UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-----------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE)
(Title of Class)
RIGHTS TO PURCHASE CLASS A PREFERRED STOCK, FIRST SERIES
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
As of June 30, 2004, the aggregate market value of the voting Common Stock held
by non-affiliates of the registrant was approximately $1,025,000.
Number of shares of Common Stock outstanding as of March 24, 2005: 24,690,902
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
This Form 10-K contains forward-looking statements, including (without
limitation) statements concerning possible or assumed future results of
operations of PubliCARD, Inc. and subsidiaries, ("PubliCARD," the "Company,"
"we," "us" and "our," as the context requires) preceded by, followed by or that
include forward-looking words or phrases, including "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 events
described under 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.
ITEM 1. BUSINESS
PubliCARD was originally incorporated in 1913 in the Commonwealth of
Pennsylvania. PubliCARD's sole operating activities are conducted through its
Infineer Ltd. ("Infineer") subsidiary. Infineer is a smart card technology
company, which designs and develops smart card software and hardware solutions
for campus environments. This market includes institutions such as corporate
campuses, secondary schools and universities. The Company's ChipNet solution
focuses on delivering a multi-functional platform to control access to and
payment for a wide variety of applications using a single smart card. The
solution has been designed to accommodate integration with a range of third
party technologies. The Company believes that the educational, government and
corporate sectors all continue to move toward the more functional and broader
applications that a smart card solution can provide over traditional methods.
The Company sells its transaction solutions to value-added resellers and
distributors, and directly to end-users.
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.
The consolidated financial statements included in this Form 10-K
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 $1.9 million at December 31, 2004. The Company also had a
shareholders' deficiency of $118.5 million at December 31, 2004.
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 5 to the Notes to Consolidated
Financial Statements for further information regarding 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.
2
INDUSTRY
Security and privacy are primary concerns of the ever-growing information
economy. The expected level of growth in secure business-to-business and
consumer-to-business transactions will only occur if consumers, businesses,
governments and other organizations are confident that their network and
Internet exchanges and transactions are secure from unauthorized intrusion,
usage, sabotage and theft. To effectively address the growing need for greater
enterprise and on-line security, individuals and organizations are turning to
smart card technology. Through its central processing and memory capabilities,
smart card technology enables cryptographic communications, authentication and
other applications that permit secure data access, information exchange and
electronic transactions within network and Internet environments.
A smart card is similar in appearance to a traditional credit card, but
unlike a traditional credit card, stores information on an integrated circuit
chip embedded within the card, rather than on a magnetic stripe on the surface.
While a typical magnetic stripe card can store information such as a user's
name, account and personal identification number, a smart card has the capacity
to store detailed account information, health care records, merchant coupons,
still or video images and cash. Additionally, the integrated circuit within a
smart card serves as a central processing unit which, combined with its memory
capacity, facilitates the use of encryption applications, which secure data and
value exchanges within networks and the Internet. Smart cards also permit
bi-directional authentication in which the smart card can authenticate the
validity of the intended party or device prior to exchanging information or
value.
The rollout of smart card technology started in the telecommunication
sector, specifically to facilitate the use of public payphones (replacing coins)
and mobile phones (Subscriber Identification Modules). The deployment of smart
card technology in this sector demonstrates the security and adaptability of the
technology and evidences the uniqueness of smart cards as a medium for storing,
transporting and processing personal information, access keys and other
information.
Smart card technology is now being widely deployed in other market
sectors, including the security and transaction management sectors. In the
security sector, smart card technology is being used to authenticate and secure
access to physical premises, PCs, networks, virtual private networks, and the
Internet, and through cryptography, facilitate secure email, electronic document
and information exchanges, e-commerce transactions/payments and other Internet
and broadband applications. In the transaction management sector, smart card
technology is being used within a variety of closed system environments. For
example, smart card technology is being used in the banking sector to secure
payment transactions in physical and virtual worlds and in the transportation
sector to replace "tickets," thereby speeding up the ticketing process and
making it more efficient. Other closed environments such as corporate or
educational campuses are using smart card technology to resolve a mix of both
security and transaction needs including purchase and payment transactions,
identification, authentication and access.
Demand for smart card solutions is being further driven by governments and
financial institutions. The U.S. Department of Defense began deployment of smart
cards to armed forces personnel under the Common Access Card personal identity
program in 2000. The European Commission ("EC") is also supporting the adoption
of smart card technology in their continuing efforts to create a more efficient
and competitive economy within the European community. Through the eEurope
program, the EC is sponsoring programs to standardize smart card infrastructure
devices and harmonize system platforms. Finally, smart card technology is
rapidly becoming a key facilitator of financial transactions. The financial and
banking community in Asia and Europe is using smart card technology to support
credit, debit and e-purse cards (cards that store cash values),
multi-application services and services dealing with coupons and/or tickets.
Several large U.S. financial institutions, including American Express,
MasterCard and Visa International, have introduced smart cards as part of their
financial card systems.
The use of smart card technology is especially well suited for managing
transactions in closed environment solutions that restrict access and manage
payments. In closed environments, smart cards are used to control access to
physical premises, process payments and provide portable network security. The
Company believes that the educational, government and corporate sectors all
continue to provide growth opportunities as these institutions move toward the
more functional and broader applications that a smart card solution can provide
over other traditional methods. Smart card solutions offer a greater level of
flexibility and permit development of customer specific applications that cannot
be offered by traditional methods of providing closed environment security and
transaction management such as the magnetic stripe.
3
With the increased use and acceptance of smart cards and related
technologies worldwide, there are numerous applications to use smart card
technology in a variety of infrastructure platforms. PubliCARD has developed a
client-server based software solution for closed campus proprietary card users,
which is focused on delivering multi-functionality around a single card
supporting a wide range of third party technologies.
STRATEGY
HISTORY OF THE COMPANY'S SMART CARD INITIATIVE
PubliCARD established its presence within the smart card industry through
a series of acquisitions:
o In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, Inc. ("Greenwald Intellicard"), the assets and
intellectual property of Intellicard Systems, Ltd. Greenwald Intellicard
provided smart cards, smart card readers, value transfer stations, card
management software and machine interface boards for the commercial
laundry appliance industry. PubliCARD initially owned 50% of Greenwald
Intellicard, and acquired the remaining 50% in February 1999 and February
2000.
o In November 1998, PubliCARD acquired Tritheim Technologies, Inc.
("Tritheim"), which developed conditional access and security products for
the software industry, computers and the electronic information and the
digital video broadcast industry. In May 2000, the Company changed the
name of its Tritheim subsidiary to Infineer, Inc. as part of a re-branding
effort.
o In February 1999, PubliCARD acquired Amazing! Smart Card Technologies,
Inc. ("Amazing"), a developer of consumer smart card solutions and a
manufacturer of customized smart cards.
o In February 1999, PubliCARD acquired Greystone Peripherals, Inc.
("Greystone"), a developer of hard disk duplicators.
o In November 1999, PubliCARD acquired Absec Limited ("Absec"), a designer
of closed environment solutions, including small value electronic cash
systems and database management solutions. In May of 2000, the Company
changed the name of its Absec subsidiary to Infineer Ltd. as part of a
re-branding effort.
While PubliCARD developed a number of successful products and solutions,
its operations were fragmented throughout a variety of markets. PubliCARD's
Board of Directors, together with its management team, determined to integrate
its operations and focus on a single market in which:
o high growth potential existed;
o PubliCARD had established relationships;
o PubliCARD had already deployed products and gained credibility; and
o PubliCARD possessed core technologies and competencies.
PubliCARD believed that it could leverage its existing smart card
technology for deployment in the rapidly growing enterprise and on-line security
and transaction management market sectors, which PubliCARD had already
penetrated and which it believed exhibited each of the characteristics
identified above. To effect this new business strategy, in March 2000, the
Company's Board of Directors adopted a plan to dispose of the operations of the
Company's Greenwald Industries Inc. ("Greenwald"), Greenwald Intellicard,
Greystone and Amazing subsidiaries. These subsidiaries designed, manufactured
and distributed mechanical and smart card laundry solutions, hard disk
duplicators and smart cards.
On June 29, 2000, the Company completed the sale of substantially all of
the assets of Greenwald and Greenwald Intellicard to The Eastern Company
("Eastern") for $22.5 million in cash, less $1.75 million held in escrow to
secure the payment of certain indemnification obligations. As part of the
transaction, Eastern assumed certain liabilities of Greenwald and Greenwald
Intellicard, including certain contractual liabilities, accounts payable and
accrued liabilities. The Company completed the wind-down of the operations of
Amazing and Greystone including the sale of certain assets and the licensing of
certain intellectual property during 2000 and 2001.
In December 2000, the Company acquired a 3.5% ownership interest in TecSec
Incorporated ("TecSec") for $5.1 million. TecSec, a Virginia company, develops
and markets encryption products and solutions, which are designed to enable the
next generation information security for the enterprise, multi-enterprise
e-business and other markets.
4
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.
CURRENT STRATEGY
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 focused 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. Key
elements of our strategy include the following:
o GENERATE CAPITAL. 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.
o GROW PUBLICARD BUSINESS THROUGH ACQUISITIONS. An important element of the
Company's strategic plan involves the acquisition of businesses in areas
outside the technology sectors in which the Company is engaged, so as to
diversify its asset base. The Company made a series of successful
acquisitions in the 1980s and early 1990s and will endeavor to replicate
this success by seeking out businesses meeting a targeted profile.
Implementation of this plan will require the Company to obtain funding.
However, there can be no assurance that the Company will be able to obtain
funding on acceptable terms or at all.
o EXPAND INFINEER MARKET REACH. Management believes that Infineer can expand
the market reach of its smart card solutions by forming strategic
marketing and distribution relationships with a number of key industry
players both in the United Kingdom and elsewhere. Infineer has a strong
market position in the United Kingdom educational sector, and to a lesser
extent in the corporate market, and intends to leverage this market
position to select markets outside of the United Kingdom. Implementation
of this initiative will require the Company to obtain funding. However,
there can be no assurance that the Company will be able to obtain funding
on acceptable terms or at all.
o EXPAND INFINEER PRODUCT OFFERING. Management believes that Infineer can
expand its total product offering, technologies and market position by
partnering with companies engaged in complementary businesses or by
acquiring or licensing complementary technologies and products. Infineer
intends to form relationships, which will provide a "complete" solution to
the educational and corporate campus market places. Implementation of this
initiative will require the Company to obtain funding. However, there can
be no assurance that the Company will be able to obtain funding on
acceptable terms or at all.
PUBLICARD PRODUCTS AND SOLUTIONS
PubliCARD, through its Infineer subsidiary, designs smart card solutions
for campus environments. Infineer's solutions facilitate card-based payment for
a wide variety of services typically found on both corporate and education
sites. Infineer's card-based solutions are currently installed in over 700
sites, primarily in educational and corporate sites in the United Kingdom and
Ireland. Infineer's products and solutions include the following:
o CHIPNET3. Using a single smart card, ChipNet3 users gain access to, and
tender payment for, a wide variety of services typically found on both
corporate and educational sites. ChipNet3 delivers applications such as
photo identification, payment for cafeteria, vending machine, photocopy
5
and printing purchases, and access control on a single card platform. Each
time a transaction takes place, all details are recorded, such as the date
and time, user and item purchased. The transaction details are then
processed by a back office software package, utilizing a tracking tool
that delivers accurate management information regarding sales and card
activity.
ChipNet3 has the ability to accept a range of both contact and contactless
smart cards. The solution is scalable and can run in a networked or
non-networked environment. The ChipNet3 solution has been structured to
allow integration with existing third party applications such as payroll,
stock control, physical access control, PC log-on and time and attendance
reporting.
ChipNet3 solution is comprised of smart cards, application software and
hardware. Each user has a personalized smart card which may feature photo
identification, a bar code, magnetic stripe or signature panel, if
required. The chip on the card carries the cardholder's personal
permission file and may be loaded and reloaded with a cash value which is
used for purchasing needs. Hardware includes point-of-sale terminals and
mini-tills, vending station card readers and add-value or card reload
stations.
Infineer recently introduced ChipNetID which allows corporate sites the
ability to extend the use of their existing identification cards to
include payment at cafeteria and vending stations. ChipNetID can operate
with a range of contactless smart cards issued by Mifare and HID.
Corporate sites can benefit from deploying cashless payments in a facility
without the need to replace existing in-use identification and access
control cards.
o EASYSMART. EasySmart is designed to deliver a first experience with smart
cards for locations that do not want to pay or do not need a
multi-application card system, and has been developed to fill a gap in the
market for an entry-level smart card solution providing an
administration-free payment system. EasySmart is a stand-alone solution
operating with a low cost smart card and is useful for a wide range of
locations including colleges, cafeterias and libraries. EasySmart offers
card acceptance for PC log-on, cafeteria point-of-sale, self-service
centers, networked printing, photocopying and encoding stations. Although
EasySmart offers the capacity to run without being networked, it also
contains a built-in upgrade path to ChipNet3.
o EASYCARD. The EasyCard product line delivers a flexible magnetic stripe
based solution across a range of applications, including copying,
printing, point-of-sale, vending and Internet access. Operating with
either disposable or rechargeable thin magnetic stripe cards, EasyCard is
a simple to use solution, useful for schools, colleges, libraries and copy
shops as well as corporate and government facilities and business parks.
Users carry cards, featuring either a cash or unit value, and the
appropriate amount is deducted each time a service is used. For those
customers not paying in advance for services, account cards can be used,
recording the use of a range of services against an individual or
department. A full range of support products offer card acceptance at
self-service card centers and encoding stations.
o PCOUNTER. Pcounter is a scalable network server-based print management and
accounting solution that provides a range of cost control and cost
recovery capabilities. Pcounter aims to eliminate waste and misuse and
help rationalize and reallocate print resources by providing usage
accountability. Pcounter is marketed to schools, colleges, professional
services firms, the public sector and corporations.
SALES AND MARKETING
Infineer sells and distributes its products directly to end-users in the
United Kingdom through its direct sales force. Infineer has approximately 16
employees directly engaged in the sale, distribution and support of its products
in the United Kingdom. Outside of the United Kingdom, Infineer is represented by
over 30 independent distributors and value-added resellers. Key markets include,
among others, the United States, the Netherlands, France and Australia.
In support of its sales strategies, Infineer also makes use of direct mail
campaigns to its customers, advertising in targeted trade media and at trade
shows and conferences. Infineer intends to continue seeking to form strategic
relationships with key industry players to provide it with access to leading
edge technology, marketing and sales leverage, and access to key customers and
accounts.
RESEARCH AND DEVELOPMENT
Research and development is a key element to the Company's future success
and competitive position. Infineer develops an annual technology development
plan as an integral part of its business planning process. This plan identifies
new areas requiring development in support of identified business opportunities,
as well as a program of maintenance and enhancement for existing solutions.
Development expenses were $716,000, $584,000 and $605,000 in 2004, 2003 and
2002, respectively.
6
Infineer's product development is organized to quickly bring products from
concept to product introduction. The Company's future success will depend upon
its ability to enhance existing products and to develop and to introduce new
products on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Results -- Our future
success depends on our ability to keep pace with technological changes and
introduce new products in a timely manner."
COMPETITION
Competition in the markets in which Infineer operates is intense and is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and rapid changes in customer requirements.
To maintain and improve its competitive position, Infineer must continue to
develop and introduce, on a timely and cost-effective basis, new products and
product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers. The principal competitive factors affecting the market for Infineer's
technology products are the product's technical characteristics and price,
customer service and competitor reputation, as well as positioning and
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results -- The highly
competitive markets in which we operate could have a material adverse effect on
our business and operating results." Infineer will be required to continue to
respond promptly and effectively to the challenges of technological changes and
its competitors' innovations.
The market for smart card technology solutions is new, intensely
competitive and rapidly evolving. The Company expects competition to continue to
increase both from existing competitors and new market entrants. Infineer's
primary competition currently comes from or is anticipated to come from
companies offering campus 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 Infineer's 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 Infineer. Many
of these companies have broader customer relationships that could be leveraged,
including relationships with many of Infineer's customers. These companies also
have more established customer support and professional services organizations
than Infineer does. In addition, a number of companies with significantly
greater resources than Infineer could attempt to increase their presence in the
marketplace by acquiring or forming strategic alliances with competitors of
Infineer, resulting in increased competition.
INTELLECTUAL PROPERTY
PubliCARD's success depends significantly upon Infineer's proprietary
technology. Infineer relies on a combination of copyright and trademark laws,
trade secrets, confidentiality agreements and contractual provisions to protect
its proprietary rights. Infineer seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. Infineer generally enters into confidentiality and
non-disclosure agreements with its employees and with key vendors and suppliers.
Despite Infineer's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Infineer's products or to obtain and use
information that Infineer regards as proprietary. Moreover, effective copyright
and trade secret protection may be unavailable or limited in certain foreign
countries, making the possibility of misappropriation of Infineer's proprietary
technology more likely. The steps taken by Infineer to protect its proprietary
technology might not prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to Infineer's products.
PubliCARD currently has several trademarks and trademark applications
registered and pending in the United States. PubliCARD and Infineer will
continue to evaluate the registration of additional trademarks as it deems
appropriate. There can be no assurance that Infineer will develop proprietary
products or technologies that are patentable, that any issued patent will
provide Infineer with any competitive advantages or will not be challenged by
third parties or that the patents of others will not have a material adverse
effect on Infineer's business and operating results.
In the event that Infineer's technology or products are determined to
infringe upon the rights of others, Infineer could be required to cease using
such technology and stop selling such products, if Infineer is unable to obtain
licenses to utilize such technology. There can be no assurance that Infineer
would be able to obtain such licenses in a timely manner on acceptable terms and
conditions, and the failure to do so could have a material adverse effect on
PubliCARD's and Infineer's financial condition and results of operations. If
7
Infineer is unable to obtain such licenses, it could encounter significant
delays in product market introductions while it attempted to design around the
infringed-upon patents or rights, or could find the development, manufacture or
sale of products requiring such license to be foreclosed. In addition, patent
disputes are common in the smart card and computer industries and there can be
no assurance that PubliCARD and Infineer will have the financial resources to
enforce or defend a patent infringement or proprietary rights action.
PubliCARD expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in the
smart card market grows. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require Infineer to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable or at all. In the event of a successful claim of product infringement
against Infineer and failure or inability to develop non-infringing technology
or license the infringed or similar technology, PubliCARD's and Infineer's
business, financial condition and results of operations could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Factors That May Affect Future Results --
Our proprietary technology is difficult to protect and may infringe on the
intellectual proprietary rights of third parties."
EMPLOYEES
As of March 24, 2005, the Company had approximately 38 employees, of which
36 are employed by Infineer. At Infineer, there are 16 employees involved in
sales, marketing and customer support, 9 employees in product development, 7
employees in manufacturing and 4 employees in administration. The Company
considers its employee relations to be good.
SEGMENT INFORMATION
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. Revenues by geographical areas for the years ended December
31, 2004, 2003 and 2002 are as follows (in thousands):
2004 2003 2002
------ ------ ------
United States $ 540 $ 869 $1,029
Europe 3,631 3,467 3,445
Rest of world 224 445 131
------ ------ ------
$4,395 $4,781 $4,605
====== ====== ======
The Company has operations in the United States and United Kingdom.
Identifiable tangible assets by country as of December 31, 2004 and 2003 are as
follows (in thousands):
2004 2003
------ ------
United States $2,770 $4,542
United Kingdom 1,521 2,035
------ ------
$4,291 $6,577
====== ======
See also the Company's Financial Statements beginning on page F-1.
AVAILABLE INFORMATION
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other Company related information at http://www.sec.gov.
8
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information about the only executive
officer of the Company as of March 24, 2005. The business address of the
executive officer is the address of the Company, One Rockefeller Plaza, New
York, New York 10020.
Name Age Office and Position
----------------- --- ------------------------------------
Antonio L. DeLise 43 Director, President, Chief Executive
Officer, Chief Financial Officer and
Secretary
Officers are elected to serve for a term ending with the next annual
meeting of shareholders.
Mr. DeLise joined the Company in April 1995 as Vice President, Chief
Financial Officer and Secretary. He was appointed to the Board of Directors in
July 2001 and was elected to the additional posts of President in February 2002
and Chief Executive Officer in August 2002.
Effective January 1, 2005, Harry I. Freund and Jay S. Goldsmith resigned
their officer positions as Chairman and Vice Chairman, respectively. Mr. Freund
and Mr. Goldsmith remain Chairman and Vice Chairman of the Board of Directors,
respectively.
ITEM 2. PROPERTIES
The Company leases the following facilities, which are believed to be
adequate for its present needs.
YEAR OF LEASE SQUARE
PREMISES PURPOSE EXPIRATION FOOTAGE
---------------- ------------------------------- ------------- -------
New York, NY Executive offices for PubliCARD 2007 3,600
Bangor, Northern Office and manufacturing 2008 12,000
Ireland
Balfour Investors Inc. ("Balfour") occupies a portion of the office space
leased by the Company in New York City. The Chairman and Vice Chairman of the
Company's Board of Directors are the only shareholders of Balfour. Balfour pays
to the Company 50% of the rent and occupancy costs paid by the Company under its
lease, including base rent, electricity, water, real estate tax escalations and
operation and maintenance escalations. The base rent payable by Balfour is
approximately $9,500 per month.
ITEM 3. LEGAL PROCEEDINGS
On May 28, 2002, a lawsuit was filed against the Company 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 names the Company and four of its current and
former executive officers and directors as the defendants. The plaintiffs seek
monetary and punitive damages for alleged actions made by the defendants in
order to induce the plaintiffs to purchase, hold or refrain from selling
PubliCARD common stock. The plaintiffs allege 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. The Company
believes it has meritorious defenses to the allegations and intends to defend
vigorously.
In November 2002, the Company and the individual defendants served with
the action 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.
9
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.
Discovery has commenced and no trial date has been set. Consequently, at this
time it is not reasonably possible to estimate the damages, or range of damages,
if any, that the Company might incur in connection with this action. However, if
the outcome of this lawsuit is unfavorable to the Company, it could have a
material adverse effect on the Company's operations, cash flow and financial
position.
The Company incurred approximately $200,000 in defense costs in 2002. No
additional costs have been incurred in 2004 and 2003. Notice of the commencement
of this action has been given to the Company's directors and officers liability
insurance carriers. The Company's directors and officers liability insurance
carriers are funding the additional costs of defending this action, subject to
the carriers' reservation of rights.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) PubliCARD's common stock was listed on the Nasdaq National Market from
December 22, 1998 to May 1, 2002. Effective May 2, 2002, the listing of
PubliCARD common stock was transferred to the Nasdaq SmallCap Market. 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 directors of the Company decided not to appeal the delisting
determination. Effective March 28, 2003, the Company's common stock began
trading on the OTC Bulletin Board. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That
May Affect Future Results - Our stock was delisted from the Nasdaq
System." The following table sets forth the high and low closing sale
prices of PubliCARD's common stock for the calendar periods indicated (in
dollars):
2004 2003
---------------- ----------------
HIGH LOW HIGH LOW
---- ---- ---- ---
First Quarter .09 .05 .16 .06
Second Quarter .10 .05 .09 .042
Third Quarter .06 .03 .09 .045
Fourth Quarter .06 .02 .12 .04
(b) There were approximately 2,300 registered holders of record of common
stock of the Company as of March 24, 2005.
(c) The Company did not pay dividends on its common stock during the prior
five fiscal years and does not anticipate paying dividends in the
foreseeable future.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company presented below for the five
year period ended December 31, 2004 have been derived from the consolidated
financial statements of the Company. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31
--------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues $ 4,395 $ 4,781 $ 4,605 $ 5,652 $ 5,543
Cost of revenues 2,010 2,316 2,455 2,875 2,913
Inventory adjustment -- -- -- 1,661 --
-------- -------- -------- -------- --------
Gross margin 2,385 2,465 2,150 1,116 2,630
-------- -------- -------- -------- --------
Operating expenses:
General and administrative 2,330 2,708 3,235 4,625 6,664
Sales and marketing 1,671 1,844 1,877 3,413 7,562
Product development 716 584 605 2,442 4,364
Stock compensation expense -- -- -- 86 1,116
Amortization of goodwill and intangibles 40 40 576 1,824 2,638
Impairment of goodwill and intangibles -- -- 1,365 -- --
Repositioning and other special charges -- -- -- 5,656 --
-------- -------- -------- -------- --------
4,757 5,176 7,658 18,046 22,344
-------- -------- -------- -------- --------
Loss from operations (2,372) (2,711) (5,508) (16,930) (19,714)
-------- -------- -------- -------- --------
Other income (expenses):
Interest income 27 15 71 476 936
Interest expense (22) (12) (39) (65) (100)
Cost of retirement benefits - non-operating (405) (903) (795) (788) (812)
Loss on pension settlement (2,739) -- -- -- --
Write-down of minority investment -- (3,000) (2,068) -- --
Gain on insurance recoveries 647 4,590 -- -- --
Other income 5 428 80 136 15
-------- -------- -------- -------- --------
(2,487) 1,118 (2,751) (241) 39
-------- -------- -------- -------- --------
Loss from continuing operations (4,859) (1,593) (8,259) (17,171) (19,675)
-------- -------- -------- -------- --------
Gain on disposition of discontinued operations -- -- 1,066 2,350 4,275
-------- -------- -------- -------- --------
Net loss $ (4,859) $ (1,593) $ (7,193) $(14,821) $(15,400)
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (.20) $ (.07) $ (.34) $ (.71) $ (.84)
Discontinued operations -- -- .04 .10 .18
-------- -------- -------- -------- --------
$ (.20) $ (.07) $ (.30) $ (.61) $ (.66)
======== ======== ======== ======== ========
AS OF DECEMBER DECEMBER 31
--------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficiency) $ 1,405 $ (987) $ (548) $ 2,631 $ 13,168
Total assets 5,073 7,399 7,939 17,397 37,179
Other non-current liabilities 7,869 3,552 4,990 5,328 6,010
Shareholders' equity (deficiency) (5,159) (2,928) (1,002) 7,484 12,578
No dividends on common shares have been declared or paid during the last five
years.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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. See
Note 9 to the Consolidated Financial Statements for a discussion on the
disposition plan.
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 $1.9
million at December 31, 2004. The Company also had a shareholders' deficit of
$5.2 million at December 31, 2004.
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 5 to the Notes to 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.
13
RESULTS OF OPERATIONS
The following table is derived from the Consolidated Financial Statements
and sets forth the Company's consolidated results of operations for the years
ended December 31, 2004, 2003 and 2002 (in thousands).
2004 2003 2002
------- ------- -------
Revenues $ 4,395 $ 4,781 $ 4,605
Cost of revenues 2,010 2,316 2,455
------- ------- -------
Gross margin 2,385 2,465 2,150
------- ------- -------
Gross margin percentage 54% 52% 47%
Operating expenses:
General and administrative 2,330 2,708 3,235
Sales and marketing 1,671 1,844 1,877
Product development 716 584 605
Amortization of intangibles 40 40 576
Impairment of goodwill and intangibles -- -- 1,365
------- ------- -------
4,757 5,176 7,658
------- ------- -------
Loss from operations (2,372) (2,711) (5,508)
------- ------- -------
Other income (expenses):
Interest income 27 15 71
Interest expense (22) (12) (39)
Cost of retirement benefits - non-operating (405) (903) (795)
Loss on pension settlement (2,739) -- --
Write-down of minority investment -- (3,000) (2,068)
Gain on insurance recoveries 647 4,590 --
Other income 5 428 80
------- ------- -------
(2,487) 1,118 (2,751)
------- ------- -------
Loss from continuing operations (4,859) (1,593) (8,259)
Income from discontinued operations -- -- 1,066
------- ------- -------
Net loss $(4,859) $(1,593) $(7,193)
======= ======= =======
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
REVENUES. Revenues are generated from product sales, technology and
software license fees, installation and maintenance contracts. Consolidated
revenues decreased to $4.4 million in 2004 compared to $4.8 million for 2003.
Foreign currency changes had the effect of increasing revenues by a 10%.
Excluding the impact of foreign currency changes, revenues in 2004 decreased by
18% driven principally by a decline in shipments to distribution partners
located in the United States and elsewhere outside of Europe.
GROSS MARGIN. Cost of revenues consists primarily of material, personnel
costs and overhead. Gross margin as a percentage of sales increased to 54% in
2004 from 52% in 2003. The gross margin improvement resulted from a higher
percentage of revenues derived from direct sales in 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 $1.7 million in 2004
compared to $1.8 million in 2003. The decrease is primarily attributable to a
reduction in employee business expense and employee termination expense
resulting from headcount reductions in 2003. 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 consist
primarily of personnel, independent consultants and contract engineering
services. Product development expenses include expenses associated with the
development of new products and enhancements to existing products. Product
development expenses amounted to $716,000 in 2004 compared to $584,000 in 2003.
The 2003 expenses included a $75,000 reimbursement of certain development costs
under a grant with a government agency in Northern Ireland. This reimbursement,
coupled with a $73,000 increase in wages and third party engineering costs,
primarily accounted for the increase in product development expense.
14
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 for the year ended December 31,
2004 decreased to $2.3 million from $2.7 million for 2003. The decrease in
expenses is mainly attributable to a $196,000 decline in corporate legal, public
reporting costs and other corporate costs as well as a $43,000 favorable bad
debt allowance adjustment.
AMORTIZATION OF INTANGIBLES. In accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), 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 expense in 2004 and 2003 relates to the continuing
amortization of definite lived intangibles. Amortization expense was $40,000 in
both 2004 and 2003.
COST OF PENSIONS - NON-OPERATING. Cost of pensions, which represents
amounts related to discontinued product lines and related plant closings in
prior years, principally relates to pension expense associated with the
Company's frozen defined benefit pension plan. As a result of the pension
settlement (see below), cost of pensions - non-operating will be zero
prospectively. Cost of pensions declined from $903,000 in 2003 to $405,000 in
2004.
LOSS ON PENSION SETTLEMENT. 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, 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 payable to the PBGC with a face amount of $7.5 million
(the "Note"). 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, between the Company and the PBGC (the "Security Agreement"
and the "Pledge Agreement") 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 December 31, 2004, Net Recoveries was approximately $3.4 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.
GAIN ON INSURANCE RECOVERIES. 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 $477,000 in May 2004 and an
additional $170,000 in October 2004. The Company recognized a gain of $477,000
in the first quarter of 2004 and an additional gain of $170,000 in the third
quarter of 2004.
INTEREST INCOME AND EXPENSE. Interest income increased to $27,000 from
$15,000 in the prior year principally due to higher investment balances.
Interest expense increased from $12,000 to $22,000 due to higher average
borrowings under the overdraft facility.
15
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUES. Consolidated revenues increased to $4.8 million in 2003 compared
to $4.6 million for 2002 driven by a 6% increase from foreign currency changes.
Excluding the impact of foreign currency changes, revenues in 2003 decreased by
2%.
GROSS MARGIN. Gross margin as a percentage of sales increased to 52% in
2003 from 47% in 2002. The gross margin improvement resulted from higher margins
generated from certain custom development projects and increased service revenue
in the United Kingdom.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1.8
million in 2003 compared to $1.9 million in 2002.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to
$584,000 in 2003 compared to $605,000 in 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2003 decreased to $2.7 million from $3.2 million
for 2002. The decrease in expense is mainly due to a $400,000 decline in salary
costs due to a headcount reduction of three employees.
IMPAIRMENT OF GOODWILL AND INTANGIBLES. The Company performed an initial
review for impairment of goodwill as of January 1, 2002 and determined that no
impairment existed at that date. The Company determined 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 relied
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 valuation included 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.
In performing its annual goodwill impairment test at the end of the fourth
quarter of 2002, the Company determined that goodwill had been impaired. Based
on comparing the values derived from the two techniques described above to the
carrying value of the reporting unit, the Company recorded a goodwill impairment
loss of $364,000 in the fourth quarter of 2002. The Company attributed the
impairment loss to the value of a comparable entity that was sold in a
transaction in late 2002, the significant 2002 operating loss for the reporting
unit and lower forecasted revenue growth due to a continued overall decline in
technology spending and a shortage of capital available to invest in the
reporting unit.
In the fourth quarter of 2002, the Company determined that its intangible
assets had been impaired and recorded an impairment loss of $1.0 million. The
Company attributes the impairment loss to the significant 2002 operating loss
for the reporting unit and lower forecasted revenue growth due to a continued
overall decline in technology spending and a shortage of capital available to
invest in the reporting unit.
AMORTIZATION OF INTANGIBLES. Amortization expense decreased from $576,000
in 2002 to $40,000 in 2003 as a result of an impairment charge recorded in 2002,
which significantly reduced the carrying value of intangibles.
COST OF PENSIONS - NON-OPERATING. Cost of pensions increased from $795,000
in 2002 to $903,000 in 2003. The net periodic pension cost increased by $112,000
principally as a result of amortization of unrecognized net losses.
GAIN ON 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. The Company recognized a gain from
these settlements of approximately $4.6 million in 2003.
WRITE-DOWN OF MINORITY INVESTMENT. In 2003 and 2002, other expense
includes charges for an impairment of the Company's minority investment in
TecSec of $3.0 million and $2.1 million, respectively.
OTHER INCOME AND EXPENSE. In 2002, other expense includes a $200,000
charge in connection with the defense of a shareholder lawsuit.
16
INTEREST INCOME AND EXPENSE. Interest income decreased to $15,000 from
$71,000 in the prior year principally due to lower interest rates and investment
balances.
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. During the year ended December 31,
2004, cash, including short-term investments, decreased by $1.6 million to $1.9
million as of December 31, 2004.
Operating activities utilized cash of $2.3 million in 2004 and principally
consisted of the net loss of $4.9 million plus a gain on insurance recoveries of
$647,000 offset by a loss on the pension settlement of $2.7 million,
depreciation and amortization of $156,000 and a reduction in assets and
liabilities of $286,000.
Investing activities provided cash of $686,000 in 2004 and principally
consisted of cash received from insurance recoveries of $727,000 offset by
capital expenditures of $48,000.
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:
o 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.
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. 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). As of December 31,
2004, Net Recoveries was approximately $3.4 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.
o On May 28, 2002, a lawsuit was filed against the Company 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
names the Company and four of its current and former executive
officers and directors as the defendants. The plaintiffs seek
monetary and punitive damages for alleged actions made by the
defendants in order to induce the plaintiff to purchase, hold or
refrain from selling PubliCARD common stock. The plaintiffs allege
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. The Company believes it has meritorious defenses to the
allegations and intends to defend vigorously.
17
In November 2002, the Company and the individual defendants served
with the action 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. Discovery has commenced
and no trial date has been set. Consequently, at this time it is not
reasonably possible to estimate the damages, or range of damages, if
any, that the Company might incur in connection with this action.
However, if the outcome of this lawsuit is unfavorable to the
Company, it could have a material adverse effect on the Company's
operations, cash flow and financial position.
o 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 $861,000.
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 an emphasis paragraph concerning substantial doubt about the Company's
ability to continue as a going concern.
18
CONTRACTUAL OBLIGATIONS
The following is a summary of the Company's commitments as of December 31,
2004 (in thousands):
PAYMENTS DUE BY PERIOD
------------------------------------------
LESS MORE
THAN 1 1 TO 3 3 TO 5 THAN 5
TOTAL 1 YEAR YEARS YEARS YEARS
------ ------ ------ ------ ------
Operating lease obligations $ 861 $ 350 $ 463 $ 48 $ --
Other long-term liabilities:
Note payable to PBGC 7,501 -- -- -- 7,501
Other long-term obligations 368 20 273 40 35
------ ------ ------ ------ ------
Total $8,730 $ 370 $ 736 $ 88 $7,536
====== ====== ====== ====== ======
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
the Notes to the Company's Consolidated Financial Statements. 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 AND INTANGIBLES. 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 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.
Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of any impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based
on the net realizable of the asset.
19
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 third quarter of 2005. SFAS No. 123R applies to
all awards granted after June 30, 2005 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 positions, 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 positions,
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
positions, 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 and 2004 of approximately $8.3
million, $1.6 million and $4.9 million, respectively. In addition, we
experienced negative cash flow from operating activities of $5.1 million, $2.2
million and $2.3 million in 2002, 2003 and 2004 respectively, and have a
shareholders' deficiency of $5.2 million as of December 31, 2004.
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 December 31, 2004, Net Recoveries was
approximately $3.4 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.
20
We and certain current and former officers are defendants in a lawsuit
alleging, among other things, misrepresentation and securities fraud. We believe
that we have meritorious defenses to the allegations and intend to defend
ourselves vigorously. The cost of defending against this action could be
significant, and if the Company is not successful in defending itself, the
Company may be required to pay the plaintiff's damages, which could have a
material adverse effect on the Company's business and operations. See "We are
unable to predict the extent to which the resolution of lawsuits pending against
us could adversely affect our business". In addition, we have future
non-cancelable operating lease obligations for office space, vehicles and office
equipment aggregating $861,000.
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 an emphasis paragraph 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.
WE CANNOT ASSURE YOU THAT INFINEER WILL BE ABLE TO CONTINUE TO OPERATE.
During 2002, 2003 and 2004, PubliCARD contributed additional capital to Infineer
of $44,000, $70,000 and $225,000, 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 ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS
PENDING AGAINST US COULD ADVERSELY AFFECT OUR BUSINESS. On May 28, 2002, a
lawsuit was filed against us 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
names four of our current and former executive officers and directors and us as
the defendants. The plaintiffs seek monetary and punitive damages for alleged
actions made by the defendants in order to induce the plaintiff to purchase,
hold or refrain from selling our common stock. The plaintiffs allege 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 us by third parties, the
nature and existence of business relationships and investments by us. We believe
we have meritorious defenses to the allegations and intend to defend vigorously.
In November 2002, we and the individual defendants served with the action
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. We and the
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. Discovery has
commenced and no trial date has been set. Consequently, at this time it is not
reasonably possible to estimate the damages, or range of damages, if any, that
we might incur in connection with this action. However, if the outcome of this
lawsuit is unfavorable to us, it could have a material adverse effect on our
operations, cash flow and financial position.
We incurred approximately $200,000 in defense costs in 2002. No additional
costs have been incurred in 2004 and 2003. Notice of the commencement of this
action has been given to our directors and officers liability insurance
carriers. Our directors and officers liability insurance carriers are funding
the additional costs of defending this action, subject to the carriers'
reservation of rights.
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
21
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:
o we will not be able to retain the employees or business
relationships of the acquired company;
o we will fail to realize any synergies or other cost reduction
objectives expected from the acquisition;
o we will not be able to integrate the operations, products, personnel
and facilities of acquired companies;
o 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;
o we will incur or assume liabilities, including liabilities that are
unknown or not fully known to us at the time of the acquisition; and
o we will enter markets in which we have no direct prior experience.
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 years ended December 31, 2003 and 2004, no
one customer accounted for more than 10% of our revenues. Amounts due from two
customers represented approximately 21% and 13%, respectively, of the accounts
receivable balance as of December 31, 2004.
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:
o product selections;
o timely and efficient completion of product design and development;
o timely and efficient implementation of manufacturing processes;
o effective sales, service and marketing;
o price; and
o product performance in the field.
22
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:
o the extent to which products support industry standards and are
capable of being operated or integrated with other products;
o technical features and level of security;
o strength of distribution channels;
o price;
o product reputation, reliability, quality, performance and customer
support;
o product features such as adaptability, functionality and ease of
use; and
o competitor reputation, positioning and resources.
We cannot assure you that competitive pressures will not have a material
adverse effect on our business and operating results. Many of our current and
potential competitors have longer operating histories 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
23
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.
Upon reaching an agreement with this third party in 2004 to amend our trademark
application, 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.
24
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 82% and 88% of total sales for the years ended
December 31, 2003 and 2004, 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:
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o currency exchange risks;
o export controls related to encryption technology;
o unexpected changes in regulatory requirements;
o changes in economic and political conditions;
o seasonal reductions in business activities in the countries where
our customers are located;
o longer payment cycles and greater difficulty in accounts receivable
collection;
o potentially adverse tax consequences; and
o 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.
25
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.
26
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:
o 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);
o 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;
o our ability to effectively manage our business, including our
ability to raise capital;
o variations in our annual or quarterly financial results or those of
our competitors;
o general economic conditions, in particular, the technology service
sector;
o expected or announced relationships with other companies;
o announcements of technological advances innovations or new products
by us or our competitors;
o patents or other proprietary rights or patent litigation; and
o 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 7A. 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 December 31, 2004, short-term investments
(principally U.S. Treasury bills) were $1.8 million and borrowing under the
overdraft facility amounted to $347,000. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, the report of independent
registered public accounting firm thereon and related schedules appear beginning
on page F-2. See Index to Consolidated Financial Statements on page F-1.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 fiscal year to which this report relates that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company is not an "accelerated filer" as defined in Rule 12b-2 under
the Securities Exchange Act of 1934. Accordingly, pursuant to SEC Release No.
33-8545, the Company is not required to include in this Annual Report on Form
10-K a management report on internal control over financial reporting or the
related registered public accounting firm attestation imposed by Section 404 of
the Sarbanes-Oxley Act of 2002.
ITEM 9B. OTHER INFORMATION
In the fourth quarter of 2004, the Company reported all required
disclosures on Form 8-K.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company currently has six directors, all of whom were elected at the
Annual Meeting of Shareholders held on December 8, 2003. All directors serve
until the next election of directors or until their successors have been elected
and have qualified. There is no family relationship between any of the directors
and executive officers of the Company.
Set forth below as to each director of the Company is information
regarding age (as of March 24, 2005), position with the Company, principal
occupation, business experience, period of service as a director of the Company
and directorships currently held.
HARRY I. FREUND: Age 65; Director of PubliCARD since April 12, 1985,
Chairman of the Board of Directors since December 1985 and Chairman of PubliCARD
from October 1998 to January 1, 2005. Mr. Freund has been Chairman of Balfour
Investors Inc., a merchant-banking firm that had previously been engaged in a
general brokerage business ("Balfour"), since 1975. Mr. Freund is also Vice
Chairman of Glasstech, Inc.
JAY S. GOLDSMITH: Age 61; Director of PubliCARD since April 12, 1985, Vice
Chairman of the Board of Directors since December 1985 and Vice Chairman of
PubliCARD from October 1998 to January 1, 2005. Mr. Goldsmith has been President
of Balfour since 1975. Mr. Goldsmith is also Chairman of Glasstech, Inc.
ANTONIO L. DELISE: Age 43; Director of PubliCARD since July 9, 2001. Mr.
DeLise joined the Company in April 1995 as Vice President, Chief Financial
Officer and Secretary. He was appointed to the Board of Directors in July 2001
and was elected to the additional posts of President in February 2002 and Chief
Executive Officer in August 2002. Prior to joining the Company, Mr. DeLise was
employed as a senior manager with the firm of Arthur Andersen LLP from July 1983
through March 1995.
CLIFFORD B. COHN: Age 53; Director of PubliCARD since July 31, 1980, and
was Vice President of Government Affairs of PubliCARD from April 1, 1982 to
November 20, 1984. Mr. Cohn is the principal of Cohn & Associates, a law firm in
Philadelphia, Pennsylvania. Mr. Cohn was an attorney for Grayson & Goldin P.C.,
a law firm in Philadelphia, Pennsylvania, during 2002.
L. G. SCHAFRAN: Age 66; Director of PubliCARD since December 3, 1986. Mr.
Schafran is the Managing General Partner of L.G. Schafran & Associates, an
investment and development firm established in 1984. Mr. Schafran is a Director
of Tarragon Realty Investors, Inc., Chairman of the Board and Co-Chief Executive
Officer of Delta-Omega Technologies, Inc., Co-Liquidating Trustee of the Banyan
Strategic Realty Trust and Director of Worldspace, Inc.
EMIL VOGEL: Age 61; Director of PubliCARD since October 5, 2001. Mr. Vogel
has been the Senior Partner and founder of Tarnow Associates ("Tarnow") since
1982. Prior to founding Tarnow, Mr. Vogel spent nine years with an executive
search firm in the New York City metropolitan area conducting senior level
search assignments. Mr. Vogel is also a director of Q.E.P. Co., Inc.
The information with respect to the executive officers of the Company
required by this item is set forth in Item 1A of this Form 10-K.
AUDIT COMMITTEE
The present members of the Audit Committee are Mr. Schafran (Chairman),
Mr. Cohn and Mr. Vogel. The Company's Board of Directors has adopted a written
charter for the Audit Committee, which can be found on the Corporate Governance
section of the Company's website at www.publicard.com. The Board of Directors of
the Company has determined that Mr. Schafran qualifies as an "audit committee
expert" as defined by the Securities and Exchange Commission.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to the chief
executive officer and senior financial officers. The Code of Ethics can be found
on the Corporate Governance section of the Company's website at
www.publicard.com. Changes to and waivers granted with respect to the Code of
Ethics that are required to be disclosed pursuant to the applicable rules and
regulations of the Securities and Exchange Commission will be posted to the
Company's website.
29
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely upon the Company's review of the copies of such forms received by
it during the fiscal year ended December 31, 2004 and representations that no
other reports were required, the Company believes that each person who, at any
time during such fiscal year, was a director, officer or, to the Company's
knowledge, beneficial owner of more than 10% of the Company's common stock
complied with all Section 16(a) filing requirements during such fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information concerning the cash
compensation, stock options and retirement benefits provided to the Company's
executive officers. The notes to these tables provide more specific information
concerning compensation.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
-------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) (1) OPTIONS/ SARS (#) (2) COMPENSATION ($)
---------------------------------- ----- ---------- ------------- --------------------- ---------------
Antonio L. DeLise (3)............ 2004 275,000 115,168 -- 9,059 (4)
President, Chief Executive 2003 275,000 84,832 -- 8,706 (4)
Officer, Chief Financial Officer 2002 262,500 40,000 -- 8,380 (4)
and Secretary
Harry I. Freund (5)................ 2004 150,000 -- -- --
Chairman of the Board of 2003 150,000 -- -- --
Directors and Chairman 2002 170,833 -- -- --
Jay S. Goldsmith (5)............... 2004 150,000 -- -- --
Vice Chairman of the Board of 2003 150,000 -- -- --
Directors and Vice Chairman 2002 170,833 -- -- --
----------
(1) Reflects bonus earned during the fiscal year. In some instances, all or a
portion of the bonus was paid during the following fiscal year.
(2) Options to acquire shares of Common Stock.
(3) Mr. DeLise has served as Chief Financial Officer since April 1995 and was
appointed to the additional posts of President in February 2002 and Chief
Executive Officer in August 2002.
(4) Consists of $5,500, $6,000 and $6,500 in contributions to PubliCARD's
401(k) plan for 2002, 2003 and 2004, respectively, and $2,880, $2,706 and
$2,559 for term life and disability insurance payments paid on behalf of
Mr. DeLise for 2002, 2003 and 2004, respectively.
(5) Effective January 1, 2005, Mr. Freund and Mr. Goldsmith resigned their
officer positions as Chairman and Vice Chairman, respectively. Mr. Freund
and Mr. Goldsmith remain as Chairman and Vice Chairman of the Board of
Directors. Beginning January 1, 2005, Mr. Freund and Mr. Goldsmith will
each receive compensation of $100,000 per year in their capacity as
Chairman and Vice Chairman of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
During the fiscal year ended December 31, 2004, there were no options
granted to the named executive officers.
30
AGGREGATE STOCK OPTION EXERCISES IN FISCAL YEAR 2004 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31, 2004
concerning exercisable and unexercisable stock options held by the following
persons:
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
YEAR END YEAR END (1)
ACQUIRES ON VALUE ----------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------- -------- -------- ----------- ------------- ----------- -------------
Antonio L. DeLise -- -- 282,500 -- -- --
Harry I. Freund -- -- 500,000 -- -- --
Jay S. Goldsmith -- -- 500,000 -- -- --
----------
(1) These values are based on the December 31, 2004 closing price for
PubliCARD's common stock on the Over-the-counter Bulletin Board of $.04
per share.
STOCK OPTION PLANS
Under the 1993 Long-Term Incentive Plan and the 1993 Non-employee Director
Stock Option Plan adopted by shareholders of the Company in 1994 and the 1999
Long-Term Incentive Plan and 1999 Stock Option Plan for Non-employee Directors
adopted by shareholders of the Company in 1999, the Company may grant stock
options, restricted stock options, stock appreciation rights, performance awards
and other stock-based awards equivalent to up to 7,300,000 shares of common
stock. As of December 31, 2004, a total of 2,041,525 shares of Common Stock in
the aggregate were available for grant under the stock option plans.
The plans are administered by the Board of Directors and/or the
Compensation Committee of the Board of Directors of the Company. Subject to the
express provisions of the plans, the Compensation Committee or the Board of
Directors, as applicable, has full and final authority to determine the terms of
all awards granted under the plans including (a) the purchase price of the
shares covered by each award, (b) whether any payment will be required upon
grant of the award, (c) the individuals to whom, and the time at which, awards
shall be granted, (d) the number of shares to be subject to each award, (e) when
an award can be exercised and whether in whole or in installments, (f) whether
the exercisability of the awards is subject to risk of forfeiture or other
condition and (g) whether the stock issued upon exercise of an award is subject
to repurchase by the Company, and the terms of such repurchase.
STOCK OPTION AGREEMENTS
In January 1996, PubliCARD issued options to Messrs. Cohn and Schafran to
buy a total of 200,000 shares of PubliCARD's Common Stock at an exercise price
of $2.50 per share for five years. In 2000, a total of 40,000 of such options
were exercised. The expiration date on the remaining options was subsequently
extended by five years to January 2006.
EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS
In August 1987, the Company entered into change of control agreements with
each of Messrs. Freund and Goldsmith, which provide for payments to them under
certain circumstances following a change of control of the Company. These
agreements were not adopted in response to any specific acquisition of shares of
PubliCARD or any other event threatening to bring about a change of control of
the Company. For purposes of the agreements, a change of control is defined as
any of the following: (a) the Company ceasing to be a publicly owned corporation
having at least 2,000 shareholders, (b) any person or group acquiring in excess
of 30% of the voting power of the Company's securities, (c) Messrs. Freund,
Goldsmith, Cohn, DeLise, Schafran and Vogel and any other director designated as
a "Continuing Director" prior to his election as a director by a majority of the
foregoing persons (the "Continuing Directors") ceasing for any reason to
constitute at least a majority of the board of directors, (d) the Company
merging or consolidating with any entity, unless approved by a majority of the
Continuing Directors or (e) the sale or transfer of a substantial portion of
PubliCARD's assets to another entity, unless approved by a majority of the
Continuing Directors.
31
In the event one of the above-named individuals (a) is terminated as an
employee of the Company for any reason other than conviction of a felony or any
act of fraud or embezzlement, (b) is disabled for six consecutive months or
dies, (c) is not elected and maintained in the office which he now occupies, (d)
is not included by the board of directors in the slate of directors recommended
to shareholders, (e) receives a reduction in his salary or fringe benefits, (f)
experiences a change in his place of employment or is required to travel
excessively or (g) experiences other substantial, material and adverse changes
in conditions under which the individual's services are to be rendered, within
three years following a change of control, the individual will be entitled to
receive in a lump sum within 10 days of the date of discontinuance, a payment
equal to 2.99 times the individual's average annual compensation for the shorter
of (a) the five years preceding the change of control, or (b) the period the
individual received compensation from PubliCARD for personal services. Assuming
a change of control of the Company and the discontinuance of an individual's
services were to occur at the present time, payments in the amounts, assuming
there are no "excess parachute payments" as defined in the Internal Revenue Code
of 1986 (the "Code"), would be made pursuant to the change of control agreements
of approximately $633,000 to each of Mr. Freund and Mr. Goldsmith. In the event
any such payment, either alone or together with others made in connection with
the individual's discontinuance, is considered to be an excess parachute
payment, the individual is entitled to receive an additional payment in an
amount which, when added to the initial payment, results in a net benefit to the
individual, after giving effect to excise taxes imposed by Section 4999 of the
Code and income taxes on such additional payment, equal to the initial payment
before such additional payment. Since the change of control agreements would
require large cash payments to be made by any person or group effecting a change
of control of PubliCARD, absent the assent of a majority of the Continuing
Directors, these agreements may discourage hostile takeover attempts of
PubliCARD.
The change of control agreements would have expired on December 1, 2004
but have been and will continue to be automatically extended for a period of one
year on each December 1, unless terminated by either party prior to any December
1. In the event a change of control occurs while the change of control
agreements are in effect, the term of such agreements will automatically be
extended to three years from the date of the change of control and the foregoing
renewal option will become inapplicable.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Through September 30, 2000, directors who were not officers of the Company
were paid $2,500 per month for services as directors and, in addition, $750 per
day for each meeting of the board or of shareholders that they attend without
regard to the number of meetings attended each day. Effective October 1, 2000,
the monthly retainer and per diem fees were suspended. Pursuant to the 1999
Stock Option Plan for Non-employee Directors adopted by shareholders of the
Company in 1999, non-employee directors receive 30,000 options to purchase
common stock of the Company in August of each year.
From October 1998 through December 2004, Mr. Freund and Mr. Goldsmith
received compensation as Chairman and Vice Chairman of the Company. For the year
ended December 31, 2004, annual compensation in such capacity was $150,000 each.
On January 1, 2005, Mr. Freund and Mr. Goldsmith resigned their officer
positions. Mr. Freund and Mr. Goldsmith remain as Chairman and Vice Chairman of
the Board of Directors, respectively. Pursuant to informal arrangements with the
Company, effective January 1, 2005, Mr. Freund and Mr. Goldsmith each receive
annual compensation at the rate of $100,000 per year as Chairman and Vice
Chairman of the Board, respectively, and for providing certain services
described below. The arrangements have indefinite terms and are terminable at
any time by either party. The compensation received by them is approved from
time to time by the Directors Compensation Committee of the Board of Directors.
Mr. Freund and Mr. Goldsmith provide advice and counsel to the Company on
a variety of strategic and financial matters, including business acquisitions
and divestitures, raising capital and shareholder relations. Mr. Freund and Mr.
Goldsmith do not render any services in connection with the day-to-day
operations of the Company. Services are provided on a less than full time basis,
with the amount of time varying depending on the activities in which the Company
is engaged from time to time. The arrangements with the Company do not provide
for a minimum amount of time to be spent on Company matters.
Mr. Freund and Mr. Goldsmith are each party to an agreement with the
Company providing for payments to them under certain circumstances following a
change in control of the Company. See "Employment and Change in Control
Agreements."
Balfour occupies a portion of the office space leased by the Company in
New York City. The Chairman and Vice Chairman of the Company's Board of
Directors are the only shareholders of Balfour. Balfour pays to the Company 50%
of the rent and occupancy costs paid by the Company under its lease, including
base rent, electricity, water, real estate tax escalations and operation and
maintenance escalations. The base rent payable by Balfour is approximately
$9,500 per month.
32
Directors of the Company are elected at each annual meeting of
shareholders to hold office until the next annual meeting of shareholders and
until their respective successors are duly elected and qualified. Executive
officers are elected to hold office until the first meeting of directors
following the next annual meeting of shareholders or until their successors are
sooner elected by the Board and qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors, which consists
entirely of outside directors, reviews the compensation of key employees of the
Company. The present members of the Compensation Committee are Clifford B. Cohn
(Chairman) and L.G. Schafran. See Item 13-"Certain Relationships and Related
Transactions".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of March 24, 2005 with respect
to each class of equity securities of the Company beneficially owned by each
person who owns of record or is known by the Company to own beneficially more
than 5% of the common stock of the Company and by all directors, nominees and
officers and by all directors, nominees and officers as a group. All information
with respect to beneficial ownership has been furnished to the Company by the
respective shareholders of the Company and the directors, nominees and officers.
BENEFICIAL OWNERSHIP OF SHARES
OF COMMON STOCK AS OF PERCENT OF
NAME POSITION MARCH 24, 2005 (1) CLASS (1)
-------------------- -------------------------- ------------------------------- -----------
Taube Hodson Stonex N/A 2,735,500 (2) 11.1%
Partners Limited
27 St. James Place
London SW1A INR
United Kingdom
Harry I. Freund Director, Chairman of the 1,024,957 (3) 4.1%
Board of Directors
Jay S. Goldsmith Director, Vice Chairman of 1,236,553 (4) 4.9%
the Board of Directors
Antonio L. DeLise Director, President, Chief 309,500 (5) 1.2%
Executive Officer, Chief
Financial Officer and
Secretary
Clifford B. Cohn Director 210,314 (6) Less than 1%
L.G. Schafran Director 364,050 (7) 1.5%
Emil Vogel Director 168,800 (8) Less than 1%
All directors, nominees
and officers as a group (6 persons) 3,301,174 (9) 12.4%
----------
(1) Calculated in accordance with Rule 13d-3 adopted by the SEC under the
Exchange Act.
33
(2) Based on statements on Schedule 13G filed with the SEC on October 11, 1999
and on Form 4 Amendment No. 2 filed with the SEC on January 15, 2004.
Taube Hodson Stonex Partners Limited is a discretionary investment advisor
to J. Rothschild Assurance Life Fund, St. James Place International Unit
Trust, J. Rothschild Assurance Pension Fund, J. Rothschild International
Assurance Managed Fund, J. Rothschild International Assurance US$ Managed
Fund, TDG Funds Limited, GAM Worldwide Fund and The Partners Fund. Taube
Hodson Stonex Partners Limited has power to vote and direct the vote and
power to dispose and direct the disposition of shares held by such funds.
(3) Includes 500,000 shares of Common Stock which may be acquired by Mr.
Freund within 60 days. Also includes 5,454 shares of Common Stock held by
Mr. Freund's spouse over which Mr. Freund has shared voting and investment
power but as to which he disclaims any beneficial interest. Also includes
13,000 shares that may be deemed to be owned beneficially by Mr. Freund
which are held by the Balfour Defined Benefit Pension Plan (the "Plan"),
for which Mr. Freund is a Trustee and Plan Administrator and in which he
participates. Mr. Freund disclaims ownership of 5,850 shares of such
13,000 shares.
(4) Includes 500,000 shares of Common Stock which may be acquired by Mr.
Goldsmith within 60 days. Also includes 13,000 shares that may be deemed
to be owned beneficially by Mr. Goldsmith which are held by the Plan, of
which Mr. Goldsmith is a Trustee and Plan Administrator and in which he
participates. Mr. Goldsmith disclaims ownership of 7,280 shares of Common
Stock held by the Plan.
(5) Includes 282,500 shares which may be acquired by Mr. DeLise within 60 days
through the exercise of stock options.
(6) Includes 210,000 shares which may be acquired by Mr. Cohn within 60 days
through the exercise of stock options.
(7) Includes 250,000 shares which may be acquired by Mr. Schafran within 60
days through the exercise of stock options. Also includes 114,050 shares
of Common Stock held by Mr. Schafran's spouse as to which Mr. Schafran
disclaims any beneficial interest.
(8) Includes 110,000 shares which may be acquired by Mr. Vogel within 60 days
through the exercise of stock options.
(9) Includes 1,852,500 shares of Common Stock which may be acquired by such
persons within 60 days.
The following table sets forth certain equity compensation plan
information for the Company as of December 31, 2004.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY (a) (b) (c)
-------------------------- ----------------------- -------------------- ----------------------------------
Equity compensation plans
approved by security
holders 2,269,475 $ .51 2,041,525
Equity compensation plans
not approved by security
holders 160,000 $ 2.50 --
---------- ----------
Total 2,429,475 $ .64 2,041,525
========== ==========
See Item 11-"Executive Compensation" for a description of the Company's
equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Employment and Change in Control Agreements" and "Information
Concerning the Board of Directors" in Item 11 and the notes to the table under
Security Ownership of Certain Beneficial Owners in Item 12 for information with
respect to information required by this Item.
34
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table summarizes the aggregate fees billed to the Company by
Deloitte & Touche LLP, the Company's independent auditor:
2004 2003
---------- ---------
Audit fees $ 177,041 $ 179,758
Audit-related fees 15,645 11,038
Tax fees -- --
All other fees -- --
Audit-related fees consist of retirement plan audit fees. The Audit
Committee requires that all services performed by Deloitte & Touche LLP are
pre-approved prior to the services being performed. All services were
pre-approved by the Audit Committee in 2004 and 2003. The Audit Committee has
considered whether the provision of non-audit services by the Company's
principal auditor are compatible with maintaining auditor independence. Deloitte
& Touche LLP did not perform any non-audit services for the Company during 2004
and 2003.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules.
1) Financial Statements - See accompanying Index to Consolidated
Financial Statements, Page F-1.
2) Financial Statement Schedules - See accompanying Index to
Consolidated Financial Statements, Page F-1.
(b) Exhibits:
3.1 Amended and Restated Articles of Incorporation, amended and restated
through November 2, 1998, of PubliCARD. Incorporated by reference to
PubliCARD's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998, dated November 9, 1998.
3.2 By-laws of PubliCARD. Incorporated by reference to PubliCARD's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990, dated March 28, 1991.
4.1 Certificate of Designation, Preferences and Rights of Class A
Preferred Stock, First Series. Incorporated by reference from
PubliCARD's Registration Statement on Form 8-A, dated September 26,
1988.
4.2 Amended and Restated Rights Agreement, dated as of August 7, 1998,
between PubliCARD and Continental Stock Transfer & Trust Company, as
Rights Agent. Incorporated by reference from PubliCARD's Current
Report on Form 8-K, filed on September 17, 1998.
4.3 Certificate of Designation, Preferences and Rights of Class A
Preferred Stock, Second Series as filed with the Department of State
of the Commonwealth of Pennsylvania on November 29, 2000.
Incorporated by reference from PubliCARD's Current Report on Form
8-K filed on December 18, 2000.
4.4 Rights Plan, adopted November 1, 2000. Incorporated by reference
from PubliCARD's Current Report on Form 8-K filed on December 18,
2000.
10.1 Agreements, dated as of August 1987, between PubliCARD and each of
Harry I. Freund and Jay S. Goldsmith concerning a change of control
of PubliCARD. Incorporated by reference from PubliCARD's Form 8
Amendment to PubliCARD's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987, filed on December 18, 1987.
10.2 PubliCARD's 1993 Long Term Incentive Plan. Incorporated by reference
from PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1993, dated March 29, 1994.
10.3 PubliCARD's Non-employee Director Stock Option Plan. Incorporated by
reference from PubliCARD's Annual Report on Form 10-K for the year
ended December 31, 1993, dated March 29, 1994.
10.4 PubliCARD's 1999 Stock Option Plan for Non-Employee Directors.
Incorporated by reference from PubliCARD's Annual Report on Form
10-K for the year ended December 31, 1999, dated March 30, 2000.
10.5 PubliCARD's 1999 Long-Term Incentive Plan. Incorporated by reference
from PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1999, dated March 30, 2000.
10.6 Settlement Agreement, dated as of September 23, 2004, by and between
the Pension Benefit Guaranty Corporation and PubliCARD, Inc.
Incorporated by reference from PubliCARD's Current Report on Form
8-K filed on October 14, 2004.
36
10.7 Promissory Note, dated as of September 23, 2004 made by PubliCARD,
Inc. to the Pension Benefit Guaranty Corporation. Incorporated by
reference from PubliCARD's Current Report on Form 8-K filed on
October 14, 2004.
10.8 Security Agreement, dated as of September 23, 2004, made by
PubliCARD, Inc. to the Pension Benefit Guaranty Corporation.
Incorporated by reference from PubliCARD's Current Report on Form
8-K filed on October 14, 2004.
10.9 Pledge Agreement, dated as of September 23, 2004, made by PubliCARD,
Inc. in favor of the Pension Benefit Guaranty Corporation.
Incorporated by reference from PubliCARD's Current Report on Form
8-K filed on October 14, 2004.
21.1 Subsidiaries of PubliCARD. Filed herewith.
23.1 Consent letter from Independent Registered Public Accounting Firm.
Filed herewith.
31(i).1 Rule 13a-14(a)/15d-14(a) certification. Filed herewith.
32.1 Section 1350 certification. Filed herewith.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PUBLICARD, INC.
(Registrant)
Date: March 30, 2005 By: /s/ ANTONIO L. DELISE
-------------------------------
Antonio L. DeLise, President,
Chief Executive Officer, Chief
Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 2005 By: /s/ ANTONIO L. DELISE
-------------------------------
Antonio L. DeLise, President,
Chief Executive Officer, Chief
Financial Officer and Director
Date: March 30, 2005 By: /s/ CLIFFORD B. COHN
-------------------------------
Clifford B. Cohn, Director
Date: March 30, 2005 By: /s/ HARRY I. FREUND
-------------------------------
Harry I. Freund, Chairman and
Director
Date: March 30, 2005 By: /s/ JAY S. GOLDSMITH
-------------------------------
Jay S. Goldsmith, Vice Chairman
and Director
Date: March 30, 2005 By: /s/ L. G. SCHAFRAN
-------------------------------
L. G. Schafran, Director
Date: March 30, 2005 By: /s/ EMIL VOGEL
-------------------------------
Emil Vogel, Director
38
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated balance sheets as of December 31, 2004 and 2003.................F-3
Consolidated statements of operations for the years ended
December 31, 2004, 2003 and 2002...........................................F-4
Consolidated statements of shareholders' equity (deficiency) for the
years ended December 31, 2004, 2003 and 2002...............................F-5
Consolidated statements of cash flows for the years ended
December 31, 2004, 2003 and 2002...........................................F-6
Notes to consolidated financial statements......................F-7 through F-23
Schedule
Report of Independent Registered Public Accounting Firm on schedule.........F-24
Schedule II - Valuation and qualifying accounts.............................F-25
All other schedules required by Regulation S-X have been omitted because
they are not applicable or because the required information is included in the
financial statements or notes thereto.
F-1
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PubliCARD, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of PubliCARD, Inc.
and subsidiary companies (the "Company") as of December 31, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity
(deficiency), and cash flows for the three years ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal controls over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of PubliCARD, Inc. and subsidiary
companies as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, a substantial decline in working capital and negative cash
flows from operations, and requires additional capital to meet its obligations,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 24, 2005
F-2
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
(in thousands, except share data)
ASSETS
Current assets:
Cash, including short-term investments of $1,837 and $3,501 in 2004 and
2003, respectively $ 1,943 $ 3,580
Trade receivables, less allowance for doubtful accounts of $48 and $115 in 2004
and 2003, respectively 827 1,133
Inventories 558 635
Prepaid insurance and other 440 440
--------- ---------
Total current assets 3,768 5,788
Equipment and leasehold improvements, net 127 191
Goodwill and intangibles 782 822
Other assets 396 598
--------- ---------
$ 5,073 $ 7,399
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Trade accounts payable and overdraft $ 1,358 $ 1,569
Accrued liabilities 1,005 5,206
--------- ---------
Total current liabilities 2,363 6,775
Note payable 7,501 --
Other non-current liabilities 368 3,552
--------- ---------
Total liabilities 10,232 10,327
--------- ---------
Commitments and contingencies (Note 7)
Shareholders' deficiency:
Class A Preferred Stock, Second Series, no par value: 1,000 shares authorized; 565
shares issued and outstanding as of December 31, 2004 and 2003, respectively 2,825 2,825
Common shares, $0.10 par value: 40,000,000 shares authorized; 24,690,902
shares issued and outstanding as of December 31, 2004 and 2003, respectively 2,469 2,469
Additional paid-in capital 108,119 108,119
Accumulated deficit (118,476) (113,617)
Other comprehensive loss (96) (2,724)
--------- ---------
Total shareholders' deficiency (5,159) (2,928)
--------- ---------
$ 5,073 $ 7,399
========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-3
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------ ------------ ------------
(in thousands, except share data)
Revenues $ 4,395 $ 4,781 $ 4,605
Cost of revenues 2,010 2,316 2,455
------------ ------------ ------------
Gross margin 2,385 2,465 2,150
------------ ------------ ------------
Operating expenses:
General and administrative 2,330 2,708 3,235
Sales and marketing 1,671 1,844 1,877
Product development 716 584 605
Amortization of intangibles 40 40 576
Impairment of goodwill and intangibles -- -- 1,365
------------ ------------ ------------
4,757 5,176 7,658
------------ ------------ ------------
Loss from operations (2,372) (2,711) (5,508)
------------ ------------ ------------
Other income (expenses):
Interest income 27 15 71
Interest expense (22) (12) (39)
Cost of retirement benefits - non-operating (405) (903) (795)
Loss on pension settlement (2,739) -- --
Write-down of minority investment -- (3,000) (2,068)
Gain on insurance recoveries 647 4,590 --
Other income 5 428 80
------------ ------------ ------------
(2,487) 1,118 (2,751)
------------ ------------ ------------
Loss from continuing operations (4,859) (1,593) (8,259)
Income from discontinued operations -- -- 1,066
------------ ------------ ------------
Net loss $ (4,859) $ (1,593) $ (7,193)
============ ============ ============
Basic and diluted earnings (loss) per common share:
Continuing operations $ (.20) $ (.07) $ (.34)
Discontinued operations -- .04
------------ ------------ ------------
$ (.20) $ (.07) $ (.30)
============ ============ ============
Weighted average common shares outstanding 24,690,902 24,469,748 24,179,364
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these
statements.
F-4
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Class A
Preferred Stock Common Shares Share-
------------------------ ----------------------- Additional Other holders'
Shares Shares Paid-in Accumulated Comprehensive Equity
Issued Amount Issued Amount Capital Deficit Loss (Deficiency)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share data)
Balance -
January 1, 2002 780 $ 3,900 24,153,402 $ 2,415 $ 107,098 $ (104,831) $ (1,098) $ 7,484
Conversion of
preferred
stock (15) (75) 37,500 4 71 -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (7,193) -- (7,193)
Foreign currency
translation
adjustment -- -- -- -- -- -- 112 112
Minimum
pension
liability -- -- -- -- -- -- (1,405) (1,405)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
comprehensive
loss (8,486)
----------
Balance -
December 31, 2002 765 3,825 24,190,902 2,419 107,169 (112,024) (2,391) (1,002)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Conversion of
preferred stock (200) (1,000) 500,000 50 950 -- -- --
Comprehensive loss:
Net loss -- -- -- -- -- (1,593) -- (1,593)
Foreign currency
translation
adjustment -- -- -- -- -- -- 10 10
Minimum
pension
liability -- -- -- -- -- -- (343) (343)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
comprehensive
loss (1,926)
----------
Balance -
December 31, 2003 565 2,825 24,690,902 2,469 108,119 (113,617) (2,724) (2,928)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive loss:
Net loss -- -- -- -- -- (4,859) -- (4,859)
Foreign currency
translation
adjustment -- -- -- -- -- -- (21) (21)
Pension settlement -- -- -- -- -- -- 2,649 2,649
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total
comprehensive
loss (2,231)
----------
Balance -
December 31, 2004 565 $ 2,825 24,690,902 $ 2,469 $ 108,119 $ (118,476) $ (96) $ (5,159)
========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
F-5
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------- ------- -------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,859) $(1,593) $(7,193)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss on pension settlement 2,739 -- --
Gain from discontinued operations -- -- (1,066)
Gain on insurance recoveries (647) (4,590) --
Write-down of minority investment -- 3,000 2,068
Amortization of intangibles 40 40 576
Impairment of goodwill and intangibles -- -- 1,365
Depreciation and amortization 116 153 205
Gain on disposal of property and fixed assets -- (286) --
Changes in assets and liabilities:
Trade receivables 397 (239) 686
Inventories 132 281 (248)
Prepaid insurance and other current assets 102 37 404
Other assets -- 293 533
Trade accounts payable and overdraft (185) 258 (27)
Accrued liabilities 541 2,455 (135)
Other non-current liabilities (701) (1,999) (2,253)
------- ------- -------
Net cash used in operating activities (2,325) (2,190) (5,085)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48) (11) (28)
Proceeds from insurance recoveries, net of funds held in escrow 727 4,118 --
Proceeds from discontinued operations and sale of property
and fixed assets 5 371 1,865
Other 2 (3) 47
------- ------- -------
Net cash provided by investing activities 686 4,475 1,884
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES -- -- --
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 2 5 12
------- ------- -------
Net increase (decrease) in cash (1,637) 2,290 (3,189)
Cash - beginning of period 3,580 1,290 4,479
------- ------- -------
Cash - end of period $ 1,943 $ 3,580 $ 1,290
======= ======= =======
Cash paid for interest $ 22 $ 12 $ 81
======= ======= =======
The accompanying notes to the consolidated financial statements are an integral part of these
financial statements.
F-6
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
PubliCARD, Inc. ("PubliCARD" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in 1913. PubliCARD entered the smart card industry
in early 1998, and began to develop solutions for the conditional access,
security, payment system and data storage needs of industries utilizing smart
card technology. 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. See Note 9 for a discussion on the
disposition plan.
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 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 $1.9 million at
December 31, 2004. The Company also had a shareholders' deficiency of $5.2
million December 31, 2004.
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 5 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
F-7
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PubliCARD
and its wholly-owned subsidiaries. All intercompany transactions are eliminated
in consolidation.
SHORT-TERM INVESTMENTS
Short-term investments consist of certain liquid instruments with original
maturities of three months or less including U.S. Treasury obligations and money
market funds.
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 at
December 31, 2004 and 2003 consisted of the following (in thousands):
2004 2003
---- ----
Raw materials and work-in-process $468 $486
Finished goods 90 149
---- ----
$558 $635
==== ====
DEPRECIATION AND AMORTIZATION
Equipment and leasehold improvements are stated at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation for equipment is computed using the
straight-line method over estimated useful lives of three to five years.
Amortization for leasehold improvements is computed using the lesser of the
estimated useful life or the life of the lease. Equipment and leasehold
improvements at December 31, 2004 and 2003 consisted of the following (in
thousands):
2004 2003
------- -------
Equipment, furniture and fixtures $ 1,123 $ 1,093
Leasehold improvements 58 224
Accumulated depreciation and amortization (1,054) (1,126)
------- -------
$ 127 $ 191
======= =======
Depreciation and amortization expense was $116,000, $153,000 and $205,000
in 2004, 2003 and 2002, respectively.
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.
F-8
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 valuation included 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 December 31, 2004 and 2003 was
$782,000.
In performing its annual goodwill impairment test at the end of the fourth
quarter of 2002, the Company determined that goodwill had been impaired. Based
on comparing the values derived from the two techniques described above to the
carrying value of the reporting unit, the Company recorded a goodwill impairment
loss of $364,000 in the fourth quarter of 2002. The Company attributed the
impairment loss to the value of a comparable entity that was sold in a
transaction in late 2002, the significant 2002 operating loss for the reporting
unit and lower forecasted revenue growth due to a continued overall decline in
technology spending and a shortage of capital available to invest in the
reporting unit.
Intangible assets consist of completed technology identified as of the
Infineer acquisition date and are amortized over a five year life. Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
any impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the net realizable of
the asset. In the fourth quarter of 2002, the Company determined that its
intangible assets had been impaired and recorded an impairment loss of $1.0
million. The Company attributes the impairment loss to the significant 2002
operating loss for the reporting unit and lower forecasted revenue growth due to
a continued overall decline in technology spending and a shortage of capital
available to invest in the reporting unit.
The gross carrying amount and accumulated amortization of intangible
assets at December 31, 2004 and 2003 consisted of the following (in thousands):
2004 2003
------- -------
Gross carrying amount $ 1,881 $ 1,881
Accumulated amortization (1,881) (1,841)
------- -------
$ -- $ 40
======= =======
Amortization of intangibles for 2004, 2003 and 2002 was $40,000, $40,000
and $576,000, respectively.
VALUATION OF INVESTMENTS
The Company periodically assesses the carrying value of its minority-owned
investments for impairment. This assessment is based upon a review of operations
and indications of continued viability, such as subsequent rounds of financing.
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.
F-9
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO 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.
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 ("APB") 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".
At December 31, 2004, the Company had four fixed stock-based compensation
plans, which are described more fully in Note 6. 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
and loss per share would have been as follows (in thousands, except per share
data):
2004 2003 2002
------- ------- -------
Net loss, as reported $(4,859) $(1,593) $(7,193)
Deduct: Total stock-based compensation
expense determined under fair value based
method (126) (490) (172)
------- ------- -------
Pro forma net loss $(4,985) $(2,083) $(7,365)
======= ======= =======
Basic and diluted loss per share:
As reported $ (.20) $ (.07) $ (.30)
======= ======= =======
Pro forma $ (.20) $ (.09) $ (.30)
======= ======= =======
For purposes of the pro forma disclosure, 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
options included in the pro forma amounts and the weighted average estimated
fair value of an option granted are as follows:
2004 2003 2002
-------- -------- --------
Expected option term (years) 5.0 5.0 5.0
Expected volatility 353.0% 93.0% 75.0%
Risk-free interest rate 3.7% 3.4% 3.5%
Weighted average fair value per option $ .06 $ .05 $ .16
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 our 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 and
intangibles to be critical policies due to the estimation processes involved.
While all available information has been considered, actual amounts could differ
from those reported.
F-10
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is based on net income divided by
the weighted average number of common shares outstanding during each year.
Diluted net income (loss) per common share assumes issuance of the net
incremental shares from stock options, warrants and convertible preferred stock
at the later of the beginning of the year or date of issuance. Diluted net
income (loss) per share was the same as basic net income (loss) per share in
2004, 2003 and 2002 since the effect of stock options and convertible preferred
stock were anti-dilutive. Shares issuable pursuant to stock options and
convertible preferred stock were 3,841,975, 4,057,475 and 5,215,635 as of
December 31, 2004, 2003 and 2002, respectively.
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.
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 December 31, 2004 was as follows (in thousands):
CARRYING FAIR
AMOUNT VALUE
-------- --------
Long-term debt $ 7,501 $1,860
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 years ended December 31, 2004 and 2003,
no one customer accounted for more than 10% of revenues. Amounts due from two
customers represented approximately 21% and 13%, respectively, of the accounts
receivable balance as of December 31, 2004.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. In accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", the Company capitalizes eligible computer
software costs upon achievement of technological feasibility subject to net
realizable value considerations. Through December 31, 2004, such costs eligible
for capitalization were insignificant. Accordingly, all such costs have been
charged to product development expenses.
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 profits, management cannot assess the likelihood that the future
benefit of these losses will be recognized. Thus, a full valuation allowance has
been recorded.
F-11
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 third quarter of 2005. SFAS No. 123R applies to
all awards granted after June 30, 2005 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 positions, 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 positions,
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
positions, results of operations and cash flows.
NOTE 2 - INVESTMENTS
In December 2000, the Company acquired an ownership interest in TecSec,
Incorporated, a Virginia corporation ("TecSec"), for $5.1 million. TecSec
develops and markets encryption products and solutions, which are designed to
enable the next generation information security for the enterprise,
multi-enterprise e-business and other markets. The TecSec investment, amounting
to a 5% ownership interest on a fully diluted basis, has been accounted for at
cost. The Company has certain anti-dilutive rights whereby its ownership
interest may be increased following contributions of additional third-party
capital. In the third quarter of 2002, the Company determined that the
investment in TecSec had been impaired and recorded a charge of $2.1 million.
The Company attributed the impairment to a general decline in valuations of
technology entities, the difficulties in raising capital and TecSec's recurring
operating losses. In the fourth quarter of 2003, the Company determined that the
investment had been further impaired and recorded a charge of $3.0 million. The
Company attributed this further impairment to the delay in anticipated
government sector awards involving information security technology and TecSec's
ongoing operating losses and liquidity issues. The impairment charges are
included in "Other income (expenses)". TecSec is currently evaluating
alternative sources of financing to meet ongoing capital and operating needs,
although there is no assurance that it will be able to obtain financing or
continue in operations. Future recoveries, if any, from the Company's ownership
interest in TecSec will be recorded as income upon receipt.
In conjunction with the decision to exit the smart card reader and chip
business, in September 2001, the Company formed a new minority-owned affiliate,
Mako Technologies LLC ("Mako"), to market its smart card reader and chip
technologies. The Company contributed certain inventories and equipment valued
at $238,000, in exchange for a 31% fully diluted ownership interest in Mako. The
Company also granted a license of its reader and chip technology to Mako in
exchange for royalties based on sales over the next two years. After reducing
headcount and reassessing business potential, a decision was made in April 2002
to liquidate Mako and terminate the license agreement. Pending the final
F-12
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
wind-down of this venture, the Company wrote-off the entire investment in Mako
in 2002. During 2002, the Company also realized proceeds of $224,000 from the
sale of smart card reader and chip inventory, which had been previously
written-off. The Mako write-off and inventory proceeds are reflected in "Other
income (expenses)".
NOTE 3 - SHAREHOLDERS' EQUITY
On December 6, 2000, the Company completed the private placement of
525,000 shares of common stock and 790 shares of Class A Preferred Stock, Second
Series ("Class A Preferred Stock"), a newly designated series of convertible
preferred stock, resulting in aggregate proceeds of $5.0 million to PubliCARD.
The securities were sold to institutional investors and other accredited
investors in the U.S. and Europe. Each share of Class A Preferred Stock is
convertible into 2,500 shares of common stock. Therefore, the shares of common
stock issued plus the shares of common stock issuable upon conversion of the
Class A Preferred Stock aggregate 2.5 million common shares. The proceeds from
the private placement were used to acquire the ownership interest in TecSec. In
2003 and 2002, 200 shares and 15 shares of Class A Preferred Stock were
converted into 500,000 shares and 37,500 shares, respectively, of PubliCARD's
common stock. As of December 31, 2004 and 2003 there were 565 shares of Class A
Preferred Stock outstanding. The Class A Preferred Stock has a liquidation
preference of $5,000 per share.
In connection with the December 2000 private placement, the Company issued
100 rights equally to the participants in the private placement. These rights
entitle the participating holders of common stock and Class A Preferred Stock to
receive an aggregate of ten percent of any increase in value of the TecSec
investment realized by the Company. The Company performed an internal valuation
of the participation rights and concluded their value on the issuance date to be
de minimus.
On August 9, 1988, the Company declared a dividend of one right ("Right")
for each outstanding share of its common stock. Each Right entitles the holder
to purchase one one-hundredth of a share of a new series of Class A Preferred
Stock, First Series, at an exercise price of $7.50, subject to adjustment to
prevent dilution. The Rights become exercisable 10 days after a person or group
acquires 20% or more of the Company's common stock or announces a tender or
exchange offer for 30% or more of the Company's common stock. If, after the
Rights become exercisable, the Company is party to a merger or similar business
combination transaction, each Right not held by a party to such transaction may
be used to purchase common stock having a market value of two times the exercise
price. The Rights, which have no voting power, may be redeemed by the Company at
$.01 per Right. In July 1998, the Company's Board of Directors approved the
extension of the rights plan to August 8, 2008.
NOTE 4 - INCOME TAXES
The loss from continuing operations consisted of the following (in
thousands):
2004 2003 2002
-------- -------- --------
United States $ (3,927) $ (508) $ (4,686)
Foreign (932) (1,085) (3,573)
-------- -------- --------
$ (4,859) $ (1,593) $ (8,259)
======== ======== ========
F-13
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of taxes computed at the U.S. Federal statutory tax rate
to income tax expense for continuing operations follows (in thousands):
2004 2003 2002
------- ------- -------
Federal taxes, at statutory rate $(1,701) $ (558) $(2,890)
Effect of domestic and foreign losses with no
tax benefit 1,686 543 2,204
Amortization of goodwill and other
non-deductible expenses 15 15 686
------- ------- -------
Income tax expense $ -- $ -- $ --
======= ======= =======
The components of net deferred taxes are as follows (in thousands):
2004 2003
-------- --------
Net operating loss carryforward $ 23,671 $ 24,583
Pension expense 2,540 1,417
Other, net (51) (26)
-------- --------
26,160 25,974
Less valuation allowance (26,160) (25,974)
-------- --------
Net deferred taxes $ -- $ --
======== ========
As of December 31, 2004, approximately $67.6 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
2005 through 2024, were available to offset future taxable income. The
carryforwards expire as follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ---------
2005 $ 6,700
2006 2,400
2007 4,300
2008 5,000
2009 2,300
2010 - 2024 46,900
---------
$ 67,600
=========
Due to the "change of ownership" provisions of the Internal Revenue Code
of 1986, the availability of net operating loss carryforwards to offset federal
taxable income in future periods could be subject to an annual limitation if a
change in ownership for income tax purposes occurs. If such change in ownership
were to occur, management estimates that virtually all of the available net
operating loss carryforwards would be unavailable to reduce its income tax
liability. Furthermore, the extent of the actual future use of the net operating
loss carryforwards is subject to inherent uncertainty, because it depends on the
amount of otherwise taxable income the Company may earn. No assurance can be
given that the Company will have sufficient taxable income in future years, if
any, to use the net operating losses before they would otherwise expire.
At December 31, 2004, the Company's foreign subsidiary had a net operating
loss carryforward for income tax purposes of approximately $4.6 million. The
operating loss carryforward has no expiration period. For financial reporting
purposes, a valuation allowance of $1.4 million has been recognized to offset
the deferred tax asset relating to this carryforward.
F-14
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EMPLOYEE BENEFITS
DEFINED CONTRIBUTION PLAN
The Company maintains a 401(k) plan for its U.S. employees. The assets of
the Company's 401(k) plan are held by an outside fund manager and are invested
in accordance with the instructions of the individual plan participants. The
Company's matching contributions totaled $10,000, $9,000 and $14,000 in 2004,
2003 and 2002, respectively.
DEFINED BENEFIT 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 owned by the Company.
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 December 31,
2004, Net Recoveries was approximately $3.4 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.
Information regarding the Plan, measured as of December 31, 2003, was as
follows (in thousands):
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,354
Interest cost 531
Benefit payments (916)
Actuarial (gain) or loss 778
---------
Benefit obligation at end of year 9,747
---------
F-15
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in plan assets:
Fair value of plan assets at beginning of year 3,210
Actual return on plan assets 542
Employer contributions --
Benefit payments and plan expenses (947)
-------
Fair value of plan assets at end of year 2,805
-------
Funded status (6,942)
Unrecognized transition obligation --
Unrecognized prior service cost 2
Unrecognized net loss 2,649
-------
$(4,291)
=======
Amounts recognized in statement of financial position consist of:
Accrued benefit liability $(6,942)
Intangible asset 2
Accumulated comprehensive loss 2,649
-------
Net amount recognized $(4,291)
=======
Cost of retirement benefits - non-operating of $405,000, $903,000 and
$795,000 in 2004, 2003 and 2002, respectively, includes the net periodic pension
cost and other Plan related expenses. The components of the net periodic pension
cost were as follows (in thousands):
2004 2003 2002
----- ----- -----
Interest cost $ 348 $ 531 $ 611
Expected return on plan assets (87) (162) (268)
Amortization of transition obligation -- 293 293
Amortization of net (gain) loss 83 86 --
----- ----- -----
Net periodic pension cost $ 344 $ 748 $ 636
===== ===== =====
The unrecognized transition obligation was zero at December 31, 2003 and,
accordingly, there was no further amortization expense related to this component
of net periodic pension cost in 2004. As a result of the termination of the
Plan, net periodic pension cost will be zero prospectively.
The change in the minimum liability included in other comprehensive income
was as follows (in thousands):
2004 2003 2002
--------- -------- --------
Other comprehensive income $ (2,649) $ 343 $ 1,405
The assumptions used to determine the net periodic pension cost for the
years ending December 31, 2004, 2003 and 2002 and the benefit obligation as of
December 31, 2003 were are follows:
NET PERIODIC BENEFIT
PENSION COST OBLIGATION
---------------------- ----------
2004 2003 2002 2003
---- ---- ----- ----
Discount rate 5.0% 6.0% 7.25% 5.0%
Long-term rate of return 5.0% 6.0% 8.0% N/A
F-16
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed above, in January 2003 the Company filed a notice with the
PBGC seeking a distress termination of the Plan. The discount rate and long-term
rate of return assumptions were decreased in 2004 and 2003 to reflect the Plan's
short time horizon due to the pending termination request.
The Plan's asset allocation at December 31, 2003, by asset category was as
follows:
2003
---------
Equity securities 64%
Government bonds 23%
Corporate bonds 4%
Money market and accrued income 9%
---------
100%
=========
The investment objectives of the Plan was to diversify assets in order to
reduce the risk of wide swings in market value from year-to-year, to provide
asset growth at a rate in excess of the rate of inflation and to achieve a
positive rate of return over the long term that significantly contributes to
meeting the Plan's obligations. The target asset mix guidelines were 60% equity
securities and 40% investment grade debt securities. Equity securities included
PubliCARD common stock in the amount of approximately $9,000 at December 31,
2003 (less than 1% of total plan assets).
Prior to 2003, the Company's funding policy had been to contribute amounts
sufficient to meet the minimum funding requirements as set forth in employee
benefit and tax laws. Contributions to the Plan were $1.1 million in 2002.
NOTE 6 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options pursuant to four fixed stock-based
compensation plans and made special stock option awards to certain directors,
consultants and employees. A summary of shares purchasable upon the exercise of
stock options as of December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
--------- --------- ---------
Fixed stock-based compensation plans 2,269,475 2,292,975 2,939,175
Special stock options 160,000 352,000 363,960
--------- --------- ---------
2,429,475 2,644,975 3,303,135
========= ========= =========
FIXED STOCK-BASED COMPENSATION PLANS
The Company has four stock-based compensation plans that provide for the
granting of incentive and non-qualified stock options, restricted stock, stock
appreciation rights, performance awards and other stock-based awards to
employees, non-employee directors and consultants. Under these plans adopted by
shareholders of the Company, the Company may grant up to 7,300,000 shares of
common stock. The plans are administered by either the Board of Directors of the
Company or the Compensation Committee of the Board of Directors. The exercise
price of each option granted was equal to the market price of the Company's
common stock on the date of grant. Stock options granted to non-employee
directors expire five years from the date of grant and vest immediately. Stock
options granted to employees generally expire five or ten years from the date of
grant. Prior to 1999, stock options granted to employees vested immediately.
Grants subsequent to 1998 generally vest over three or four years. As of
December 31, 2004, there were 2,041,525 shares available for grant under the
fixed stock-based compensation plans.
F-17
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock options issued pursuant to the fixed stock-based
compensation plans as of December 31, 2004, 2003 and 2002 and changes during the
years then ended is presented below:
2004 2003 2002
------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Balance at January 1 2,292,975 $ .79 2,939,175 $ 1.01 4,608,450 $ 1.07
Granted 90,000 .05 90,000 .07 90,000 .25
Exercised -- -- -- -- -- --
Canceled (113,500) 5.67 (736,200) 1.58 (1,759,275) 1.13
--------- --------- ----------
Balance at December 31 2,269,475 .51 2,292,975 .79 2,939,175 1.01
========= ========= ==========
A summary of the Company's stock options outstanding and exercisable issued
pursuant to the fixed stock-based compensation plans as of December 31, 2004, is
as follows:
OUTSTANDING EXERCISABLE
----------------------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
-------------- --------- ---- ----------- --------- ------
$.05 to $.07 180,000 4.1 $.06 180,000 $.06
$.25 to $.40 1,952,350 4.4 .38 1,952,350 .38
$2.06 to $4.00 137,125 .6 2.98 137,125 2.98
--------- ---------
$.05 to $4.00 (all options) 2,269,475 4.1 .51 2,269,475 .51
========= =========
SPECIAL STOCK OPTIONS AND STOCK AWARDS
The Company has issued special stock options outside of the fixed stock
option plans. As of December 31, 2004, there are a total of 160,000 special
stock options outstanding. All of such options are currently exercisable. No
special stock options were granted or exercised in 2004, 2003 or 2002.
In January 1996, the Company issued options to two members of the
Company's Board of Directors to purchase 200,000 shares of the Company's common
stock at a price of $2.50 per share for five years. In 2000, a total of 40,000
options were exercised. The expiration date of the remaining 160,000 options was
subsequently extended by five years to January 2006.
COMMON STOCK PURCHASE WARRANTS
In December 1986, the Company issued $30 million of 13% Subordinated Notes
together with detachable warrants and underwriter's warrants to purchase a total
of 4,800,000 shares of the Company's common stock for five years, which period
was subsequently extended by five years. In 1997, the shareholders of the
Company approved an additional five-year extension and certain modifications to
the warrants. On July 2, 2002, the remaining warrants, entitling the warrant
holders to purchase 1,523,573 shares of common stock, expired.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next four years. Certain of these
operating leases provide the Company with the option, after the initial lease
term, to either purchase the property or renew the lease. Total rent expense for
all operating leases amounted to approximately $254,000 in 2004, $241,000 in
2003 and $221,000 in 2002.
F-18
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows (in thousands):
MINIMUM
YEAR ENDING LEASE SUBLEASE
DECEMBER 31, PAYMENTS INCOME NET
------------ -------- -------- --------
2005 $ 350 $ 114 $ 236
2006 315 114 201
2007 148 38 110
2008 48 -- 48
Remainder -- -- --
-------- -------- --------
Total minimum lease payments $ 861 $ 266 $ 595
======== ======== ========
Balfour Investors Inc. ("Balfour") occupies a portion of the office space
leased by the Company in New York City. The Chairman and Vice Chairman of the
Company's Board of Directors are the only shareholders of Balfour. Balfour pays
to the Company 50% of the rent and occupancy costs paid by the Company under its
lease, including base rent, electricity, water, real estate tax escalations and
operation and maintenance escalations. The base rent payable by Balfour is
approximately $9,500 per month.
ENVIRONMENTAL
In April 1996, a consent decree (the "Consent Decree") among the Company,
the United States Environmental Protection Agency ("EPA") and the Pennsylvania
Department of Environmental Protection ("PADEP") was entered by the court which
resolved all of the United States' and PADEP's claims against the Company for
recovery of costs incurred in responding to releases of hazardous substances at
a facility in Philadelphia previously owned and operated by the Company.
Pursuant to the Consent Decree, the Company was obligated to pay a total of
$14.4 million plus interest to the United States and the Commonwealth of
Pennsylvania. In January 2002, the Company and the EPA reached an agreement to
extend the due date on the remaining unpaid balance through April 2004. In
return, the EPA was granted a security interest in certain assets held in escrow
("Greenwald Escrow").
As discussed in Note 9, in September 2002, the Company reached an
agreement pursuant to which the Greenwald Escrow was terminated and net proceeds
of approximately $1.3 million were disbursed to the Company. Upon termination of
the Greenwald Escrow in October 2002, the Company satisfied the remaining
obligation to the EPA amounting to $806,000, which included accrued interest.
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 December 31, 2004, the
Company has a contingent liability to repay, in whole or part, grants received
of approximately $510,000 in the event the Company becomes insolvent or
otherwise violates the terms of such grants. As of December 31, 2004, 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 240,000 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 December 31, 2004). As of December 31,
2004, Infineer had borrowings outstanding under this facility totaling 181,000
British pounds (or the equivalent of $347,000).
LEGAL
On May 28, 2002, a lawsuit was filed against the Company 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 names the Company and four of its current and
former executive officers and directors as the defendants. The plaintiffs seek
monetary and punitive damages for alleged actions made by the defendants in
F-19
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
order to induce the plaintiff to purchase, hold or refrain from selling
PubliCARD common stock. The plaintiffs allege 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. The Company
believes it has meritorious defenses to the allegations and intends to defend
vigorously.
In November 2002, the Company and the individual defendants served with
the action 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.
Discovery has commenced and no trial date has been set. Consequently, at this
time it is not reasonably possible to estimate the damages, or range of damages,
if any, that the Company might incur in connection with this action. However, if
the outcome of this lawsuit is unfavorable to the Company, it could have a
material adverse effect on the Company's operations, cash flow and financial
position.
The Company incurred approximately $200,000 in defense costs in 2002. No
additional costs have been incurred in 2003 and 2004. Notice of the commencement
of this action has been given to the Company's directors and officers liability
insurance carriers. The Company's directors and officers liability insurance
carriers are funding the additional costs of defending this action, subject to
the carriers' reservation of rights.
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.
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 $633,000 each
would be made to the Company's Chairman and Vice Chairman. 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.
INSURANCE AND OTHER 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
F-20
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
any indemnity claims, amounts will be released from escrow beginning September
30, 2004 and ending June 30, 2006. During 2004, net cash released from escrow
amounted to approximately $84,000. 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 $647,000 in 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.
In October 2003, the Company sold a parcel of land in Louisiana resulting
in net proceeds of approximately $370,000. The Company recognized a gain of
approximately $330,000 in 2003 relating to the land sale which is included in
"Other income (expenses)".
NOTE 8 - 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. Revenues by geographical areas for the years ended December
31, 2004, 2003 and 2002 are as follows (in thousands):
2004 2003 2002
------ ------ ------
United States $ 540 $ 869 $1,029
Europe 3,631 3,467 3,445
Rest of world 224 445 131
------ ------ ------
$4,395 $4,781 $4,605
====== ====== ======
The Company has operations in the United States and United Kingdom.
Identifiable tangible assets by country as of December 31, 2004 and 2003 are as
follows (in thousands):
2004 2003
------ ------
United States $2,770 $4,542
United Kingdom 1,521 2,035
------ ------
$4,291 $6,577
====== ======
NOTE 9 - DISCONTINUED OPERATIONS
In March 2000, the Company's Board adopted a plan to dispose of the
operations of the Company's Greenwald Industries Inc. ("Greenwald"), Greenwald
Intellicard, Inc. ("Greenwald Intellicard"), Greystone Peripherals, Inc.
("Greystone") and Amazing Smart Card Technologies, Inc. ("Amazing")
subsidiaries. These subsidiaries designed, manufactured and distributed
mechanical and smart card laundry solutions, hard disk duplicators and smart
cards. In the fourth quarter of 1999, the Company recorded a loss of $2.0
million related to the disposition plan, net of the expected gain on the
disposition of these businesses. The loss provision was based on estimates of
the proceeds expected to be realized on the dispositions and the results of
operations through the disposition or wind-down dates.
F-21
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 2000, the Company completed the sale of substantially all of
the assets of Greenwald and Greenwald Intellicard to The Eastern Company
("Eastern") for $22.5 million in cash, less $1.75 million held in escrow
("Greenwald Escrow") to secure the payment of certain indemnification
obligations. As part of the transaction, Eastern assumed certain liabilities of
Greenwald and Greenwald Intellicard, including certain contractual liabilities,
accounts payable and accrued liabilities. In the third quarter of 2000, the
Company recognized a gain of $4.3 million principally related to the sale of
Greenwald and Greenwald Intellicard.
In the second quarter of 2001, the Company revised its estimates of
proceeds and expenses associated with the wind-down of Amazing and Greystone and
recognized a gain of $2.4 million, which had been previously deferred pending
resolution of certain contingencies.
On September 30, 2002, the Company reached an agreement ("Escrow
Termination Agreement") pursuant to which the Greenwald Escrow was terminated
and net proceeds of approximately $1.3 million were disbursed to the Company.
Pursuant to the Escrow Termination Agreement, Eastern acknowledged that there
were no indemnification claims outstanding under the applicable asset purchase
agreement. A gain of $1.1 million was recognized in the third quarter of 2002,
principally relating to the release of reserves upon the resolution of the
Greenwald Escrow. The amounts the Company will ultimately realize from its
discontinued operations could differ from the amounts estimated and could
therefore result in additional charges or gains in future periods.
NOTE 10 - SUPPLEMENTAL INFORMATION
Other assets as of December 31, 2004 and 2003 consisted of the following
(in thousands):
2004 2003
---- ----
Escrow deposit - non current $396 $596
Intangible pension asset -- 2
---- ----
$396 $598
==== ====
Accrued liabilities as of December 31, 2004 and 2003 consisted of the
following (in thousands):
2004 2003
------ ------
Pension liability $ -- $3,866
Payroll and other employee benefits 259 260
Deferred revenue 363 585
Other 383 495
------ ------
$1,005 $5,206
====== ======
Other non-current liabilities as of December 31, 2004 and 2003 consisted
of the following (in thousands):
2004 2003
------ ------
Pension liability $ -- $3,076
Other retiree benefits 135 180
Other 233 296
------ ------
$ 368 $3,552
====== ======
F-22
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of other comprehensive loss as of December 31, 2004 and
2003 consisted of the following (in thousands):
2004 2003
------ ------
Foreign currency translation
adjustment $ 96 $ 75
Minimum pension liability -- 2,649
------ ------
$ 96 $2,724
====== ======
Comprehensive loss for the Company includes foreign currency translation
adjustments and minimum pension liability, as well as net loss reported in the
Company's Statements of Operations. Comprehensive loss for years ended December
31, 2004, 2003 and 2002 was as follows (in thousands):
2004 2003 2002
------- ------- -------
Net loss $(4,859) $(1,593) $(7,193)
Minimum pension liability 2,649 (343) (1,405)
Foreign currency translation adjustments (21) 10 112
------- ------- -------
Comprehensive loss $(2,231) $(1,926) $(8,486)
======= ======= =======
NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited consolidated financial statements for each of the quarterly
periods in the years ended December 31, 2004 and 2003 are as follows (in
thousands, except per share data):
MAR. 31 JUN. 30 SEP. 30 DEC. 31
------- ------- ------- -------
2004
Net sales $ 828 $ 1,028 $ 1,260 $ 1,279
Gross margin 422 548 730 685
Net income (loss) (503) (783) (3,082) (491)
Basic and diluted earnings
(loss) per share $ (.02) $ (.03) $ (.12) $ (.02)
2003
Net sales $ 1,413 $ 1,193 $ 1,417 $ 758
Gross margin 794 581 772 318
Net income (loss) 1,000 (929) (749) (915)
Basic and diluted earnings
(loss) per share $ .04 $ (.04) $ (.03) $ (.04)
F-23
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II
To the Board of Directors and Shareholders of
PubliCARD, Inc.
New York, New York
We have audited the consolidated financial statements of PubliCARD, Inc. and
subsidiary companies (the "Company") as of December 31, 2004 and 2003 and for
each of the three years ended December 31, 2004, and have issued our report
thereon dated March 24, 2005 (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the Company's ability to continue
as a going concern). Our audits also included the consolidated financial
statement schedule listed in Index at Item 15. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
The aforementioned financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, a substantial decline in working capital and negative cash
flows from operations, and requires additional capital to meet its obligations,
which raises substantial doubt about its 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.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 24, 2005
F-24
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ADDITIONS
-------------------
CHARGED TO
BALANCE COSTS AND BALANCE
JANUARY 1 EXPENSES OTHER DEDUCTIONS (1) DECEMBER 31
--------- --------- ------ -------------- -----------
(in thousand of dollars)
Year ended December 31, 2004:
Allowance for doubtful accounts 115 (43) 2 (26) 48
Reserve for discontinued operations 406 -- -- (29) 377
Year ended December 31, 2003:
Allowance for doubtful accounts 103 5 7 -- 115
Reserve for discontinued operations 429 -- -- (23) 406
Year ended December 31, 2002:
Allowance for doubtful accounts 216 -- -- (113) 103
Reserve for discontinued operations 1,245 (457) -- (359) 429
----------
(1) Deductions for allowance for doubtful accounts represent the write-offs of account receivable. Deductions
for discontinued operations represent charges and payments to reserves net of gains and receipts credited
to reserves.
F-25