UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________________
FORM
10-Q
(Mark
One)
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
|
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2006
OR
[
] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
|
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from ___ to ___.
Commission
file number 0-29794
PUBLICARD,
INC.
(Exact
name of registrant as specified in its charter)
Pennsylvania
|
23-0991870
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
No.)
|
|
|
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
__.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer ___
Accelerated
filer ___ Non-accelerated
filer X
Indicate
by check whether the registrant is a shell company (as defined in Rule 12b-2
of
the Exchange Act).
Yes __
No
X
Number
of
shares of Common Stock outstanding as of November 16, 2006: 24,940,902
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
CONDENSED
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER
30, 2006 AND DECEMBER 31, 2005
(in
thousands, except share data)
(Unaudited)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash,
including short-term investments of $229 and $989 in 2006
and
|
|
|
|
|
|
|
|
2005,
respectively
|
|
$
|
247
|
|
$
|
1,072
|
|
Trade
receivables, less allowance for doubtful accounts of $17 and
$16
|
|
|
|
|
|
|
|
in
2006 and 2005, respectively
|
|
|
733
|
|
|
647
|
|
Inventories,
net of reserve of $60 and $56 in 2006 and 2005,
respectively
|
|
|
247
|
|
|
303
|
|
Other
current assets
|
|
|
70
|
|
|
573
|
|
Total
current assets
|
|
|
1,297
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
Equipment
and leasehold improvements, net
|
|
|
24
|
|
|
47
|
|
|
|
$
|
1,321
|
|
$
|
2,642
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Overdraft
payable
|
|
$
|
564
|
|
$
|
406
|
|
Trade
accounts payable
|
|
|
617
|
|
|
592
|
|
Accrued
liabilities
|
|
|
916
|
|
|
1,067
|
|
Current
portion of note payable (Note 1)
|
|
|
25
|
|
|
-
|
|
Total
current liabilities
|
|
|
2,122
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
Note
payable (Note 1)
|
|
|
-
|
|
|
7,501
|
|
Other
non-current liabilities
|
|
|
219
|
|
|
227
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,341
|
|
|
9,793
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
deficiency:
|
|
|
|
|
|
|
|
Class
A Preferred Stock, Second Series, no par value: 1,000 shares authorized;
465
|
|
|
|
|
|
|
|
shares
issued and outstanding as of September 30, 2006 and December 31,
2005
|
|
|
2,325
|
|
|
2,325
|
|
Common
shares, $0.10 par value: 40,000,000 shares authorized; 24,940,902
|
|
|
|
|
|
|
|
shares
issued and outstanding as of September 30, 2006 and December 31,
2005
|
|
|
2,494
|
|
|
2,494
|
|
Additional
paid-in capital
|
|
|
108,617
|
|
|
108,594
|
|
Accumulated
deficit
|
|
|
(114,309
|
)
|
|
(120,507
|
)
|
Accumulated
other comprehensive loss
|
|
|
(147
|
)
|
|
(57
|
)
|
Total
shareholders’ deficiency
|
|
|
(1,020
|
)
|
|
(7,151
|
)
|
|
|
$
|
1,321
|
|
$
|
2,642
|
|
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
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005
(in
thousands, except share data)
(unaudited)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
887
|
|
$
|
1,029
|
|
$
|
2,434
|
|
$
|
2,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
412
|
|
|
429
|
|
|
1,143
|
|
|
1,220
|
|
Gross
margin
|
|
|
475
|
|
|
600
|
|
|
1,291
|
|
|
1,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
387
|
|
|
514
|
|
|
1,296
|
|
|
1,537
|
|
Sales
and marketing
|
|
|
249
|
|
|
248
|
|
|
769
|
|
|
929
|
|
Product
development
|
|
|
156
|
|
|
149
|
|
|
441
|
|
|
489
|
|
|
|
|
792
|
|
|
911
|
|
|
2,506
|
|
|
2,955
|
|
Loss
from operations
|
|
|
(317
|
)
|
|
(311
|
)
|
|
(1,215
|
)
|
|
(1,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5
|
|
|
7
|
|
|
13
|
|
|
21
|
|
Interest
expense
|
|
|
(9
|
)
|
|
(8
|
)
|
|
(25
|
)
|
|
(19
|
)
|
Other
income
|
|
|
182
|
|
|
-
|
|
|
205
|
|
|
-
|
|
|
|
|
178
|
|
|
(1
|
)
|
|
193
|
|
|
(2
|
)
|
Net
loss from continuing operations
|
|
$
|
(139
|
)
|
$
|
(312
|
)
|
$
|
(1,022
|
)
|
$
|
(1,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary
gain on settlement with the PBGC
|
|
$
|
7,220
|
|
$
|
-
|
|
$
|
7,220
|
|
|
- |
|
Net
income (loss)
|
|
$
|
7,081
|
|
$
|
(312
|
)
|
$
|
6,198
|
|
$
|
(1,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per
Common
Share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(.01
|
)
|
$
|
(.01
|
)
|
$
|
(.05
|
)
|
$
|
(.06
|
)
|
Gain
on settlement with the PBGC
|
|
$
|
.29
|
|
$
|
.
|
|
$
|
.30
|
|
|
-
|
|
Basic
and diluted income (loss) per common share
|
|
$
|
.28
|
|
$
|
(.01
|
)
|
$
|
.25
|
|
$
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
24,940,902
|
|
|
24,690,902
|
|
|
24,940,902
|
|
|
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 NINE MONTHS ENDED SEPTEMBER 30, 2006
(in
thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
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, 2006
|
|
$
|
2,325
|
|
|
24,940,902
|
|
$
|
2,494
|
|
$
|
108,594
|
|
$
|
(120,507
|
)
|
$
|
(57
|
)
|
$
|
(7,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
cost related to grant of stock options
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
23
|
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,198
|
|
|
-
|
|
|
6,198
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(90
|
)
|
|
(90
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- September 30, 2006
|
|
$
|
2,325
|
|
|
24,940,902
|
|
$
|
2,494
|
|
$
|
108,617
|
|
$
|
(114,309
|
)
|
$
|
(147
|
)
|
$
|
(1,020
|
)
|
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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(in
thousands)
(unaudited)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income/(loss)
|
|
$
|
6,198
|
|
$
|
(1,484
|
)
|
Adjustments
to reconcile net income (loss) to net cash used
|
|
|
|
|
|
|
|
in
operating activities:
|
|
|
|
|
|
|
|
Compensation
cost from issuance of stock options
|
|
|
23
|
|
|
-
|
|
Gain
on insurance recovery
|
|
|
(205
|
)
|
|
-
|
|
Gain
on settlement with the PBGC
|
|
|
(7,220 |
)
|
|
- |
|
Loss
on disposal of equipment
|
|
|
4 |
|
|
- |
|
Depreciation
and amortization
|
|
|
28
|
|
|
63
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
19
|
|
|
(43
|
)
|
Inventories
|
|
|
96
|
|
|
173
|
|
Other
current assets
|
|
|
249
|
|
|
141
|
|
Trade
accounts payable
|
|
|
(39
|
)
|
|
(325
|
)
|
Accrued
liabilities
|
|
|
(256
|
)
|
|
75
|
|
Other
non-current liabilities
|
|
|
(8
|
)
|
|
(15
|
)
|
Net
cash used in operating activities
|
|
|
(1,111
|
)
|
|
(1,415
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from insurance recoveries
|
|
|
461
|
|
|
52
|
|
Capital
expenditures
|
|
|
(5
|
)
|
|
-
|
|
Other
|
|
|
-
|
|
|
(3
|
)
|
Net
cash provided by investing activities
|
|
|
456
|
|
|
49
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayment
of Long Term Debt
Proceeds
from overdraft facility
|
|
|
(256)
85
|
|
|
0
172
|
|
Net
cash (used in) provided by financing activities
|
|
|
(171
|
)
|
|
172
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(825
|
)
|
|
(1,193
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
1,072
|
|
|
1,943
|
|
Cash
and cash equivalents - end of period
|
|
$
|
247
|
|
$
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
19
|
|
$
|
19
|
|
Cash
paid for taxes
|
|
$
|
5
|
|
$
|
8
|
|
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.
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.
Liquidity
and Going Concern Considerations
The
consolidated financial statements included in this Form 10-Q contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the factors described below, it is unlikely that
the
Company will be able 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, 2005, 2004,
2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
the
Company’s ability to continue as a going concern.
Infineer
has continued to incur operating losses and negative cash flow. During 2003,
2004 and 2005, the Company contributed additional capital to Infineer of
$70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
require additional capital and the Company does not have the financial resources
to provide such support. Given the Company’s lack of available resources,
continued operating losses and bank overdraft, the Company has begun to
consider various alternatives. In 2006, with the assistance of an investment
banker, the Company commenced an assessment of the value of Infineer, developed
an information memorandum and obtained offers for Infineer’s potential for sale.
This process concluded without a viable offer for the business. The Board of
Directors has not decided whether to continue with the disposition effort.
It is
therefore uncertain whether an acceptable offer will materialize or whether
any
such sale will ultimately be consummated. Any
such
determination to dispose of Infineer would depend upon, among other things,
the
amount of potential proceeds of any such sale and require the approval of the
Company’s shareholders.
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 (“PBGC”) seeking a “distress termination” of that 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. 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.
Under
the
terms of the Settlement Agreement, effective September 23, 2004, between the
PBGC and the Company (the “Settlement Agreement”), 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 a non-interest bearing note (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 was
secured by (a) all presently owned or thereafter 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.
On
July
27, 2006, the Company entered into a Payment, Retirement and Release Agreement
(the “Payment Agreement”) with the PBGC pursuant to which the PBGC and the
Company provided for the settlement and discharge of the Company’s obligations
under the Settlement Agreement and the Note. Pursuant to the Payment Agreement,
the Company paid the $256,391.31 on July 27, 2006, and agreed that if, between
July 27, 2006 and July 27, 2011, the Company receives Net Proceeds in excess
of
$250,000, the Company will pay to the PBGC 50% of the amount of such excess.
As
defined in the Payment Agreement, “Net Proceeds” means the amount received by
the Company in cash or marketable securities, less the amount of reasonable
transaction costs and expenses and debt paid, retained or assumed, from any
of
(i) the sale by the Company of any or all capital stock of Infineer; (ii)
the
sale by Infineer of all or substantially all of its assets and a distribution
of
the proceeds of such sale to the Company; (iii) the sale by the Company of
any
or all capital stock of Tecsec; and (iv) proceeds received by the Company
from
settlements, buyouts or assignments of claims with respect to insurance policies
covering environmental liabilities for which claims were made prior to July
27,
2006. The Payment Agreement further provides that if, on July 27, 2011, the
Company exists as a going concern and holds capital stock of Infineer (and
Infineer exists as a going concern) or Tecsec (and Tecsec exists as a going
concern), the Company will be deemed to have sold such capital stock for
its
fair market value, which shall be added to Net Proceeds for purposes of
determining the amount of additional payments to the PBGC, if any.
On
October 13, 2006, the Company entered into an Assignment of Shares and
Assumption of Obligations agreement (the “Assignment Agreement”) with Sallyport
Investment Partnership (“Sallyport”), pursuant to which the Company assigned
60,058 shares of Series A Preferred Stock of Tecsec to Sallyport in exchange
for
$150,000. In addition, pursuant to the Assignment Agreement, Sallyport agreed
to
use its best efforts to transfer to the Company or cause to be issued to
the
Company shares of common stock of Tecsec representing 2 ½% of Tecsec’s common
stock, calculated on a fully-diluted basis and giving effect to shares that
may
be issued as a result of Sallyport’s financing of Tecsec during the current
year. On October 13, 2006, Tecsec confirmed its agreement to issue such shares
to the Company.
The
future payments to the PBGC, based on the proceeds from the Assignment Agreement
and the Company’s projection of future insurance recoveries of $150,000,
are anticipated to be $25,000 although no assurance can be given that this
will be the case, and are included in Note Payable. As
a
result of this settlement of the liability to the PBGC, the Company has
recognized a $7.2 million gain on its Statement of Operations. Given
the
Company’s current financial position, it does not believe that any additional
payments will be due to the PBGC on July 27, 2011.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 $247,000 at September
30, 2006. The Company also had a shareholders’ deficiency of $1,020,000 as of
September 30, 2006.
Management
believes that existing cash and short-term investments will not be sufficient
to
permit the Company to continue operating past the first quarter of 2007 and
the
Company will likely cease operations. If a sale of Infineer is consummated,
the
Company will not thereafter have any ongoing business operations. In either
case, the Company does not expect that any funds will be available for
distribution to its shareholders.
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 condensed consolidated financial statements reflect
all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of the Company and its
subsidiary companies as of September 30, 2006 and the results of their
operations and cash flows for the three and nine months ended September 30,
2006. 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, 2005.
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 nine months ended September
30, 2006, 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 6,416,925 and 3,589,850 as of September 30,
2006 and 2005, respectively. At September 30, 2006, the 2,837,075 options
granted during the quarter then ended remained unvested.
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.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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
September 30, 2006 and December 31, 2005 consisted of the following (in
thousands):
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Raw
materials and work-in-process
|
|
$
|
235
|
|
$
|
254
|
|
Finished
goods
|
|
|
72
|
|
|
95
|
|
|
|
|
307 |
|
|
359 |
|
Inventory
Reserve
|
|
|
(60
|
)
|
|
(56
|
)
|
|
|
$
|
247
|
|
$
|
303
|
|
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “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 is recognized over the
requisite service period, generally as the award vests. Pro forma disclosure
of
the income statement effects of share-based payments is no longer an
alternative. The Company has elected the modified prospective transition method
as permitted by SFAS No. 123(R), in which compensation cost is recognized
beginning with the effective date based on the requirements of SFAS
No. 123(R) for all share-based payments granted after January 1, 2006,
and based on the requirements of SFAS No. 123 for all awards granted to
employees prior to that date that remained unvested upon adoption of SFAS
No. 123(R). Compensation expense related to share-based awards is
recognized over the requisite service period, which is generally the vesting
period. The adoption of SFAS No. 123(R) had no impact on the Company’s
consolidated financial statements since there were no previously granted awards
unvested as of the adoption date.
On
July
21, 2006, the Company entered into an Engagement Agreement (as
amended, the
“Engagement Agreement”) with Joseph Sarachek. Pursuant to the Engagement
Agreement, Mr. Sarachek was appointed to the Company’s Board of Directors on
July 21, 2006. Also pursuant to the Agreement, Mr. Sarachek was appointed
as the
Company’s Chief Executive Officer, effective July 31, 2006.
Pursuant
to the Engagement Agreement, Mr. Sarachek was granted options (the “Initial
Options”) to purchase 2,837,075 shares of the Company’s common stock at an
exercise price of $0.0279 per share, the fair value of the Company’s stock on
the date of the grant. 1,793,650 of the Initial Options were granted under
the
Company’s 1999 Long Term Incentive Plan (the “Long Term Incentive Plan”), and
1,043,425 of the Initial Options were granted pursuant to a Non-Plan Stock
Option Agreement between Mr. Sarachek and the Company, dated as of July 21,
2006. All of the Initial Options will vest upon the consummation of a sale
of
the Company or other restructuring or similar transaction involving the Company,
as defined in the Engagement Agreement. The Company has recognized compensation
expense for the Initial Options under the guidelines set forth in SFAS No.
123(R), amounting to $20,000 for the three and nine months ended September
30,
2006.
Following
the consummation of any such transaction, Mr. Sarachek will be granted
additional options to purchase shares of the Company’s common stock, which
options will be exercisable into shares of the Company’s common stock
representing (when taken together with the Initial Options) 10% of the Company’s
outstanding common stock, calculated on a fully-diluted basis. Such options
will
be exercisable when granted. The Agreement also provides that, upon consummation
of any such transaction, Mr. Sarachek will be entitled to receive a cash
transaction fee in an amount equal to a percentage of the aggregate value
of
such transaction received by the Company or its shareholders ranging from
4% to
7%.
On
August
24, 2006, the Company issued 150,000 options to its Directors under the
Non-Employee Director Stock Option Plan. The Company issued these options to
each of its directors at an exercise price of $0.03 per share, which represents
the fair value per share at the date of the grant. These options vested
immediately upon issuance, and have an expiration date of August 4, 2011. The
Company recognized $3,000 of expense associated with the issuance of these
options.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
For
purposes of computing the share based compensation, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. The weighted average assumptions used to estimate the value
of
the share-based grants are as follows:
|
|
2006
|
|
2005
|
|
Expected
option term (years)
|
|
|
5.0-10.0
|
|
|
5.0
|
|
Expected
volatility
|
|
|
100.0
|
%
|
|
165.0
|
%
|
Risk-free
interest rate
|
|
|
5.0
|
%
|
|
4.1
|
%
|
Weighted
average fair value per option
|
|
$
|
.03
|
|
$
|
.02
|
|
Prior
to
the adoption of SFAS No. 123(R), the Company accounted for employee share-based
compensation awards using the intrinsic value method of accounting prescribed
by
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”). Under APB No. 25, no share-based compensation expense
was reflected in the statement of operations as a result of stock option grants
because each option granted pursuant to the Company’s plans had an exercise
price equal to the market price of the Company’s common stock on the date of
grant. There were no stock option grants impacting compensation cost for the
nine months ended September 30, 2005. As such, there is no difference between
the Company’s reported net loss and loss per share and pro forma net loss and
loss per share computed consistent with the method prescribed by SFAS No. 123
for the three and nine months ended September 30, 2005.
Foreign
Currency Translation
The
local
currency of the Company's foreign (United Kingdom) subsidiary is its functional
currency. Assets and liabilities of the Company's foreign subsidiary are
translated into U.S. dollars at the current exchange rate. Statement of
operations accounts are translated at the average rate of exchange prevailing
during the year. Translation adjustments arising from the use of differing
exchange rates from period to period are a component of accumulated
comprehensive loss included in shareholders' equity.
Income
Taxes
The
Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Since the Company has no recent
history of continuing profits, it is unlikely that the future benefit of these
losses will be recognized. Thus, a full valuation allowance has been
recorded. As of December 31, 2005, approximately $61.7 million of U.S. tax
loss carryforwards (subject to review by the Internal Revenue Service), expiring
from 2006 through 2025, were available to offset future taxable income.
Therefore, the Company did not record any tax provision on its income generated
during the three and nine months ended September 30, 2006.
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 Note Payable as of
September 30, 2006 was approximately $25,000. See above for discussion regarding
the retirement of the Note to the PBGC.
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 nine months ended September 30, 2006, no single
customer accounted for 10% or more of revenues. Balances due from one customer
accounted for approximately 10% of the accounts receivable balance as of
September 30, 2006.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 and estimates of reserves
for
receivables and inventories to be critical policies due to the estimation
processes involved. While all available information has been considered, actual
amounts could differ from those reported.
Recent
Accounting Pronouncements
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
did not 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 did not 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
Company currently does not contemplate any voluntary changes in accounting
principles.
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 nine months ended
September 30, 2006 and 2005 are as follows (in thousands):
|
|
Three
months ended
September
30
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
$
|
650
|
|
$
|
795
|
|
$
|
1,613
|
|
$
|
1,856
|
|
United
States
|
|
|
46
|
|
|
89
|
|
|
303
|
|
|
327
|
|
Europe
(excluding United Kingdom)
|
|
|
173
|
|
|
119
|
|
|
426
|
|
|
434
|
|
Rest
of world
|
|
|
18
|
|
|
26
|
|
|
92
|
|
|
72
|
|
|
|
$
|
887
|
|
$
|
1,029
|
|
$
|
2,434
|
|
$
|
2,689
|
|
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The
Company has operations in the United States and United Kingdom. Identifiable
tangible assets by country as of September 30, 2006 and December 31, 2005 are
as
follows (in thousands):
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
United
States
|
|
$
|
299
|
|
$
|
1,647
|
|
United
Kingdom
|
|
|
1,022
|
|
|
995
|
|
|
|
$
|
1,321
|
|
$
|
2,642
|
|
Note
3 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases certain office space, vehicles and office equipment under
operating leases that expire over the next three years. Minimum payments for
operating leases having initial or remaining non-cancelable terms in excess
of
one year aggregate approximately $187,000.
Grants
and bank financing
Infineer
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
Infineer to maintain certain levels of operations and employment in Northern
Ireland. As of September 30, 2006, Infineer has a contingent liability to repay,
in whole or in part, grants received of approximately $222,000 in the event
Infineer becomes insolvent or otherwise violates the terms of such grants.
As of
September 30, 2006, Infineer 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 September 30, 2006). As of September 30, 2006, Infineer
had borrowings outstanding under this facility totaling approximately 300,000
British pounds (or the equivalent of approximately $564,000).
Legal
Various
legal proceedings are pending against the Company. The Company considers all
such 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.
Change
of control agreements
The
Company is a party to change of control agreements, which provide for payments
to certain 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 was to occur at the present time, payments of approximately
$449,000 each would be made to the Chairman and Vice Chairman of the Company’s
Board of Directors. 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 the Company would not be able to deduct these
initial or additional payments for income tax purposes.
PUBLICARD,
INC.
AND
SUBSIDIARY COMPANIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note
4- COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) for the Company includes foreign currency translation adjustments,
as well as the net income (loss) reported in the Company's Condensed
Consolidated Statements of Operations. Comprehensive loss for the three and
nine
months ended September 30, 2006 and 2005 was as follows (in
thousands):
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
7,081
|
|
$
|
(312
|
)
|
$
|
6,198
|
|
$
|
(1,484
|
)
|
Foreign
currency translation adjustments
|
|
|
(57
|
)
|
|
9
|
|
|
(90
|
)
|
|
36
|
|
Comprehensive
income (loss)
|
|
$
|
7,024
|
|
$
|
(303
|
)
|
$
|
6,108
|
|
$
|
(1,448
|
)
|
Note
5- SUBSEQUENT EVENTS
On
October 13, 2006, the Company entered into the Assignment Agreement with
Sallyport, pursuant to which the Company assigned 60,058 shares of Series
A
Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition,
pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts
to transfer to the Company or cause to be issued to the Company shares of
common
stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a
fully-diluted basis and giving effect to shares that may be issued as a result
of Sallyport’s financing of Tecsec during the current year. On October 13, 2006,
Tecsec confirmed its agreement to issue such shares to the Company.
On
October 23, 2006, the Company received an interim distribution of $105,000
from
the Arizona Department of Environmental Quality (“ADEQ”) for reimbursement of
expenses incurred for the remediation of the Masterview Window Property in
Phoenix, Arizona. The Company has requested a hearing with the ADEQ to seek
its
approval to disburse payment for the remainder of the $370,000 in total expense
it incurred as part of the remediation. The Company cannot determine at this
time whether any future reimbursements will be made by the ADEQ.
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 the caption “Risk Factors” 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’s
sole operating activities are conducted through its wholly-owned Infineer Ltd.
subsidiary. Infineer designs smart card solutions for educational and corporate
sites.
Infineer
has continued to incur operating losses and negative cash flow. During 2003,
2004 and 2005, the Company contributed additional capital to Infineer of
$70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
require additional capital and the Company does not have the financial resources
to provide such support. Given the Company’s lack of available resources,
continued operating losses and debt position, the Company has begun to consider
various alternatives. In 2006, with the assistance of an investment banker,
the
Company commenced an assessment of the value of Infineer, developed an
information memorandum and obtained offers for Infineer’s potential for sale.
This process concluded without a viable offer for the business. The Board
of Directors has not decided whether to continue with the disposition effort.
It
is therefore uncertain whether an acceptable offer will materialize or whether
any such sale will ultimately be consummated. Any
such
determination to dispose of Infineer would depend upon, among other things,
the
amount of potential proceeds of any such sale and require the approval of the
Company’s shareholders.
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. 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.
Under
the
terms of the Settlement Agreement 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 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 was secured by (a) all presently owned or
thereafter 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.
On
July
27, 2006, the Company entered into the Payment Agreement with the PBGC pursuant
to which the PBGC and the Company provided for the settlement and discharge
of
the Company’s obligations under the Settlement Agreement and the Note. Pursuant
to the Payment Agreement, the Company paid the $256,391.31 on July 27, 2006,
and
agreed that if, between July 27, 2006 and July 27, 2011, the Company receives
Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50%
of the
amount of such excess. As defined in the Payment Agreement, “Net Proceeds” means
the amount received by the Company in cash or marketable securities, less
the
amount of reasonable transaction costs and expenses and debt paid, retained
or
assumed, from any of (i) the sale by the Company of any or all capital stock
of
Infineer; (ii) the sale by Infineer of all or substantially all of its assets
and a distribution of the proceeds of such sale to the Company; (iii) the
sale
by the Company of any or all capital stock of Tecsec; and (iv) proceeds received
by the Company from settlements, buyouts or assignments of claims with respect
to insurance policies covering environmental liabilities for which claims
were
made prior to July 27, 2006. The Payment Agreement further provides that
if, on
July 27, 2011, the Company exists as a going concern and holds capital stock
of
Infineer (and Infineer exists as a going concern) or Tecsec (and Tecsec exists
as a going concern), the Company will be deemed to have sold such capital
stock
for its fair market value, which shall be added to Net Proceeds for purposes
of
determining the amount of additional payments to the PBGC, if any.
On
October 13, 2006, the Company entered into the Assignment Agreement with
Sallyport, pursuant to which the Company assigned 60,058 shares of Series
A
Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition,
pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts
to transfer to the Company or cause to be issued to the Company shares of
common
stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a
fully-diluted basis and giving effect to shares that may be issued as a result
of Sallyport’s financing of Tecsec during the current year. On October 13, 2006,
Tecsec confirmed its agreement to issue such shares to the Company. Given
the
Company’s current financial position, it does not believe that any additional
payments will be due to the PBGC on July 27, 2011.
On
July
27, 2006, the Company entered into the Payment Agreement with the PBGC,
which
provides that if, between July 27, 2006 and July 27, 2011, the Company
receives
Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50%
of the
amount of such excess. See “ -- Liquidity” below. Based on proceeds from the
Tecsec Assignment Agreement and estimated future insurance recoveries,
the
Company expects that the Company will receive Net Proceeds in excess of
$250,000. Accordingly, the Company expects to pay to the PBGC 50% of the
proceeds received in connection with the Assignment Agreement.
The
Company has not recorded any value on its financial statements for the
equity
received in connection with the Assignment Agreement. In accordance with
SFAS
No. 15, Troubled
Debt Restructurings,
the
Company has reduced the carrying value of its liability to the PBGC to
an amount
equal to its estimated future cash payments, which has resulted in a gain
of
$7.2 million, or $0.29 per common share, from the settlement with the PBGC.
The
Company has pledged 1.25% of the equity received from Assignment and Assumption
Agreement with Sallyport Capital Holdings to the PBGC. The Company has
not
recorded any value on its financial statements for this equity. In accordance
with SFAS No. 15, Troubled
Debt Restructurings,
the
Company has reduced the carrying value of its liability to the PBGC to
an amount
equal to its estimated future cash payments, which has resulted in a gain
of
$7.2 million, or $0.29 per common share from the settlement with the
PBGC.
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 $247,000 at September
30, 2006. The Company also had a shareholders’ deficiency of $1,020,000 as of
September 30, 2006.
Management
believes that existing cash and short-term investments will not be sufficient
to
permit the Company to continue operating past the first quarter of 2007 and
the
Company will likely cease operations. If a sale of Infineer is consummated,
the
Company will not thereafter have any ongoing business operations. In either
case, the Company does not expect that any funds will be available for
distribution to its shareholders.
The
consolidated financial statements included in this Form 10-Q contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the factors described above, it is unlikely that
the
Company will be able 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, 2005, 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 nine months ended September 30, 2006 and 2005 (dollars in
thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
887
|
|
$
|
1,029
|
|
$
|
2,434
|
|
$
|
2,689
|
|
Cost
of revenues
|
|
|
412
|
|
|
429
|
|
|
1,143
|
|
|
1,220
|
|
Gross
margin
|
|
|
475
|
|
|
600
|
|
|
1,291
|
|
|
1,469
|
|
Gross
margin percentage
|
|
|
54
|
%
|
|
58
|
%
|
|
53
|
%
|
|
55
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
387
|
|
|
514
|
|
|
1,296
|
|
|
1,537
|
|
Sales
and marketing
|
|
|
249
|
|
|
248
|
|
|
769
|
|
|
929
|
|
Product
development
|
|
|
156
|
|
|
149
|
|
|
441
|
|
|
489
|
|
|
|
|
792
|
|
|
911
|
|
|
2,506
|
|
|
2,955
|
|
Loss
from operations
|
|
|
(317
|
)
|
|
(311
|
)
|
|
(1,215
|
)
|
|
(1,486
|
)
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5
|
|
|
7
|
|
|
13
|
|
|
21
|
|
Interest
expense
|
|
|
(9
|
)
|
|
(8
|
)
|
|
(25
|
)
|
|
(19
|
)
|
Other
income
|
|
|
182
|
|
|
-
|
|
|
205
|
|
|
-
|
|
|
|
|
178
|
|
|
(1
|
)
|
|
193
|
|
|
2
|
|
Net
loss from continuing operations
|
|
$
|
(139
|
)
|
$
|
(312
|
)
|
$
|
(1,022
|
)
|
$
|
(1,484
|
)
|
|
Results
of Operations
Three
Months Ended September 30, 2006 Compared to Three Months Ended September 30,
2005
Revenues.
Revenues
are generated from product sales, technology and software license fees,
installation and maintenance contracts. Consolidated revenues decreased to
$887,000 in 2006 compared to $1.03 million in 2005. Foreign currency changes
had
the effect of increasing revenues by 2%. Excluding the impact of foreign
currency changes, sales in 2006 decreased by 17% driven by a $146,000 decline
in
direct sales to customers located in the United Kingdom offset by a $3,000
increase in shipments to distribution partners located outside of the United
Kingdom (other than the U.S.).
Gross
margin. Cost
of
revenues consists primarily of material, personnel costs and overhead. Gross
margin, as a percentage of net revenues, was 54% in 2006 compared to 58% in
2005. The decrease is primarily a result of a shift in the Company’s sales mix
which provided a greater proportion of sales to customers located outside the
United Kingdom. Sales to these distribution partners are generally at a lower
margin than sales to customers located within the United Kingdom.
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 $249,000 in 2006 compared to $248,000 in 2005. Headcount levels within
the
sales and marketing departments were consistent between 2006 and
2005.
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 $156,000 in 2006 compared
to
$149,000 in 2005. Headcount levels related to product development were
consistent between 2006 and 2005.
General
and administrative expenses. General
and administrative expenses consist primarily of personnel and related costs
for
general corporate activities, including finance and accounting, risk management
and legal. General and administrative expenses were $387,000 in 2006 compared
to
$514,000 in 2005. The decrease in expenses is mainly attributable to a $43,000
reduction in directors fees, reduced outside services expense of $12,000,
reduced employee salaries and business related expenses of $111,000 and lower
legal and insurance expenses of $12,000 at corporate, offset by $30,000 of
additional consultant expenses and stock based compensation expenses of
$23,000.
Other
Income and Expenses. Other
Income and Expenses consist primarily of interest income and expenses, insurance
settlement proceeds, and other restructuring benefits and expenses. The increase
in other income was primarily the result of receipt of $72,000 in connection
with unclaimed property as a result of a demutualization proceeding and
$111,000 of net proceeds received from the Department of Energy in
connection with a crude oil overcharge refund.
Nine
Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
2005
Revenues.
Consolidated
revenues decreased to $2.4 million in 2006 compared to $2.7 million for 2005.
Foreign currency changes had the effect of increasing revenues by 7%. Excluding
the impact of foreign currency changes, sales in 2006 decreased by 10% driven
by
a decline of $303,000 in direct sales to customers located in the United Kingdom
as well as a $11,000 decline in shipments to distribution partners located
outside of the United Kingdom.
Cost
of revenues. Gross
margin, as a percentage of net revenues, was 53% in 2006 compared to 55% in
2005. The decrease is primarily a result of a shift in the Company’s sales mix
which provided a greater proportion of sales to customers located outside the
United Kingdom. Sales to these distribution partners are generally at a lower
margin than sales to customers located within the United Kingdom.
Sales
and marketing expenses. Sales
and
marketing expenses were $769,000 in 2006 compared to $929,000 in 2005. The
decrease is primarily attributable to a $163,000 reduction in wages, benefits
and employee business expense resulting from headcount reductions.
Product
development expenses. Product
development expenses amounted to $441,000 in 2006 compared to $489,000 in 2005.
The decrease in expenses is mainly attributable to a $32,000 decline in wages,
benefits and employee business expense associated with headcount reductions,
and
an $8,000 decrease in depreciation.
General
and administrative expenses. General
and administrative expenses for the nine months ended September 30, 2006
decreased to $1.3 million from $1.5 million for 2005. The decrease in expenses
is mainly attributable to lower outside services (primarily legal, insurance
and
shareholder reporting) of $96,000 at corporate, a $51,000 reduction in directors
fees, reduced employee salaries and expenses of $111,000 and lower salary,
professional fees, depreciation and other expenses of $80,000 at Infineer,
offset by stock based compensation expense of $23,000, higher consulting
expenses at corporate of $52,000, and higher auditing and tax related services
expense of $15,000.
Other
Income and Expenses. Other
Income and Expenses consist primarily of interest income and expenses, insurance
settlement proceeds, and other restructuring benefits and expenses. The increase
in other income was primarily a result of receipt of $72,000 in connection
with unclaimed property as a result of a demutualization proceeding, $25,000
released from an escrow previously established in connection with a claim
against a historical insurer, and $111,000 of net proceeds received from the
Department of Energy in connection with a crude oil overcharge refund.
Liquidity
The
consolidated financial statements included in this Form 10-Q contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. As a result of the factors described above, it is unlikely that
the
Company will be able 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, 2005, 2004,
2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
the
Company’s ability to continue as a going concern.
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 and other recoveries in 2003, 2004 and 2005. For the nine months
ended
September 30, 2006, cash, including short-term investments, decreased by
$825,000 to $247,000 as of September 30, 2006.
Operating
activities utilized cash of $1,111,000 for the nine months ended September
30,
2006 and principally consisted of the net income of $6.2 million, an increase
in
operating assets and liabilities of $61,000 offset by a gain on insurance
recoveries of $205,000 depreciation and amortization of $28,000 and a $7.2
million one time non-cash gain resulting from the settlement of the PBGC Note
.
Investing
activities generated cash of $456,000 for the nine months ended September 30,
2006 and principally consisted of insurance collections of $461,000. The Company
expects to receive additional net funds of approximately $250,000 in
the fourth
quarter
of 2006 from future insurance settlements.
Financing
activities used cash of $171,000 for the nine months ended September 30, 2006
and consisted of an increase in the overdraft facility at Infineer of $85,000,
offset by repayment of the PBGC Note of $256,000.
The
Company has experienced negative cash flow from operating activities in the
past
and expects to experience negative cash flow in the future.
Infineer
has continued to incur operating losses and negative cash flow. During 2003,
2004 and 2005, the Company contributed additional capital to Infineer of
$70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
require additional capital and the Company does not have the financial resources
to provide such support. Given the Company’s lack of available resources,
continued operating losses and debt position, the Company has begun to consider
various alternatives. In 2006, with the assistance of an investment banker,
the
Company commenced an assessment of the value of Infineer, developed an
information memorandum and obtained offers for Infineer’s potential for sale.
This process concluded without a viable offer for the business. The Board of
Directors has not decided whether to continue with the disposition effort.
It is
therefore uncertain whether an acceptable offer will materialize or whether
any
such sale will ultimately be consummated. Any
such
determination to dispose of Infineer would depend upon, among other things,
the
amount of potential proceeds of any such sale and require the approval of the
Company’s shareholders.
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. 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.
Under
the
terms of the Settlement Agreement 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 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 was secured by (a) all presently owned or
thereafter 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.
On
July
27, 2006, the Company entered into the Payment Agreement with the PBGC pursuant
to which the PBGC and the Company provided for the settlement and discharge
of
the Company’s obligations under the Settlement Agreement and the Note. Pursuant
to the Payment Agreement, the Company paid the $256,391.31 on July 27, 2006,
and
agreed that if, between July 27, 2006 and July 27, 2011, the Company receives
Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50%
of the
amount of such excess. As defined in the Payment Agreement, “Net Proceeds” means
the amount received by the Company in cash or marketable securities, less
the
amount of reasonable transaction costs and expenses and debt paid, retained
or
assumed, from any of (i) the sale by the Company of any or all capital stock
of
Infineer; (ii) the sale by Infineer of all or substantially all of its assets
and a distribution of the proceeds of such sale to the Company; (iii) the
sale
by the Company of any or all capital stock of Tecsec; and (iv) proceeds received
by the Company from settlements, buyouts or assignments of claims with respect
to insurance policies covering environmental liabilities for which claims
were
made prior to July 27, 2006. The Payment Agreement further provides that
if, on
July 27, 2011, the Company exists as a going concern and holds capital stock
of
Infineer (and Infineer exists as a going concern) or Tecsec (and Tecsec exists
as a going concern), the Company will be deemed to have sold such capital
stock
for its fair market value, which shall be added to Net Proceeds for purposes
of
determining the amount of additional payments to the PBGC, if any.
On
October 13, 2006, the Company entered into the Assignment Agreement with
Sallyport, pursuant to which the Company assigned 60,058 shares of Series
A
Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition,
pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts
to transfer to the Company or cause to be issued to the Company shares of
common
stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a
fully-diluted basis and giving effect to shares that may be issued as a result
of Sallyport’s financing of Tecsec during the current year. On October 13, 2006,
Tecsec confirmed its agreement to issue such shares to the Company. Given
the
Company’s current financial position, it does not believe that any additional
payments will be due to the PBGC on July 27, 2011. See Note 5.
Based
on
proceeds from the Tecsec Assignment Agreement and estimated future insurance
recoveries, the Company expects that it will receive Net Proceeds in excess
of
$250,000. Accordingly, the Company expects to pay to the PBGC 50% of the
proceeds received in connection with the Assignment Agreement.
The
Company has not recorded any value on its financial statements for the equity
received in connection with the Assignment Agreement. In accordance with
SFAS
No. 15, Troubled
Debt Restructurings,
the
Company has reduced the carrying value of its liability to the PBGC to an
amount
equal to its estimated future cash payments, which has resulted in a gain
of
$7.2 million, or $0.29 per common share, from the settlement with the PBGC.
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 $247,000 at September
30, 2006. The Company also had a shareholders’ deficiency of $1,020,000 as of
September 30, 2006.
Management
believes that existing cash and short-term investments will not be sufficient
to
permit the Company to continue operating past the first quarter of 2007 and
the
Company will likely cease operations. If a sale of Infineer is consummated,
the
Company will not thereafter have any ongoing business operations. In either
case, the Company does not expect that any funds will be available for
distribution to its shareholders.
Contractual
Obligations
The
following is a summary of the Company’s commitments as of September 30, 2006 (in
thousands):
|
|
Payments
Due by Period
|
|
Contractual
Obligation Years
|
|
Total
|
|
Less
than 1
year
|
|
1
to 3 years
|
|
3
to 5 years
|
|
More
than
5
years
|
|
Operating
lease obligations
|
|
$
|
326
|
|
$
|
164
|
|
$
|
162
|
|
$
|
0
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
payable to PBGC (a)
|
|
|
25
|
|
|
25
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
219
|
|
|
6
|
|
|
58
|
|
|
58
|
|
|
97
|
|
Total
|
|
$
|
570
|
|
$
|
195
|
|
$
|
220
|
|
$
|
58
|
|
$
|
97
|
|
|
(a) |
The
Note payable to the PBGC was settled on July 27, 2006. See Note 1
to the
Unaudited Condensed Consolidated Financial
Statements.
|
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, 2005. 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
and estimates of reserves for receivables and inventories 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.
Income
Taxes.
The
Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Since the Company has no history
of continuing profits, it is unlikely that the future benefit of these losses
will be recognized. Thus, a full valuation allowance has been recorded. As
of December 31, 2005, approximately $61.7 million of U.S. tax loss carryforwards
(subject to review by the Internal Revenue Service), expiring from 2006 through
2025, were available to offset future taxable income. Therefore, the
Company did not record any tax provision on its income generated during the
three and nine months ended September 30, 2006.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), “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 is recognized over the requisite
service period, generally as the award vests. The Company adopted SFAS No.
123(R) in the first quarter of 2006. There were no previously-granted awards
unvested as of the adoption date. The adoption of the statement had no impact
on
the 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
did not 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 did not 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
Company currently does not contemplate any voluntary changes in accounting
principles.
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 September 30, 2006, short-term investments (a money market
account) were $229,000 and borrowing under the overdraft facility amounted
to
$564,000. Due to the nature of these investments and the amount of the overdraft
facility and the Company's financial condition, any change in rates
(other than a nominal change) would 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 principal financial officer
have 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 principal
financial officer have 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
Various
legal proceedings are pending against the Company. The Company considers all
such proceedings to be ordinary litigation incident to the character of its
business. Certain claims are covered by liability insurance.
ITEM
1A. RISK FACTORS
We
do not expect to continue as a going concern. We
have
incurred losses, a substantial decline in working capital and negative cash
flow
from operations for a number of years. We have also experienced a substantial
reduction in our cash and short term investments, which declined from $17.0
million at December 31, 2000 to $247,000 at September 30, 2006. We also had
a
shareholders’ deficiency of $1,020,000 as of September 30, 2006.
Infineer
has continued to incur operating losses and negative cash flow. During 2003,
2004 and 2005, we contributed additional capital to Infineer of $70,000,
$225,000 and $150,000, respectively. It is likely that Infineer will require
additional capital and we do not have the financial resources to provide such
support. Given our lack of available resources, continued operating losses
and
debt position, we have begun to consider various alternatives. In 2006, with
the
assistance of an investment banker, we commenced an assessment of the value
of
Infineer, developed an information memorandum and obtained offers for Infineer’s
potential for sale. This process concluded without a viable offer for the
business. The Board of Directors has not decided whether to continue with the
disposition effort. It is therefore uncertain whether an acceptable offer will
materialize or whether any such sale will ultimately be consummated. Any
such
determination to dispose of Infineer would depend upon, among other things,
the
amount of potential proceeds of any such sale and require the approval of our
shareholders.
We
believe that existing cash and short-term investments will not be sufficient
to
permit us to continue operating past the first quarter of 2007 and we will
likely cease operations. If a sale of Infineer is consummated, we will not
thereafter have any ongoing business operations. In either case, we do not
expect that any funds will be available for distribution to its
shareholders.
Accordingly,
it is unlikely that we will be able to continue as a going concern. Our
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The independent auditors’ reports
on the our consolidated financial statements for the years ended December 31,
2005, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial
doubt about the Company’s ability to continue as a going concern.
ITEM
6. EXHIBITS
(a)
Exhibits
10.1 |
Engagement
Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and
Joseph
Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report
on Form 8-K filed on July 27, 2006.
|
10.2 |
Addendum
to Engagement Agreement, dated as of July 26, 2006, between PubliCARD,
Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD,
Inc.’s Current Report on Form 8-K filed on July 27,
2006.
|
10.3 |
Indemnification
Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and
Joseph
E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current
Report on Form 8-K filed on July 27,
2006.
|
10.4 |
Stock
Option Agreement, dated as of July 21, 2006, between PubliCARD, Inc.
and
Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s
Current Report on Form 8-K filed on July 27,
2006.
|
10.5 |
Non-Plan
Stock Option Agreement, dated as of July 21, 2006, between PubliCARD,
Inc.
and Joseph E. Sarachek. Incorporated by reference from PubliCARD,
Inc.’s
Current Report on Form 8-K filed on July 27,
2006.
|
10.6 |
Payment,
Retirement and Release Agreement dated as of July 27, 2006 by and
between
the Pension Benefit Guaranty Corporation and PubliCARD, Inc. Incorporated
by reference from PubliCARD, Inc.’s Current Report on Form 10-Q filed on
July 28, 2006.
|
10.7 |
Assignment
of Shares and Assumption of Obligations Agreement dated as of October
13,
2006 between Sallyport Investment Partnership and PubliCARD, Inc.
Incorporated by reference from PubliCARD, Inc.’s Current
Report on Form 8-K filed on October 27,
2006.
|
10.8 |
Letter from TECSEC, Incorporated to
PubliCARD,
Inc., dated as of October 13, 2006. Incorporated by reference to
PubliCARD, Inc.’s Current Report on Form 8-K filed on October 27,
2006. |
31(i).1 |
Certification
of the Chief Executive Officer filed herewith pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
31(i).2 |
Certification
of the Principal Financial Officer filed herewith pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1 |
Certification
of the Chief Executive Officer filed herewith pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
32.2 |
Certification
of the Principal 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:
November 16, 2006 |
|
/s/
Joseph Sarachek |
|
Joseph Sarachek |
|
Chief
Executive Officer |
EXHIBIT
INDEX
Exhibit
10.1 |
Engagement
Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and
Joseph
Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report
on Form 8-K filed on July 27, 2006.
|
10.2 |
Addendum
to Engagement Agreement, dated as of July 26, 2006, between PubliCARD,
Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD,
Inc.’s Current Report on Form 8-K filed on July 27,
2006.
|
10.3 |
Indemnification
Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and
Joseph
E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current
Report on Form 8-K filed on July 27,
2006.
|
10.4 |
Stock
Option Agreement, dated as of July 21, 2006, between PubliCARD,
Inc. and
Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s
Current Report on Form 8-K filed on July 27,
2006.
|
10.5 |
Non-Plan
Stock Option Agreement, dated as of July 21, 2006, between PubliCARD,
Inc.
and Joseph E. Sarachek. Incorporated by reference from PubliCARD,
Inc.’s
Current Report on Form 8-K filed on July 27,
2006.
|
10.6 |
Payment,
Retirement and Release Agreement dated as of July 27, 2006 by and
between
the Pension Benefit Guaranty Corporation and PubliCARD, Inc. Incorporated
by reference from PubliCARD, Inc.’s Current Report on Form 10-Q filed on
July 28, 2006
|
10.7 |
Assignment
of Shares and Assumption of Obligations Agreement dated as of
October 13,
2006 between Sallyport Investment Partnership and PubliCARD,
Inc.
Incorporated by reference from PubliCARD, Inc.’s Current
Report on Form 8-K filed on October 27,
2006.
|
10.8 |
Letter from TECSEC, Incorporated
to PubliCARD,
Inc., dated as of October 13, 2006. Incorporated by reference to
PubliCARD, Inc.’s Current Report on Form 8-K filed on October 27,
2006. |
31(i).1 |
Certification
of the Chief Executive Officer filed herewith pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
31(i).2 |
Certification
of the Principal Financial Officer filed herewith pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1 |
Certification
of the Chief Executive Officer filed herewith pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
|
32.2 |
Certification
of the Principal Financial Officer filed herewith pursuant to
Section 906
of the Sarbanes-Oxley Act of
2002.
|