses is mainly
attributable to a $90,000 decline in corporate wages and benefits.
Amortization
of intangibles. In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, effective
January 1, 2002, goodwill is no longer amortized. Goodwill and other intangibles
will be subject to an annual review for impairment or earlier if circumstances
or events indicate that impairment has occurred. This may result in future
write-downs or the write-off of such assets. Amortization of intangibles
of
$10,000 in 2004 related to the continuing amortization of definite life
intangibles, which have been fully amortized as of December 31,
2004.
Other
income and expense. Cost
of
pensions in 2004 of $130,000 principally represents pension expense associated
with the Company’s frozen defined benefit pension plan. Effective September 30,
2004, the PBGC proceeded to terminate the Plan and was appointed as the Plan’s
trustee. See Note 3 to Notes to Unaudited Condensed Consolidated Financial
Statements for further discussion. As a result of the termination of the
Plan,
net periodic pension cost will be zero prospectively.
Six
Months Ended June 30, 2005 Compared to Six Months Ended June 30,
2004
Revenues.
Consolidated
revenues decreased to $1.7 million in 2005 compared to $1.9 million for 2004.
Foreign currency changes had the effect of increasing revenues by 2%. Excluding
the impact of foreign currency changes, sales in 2005 decreased by 13% driven
by
a decline of $134,000 in direct sales to customers located in the United
Kingdom
as well as a $129,000 decline in shipments to distribution partners located
outside of the United Kingdom (other than the U.S.).
Cost
of revenues. Gross
margin, as a percentage of net sales, was 52% in both 2005 and 2004.
Sales
and marketing expenses. Sales
and
marketing expenses were $682,000 in 2005 compared to $825,000 in 2004. The
decrease is primarily attributable to a $144,000 reduction in wages, benefits
and employee business expense resulting from headcount reductions. Also,
the
2004 expenses reflect a reimbursement of $47,000 of marketing costs under
a
grant with a government agency in Northern Ireland.
Product
development expenses. Product
development expenses amounted to $339,000 in 2005 compared to $349,000 in
2004.
General
and administrative expenses. General
and administrative expenses for the six months ended June 30, 2005 decreased
to
$1.0 million from $1.3 million for 2004. The decrease in expenses is mainly
attributable to a $208,000 decline in corporate wages and benefits.
Amortization
of goodwill and intangibles. Amortization
expense associated with definite lived intangible assets was $20,000 in
2004.
Other
income and expense. Cost
of
pensions in 2004 of $264,000 principally represents pension expense associated
with the Company’s frozen defined benefit pension plan.
In
February 2004, the Company entered into a binding agreement to assign to
a third
party certain insurance claims against a group of historic insurers. The
claims
involve several historic general liability policies of insurance issued to
the
Company. As a result of the assignment, after allowance for associated expenses
and offsetting adjustments, the Company recognized a gain of $477,000 in
the
first quarter of 2004. The Company received the net proceeds of $477,000
in May
2004.
Liquidity
The
Company has financed its operations over the last several years primarily
through funds received from the sale of a non-core businesses in 2000 and
insurance recoveries in 2003 and 2004. For the six months ended June 30,
2005,
cash, including short-term investments, decreased by $770,000 to $1.2 million
as
of June 30, 2005.
Operating
activities utilized cash of $838,000 in 2005 and principally consisted of
the
net loss of $1.2 million offset by depreciation and amortization of $43,000
and
a reduction in assets and liabilities of $291,000.
Investing
activities generated cash of $67,000 for the six months ended June 30, 2005
and
consisted of the release of funds held in escrow pursuant to a 2003 insurance
settlement.
The
Company has experienced negative cash flow from operating activities in the
past
and expects to experience negative cash flow in 2005 and beyond. In addition
to
funding operating and capital requirements and corporate overhead, future
uses
of cash include the following:
·
|
The
Company sponsored a defined benefit pension plan, which was frozen
in
1993. In January 2003, the Company filed a notice with the PBGC
seeking a
“distress termination” of the Plan. Pursuant to the Agreement for
Appointment of Trustee and Termination of Plan between the PBGC
and the
Company effective September 30, 2004, the PBGC proceeded to terminate
the
Plan and was appointed as the Plan’s trustee. As a result, the PBGC has
assumed responsibility for paying the obligations to Plan participants.
Under the terms of the Settlement Agreement effective September
23, 2004
between the PBGC and the Company, the Company was liable to the
PBGC for
the unfunded guaranteed benefit payable by the PBGC to Plan participants
in the amount of $7.5 million. The Company satisfied this liability
by
issuing the Note dated September 23, 2004 payable to the PBGC with
a face
amount of $7.5 million. A loss on the termination of the Plan of
$2.7
million was recorded in the third quarter of 2004.
|
Pursuant
to the Security Agreement and Pledge Agreement, both dated September 23,
2004,
the Note is secured by (a) all presently owned or hereafter acquired real
or
personal property and rights to property of the Company and (b) the common
and
preferred stock of Infineer and TecSec owned by the Company. Infineer is
a
wholly-owned subsidiary of the Company. The Company has an approximately
5%
ownership interest in TecSec, on a fully diluted basis.
The
Note
matures on September 23, 2011. The first payment will be equal to $1.0 million
and will become due 30 days after the Company has received a total of $4.0
million in Net Recoveries (as defined below). Thereafter, on each anniversary
of
the first payment, the Company is required to pay the PBGC an amount equal
to
25% of the Net Recoveries in excess of $4.0 million (less the sum of all
prior
payments made in accordance with this sentence in prior years). Net Recoveries,
as defined in the Settlement Agreement, is the net cash proceeds received
by the
Company with respect to transactions consummated after March 31, 2003 from
(a)
the sale of the Company’s interest in Infineer and TecSec, real property in
Louisiana and any other real or personal property assets and (b) any recoveries
from the Company’s historic insurance program. As of June 30, 2005, Net
Recoveries was approximately $3.5 million.
In
the
event of default by the Company under the Settlement Agreement, the PBGC
may
declare the outstanding amount of the Note to be immediately due and payable,
proceed with foreclosure of the liens granted in favor of the PBGC and exercise
any other rights available under applicable law.
|
·
|
The
Company leases certain office space, vehicles and office equipment
under
operating leases that expire over the next four years. Minimum
future
payments for operating leases having initial or remaining non-cancelable
terms in excess of one year aggregates approximately
$665,000.
|
The
Company will need to raise additional capital that may not be available to
it.
As a result of the Plan termination discussed above, the Company’s 2003 and 2004
funding requirements due to the Plan amounting to $3.4 million through September
15, 2004 were eliminated. As such, management believes that existing cash
and
short term investments may be sufficient to meet the Company’s operating and
capital requirements at the currently anticipated levels through December
31,
2005. However, additional capital will be necessary in order to operate beyond
December 31, 2005 and to fund the current business plan and other obligations.
While the Company is considering various funding alternatives, the Company
has
not secured or entered into any arrangements to obtain additional funds.
There
can be no assurance that the Company will be able to obtain additional funding
on acceptable terms or at all. If the Company cannot raise additional capital
to
continue its present level of operations it is not likely to be able to meet
its
obligations, take advantage of future acquisition opportunities or further
develop or enhance its product offering, any of which would have a material
adverse effect on its business and results of operations.
The
Company currently has no capacity for commercial debt financing. Should such
capacity become available it may be adversely affected in the future by factors
such as higher interest rates, inability to borrow without collateral, and
continued operating losses. Borrowings may also involve covenants limiting
or
restricting its operations or future opportunities.
As
a
result of a failure to meet certain continuing listing requirements of the
Nasdaq National Market, the Company transferred the listing of its common
stock
to the Nasdaq SmallCap Market effective May 2, 2002. On March 19, 2003, the
Company received a Nasdaq Staff Determination letter indicating that the
Company
failed to comply with the minimum bid price requirement for continued listing
on
the Nasdaq SmallCap Market and that the Company’s common stock was therefore
subject to delisting. The Board of the Company decided not to appeal the
delisting determination. Effective March 28, 2003, the Company’s common stock no
longer traded on the Nasdaq SmallCap Market. On March 28, 2003 the Company’s
common stock began trading on the OTC Bulletin Board. As a result of the
delisting, the liquidity of the common stock may be adversely affected. This
could impair the Company’s ability to raise capital in the future. If additional
capital is raised through the issuance of equity securities, the Company’s
stockholders’ percentage ownership of the common stock will be reduced and
stockholders may experience dilution in net book value per share, or the
new
equity securities may have rights, preferences or privileges senior to those
of
its common stockholders.
If
the
Company’s liquidity does not improve, it may be unable to continue as a going
concern and is likely to seek bankruptcy protection. Such an event may result
in
the Company’s common and preferred stock being negatively affected or becoming
worthless. The auditors’ reports on the Company’s Consolidated Financial
Statements for the years ended December 31, 2004, 2003 and 2002 contained
emphasis paragraphs concerning substantial doubt about the Company’s ability to
continue as a going concern.
Contractual
Obligations
The
following is a summary of the Company’s commitments as of June 30, 2005 (in
thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less
than 1
year
|
|
1
to 3 years
|
|
3
to 5 years
|
|
More
than
5
years
|
|
Operating
lease obligations
|
|
$
|
665
|
|
$
|
247
|
|
$
|
387
|
|
$
|
31
|
|
$
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to PBGC
|
|
|
7,501
|
|
|
|
|
|
|
|
|
|
|
|
7,501
|
|
Other
long-term obligations
|
|
|
215
|
|
|
20
|
|
|
120
|
|
|
40
|
|
|
35
|
|
Total
|
|
$
|
8,381
|
|
$
|
267
|
|
$
|
507
|
|
$
|
71
|
|
$
|
7,536
|
|
Critical
Accounting Policies
The
Company’s significant accounting policies are more fully described in the Notes
to the Company’s Unaudited Condensed Consolidated Financial Statements included
herein and the Notes to the Consolidated Financial Statements included the
Company’s Form 10-K for the year ended December 31, 2004. Certain accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates.
By
their nature, these judgments are subject to an inherent degree of uncertainty.
The Company considers certain accounting policies related to revenue
recognition, estimates of reserves for receivables and inventories and valuation
of goodwill to be critical policies due to the estimation processes
involved.
Revenue
recognition and accounts receivable.
Revenue
from product sales and technology and software license fees is recorded upon
shipment if a signed contract exists, the fee is fixed and determinable,
the
collection of the resulting receivable is probable and the Company has no
obligation to install the product or solution. If the Company is responsible
for
installation, revenue from product sales and license fees is deferred and
recognized upon client acceptance or “go live” date. Maintenance and support
fees are deferred and recognized as revenue ratably over the contract period.
Provisions are recorded for estimated warranty repairs and returns at the
time
the products are shipped. In the event changes in conditions cause management
to
determine that revenue recognition criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely
affected.
The
Company performs ongoing credit evaluations of its customers and adjusts
credit
limits based upon payment history and the customer's credit worthiness. The
Company continually monitors collections and payments from its customers
and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues that it has identified.
While such credit losses have historically been within management’s expectations
and the provisions established, there is no assurance that the Company will
continue to experience the same credit loss rates as in the past.
Inventories.
Inventories are stated at lower of cost (first-in, first-out method) or market.
The Company periodically evaluates the need to record adjustments for impairment
of inventory. Inventory in excess of the Company’s estimated usage requirements
is written down to its estimated net realizable value. Inherent in the estimates
of net realizable value are management’s estimates related to the Company’s
production schedules, customer demand, possible alternative uses and the
ultimate realization of potentially excess inventory. A decrease in future
demand for current products could result in an increase in the amount of
excess
inventories on hand.
Impairment
of goodwill. Effective
January 1, 2002, the Company adopted SFAS No. 142. In accordance with the
guidelines of this statement, goodwill and indefinite lived intangible assets
are no longer amortized but will be assessed for impairment on at least an
annual basis. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives and
reviewed for impairment. The Company determines the fair value of its sole
reporting unit primarily using two approaches: a market approach technique
and a
discounted cash flow valuation technique. The market approach relies primarily
on the implied fair value using a multiple of revenues for several entities
with
comparable operations and economic characteristics. Significant assumptions
used
in the discounted cash flow valuation include estimates of future cash flows,
future short-term and long-term growth rates and estimated cost of capital
for
purposes of arriving at a discount factor.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
Payment”. This statement requires compensation costs related to share-based
payment transactions to be recognized in financial statements. Generally,
compensation cost will be measured based on the grant-date fair value of
the
equity or liability instruments issued. In addition, liability awards will
be
remeasured each reporting period. Compensation cost will be recognized over
the
requisite service period, generally as the award vests. The Company will
adopt
SFAS No. 123R in the first quarter of 2006. SFAS No. 123R applies to all
awards
granted after the effective date and to previously-granted awards unvested
as of
the adoption date. The adoption of the statement is not expected to have
a
material impact on Company’s
consolidated financial position, results of operations and cash flows.
In November 2004, the FASB issued SFAS No. 151, “Inventory Cost, an
amendment of ARB No. 43, Chapter 4.” This statement amends Accounting Research
Bulletin No. 43 to clarify the accounting for abnormal amounts
of idle
facility expense, freight, handling costs and wasted material (spoilage).
The
provision of the statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of the statement
is not expected to have a material effect on the Company’s consolidated
financial position, results of operations and cash flows.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29.” This statement amends APB
No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the
exception for nonmonetary exchanges of similar productive assets under
APB No. 29 and replaces it with a general exception for exchanges
of
nonmonetary assets that do not have commercial substance. The statement is
effective for financial statements for fiscal years beginning after
June 15, 2005. The adoption of the statement is not expected to have
a
material effect on the Company’s consolidated financial position, results of
operations and cash flows.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,
a
replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
provides guidance on the accounting for and reporting of accounting changes
and
error corrections. It establishes, unless impracticable, retrospective
application as the required method for reporting a change in accounting
principle in the absence of explicit transition requirements specific to
the
newly adopted accounting principle. This statement also provides guidance
for
determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. SFAS No. 154 is effective for accounting changes
and correction of errors made in fiscal years beginning after December 15,
2005.
The
adoption of the statement is not expected to have a material effect on the
Company’s consolidated financial position, results of operations and cash flows.
Factors
That May Affect Future Results
We
have a history of operating losses and negative cash flow, we have ongoing
funding obligations and we need to raise additional capital that may not
be
available to us, all of which could lead us to seek bankruptcy protection.
We
have
incurred losses and experienced negative cash flow from operating activities
in
the past, and we expect to incur losses and experience negative cash flow
from
operating activities in the foreseeable future. We incurred losses from
continuing operations in 2002, 2003, 2004 and the six months ended June 30,
2005
of approximately $8.3 million, $1.6 million, $4.9 million and $1.2 million,
respectively. In addition, we experienced negative cash flow from operating
activities of $5.1 million, $2.2 million, $2.3 million and $838,000 in 2002,
2003, 2004 and the six months ended June 30, 2005, respectively, and have
a
shareholders’ deficiency of $6.3 million as of June 30, 2005.
We
sponsor a defined benefit pension plan which was frozen in 1993. In January
2003, we filed a notice with the PBGC seeking a “distress termination” of the
Plan. Pursuant to the Agreement for Appointment of Trustee and Termination
of
Plan between the PBGC and us effective September 30, 2004, the PBGC proceeded
to
terminate the Plan and was appointed as the Plan’s trustee. As a result, the
PBGC has assumed responsibility for paying the obligations to Plan participants.
Under the terms of the Settlement Agreement effective September 23, 2004
between
the PBGC and us, we were liable to the PBGC for the unfunded guaranteed benefit
payable by the PBGC to Plan participants in the amount of $7.5 million. We
satisfied this liability by issuing the Note dated September 23, 2004 payable
to
the PBGC with a face amount of $7.5 million.
Pursuant
to the Security Agreement and Pledge Agreement, both dated September 23,
2004,
the Note is secured by (a) all of our presently owned or hereafter acquired
real
or personal property and rights to property and (b) the common and preferred
stock of Infineer and TecSec we own. Infineer is a wholly-owned subsidiary
of
ours. We have an approximately 5% ownership interest in TecSec, on a fully
diluted basis.
The
Note
matures on September 23, 2011. The first payment will be equal to $1.0 million
and will become due 30 days after we have received a total of $4.0 million
in
Net Recoveries. Thereafter, on each anniversary of the first payment, we
are
required to pay the PBGC an amount equal to 25% of the Net Recoveries in
excess
of $4.0 million (less the sum of all prior payments made in accordance with
this
sentence in prior years). As of June 30, 2005, Net Recoveries was approximately
$3.5 million.
In
the
event of our default under the Settlement Agreement, the PBGC may declare
the
outstanding amount of the Note to be immediately due and payable, proceed
with
foreclosure of the liens granted in favor of the PBGC and exercise any other
rights available under applicable law.
We
will
need to raise additional capital that may not be available to us. As a result
of
the Plan termination discussed above, our 2003 and 2004 funding requirements
due
to the Plan amounting to $3.4 million through September 15, 2004 were
eliminated. As such, we believe that existing cash and short term investments
may be sufficient to meet our operating and capital requirements at the
currently anticipated levels through December 31, 2005. However, additional
capital will be necessary in order to operate beyond December 31, 2005 and
to
fund the current business plan and other obligations. While we are actively
considering various funding alternatives, no arrangement to obtain additional
funding has been secured or entered into. There can be no assurance that
we will
be able to obtain additional funding, on acceptable terms or at all. If we
cannot raise additional capital to continue at our present level of operations
we may not be able to meet our obligations, take advantage of future acquisition
opportunities or further develop or enhance our product offering, any of
which
could have a material adverse effect on our business and results of operations
and could lead us to seek bankruptcy protection. The auditors’ reports on the
Company’s Consolidated Financial Statements for the years ended December 31,
2002, 2003 and 2004 contained emphasis paragraphs concerning substantial
doubt
about the Company’s ability to continue as a going concern.
We
currently have no capacity for commercial debt financing. Should such capacity
become available to us, we may be adversely affected in the future by factors
such as higher interest rates, inability to borrow without collateral, and
continued operating losses. Borrowings may also involve covenants limiting
or
restricting our operations or future opportunities. In addition, we have
future
non-cancelable operating lease obligations for office space, vehicles and
office
equipment aggregating $665,000.
We
cannot assure you that Infineer will be able to continue to operate.
During
2002, 2003, 2004 and the six months ended June 30, 2005, PubliCARD contributed
additional capital to Infineer of $44,000, $70,000, $225,000 and $150,000,
respectively. Without such contributions, Infineer may not have been able
to
fund its operations. We cannot assure you that additional capital contributions
will not be required in the future, or, if required, that PubliCARD will
be in a
position to make any additional capital contributions.
We
face risks associated with acquisitions.
An
important element of our strategic plan involves the acquisition of businesses
in areas outside the technology sectors in which we have recently been engaged,
so as to diversify our asset base. However, we will only be able to engage
in
future acquisitions if we are successful in obtaining additional funding,
as to
which no assurance can be given. Acquisitions would require us to invest
financial resources and may have a dilutive effect on our earnings or book
value
per share of common stock. We cannot assure you that we will consummate any
acquisitions in the future, that any financing required for such acquisitions
will be available on acceptable terms or at all, or that any past or future
acquisitions will not materially adversely affect our results of operations
and
financial condition.
Our
acquisition strategy generally presents a number of significant risks and
uncertainties, including the risks that:
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we
will not be able to retain the employees or business relationships
of the
acquired company;
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we
will fail to realize any synergies or other cost reduction objectives
expected from the acquisition;
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we
will not be able to integrate the operations, products, personnel
and
facilities of acquired companies;
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management’s
attention will be diverted to pursuing acquisition opportunities
and
integrating acquired products, technologies or companies and will
be
distracted from performing its regular
responsibilities;
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we
will incur or assume liabilities, including liabilities that are
unknown
or not fully known to us at the time of the acquisition;
and
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we
will enter markets in which we have no direct prior experience.
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We
cannot
assure you that any of the foregoing will not materialize, which could have
an
adverse effect on our results of operations and financial condition.
The
market’s acceptance of our products is uncertain.
Demand
for, and market acceptance of, our software solutions and products are subject
to a high level of uncertainty due to rapidly changing technology, new product
introductions and changes in customer requirements and preferences. The success
of our products or any future products depends upon our ability to enhance
our
existing products and to develop and introduce new products and technologies
to
meet customer requirements. We face the risk that our current and future
products will not achieve market acceptance.
Our
future revenues and earnings depend in large part on the success of these
products, and if the benefits are not perceived sufficient or if alternative
technologies are more widely accepted, the demand for our solutions may not
grow
and our business and operating results would be materially and adversely
affected.
We
depend on a relatively small number of customers for a majority of our
revenues.
We rely
on a limited number of customers in our business. We expect to continue to
depend upon a relatively small number of customers for a majority of the
revenues in our business.
For the
year ended December 31, 2004 and the six months ended June 30, 2005, no one
customer accounted for more than 10% of our revenues. In
addition, no one customer accounted for more than 10% of the accounts receivable
balance as of June 30, 2005.
We
generally do not enter into long-term supply commitments with our customers.
Instead, we bid on a project basis. Significant reductions in sales to any
of
our largest customers would have a material adverse effect on our business.
In
addition, we generate significant accounts receivable and inventory balances
in
connection with providing products to our customers. A customer’s inability to
pay for our products could have a material adverse effect on our results
of
operations.
Our
future success depends on our ability to keep pace with technological changes
and introduce new products in a timely manner. The
rate
of technological change currently affecting the smart card market is
particularly rapid compared to other industries. Our ability to anticipate
these
trends and adapt to new technologies is critical to our success. Because
new
product development commitments must be made well in advance of actual sales,
new product decisions must anticipate future demand as well as the speed
and
direction of technological change. Our ability to remain competitive will
depend
upon our ability to develop in a timely and cost effective manner new and
enhanced products at competitive prices. New product introductions or
enhancements by our competitors could cause a decline in sales or loss of
market
acceptance of our existing products and lower profit margins.
Our
success in developing, introducing and selling new and enhanced products
depends
upon a variety of factors, including:
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timely
and efficient completion of product design and
development;
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timely
and efficient implementation of manufacturing
processes;
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effective
sales, service and marketing;
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product
performance in the field.
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Our
ability to develop new products also depends upon the success of our research
and development efforts. We may need to devote additional resources to our
research and development efforts in the future. We cannot assure you that
funds
will be available for these expenditures or that these funds will lead to
the
development of viable products.
The
highly competitive markets in which we operate could have a material adverse
effect on our business and operating results. The
markets in which we operate are intensely competitive and characterized by
rapidly changing technology. We compete against numerous companies, many
of
which have greater resources than we do, and we believe that competition
is
likely to intensify.
We
believe that the principal competitive factors affecting us are:
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the
extent to which products support industry standards and are capable
of
being operated or integrated with other
products;
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technical
features and level of security;
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strength
of distribution channels;
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product
reputation, reliability, quality, performance and customer
support;
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product
features such as adaptability, functionality and ease of use;
and
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competitor
reputation, positioning and
resources.
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We
cannot
assure you that competitive pressures will not have a material adverse effect
on
our business and operating results. Many of our current and potential
competitors have longer operating histories and significantly greater financial,
technical, sales, customer support, marketing and other resources, as well
as
greater name recognition and a larger installed base of their products and
technologies than our company. Additionally, there can be no assurance that
new
competitors will not enter our markets. Increased competition would likely
result in price reductions, reduced margins and loss of market share, any
of
which could have a material adverse effect on our business and operating
results.
Our
primary competition currently comes from companies offering closed environment
solutions, including small value electronic cash systems and database management
solutions, such as Moneybox (Girovend), Counter Solutions, Uniware, Cunninghams,
Plastic Card Services, MARS, Diebold and Schlumberger.
Many
of
our current and potential competitors have broader customer relationships
that
could be leveraged, including relationships with many of our customers. These
companies also have more established customer support and professional services
organizations than we do. In addition, a number of companies with significantly
greater resources than we have could attempt to increase their presence by
acquiring or forming strategic alliances with our competitors, resulting
in
increased competition.
Our
long product sales cycles subject us to risk.
Our
products fall into two categories; those that are standardized and ready
to
install and use and those that require significant development efforts to
implement within the purchasers’ own systems. Those products requiring
significant development efforts tend to be newly developed
technologies and
software applications that
can
represent major investments for customers. We are subject to potential
customers’ internal review processes and systems requirements. The
implementation of some of our products involves deliveries of small quantities
for pilot programs and significant testing by the customers before firm orders
are received, or lengthy beta testing of software solutions. For these more
complex products, the sales process may take one year or longer, during which
time we may expend significant financial, technical and management resources,
without any certainty of a sale.
We
may be limited in our use of our federal net operating loss
carryforwards. As
of
December 31, 2004, we had federal net operating loss carryforwards, subject
to
review by the Internal Revenue Service, totaling approximately $67.6
million for federal income tax purposes. The federal net operating loss
carryforwards begin to expire in 2005. We do not expect to earn any significant
taxable income in the next several years, and may not do so until much later,
if
ever. A federal net operating loss can generally be carried back two, three
or
five years and then forward fifteen or twenty years (depending on the year
in
which the loss was incurred), and used to offset taxable income earned by
a
company (and thus reduce its income tax liability).
Section
382 of the Internal Revenue Code provides that when a company undergoes an
“ownership change,” that company’s use of its net operating losses is limited in
each subsequent year. An “ownership change” occurs when, as of any testing date,
the sum of the increases in ownership of each shareholder that owns five
percent
or more of the value of a company’s stock as compared to that shareholder’s
lowest percentage ownership during the preceding three-year period exceeds
fifty
percentage points. For purposes of this rule, certain shareholders who own
less
than five percent of a company’s stock are aggregated and treated as a single
five-percent shareholder. We may issue a substantial number of shares of
our
stock in connection with public and private offerings, acquisitions and other
transactions in the future, although no assurance can be given that any such
offering, acquisition or other transaction will be effected. In addition,
the
exercise of outstanding options to purchase shares of our common stock may
require us to issue additional shares of our common stock. The issuance of
a
significant number of shares of stock could result in an “ownership change.” If
we were to experience such an “ownership change,” we estimate that virtually all
of our available federal net operating loss carryforwards would be effectively
unavailable to reduce our taxable income.
The
extent of the actual future use of our federal net operating loss carryforwards
is subject to inherent uncertainty because it depends on the amount of otherwise
taxable income we may earn. We cannot give any assurance that we will have
sufficient taxable income in future years to use any of our federal net
operating loss carryforwards before they would otherwise expire.
Our
proprietary technology is difficult to protect and may infringe on the
intellectual property rights of third parties. Our
success depends significantly upon our proprietary technology. We rely on
a
combination of copyright and trademark laws, trade secrets, confidentiality
agreements and contractual provisions to protect our proprietary rights.
We seek
to protect our software, documentation and other written materials under
trade
secret and copyright laws, which afford only limited protection. We cannot
assure you that any of our applications will be approved, that any new patents
will be issued, that we will develop proprietary products or technologies
that
are patentable, that any issued patent will provide us with any competitive
advantages or will not be challenged by third parties. Furthermore, we cannot
assure you that the patents of others will not have a material adverse effect
on
our business and operating results.
If
our
technology or products is determined to infringe upon the rights of others,
and
we were unable to obtain licenses to use the technology, we could be required
to
cease using the technology and stop selling the products. We may not be able
to
obtain a license in a timely manner on acceptable terms or at all. Any of
these
events would have a material adverse effect on our financial condition and
results of operations.
Patent
disputes are common in technology related industries. We cannot assure you
that
we will have the financial resources to enforce or defend a patent infringement
or proprietary rights action. As the number of products and competitors in
the
smart card market grows, the likelihood of infringement claims also increases.
Any claim or litigation may be time consuming and costly, cause product shipment
delays or require us to redesign our products or enter into royalty or licensing
agreements. Any of these events would have a material adverse effect on our
business and operating results. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products
or to
use our proprietary information and software. In addition, the laws of some
foreign countries do not protect proprietary and intellectual property rights
as
effectively as do the laws of the United States. Our means of protecting
our
proprietary and intellectual property rights may not be adequate. There is
a
risk that our competitors will independently develop similar technology,
duplicate our products or design around patents or other intellectual property
rights.
We
believe that establishing, maintaining and enhancing the Infineer brand name
is
essential to our business. We filed an application for a United States trademark
registration and an application for service mark registration of our name
and
logo. We are aware of third parties that use marks or names that contain
similar
sounding words or variations of the “infi” prefix. In July 2002, we received a
claim from a third party challenging the use of the Infineer name. We reached
an
agreement with this third party in 2004 to amend our trademark application,
and
we believe that this claim has been resolved. As a result of this claim and
other challenges which may occur in the future, we may incur significant
expenses, pay substantial damages and be prevented from using the Infineer
name.
Use of a similar name by third parties may also cause confusion to our clients
and confusion in the market, which could decrease the value of our brand
and
harm our reputation. We cannot assure you that our business would not be
adversely affected if we are required to change our name or if confusion
in the
market did occur.
The
nature of our products subjects us to product liability
risks.
Our
customers may rely on certain of our current products and products in
development to prevent unauthorized access to digital content for financial
transactions, computer networks, and real property. A malfunction of or design
defect in certain of our products could result in tort or warranty claims.
Although we attempt to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in our sales agreements
and by maintaining product liability insurance, we cannot assure you that
these
measures will be effective in limiting our liability for any damages. Any
liability for damages resulting from security breaches could be substantial
and
could have a material adverse effect on our business and operating results.
In
addition, a well-publicized actual or perceived security breach involving
our
conditional access or security products could adversely affect the market’s
perception of our products in general, regardless of whether any breach is
attributable to our products. This could result in a decline in demand for
our
products, which could have a material adverse effect on our business and
operating results.
We
may have difficulty retaining or recruiting professionals for our
business.
Our
future success and performance is dependent on the continued services and
performance of our senior management and other key personnel. If we fail
to meet
our operating and financial objectives this may make it more difficult to
retain
and reward our senior management and key personnel. The loss of the services
of
any of our executive officers or other key employees could materially adversely
affect our business.
Our
business requires experienced software and hardware engineers, and our success
depends on identifying, hiring, training and retaining such experienced,
knowledgeable professionals. If a significant number of our current employees
or
any of our senior technical personnel resign, or for other reasons are no
longer
employed by us, we may be unable to complete or retain existing projects
or bid
for new projects of similar scope and revenues. In addition, former employees
may compete with us in the future.
Even
if
we retain our current employees, our management must continually recruit
talented professionals in order for our business to grow. Furthermore, there
is
significant competition for employees with the skills required to perform
the
services we offer. We cannot assure you that we will be able to attract a
sufficient number of qualified employees in the future to sustain and grow
our
business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer.
Our
international operations subject us to risks associated with operating in
foreign markets, including fluctuations in currency exchange rates, which
could
adversely affect our operations and financial
condition.
Our
operations are located in the United Kingdom and sales to customers outside
the
U.S. represented approximately 88% and 86% of total sales for the year ended
December 31, 2004 and the six months ended June 30, 2005, respectively. Because
we derive a substantial portion of our business outside the United States,
we
are subject to certain risks associated with operating in foreign markets
including the following:
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tariffs
and other trade barriers;
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difficulties in staffing and managing
foreign
operations; |
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currency exchange
risks; |
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export controls related to encryption
technology; |
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unexpected changes in regulatory
requirements; |
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changes in economic and political
conditions; |
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seasonal reductions in business
activities in
the countries where our customers are
located; |
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longer payment cycles and greater
difficulty
in accounts receivable collection; |
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potentially adverse tax consequences;
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burdens of complying with a variety
of foreign
laws. |
Any
of
the foregoing could adversely impact the success of our operations. We cannot
assure you that such factors will not have a material adverse effect on our
future sales and, consequently, on our business, operating results and financial
condition. In addition, fluctuations in exchange rates could have a material
adverse effect on our business, operating results and financial condition.
To
date, we have not engaged in currency hedging.
Changes
we may need or be required to make in our insurance coverage may expose us
to
increased liabilities and may interfere with our ability to retain or attract
qualified officers and directors.
We renew
or replace various insurance policies on an annual basis, including those
that
cover directors and officers liability. Given the current climate of rapidly
increasing insurance premiums and erosions of coverage, we may need or be
required to reduce our coverage and increase our deductibles in order to
afford
the premiums. To the extent we reduce our coverage and increase our deductibles,
our exposure and the exposure of our directors and officers for liabilities
that
either become excluded from coverage or underinsured will increase. As a
result,
we may lose or may experience difficulty in attracting qualified directors
and
officers.
We
are subject to government regulation. Federal,
state and local regulations impose various environmental controls on the
discharge of chemicals and gases, which have been used in our past assembly
processes and may be used in future processes. Moreover, changes in such
environmental rules and regulations may require us to invest in capital
equipment and implement compliance programs in the future. Any failure by
us to
comply with environmental rules and regulations, including the discharge
of
hazardous substances, could subject us to liabilities and could materially
adversely affect our operations.
Recently
enacted and proposed regulatory changes will cause us to incur increased
costs. Recently
enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002, will
increase our expenses as we evaluate the implications of new rules and devote
resources to respond to the new requirements. In particular, we expect to
incur
significant additional administrative expense as we implement Section 404
of the
Sarbanes-Oxley Act, which requires management to report on, and our independent
registered public accounting firm to attest to, our internal controls. The
compliance of these new rules could also result in continued diversion of
management’s time and attention, which could prove to be disruptive to business
operations. Further, we may lose or may experience difficulty in attracting
qualified directors and officers.
There
can
be no assurance that we will timely complete the management certification
and
auditor attestation requirements of Section 404 of Sarbanes-Oxley Act. Possible
consequences of failure to complete such actions include sanction or
investigation by regulatory authorities, such as the Securities and Exchange
Commission. Any such action could harm our stock price and also have a material
adverse effect on our cash flow and financial position.
Our
articles of incorporation and by-laws, certain change of control agreements,
our
rights plan and provisions of Pennsylvania law could deter takeover
attempts.
Blank
check preferred stock.
Our
board of directors has the authority to issue preferred stock and to fix
the
rights, preferences, privileges and restrictions, including voting rights,
of
these shares without any further vote or action by the holders of our common
stock. The rights of the holders of any preferred stock that may be issued
in
the future may adversely affect the rights of the holders of our common stock.
The issuance of preferred stock could make it more difficult for a third
party
to acquire a majority of our outstanding voting stock, thereby delaying,
deferring or preventing a change of control. Such preferred stock may have
other
rights, including economic rights, senior to our common stock, and as a result,
the issuance of the preferred stock could limit the price that investors
might
be willing to pay in the future for shares of our common stock and could
have a
material adverse effect on the market value of our common stock.
Rights
plan.
Our
rights plan entitles the registered holders of rights to purchase shares
of our
class A preferred stock upon the occurrence of certain events, and may have
the
effect of delaying, deferring or preventing a change of control.
Change
of control agreements.
We are
a party to change of control agreements, which provide for payments to certain
of our directors under certain circumstances following a change of control.
Since the change of control agreements require large cash payments to be
made by
any person effecting a change of control, these agreements may discourage
takeover attempts.
The
change of control agreements provide that, if the services of any person
party
to a change of control agreement are terminated within three years following
a
change of control, that individual will be entitled to receive, in a lump
sum
within 10 days of the termination date, a payment equal to 2.99 times that
individual’s average annual compensation for the shorter of the five years
preceding the change of control and the period the individual received
compensation from us for personal services. Assuming a change of control
were to
occur at the present time, payments would be made of approximately $633,000
to
each of Mr. Harry I. Freund and Mr. Jay S. Goldsmith. If any such payment,
either alone or together with others made in connection with the individual’s
termination, is considered to be an excess parachute payment under the Internal
Revenue Code, the individual will be entitled to receive an additional payment
in an amount which, when added to the initial payment, would result in a
net
benefit to the individual, after giving effect to excise taxes imposed by
Section 4999 of the Internal Revenue Code and income taxes on such additional
payment, equal to the initial payment before such additional payment and
we
would not be able to deduct these initial or additional payments for income
tax
purposes.
Pennsylvania
law.
We are
a Pennsylvania corporation. Anti-takeover provisions of Pennsylvania law
could
make it difficult for a third party to acquire control of us, even if such
change of control would be beneficial to our shareholders.
Our
stock was delisted from the Nasdaq System.
On
February 14, 2002, we received a notice from The Nasdaq Stock Market that
our
common stock had failed to maintain a minimum closing bid price of $1.00
over
the last 30 consecutive trading days as required by the Nasdaq National Market
rules. We received a second notice on February 27, 2002, that our common
stock
also failed to maintain a market value of public float of $5 million.
In
accordance with the Nasdaq rules, we were required to regain compliance with
the
National Market minimum bid price requirement and with the market value of
public float requirement by May 2002. Since our common stock continued to
trade
significantly below $1.00, in April 2002, we filed an application to transfer
the listing of our common stock to the SmallCap Market. The application was
approved and our common stock listing was transferred to the SmallCap Market
effective May 2, 2002. The SmallCap Market also has a minimum bid price
requirement of $1.00. We qualified for an extended grace period to comply
with
the SmallCap Market’s $1.00 minimum bid price requirement, which extended the
delisting determination by Nasdaq until February 10, 2003.
On
March
19, 2003, we received a Nasdaq Staff Determination letter indicating that
we
failed to comply with the minimum bid price requirement for continued listing
on
the SmallCap Market and that our common stock was therefore subject to
delisting. Our board of directors decided not to appeal the delisting
determination. Effective March 28, 2003, our common stock no longer traded
on
the SmallCap Market. On March 28, 2003, our common stock began trading on
the
OTC Bulletin Board.
As
a
result of the delisting, the liquidity of our common stock may be materially
adversely affected. This could impair our ability to raise capital in the
future. There can be no assurance that we will be able to obtain additional
funding, on acceptable terms or at all. If we cannot raise additional capital
to
continue at our present level of operations we may not be able to meet our
obligations, take advantage of future acquisition opportunities or further
develop or enhance our product offering, any of which could have a material
adverse effect on our business and results of operations and could lead us
to
seek bankruptcy protection.
Our
stock price is extremely volatile.
The
stock market has recently experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies. The market
price
of our common stock has been highly volatile and is likely to continue to
be
volatile. The future trading price for our common stock will depend on a
number
of factors, including:
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delisting
of our common stock from the Nasdaq SmallCap Market effective March
28,
2003 (see “Our stock has been delisted from the Nasdaq System”
above);
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the
volume of activity for our common stock is minimal and therefore
a large
number of shares placed for sale or purchase could increase its
volatility;
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our ability to effectively manage our business,
including
our ability to raise capital; |
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variations
in our annual or quarterly financial results or those of our
competitors;
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general economic conditions, in particular,
the
technology service sector; |
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expected or announced relationships with other
companies; |
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announcements of technological advances innovations
or
new products by us or our
competitors; |
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patents or other proprietary rights or patent
litigation;
and |
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product liability or warranty
litigation. |
We
cannot
be certain that the market price of our common stock will not experience
significant fluctuations in the future, including fluctuations that are adverse
and unrelated to our performance.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Foreign
currency exchange rate risk
We
conduct operations in the United Kingdom and sell products in several different
countries. Therefore, our operating results may be impacted by the fluctuating
exchange rates of foreign currencies, especially the British pound, in relation
to the U.S. dollar. We do not currently engage in hedging activities with
respect to our foreign currency exposure. We continually monitor our exposure
to
currency fluctuations and may use financial hedging techniques when appropriate
to minimize the effect of these fluctuations. Even so, exchange rate
fluctuations may still have a material adverse effect on our business and
operating results.
Market
Risk
We
are
exposed to market risk primarily through short-term investments and an overdraft
facility. Our investment policy calls for investment in short-term, low risk
instruments. As of June 30, 2005, short-term investments (principally U.S.
Treasury bills) were $1.1 million and borrowing under the overdraft facility
amounted to $531,000. Due to the nature of these investments and the amount
of
the overdraft facility, any change in rates would not have a material impact
on
our financial condition or results of operations.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures designed to ensure that
the
information the Company must disclose in its filings with the SEC is recorded,
processed, summarized and reported on a timely basis. With the participation
of
management, the Company's chief executive officer and chief financial officer
has evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by
this
report. Based upon this evaluation, the chief executive officer and chief
financial officer has concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.
Changes
in Internal Control over Financial Reporting
There
has
not been any change in the Company's internal controls over financial reporting
during the period to which this report relates that has materially affected,
or
is reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
May
28, 2002, a lawsuit was filed against the Company and four of its current
and
former directors and executive officers in the Superior Court of the State
of
California, in the County of Los Angeles by Leonard M. Ross and affiliated
entities alleging, among other things, misrepresentation and securities fraud
(the “Lawsuit”). The plaintiffs sought compensatory and punitive damages for
alleged actions of the defendants in order to induce the plaintiff to purchase,
hold or refrain from selling shares of the Company’s common stock. The
plaintiffs alleged that the defendants made a series of material
misrepresentations, misleading statements, omissions and concealments,
specifically and directly to the plaintiffs concerning the nature, existence
and
status of contracts with certain purchasers, the nature and existence of
investments in the Company by third parties, the nature and existence of
business relationships and investments by the Company.
In
November 2002, the Company and the individual defendants served with the
Lawsuit
filed a demurrer seeking the dismissal of six of the plaintiffs’ nine purported
causes of action. In January 2003, the court ruled in favor of the demurrer
and
dismissed the entire complaint. The plaintiffs were granted the right to
replead
and subsequently filed an amended complaint in February 2003. The Company
and
individual defendants filed a second demurrer in March 2003. In June 2003,
the
court ruled in favor of the demurrer and dismissed, without leave to amend,
six
of the eleven purported causes of action in the amended complaint. The parties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
The
parties to the Lawsuit agreed to engage in non-binding mediation and on July
20,
2005, reached an agreement to settle the Lawsuit. Pursuant to this agreement,
in
exchange for a payment, the plaintiffs have agreed to dismiss the case with
prejudice and the parties have agreed to execute mutual general releases.
The
Company’s primary directors and officers liability insurance carriersreparties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
has
agreed to fund the full cost of the settlement.
The
Company incurred approximately $200,000 in defense costs in 2002. No additional
costs have been incurred in 2005, 2004 and 2003. The
Company’s primary directors and officers liability insurance carriersreparties
to the Lawsuit subsequently began the document discovery process and responded
to interrogatories.
funded
the additional costs of defending this Lawsuit.
Various
other legal proceedings are pending against the Company. The Company considers
all such other proceedings to be ordinary litigation incident to the character
of its business. Certain claims are covered by liability insurance. The Company
believes that the resolution of these claims to the extent not covered by
insurance will not, individually or in the aggregate, have a material adverse
effect on the consolidated financial position or consolidated results of
operations of the Company.
ITEM
5. OTHER INFORMATION
In
the
second quarter of 2005, the Company reported all required disclosures on
Form
8-K.
ITEM
6. EXHIBITS
(a)
Exhibits
31(i).1 |
Certification
of the Chief Executive Officer and Chief Financial Officer filed
herewith
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer filed
herewith
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
PUBLICARD,
INC.
(Registrant)
|
|
|
|
Date:
August 12, 2005 |
By: |
/s/
Antonio L. DeLise |
|
Antonio
L. DeLise, President, |
|
Chief
Executive Officer, Chief Financial
Officer
|