Three months ended  September 30,						Nine months ended  September 30,
		2006			2005			2006			2005
Net income (loss)		$	7,081		$	(312	)	$	6,198		$	(1,484	)
Foreign currency translation adjustments			(57	)		9			(90	)		36
Comprehensive income (loss)		$	7,024		$	(303	)	$	6,108		$	(1,448	)

Note 5- SUBSEQUENT EVENTS

On October 13, 2006, the Company entered into the Assignment Agreement with Sallyport, pursuant to which the Company assigned 60,058 shares of Series A Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition, pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts to transfer to the Company or cause to be issued to the Company shares of common stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a fully-diluted basis and giving effect to shares that may be issued as a result of Sallyport’s financing of Tecsec during the current year. On October 13, 2006, Tecsec confirmed its agreement to issue such shares to the Company.

 

On October 23, 2006, the Company received an interim distribution of $105,000 from the Arizona Department of Environmental Quality (“ADEQ”) for reimbursement of expenses incurred for the remediation of the Masterview Window Property in Phoenix, Arizona. The Company has requested a hearing with the ADEQ to seek its approval to disburse payment for the remainder of the $370,000 in total expense it incurred as part of the remediation. The Company cannot determine at this time whether any future reimbursements will be made by the ADEQ.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Form 10-Q contain forward-looking statements, including (without limitation) statements concerning possible or assumed future results of operations of PubliCARD preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “estimates,” “may,” “should,” “would,” “could,” “intends,” “plans” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. You should understand that the possible consequences of such statements made under the caption “Risk Factors” and elsewhere in this document could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements.

Overview 

 

PubliCARD’s sole operating activities are conducted through its wholly-owned Infineer Ltd. subsidiary. Infineer designs smart card solutions for educational and corporate sites.

Infineer has continued to incur operating losses and negative cash flow. During 2003, 2004 and 2005, the Company contributed additional capital to Infineer of $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will require additional capital and the Company does not have the financial resources to provide such support. Given the Company’s lack of available resources, continued operating losses and debt position, the Company has begun to consider various alternatives. In 2006, with the assistance of an investment banker, the Company commenced an assessment of the value of Infineer, developed an information memorandum and obtained offers for Infineer’s potential for sale. This process concluded without a viable offer for the business. The Board of Directors has not decided whether to continue with the disposition effort. It is therefore uncertain whether an acceptable offer will materialize or whether any such sale will ultimately be consummated. Any such determination to dispose of Infineer would depend upon, among other things, the amount of potential proceeds of any such sale and require the approval of the Company’s shareholders.

The Company sponsored a defined benefit pension plan that was frozen in 1993. In January 2003, the Company filed a notice with the PBGC seeking a “distress termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee and Termination of Plan between the PBGC and the Company, effective September 30, 2004, the PBGC proceeded to terminate the Plan and was appointed as the Plan’s trustee. As a result, the PBGC has assumed responsibility for paying the obligations to Plan participants. As a result of the Plan termination, the Company’s 2003 and 2004 funding requirements due to the Plan amounting to $3.4 million through September 15, 2004 were eliminated.

Under the terms of the Settlement Agreement between the PBGC and the Company, the Company was liable to the PBGC for the unfunded guaranteed benefit payable by the PBGC to Plan participants in the amount of $7.5 million. The Company satisfied this liability by issuing the Note payable to the PBGC with a face amount of $7.5 million. Pursuant to the Security Agreement and Pledge Agreement, both dated September 23, 2004, the Note was secured by (a) all presently owned or thereafter acquired real or personal property and rights to property of the Company and (b) the common and preferred stock of Infineer and TecSec owned by the Company.

 

On July 27, 2006, the Company entered into the Payment Agreement with the PBGC pursuant to which the PBGC and the Company provided for the settlement and discharge of the Company’s obligations under the Settlement Agreement and the Note. Pursuant to the Payment Agreement, the Company paid the $256,391.31 on July 27, 2006, and agreed that if, between July 27, 2006 and July 27, 2011, the Company receives Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50% of the amount of such excess. As defined in the Payment Agreement, “Net Proceeds” means the amount received by the Company in cash or marketable securities, less the amount of reasonable transaction costs and expenses and debt paid, retained or assumed, from any of (i) the sale by the Company of any or all capital stock of Infineer; (ii) the sale by Infineer of all or substantially all of its assets and a distribution of the proceeds of such sale to the Company; (iii) the sale by the Company of any or all capital stock of Tecsec; and (iv) proceeds received by the Company from settlements, buyouts or assignments of claims with respect to insurance policies covering environmental liabilities for which claims were made prior to July 27, 2006. The Payment Agreement further provides that if, on July 27, 2011, the Company exists as a going concern and holds capital stock of Infineer (and Infineer exists as a going concern) or Tecsec (and Tecsec exists as a going concern), the Company will be deemed to have sold such capital stock for its fair market value, which shall be added to Net Proceeds for purposes of determining the amount of additional payments to the PBGC, if any.

On October 13, 2006, the Company entered into the Assignment Agreement with Sallyport, pursuant to which the Company assigned 60,058 shares of Series A Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition, pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts to transfer to the Company or cause to be issued to the Company shares of common stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a fully-diluted basis and giving effect to shares that may be issued as a result of Sallyport’s financing of Tecsec during the current year. On October 13, 2006, Tecsec confirmed its agreement to issue such shares to the Company. Given the Company’s current financial position, it does not believe that any additional payments will be due to the PBGC on July 27, 2011.

On July 27, 2006, the Company entered into the Payment Agreement with the PBGC, which provides that if, between July 27, 2006 and July 27, 2011, the Company receives Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50% of the amount of such excess. See “ -- Liquidity” below. Based on proceeds from the Tecsec Assignment Agreement and estimated future insurance recoveries, the Company expects that the Company will receive Net Proceeds in excess of $250,000. Accordingly, the Company expects to pay to the PBGC 50% of the proceeds received in connection with the Assignment Agreement.

The Company has not recorded any value on its financial statements for the equity received in connection with the Assignment Agreement. In accordance with SFAS No. 15, Troubled Debt Restructurings, the Company has reduced the carrying value of its liability to the PBGC to an amount equal to its estimated future cash payments, which has resulted in a gain of $7.2 million, or $0.29 per common share, from the settlement with the PBGC. The Company has pledged 1.25% of the equity received from Assignment and Assumption Agreement with Sallyport Capital Holdings to the PBGC. The Company has not recorded any value on its financial statements for this equity. In accordance with SFAS No. 15, Troubled Debt Restructurings, the Company has reduced the carrying value of its liability to the PBGC to an amount equal to its estimated future cash payments, which has resulted in a gain of $7.2 million, or $0.29 per common share from the settlement with the PBGC.

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The Company has incurred operating losses, a substantial decline in working capital and negative cash flow from operations for a number of years. The Company has also experienced a substantial reduction in its cash and short term investments, which declined from $17.0 million at December 31, 2000 to $247,000 at September 30, 2006. The Company also had a shareholders’ deficiency of $1,020,000 as of September 30, 2006.

Management believes that existing cash and short-term investments will not be sufficient to permit the Company to continue operating past the first quarter of 2007 and the Company will likely cease operations. If a sale of Infineer is consummated, the Company will not thereafter have any ongoing business operations. In either case, the Company does not expect that any funds will be available for distribution to its shareholders.

The consolidated financial statements included in this Form 10-Q contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the factors described above, it is unlikely that the Company will be able to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The independent auditors’ reports on the Company’s Consolidated Financial Statements for the years ended December 31, 2005, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial doubt about the Company’s ability to continue as a going concern.

Results of Operations

 

The following table is derived from the Unaudited Condensed Consolidated Financial Statements and sets forth the Company’s consolidated results of operations for the three and nine months ended September 30, 2006 and 2005 (dollars in thousands):

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2006			2005			2006			2005
Revenues		$	887		$	1,029		$	2,434		$	2,689
Cost of revenues			412			429			1,143			1,220
Gross margin			475			600			1,291			1,469
Gross margin percentage			54	%		58	%		53	%		55	%
Operating expenses:
General and administrative			387			514			1,296			1,537
Sales and marketing			249			248			769			929
Product development			156			149			441			489
			792			911			2,506			2,955
Loss from operations			(317	)		(311	)		(1,215	)		(1,486	)
Other income (expenses):
Interest income			5			7			13			21
Interest expense			(9	)		(8	)		(25	)		(19	)
Other income			182			-			205			-
			178			(1	)		193			2
Net loss from continuing operations		$	(139	)	$	(312	)	$	(1,022	)	$	(1,484	)

Results of Operations

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Revenues. Revenues are generated from product sales, technology and software license fees, installation and maintenance contracts. Consolidated revenues decreased to $887,000 in 2006 compared to $1.03 million in 2005. Foreign currency changes had the effect of increasing revenues by 2%. Excluding the impact of foreign currency changes, sales in 2006 decreased by 17% driven by a $146,000 decline in direct sales to customers located in the United Kingdom offset by a $3,000 increase in shipments to distribution partners located outside of the United Kingdom (other than the U.S.).

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Gross margin. Cost of revenues consists primarily of material, personnel costs and overhead. Gross margin, as a percentage of net revenues, was 54% in 2006 compared to 58% in 2005. The decrease is primarily a result of a shift in the Company’s sales mix which provided a greater proportion of sales to customers located outside the United Kingdom. Sales to these distribution partners are generally at a lower margin than sales to customers located within the United Kingdom.

Sales and marketing expenses. Sales and marketing expenses consist primarily of personnel and travel costs, public relations, trade shows and marketing materials. Sales and marketing expenses were $249,000 in 2006 compared to $248,000 in 2005. Headcount levels within the sales and marketing departments were consistent between 2006 and 2005.

Product development expenses. Product development expenses include costs associated with the development of new products and enhancements to existing products. Product development expenses consist primarily of personnel and travel costs and contract engineering services. Product development expenses amounted to $156,000 in 2006 compared to $149,000 in 2005. Headcount levels related to product development were consistent between 2006 and 2005.

General and administrative expenses. General and administrative expenses consist primarily of personnel and related costs for general corporate activities, including finance and accounting, risk management and legal. General and administrative expenses were $387,000 in 2006 compared to $514,000 in 2005. The decrease in expenses is mainly attributable to a $43,000 reduction in directors fees, reduced outside services expense of $12,000, reduced employee salaries and business related expenses of $111,000 and lower legal and insurance expenses of $12,000 at corporate, offset by $30,000 of additional consultant expenses and stock based compensation expenses of $23,000.

Other Income and Expenses. Other Income and Expenses consist primarily of interest income and expenses, insurance settlement proceeds, and other restructuring benefits and expenses. The increase in other income was primarily the result of receipt of $72,000 in connection with unclaimed property as a result of a demutualization proceeding and $111,000 of net proceeds received from the Department of Energy in connection with a crude oil overcharge refund.

Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

Revenues. Consolidated revenues decreased to $2.4 million in 2006 compared to $2.7 million for 2005. Foreign currency changes had the effect of increasing revenues by 7%. Excluding the impact of foreign currency changes, sales in 2006 decreased by 10% driven by a decline of $303,000 in direct sales to customers located in the United Kingdom as well as a $11,000 decline in shipments to distribution partners located outside of the United Kingdom.

Cost of revenues. Gross margin, as a percentage of net revenues, was 53% in 2006 compared to 55% in 2005. The decrease is primarily a result of a shift in the Company’s sales mix which provided a greater proportion of sales to customers located outside the United Kingdom. Sales to these distribution partners are generally at a lower margin than sales to customers located within the United Kingdom.  

Sales and marketing expenses. Sales and marketing expenses were $769,000 in 2006 compared to $929,000 in 2005. The decrease is primarily attributable to a $163,000 reduction in wages, benefits and employee business expense resulting from headcount reductions.

Product development expenses. Product development expenses amounted to $441,000 in 2006 compared to $489,000 in 2005. The decrease in expenses is mainly attributable to a $32,000 decline in wages, benefits and employee business expense associated with headcount reductions, and an $8,000 decrease in depreciation.

General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2006 decreased to $1.3 million from $1.5 million for 2005. The decrease in expenses is mainly attributable to lower outside services (primarily legal, insurance and shareholder reporting) of $96,000 at corporate, a $51,000 reduction in directors fees, reduced employee salaries and expenses of $111,000 and lower salary, professional fees, depreciation and other expenses of $80,000 at Infineer, offset by stock based compensation expense of $23,000, higher consulting expenses at corporate of $52,000, and higher auditing and tax related services expense of $15,000.

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Other Income and Expenses. Other Income and Expenses consist primarily of interest income and expenses, insurance settlement proceeds, and other restructuring benefits and expenses. The increase in other income was primarily a result of receipt of $72,000 in connection with unclaimed property as a result of a demutualization proceeding, $25,000 released from an escrow previously established in connection with a claim against a historical insurer, and $111,000 of net proceeds received from the Department of Energy in connection with a crude oil overcharge refund.

Liquidity

 

The consolidated financial statements included in this Form 10-Q contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As a result of the factors described above, it is unlikely that the Company will be able to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The independent auditors’ reports on the Company’s Consolidated Financial Statements for the years ended December 31, 2005, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial doubt about the Company’s ability to continue as a going concern.

The Company has financed its operations over the last several years primarily through funds received from the sale of a non-core businesses in 2000 and insurance and other recoveries in 2003, 2004 and 2005. For the nine months ended September 30, 2006, cash, including short-term investments, decreased by $825,000 to $247,000 as of September 30, 2006.

Operating activities utilized cash of $1,111,000 for the nine months ended September 30, 2006 and principally consisted of the net income of $6.2 million, an increase in operating assets and liabilities of $61,000 offset by a gain on insurance recoveries of $205,000 depreciation and amortization of $28,000 and a $7.2 million one time non-cash gain resulting from the settlement of the PBGC Note .

Investing activities generated cash of $456,000 for the nine months ended September 30, 2006 and principally consisted of insurance collections of $461,000. The Company expects to receive additional net funds of approximately $250,000 in the fourth quarter of 2006 from future insurance settlements.

Financing activities used cash of $171,000 for the nine months ended September 30, 2006 and consisted of an increase in the overdraft facility at Infineer of $85,000, offset by repayment of the PBGC Note of $256,000.

The Company has experienced negative cash flow from operating activities in the past and expects to experience negative cash flow in the future.

Infineer has continued to incur operating losses and negative cash flow. During 2003, 2004 and 2005, the Company contributed additional capital to Infineer of $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will require additional capital and the Company does not have the financial resources to provide such support. Given the Company’s lack of available resources, continued operating losses and debt position, the Company has begun to consider various alternatives. In 2006, with the assistance of an investment banker, the Company commenced an assessment of the value of Infineer, developed an information memorandum and obtained offers for Infineer’s potential for sale. This process concluded without a viable offer for the business. The Board of Directors has not decided whether to continue with the disposition effort. It is therefore uncertain whether an acceptable offer will materialize or whether any such sale will ultimately be consummated. Any such determination to dispose of Infineer would depend upon, among other things, the amount of potential proceeds of any such sale and require the approval of the Company’s shareholders.

 

The Company sponsored a defined benefit pension plan that was frozen in 1993. In January 2003, the Company filed a notice with the PBGC seeking a “distress termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee and Termination of Plan between the PBGC and the Company, effective September 30, 2004, the PBGC proceeded to terminate the Plan and was appointed as the Plan’s trustee. As a result, the PBGC has assumed responsibility for paying the obligations to Plan participants. As a result of the Plan termination, the Company’s 2003 and 2004 funding requirements due to the Plan amounting to $3.4 million through September 15, 2004 were eliminated.

Under the terms of the Settlement Agreement between the PBGC and the Company, the Company was liable to the PBGC for the unfunded guaranteed benefit payable by the PBGC to Plan participants in the amount of $7.5 million. The Company satisfied this liability by issuing the Note payable to the PBGC with a face amount of $7.5 million. Pursuant to the Security Agreement and Pledge Agreement, both dated September 23, 2004, the Note was secured by (a) all presently owned or thereafter acquired real or personal property and rights to property of the Company and (b) the common and preferred stock of Infineer and TecSec owned by the Company.

On July 27, 2006, the Company entered into the Payment Agreement with the PBGC pursuant to which the PBGC and the Company provided for the settlement and discharge of the Company’s obligations under the Settlement Agreement and the Note. Pursuant to the Payment Agreement, the Company paid the $256,391.31 on July 27, 2006, and agreed that if, between July 27, 2006 and July 27, 2011, the Company receives Net Proceeds in excess of $250,000, the Company will pay to the PBGC 50% of the amount of such excess. As defined in the Payment Agreement, “Net Proceeds” means the amount received by the Company in cash or marketable securities, less the amount of reasonable transaction costs and expenses and debt paid, retained or assumed, from any of (i) the sale by the Company of any or all capital stock of Infineer; (ii) the sale by Infineer of all or substantially all of its assets and a distribution of the proceeds of such sale to the Company; (iii) the sale by the Company of any or all capital stock of Tecsec; and (iv) proceeds received by the Company from settlements, buyouts or assignments of claims with respect to insurance policies covering environmental liabilities for which claims were made prior to July 27, 2006. The Payment Agreement further provides that if, on July 27, 2011, the Company exists as a going concern and holds capital stock of Infineer (and Infineer exists as a going concern) or Tecsec (and Tecsec exists as a going concern), the Company will be deemed to have sold such capital stock for its fair market value, which shall be added to Net Proceeds for purposes of determining the amount of additional payments to the PBGC, if any.

On October 13, 2006, the Company entered into the Assignment Agreement with Sallyport, pursuant to which the Company assigned 60,058 shares of Series A Preferred Stock of Tecsec to Sallyport in exchange for $150,000. In addition, pursuant to the Assignment Agreement, Sallyport agreed to use its best efforts to transfer to the Company or cause to be issued to the Company shares of common stock of Tecsec representing 2 ½% of Tecsec’s common stock, calculated on a fully-diluted basis and giving effect to shares that may be issued as a result of Sallyport’s financing of Tecsec during the current year. On October 13, 2006, Tecsec confirmed its agreement to issue such shares to the Company. Given the Company’s current financial position, it does not believe that any additional payments will be due to the PBGC on July 27, 2011. See Note 5.

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Based on proceeds from the Tecsec Assignment Agreement and estimated future insurance recoveries, the Company expects that it will receive Net Proceeds in excess of $250,000. Accordingly, the Company expects to pay to the PBGC 50% of the proceeds received in connection with the Assignment Agreement.

The Company has not recorded any value on its financial statements for the equity received in connection with the Assignment Agreement. In accordance with SFAS No. 15, Troubled Debt Restructurings, the Company has reduced the carrying value of its liability to the PBGC to an amount equal to its estimated future cash payments, which has resulted in a gain of $7.2 million, or $0.29 per common share, from the settlement with the PBGC.

The Company has incurred operating losses, a substantial decline in working capital and negative cash flow from operations for a number of years. The Company has also experienced a substantial reduction in its cash and short term investments, which declined from $17.0 million at December 31, 2000 to $247,000 at September 30, 2006. The Company also had a shareholders’ deficiency of $1,020,000 as of September 30, 2006.

 

Management believes that existing cash and short-term investments will not be sufficient to permit the Company to continue operating past the first quarter of 2007 and the Company will likely cease operations. If a sale of Infineer is consummated, the Company will not thereafter have any ongoing business operations. In either case, the Company does not expect that any funds will be available for distribution to its shareholders.

Contractual Obligations

 

The following is a summary of the Company’s commitments as of September 30, 2006 (in thousands):

		Payments Due by Period
Contractual Obligation Years		Total			Less than 1 year			1 to 3 years			3 to 5 years			More than 5 years
Operating lease obligations		$	326		$	164		$	162		$	0		$	-
Note payable to PBGC (a)			25			25			-			-			-
Other long-term liabilities			219			6			58			58			97
Total		$	570		$	195		$	220		$	58		$	97

 

(a)

The Note payable to the PBGC was settled on July 27, 2006. See Note 1 to the Unaudited Condensed Consolidated Financial Statements.

Critical Accounting Policies

 

The Company’s significant accounting policies are more fully described in the Notes to the Company’s Unaudited Condensed Consolidated Financial Statements included herein and the Notes to the Consolidated Financial Statements included the Company’s Form 10-K for the year ended December 31, 2005. Certain accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. The Company considers certain accounting policies related to revenue recognition and estimates of reserves for receivables and inventories to be critical policies due to the estimation processes involved.

Revenue recognition and accounts receivable. Revenue from product sales and technology and software license fees is recorded upon shipment if a signed contract exists, the fee is fixed and determinable, the collection of the resulting receivable is probable and the Company has no obligation to install the product or solution. If the Company is responsible for installation, revenue from product sales and license fees is deferred and recognized upon client acceptance or “go live” date. Maintenance and support fees are deferred and recognized as revenue ratably over the contract period. Provisions are recorded for estimated warranty repairs and returns at the time the products are shipped. In the event changes in conditions cause management to determine that revenue recognition criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's credit worthiness. The Company continually monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that it has identified. While such credit losses have historically been within management’s expectations and the provisions established, there is no assurance that the Company will continue to experience the same credit loss rates as in the past.

Inventories. Inventories are stated at lower of cost (first-in, first-out method) or market. The Company periodically evaluates the need to record adjustments for impairment of inventory. Inventory in excess of the Company’s estimated usage requirements is written down to its estimated net realizable value. Inherent in the estimates of net realizable value are management’s estimates related to the Company’s production schedules, customer demand, possible alternative uses and the ultimate realization of potentially excess inventory. A decrease in future demand for current products could result in an increase in the amount of excess inventories on hand.

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Income Taxes. The Company follows SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Since the Company has no history of continuing profits, it is unlikely that the future benefit of these losses will be recognized. Thus, a full valuation allowance has been recorded.  As of December 31, 2005, approximately $61.7 million of U.S. tax loss carryforwards (subject to review by the Internal Revenue Service), expiring from 2006 through 2025, were available to offset future taxable income.  Therefore, the Company did not record any tax provision on its income generated during the three and nine months ended September 30, 2006. 

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This statement requires compensation costs related to share-based payment transactions to be recognized in financial statements. Generally, compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost is recognized over the requisite service period, generally as the award vests. The Company adopted SFAS No. 123(R) in the first quarter of 2006. There were no previously-granted awards unvested as of the adoption date. The adoption of the statement had no impact on the Company’s consolidated financial position, results of operations and cash flows.  

      In November 2004, the FASB issued SFAS No. 151, “Inventory Cost, an amendment of ARB No. 43, Chapter 4”. This statement amends Accounting Research Bulletin No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). The provision of the statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the statement did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” This statement amends APB No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exception for nonmonetary exchanges of similar productive assets under APB No. 29 and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of the statement did not have a material effect on the Company’s consolidated financial position, results of operations and cash flows.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company currently does not contemplate any voluntary changes in accounting principles.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency exchange rate risk

 

We conduct operations in the United Kingdom and sell products in several different countries. Therefore, our operating results may be impacted by the fluctuating exchange rates of foreign currencies, especially the British pound, in relation to the U.S. dollar. We do not currently engage in hedging activities with respect to our foreign currency exposure. We continually monitor our exposure to currency fluctuations and may use financial hedging techniques when appropriate to minimize the effect of these fluctuations. Even so, exchange rate fluctuations may still have a material adverse effect on our business and operating results.

Market Risk

 

We are exposed to market risk primarily through short-term investments and an overdraft facility. Our investment policy calls for investment in short-term, low risk instruments. As of September 30, 2006, short-term investments (a money market account) were $229,000 and borrowing under the overdraft facility amounted to $564,000. Due to the nature of these investments and the amount of the overdraft facility and the Company's financial condition, any change in rates  (other than a nominal change) would have a material impact on our financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the SEC is recorded, processed, summarized and reported on a timely basis. With the participation of management, the Company's chief executive officer and principal financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon this evaluation, the chief executive officer and principal financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

 

There has not been any change in the Company's internal controls over financial reporting during the period to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Various legal proceedings are pending against the Company. The Company considers all such proceedings to be ordinary litigation incident to the character of its business. Certain claims are covered by liability insurance.

ITEM 1A. RISK FACTORS

We do not expect to continue as a going concern. We have incurred losses, a substantial decline in working capital and negative cash flow from operations for a number of years. We have also experienced a substantial reduction in our cash and short term investments, which declined from $17.0 million at December 31, 2000 to $247,000 at September 30, 2006. We also had a shareholders’ deficiency of $1,020,000 as of September 30, 2006.

Infineer has continued to incur operating losses and negative cash flow. During 2003, 2004 and 2005, we contributed additional capital to Infineer of $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will require additional capital and we do not have the financial resources to provide such support. Given our lack of available resources, continued operating losses and debt position, we have begun to consider various alternatives. In 2006, with the assistance of an investment banker, we commenced an assessment of the value of Infineer, developed an information memorandum and obtained offers for Infineer’s potential for sale. This process concluded without a viable offer for the business. The Board of Directors has not decided whether to continue with the disposition effort. It is therefore uncertain whether an acceptable offer will materialize or whether any such sale will ultimately be consummated. Any such determination to dispose of Infineer would depend upon, among other things, the amount of potential proceeds of any such sale and require the approval of our shareholders.

We believe that existing cash and short-term investments will not be sufficient to permit us to continue operating past the first quarter of 2007 and we will likely cease operations. If a sale of Infineer is consummated, we will not thereafter have any ongoing business operations. In either case, we do not expect that any funds will be available for distribution to its shareholders.

Accordingly, it is unlikely that we will be able to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The independent auditors’ reports on the our consolidated financial statements for the years ended December 31, 2005, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial doubt about the Company’s ability to continue as a going concern.

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ITEM 6. EXHIBITS

(a) Exhibits

10.1	Engagement Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.2	Addendum to Engagement Agreement, dated as of July 26, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.3	Indemnification Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.4	Stock Option Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.5	Non-Plan Stock Option Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.6	Payment, Retirement and Release Agreement dated as of July 27, 2006 by and between the Pension Benefit Guaranty Corporation and PubliCARD, Inc. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 10-Q filed on July 28, 2006.

10.7	Assignment of Shares and Assumption of Obligations Agreement dated as of October 13, 2006 between Sallyport Investment Partnership and PubliCARD, Inc. Incorporated by reference from PubliCARD, Inc.’s  Current Report  on Form 8-K filed on October 27, 2006.

10.8	Letter from TECSEC, Incorporated to PubliCARD, Inc., dated as of October 13, 2006. Incorporated by reference to PubliCARD, Inc.’s  Current Report on Form 8-K filed on October 27, 2006.

31(i).1

Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(i).2

Certification of the Principal Financial Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of the Chief Executive Officer filed herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of the Principal Financial Officer filed herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PUBLICARD, INC.
	(Registrant)
Date: November 16, 2006		/s/ Joseph Sarachek
		Joseph Sarachek
		Chief Executive Officer

 

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EXHIBIT INDEX

Exhibit

Number

Description

 

10.1	Engagement Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.2	Addendum to Engagement Agreement, dated as of July 26, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.3	Indemnification Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.4	Stock Option Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.5	Non-Plan Stock Option Agreement, dated as of July 21, 2006, between PubliCARD, Inc. and Joseph E. Sarachek. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 8-K filed on July 27, 2006.

10.6	Payment, Retirement and Release Agreement dated as of July 27, 2006 by and between the Pension Benefit Guaranty Corporation and PubliCARD, Inc. Incorporated by reference from PubliCARD, Inc.’s Current Report on Form 10-Q filed on July 28, 2006

10.7	Assignment of Shares and Assumption of Obligations Agreement dated as of October 13, 2006 between Sallyport Investment Partnership and PubliCARD, Inc. Incorporated by reference from PubliCARD, Inc.’s  Current Report  on Form 8-K filed on October 27, 2006.

10.8	Letter from TECSEC, Incorporated to PubliCARD, Inc., dated as of October 13, 2006. Incorporated by reference to PubliCARD, Inc.’s  Current Report on Form 8-K filed on October 27, 2006.

31(i).1

Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(i).2

Certification of the Principal Financial Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of the Chief Executive Officer filed herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of the Principal Financial Officer filed herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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