Part
I
Item
1. Business
Porta
Systems Corp. develops designs, manufactures and markets a range of standard and
proprietary telecommunications equipment for sale domestically and
internationally. Our core products, focused on ensuring communications for
service providers worldwide, fall principally into two categories:
Telecommunications
connection and protection equipment. These
systems are used to connect copper-wired telecommunications networks and to
protect telecommunications equipment from voltage surges. We market our copper
connection equipment and systems to telephone operating companies and customer
premise systems providers in the United States and foreign
countries.
Signal
processing equipment. These
products, which we sell principally for use in defense and aerospace
applications, support copper wire-based communications systems.
Through
2004, we offered a third category of products - operation support systems, which
we call OSS. During 2003 we began to scale back our OSS operations and we
continued to scale back these operations during 2004. We now limit our OSS
operations to the performance of maintenance on existing systems and the
performance of warranty services. We are also seeking to sell our existing OSS
inventory; however, such sales were not significant in 2004, and we do not plan
to add additional inventory. During 2004, we also completed installations of OSS
systems pursuant to contracts which we entered into in prior years. OSS systems
focus on the access loop and are components of telephone companies’ service
assurance and service delivery initiatives. The systems primarily focus on
trouble management, line testing, network provisioning, inventory and
assignment, and automatic activation, and most currently single ended line
qualification for the delivery of xDSL high bandwidth services.
We are a
Delaware corporation incorporated in 1972 as the successor to a New York
corporation of the same name incorporated in 1969. Our principal offices are
located at 6851 Jericho Turnpike, Syosset, New York 11791; telephone number,
516-364-9300. References to “we,” “us,” “our,” and words of like import refer to
Porta Systems Corp. and its subsidiaries, unless the context indicates
otherwise.
Forward-Looking
Statements
Statements
in this Form 10-K annual report may be “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, but are not limited to, statements that express our
intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and probably will, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those risks discussed from time to time in this Form
10-K annual report, including the risks described under “Risk Factors” and the
matters described under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and in other documents which we file with
the Securities and Exchange Commission. In addition, such statements could be
affected by risks and uncertainties related to our financial conditions, our
relationship with the holder of our senior debt, factors which affect the
telecommunications industry, market and customer acceptance, competition,
government regulations and requirements and pricing, as well as general industry
and market conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-K.
Risk
Factors
We
require substantial financing to meet our working capital requirements and
we
have no access to such
financing. We had a
working capital deficit at December 31, 2004 of
$34,150,000. As of December 31, 2004, our current liabilities included
$25,674,000 due to the
holder of our
senior debt. We do not have sufficient resources to pay the senior debt or to
pay principal and interest of $10,273,000 due at
December 31, 2004 on the outstanding subordinated notes that became due on July
3, 2001, and we do not expect to generate the necessary cash from our operations
to enable us to make those payments and we
have no other source of outside financing. The
holder of our senior debt is not advancing funds to us; and, at present our only
source of funds is from operations. To the extent that either
our
operations do not generate sufficient funds to cover our expenses or the
holders of our debt demand payment which we are unable to make, it may
be necessary for us to seek protection under the Bankruptcy Code. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Our
independent auditors have included an explanatory paragraph relating to our
ability to continue
as a going concern in their report on our financial statements.
Because
we have suffered substantial recurring losses from operations in two of the last
three years, and because of our stockholders’ deficit of $30,661,000 and our
working capital deficit of $34,150,000 as of December 31, 2004, our auditors
included in their report an explanatory paragraph about our ability to
continue as a
going concern.
Our
increase in sales in our copper connection/protection segment is based on
specific market factors and the requirements of British Telecommunications,
which may not continue. The
increase in our copper connection business during 2004 resulted primarily from
the requirements of British Telecommunications to provide increased DSL service.
Total sales for British Telecommunications, consisting of direct sales and sales
to systems integrators for British Telecommunications (including Fujitsu
Telecommunications Europe LTD) were $14,055,000 (48% of sales) for 2004,
$7,077,000 (36%) for 2003 and $5,128,000 (24%) for 2002. Almost all of such
sales were sales of copper connection products. To the extent that British
Telecommunications is no longer required to provide such service or no longer
requires products from us, we may be unable to operate profitably, and it may be
necessary for us to seek protection under the Bankruptcy Code.
We
are a defendant in a material arbitration proceeding which, if adversely
determined, would impair our ability to continue in business.
A vendor
has commenced an arbitration proceeding against us seeking $3 million for breach
of contract. Although terms of a settlement are being negotiated, if these
discussions do not result in an agreement and the claimant obtains a significant
judgment against us and the claimant seeks to enforce the judgment, it may be
necessary for us to seek protection under the Bankruptcy Code.
Our
sales have been impaired as a result of overbuilding by telecommunications
companies and the failure of a number of companies in the industry during the
past six years. Since our
sales are dependent upon the growth of the telecommunications industry, our
ability to operate profitably will be impaired by any factors which affect the
telecommunications industries generally or to the extent that our customers’
needs change either as a result of regulatory conditions or changes in
technology.
We
are heavily dependent on foreign sales.
Approximately 66% of our sales in 2004, 56% of our sales in 2003 and 54% of our
sales in 2002, were made to foreign telephone operating companies. In selling to
customers in foreign countries, we are exposed to inherent risks not normally
present in the case of our sales to United States customers, including risks
relating to political and economic changes,
including the decline in the value of the dollar against other major
currencies.
Furthermore, our financial condition has impaired our ability to generate new
business in the international market as potential customers express concern
about our ability to perform.
We
have granted to British Telecommunications rights to our
technology. Under
our agreement with British Telecommunications, we gave British
Telecommunications the right to use our connection/protection technology or have
products using our technology manufactured for it by others. As a result,
British Telecommunications may have the right to use our technology and purchase
products based on our technology from others, which may result in a significant
decline in our sales to British Telecommunications.
Because
of our small size and our financial problems, we may have difficulty competing
for business. We
compete directly with a number of large and small domestic
and foreign telephone
equipment manufacturers, with
CommScope, Inc., which acquired the connection/protection business from Lucent
Technologies, continuing to be our principal United States competitor. Our
competitors have used our financial difficulties in successfully competing
against us. We anticipate that our working capital deficit and our historical
losses, combined with the absence of financing, may continue to place us in a
competitive disadvantage.
We
require access to current technological developments. We rely
primarily on the performance and design characteristics of our products
in
marketing our products, which requires access to state-of-the-art technology in
order to be
competitive. Our business could be adversely affected if we cannot obtain
licenses for such updated technology or self develop state-of-the-art
technology. Because
of our financial problems, we were not able to devote any significant effort to
research and development, which could increase our difficulties in making sales
of our products.
We
rely on certain key employees. We are
dependent upon the continued employment of certain key employees, including our
senior executive officers and our
operations and technical personnel. Our
failure to retain such employees may have a material adverse effect upon our
business. If we are unable to provide our customers with necessary service, our
ability to operate profitably could be impaired.
Because
our stock is subject to the penny stock rules, our stockholders may have
difficulty in selling our stock. Because
our stock is traded on the OTC Bulletin Board and our stock price is very low,
our stock is subject to the Securities and Exchange Commission’s penny stock
rules, which impose additional sales practice requirements on broker-dealers
that sell our stock to persons other than established customers and
institutional accredited investors. These rules may affect the ability of
broker-dealers to sell our common stock and may affect the ability of our
stockholders to sell any common stock they may own.
We
do not pay dividends on common stock. The
holder of our senior debt has prohibited us from paying any dividends on our
common stock.
Products
Telecommunications
Connection Equipment. Our
copper connection/protection equipment is used by domestic and international
telephone operating companies, by owners of private telecommunications equipment
and manufacturers and suppliers of telephone central office and customer
premises equipment. Products of the types comprising our telecommunications
connection equipment are included as integral parts of all domestic and foreign
telephone and telecommunications systems.
Our
connection equipment consists of connection/protection blocks, building entrance
terminals and protection modules. These products are used by telephone companies
and installers of communications and data transmission equipment to interconnect
copper-based subscriber lines to switching equipment lines. The protector
modules protect central office and customer premises personnel and equipment
from electrical surges. The need for protection products has increased as a
result of the worldwide move to digital technology, which is extremely sensitive
to damage by electrical overloads, and private owners of telecommunications
equipment now have the responsibility to protect their equipment, personnel and
buildings from damage caused by electrical surges. Line connection/protection
equipment usually incorporates protector modules to safeguard equipment and
personnel from injury due to power surges. Currently, these products include a
variety of connector blocks, protector modules, building entrance terminals and
frames used in telephone central switching offices, PBX installations, multiple
user facilities and customer premise applications.
We also
have developed a range of frames for use in conjunction with our traditional
line of connecting/protecting products. Frames for the interconnection of copper
circuits are specially designed structures which, when equipped with connector
blocks and protectors, interconnect and protect telephone lines and distribute
them in an orderly fashion allowing access for repairs and changes in line
connections. One of our frame products, the CAM frame, is designed for the
optimum placement of connections for telephone lines and connector blocks
mounted on the frame.
Our
copper connection/protection products are used by many of the regional Bell and
international operating companies as well as independent telephone operating
companies in the United States, owners of private telecommunications equipment
providing communications and data transmission facilities and equipment. These
products are also purchased by equipment manufacturers for integration with
their systems. In addition, our telecommunications connection products have been
sold to telephone operating companies in various foreign countries. This
equipment is compatible with existing telephone systems both within and outside
the United States and can generally be used without modification, although we do
custom-design modifications to accommodate the specific needs of our
customers.
Signal
Processing Products. Our
signal processing products include data bus systems and wideband transformers.
Data bus systems, which are the communication standard for military and
aerospace systems, require an extremely high level of reliability and
performance. Wideband transformers are required for ground noise elimination in
video imaging systems and are used in the television and broadcast, medical
imaging and industrial process control industries.
Operations
Support Systems. Through
2004, we sold our OSS
systems primarily to telephone operating companies in established and developing
countries in Asia, South and Central America and Europe. Because
of continuing losses in this division, combined with difficulties in marketing
OSS products in view of our financial condition, we limited our OSS activities
to the performance of maintenance and warranty services. In addition, we are
trying to sell our remaining OSS inventory, although such sales were not
significant and we can give no assurance that we will be able to sell the
remaining OSS inventory. Although we made modest efforts to generate new
business in selected markets, we were not successful in these efforts. We expect
our OSS business to continue to decline in future years.
The table
below shows, for the last three fiscal years, the contribution made to our sales
by each of our major categories of the telecommunications industry:
Sales
by Product Category
Years
Ended December 31,
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
(Dollars
in thousands) |
|
Line
Connecting /Protecting Equipment |
|
$ |
21,545 |
|
|
74 |
% |
$ |
11,334 |
|
|
58 |
% |
$ |
9,598 |
|
|
45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Signal
Processing |
|
|
5,551 |
|
|
19 |
% |
|
4,253 |
|
|
21 |
% |
|
4,523 |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSS
Systems |
|
|
2,003 |
|
|
7 |
% |
|
3,249 |
|
|
17 |
% |
|
6,414 |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
69 |
|
|
0 |
% |
|
754 |
|
|
4 |
% |
|
882 |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,168 |
|
|
100 |
% |
$ |
19,590 |
|
|
100 |
% |
$ |
21,417 |
|
|
100 |
% |
Markets
As a
telephone company expands the number of its subscriber lines, it may require
additional connection equipment to interconnect and protect those lines in its
central offices. We provide a line of copper connection equipment for this
purpose. Recent trends towards the transmission of high frequency signals on
copper lines are sustaining this market. Less developed countries, such as those
with emerging telecommunications networks or those upgrading to digital
switching systems, provide a growing market for copper connection and protection
equipment.
The
increased sensitivity of the newer digital switches to small amounts of voltage
requires the telephone company which is upgrading its systems to digital
switching systems to also upgrade its central office connection/protection
systems in order to meet these more stringent protection requirements. We supply
central office connection/protection systems to meet these needs.
During
2004, approximately 74% of our sales were made to customers in this
category.
Our line
of signal processing products is supplied to customers in the military and
aerospace industry as well as manufacturers of medical equipment and video
systems. The primary communication standard in new military and aerospace
systems is the MIL-STD-1553 Command Response Data Bus, an application which
requires an extremely high level of reliability and performance. Our
wideband transformers are required for ground noise elimination in video imaging
systems and are used in the television and broadcast, medical imaging and
industrial process control industries. If not eliminated, ground noise caused by
poor electrical system wiring or power supplies, results in significant
deterioration in system performance, including poor picture quality and process
failures in instrumentation. The wideband transformers provide a cost-effective
and quick solution to the problem without the need of redesign of the rest of
the system. Products
are designed to satisfy
the specific
requirements of each military or aerospace customer.
During
2004, signal processing equipment accounted for approximately 19% of our
sales.
During
2004, approximately 7% of our sales consisted principally of maintenance
services and, to a lesser extent, to the sale of our existing OSS inventory. We
do not expect to enter into new maintenance agreements which have a term that
extends beyond 2007. We anticipate that the OSS sales will represent a declining
percentage of total sales.
Marketing
and Sales
We
operate principally through two business units, which are organized by product
line, and with each having responsibility for the sales and marketing of its
products. We also continue to employ a modest staff of maintenance personnel to
perform maintenance and warranty services on OSS systems.
When
appropriate to obtain sales in foreign countries, we may enter into business
arrangements and technology transfer agreements covering our products with local
manufacturers and participate in manufacturing and licensing arrangements with
local telephone equipment suppliers.
In the
United States and throughout the world, we use independent distributors in the
marketing of all copper based products to the regional Bell operating companies
and the customer premises equipment market. All distributors marketing
copper-based products also market directly competing products. In addition, we
continue to promote the direct marketing relationships we developed in the past
with telephone operating companies.
British
Telecommunications purchased line connecting/protecting products of $2,259,000
(8% of sales) in 2004, $867,000 (4% of sales) in 2003, and $689,000 (3% of
sales) in 2002. During these years, we also sold our products to unaffiliated
suppliers for resale to British Telecommunications, the most significant of
which was Fujitsu, a systems integrator for British Telecommunications, to whom
we sold $4,772,000 in 2004, $3,150,000 in 2003, and $1,585,000 in 2002. We have
a cross-licensing agreement with British Telecommunications which, in effect,
enables British Telecommunications to use certain of our proprietary information
to modify or enhance products provided to British Telecommunications and permits
British Telecommunications to manufacture or engage others to manufacture those
products.
Our
signal processing products are sold primarily to United States military and
aerospace prime contractors, and domestic original equipment manufacturers and
end users.
The
following table sets forth for the last three fiscal years our sales to
customers by geographic region:
Sales to
Customers By Geographic Region (1)
|
|
Year
Ended December 31, |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
(Dollars
in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America |
|
$ |
12,948 |
|
|
44 |
% |
$ |
9,647 |
|
|
49 |
% |
$ |
10,442 |
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom |
|
|
14,911 |
|
|
51 |
% |
|
7,523 |
|
|
38 |
% |
|
6,388 |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia/Pacific |
|
|
694 |
|
|
2 |
% |
|
954 |
|
|
6 |
% |
|
2,729 |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Europe |
|
|
457 |
|
|
2 |
% |
|
1,228 |
|
|
6 |
% |
|
1,600 |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America |
|
|
158 |
|
|
1 |
% |
|
238 |
|
|
1 |
% |
|
258 |
|
|
1 |
% |
Total
Sales |
|
$ |
29,168 |
|
|
100 |
% |
$ |
19,590 |
|
|
100 |
% |
$ |
21,417 |
|
|
100 |
% |
(1) |
For
information regarding the amount of sales, operating profit or loss and
identifiable assets attributable to each of our divisions and geographic
areas, see Note 21 of Notes to the Consolidated Financial
Statements. |
In
selling to customers in foreign countries, we face inherent risks not normally
present in the case of sales to United States customers, including risks
associated with currency devaluation, inability to convert local currency into
dollars, as well as local tax regulations and political
instability.
Manufacturing
At
present, our manufacturing operations are conducted at facilities located in
Syosset, New York and Matamoros, Mexico. From
time to time we also use subcontractors to augment various aspects of our
production activities and periodically explore the feasibility of conducting
operations at lower cost manufacturing facilities located abroad. We are no
longer manufacturing or purchasing new inventory for OSS products.
Source
and Availability of Components
We
generally purchase the standard components used in the manufacture of our
products from a number of suppliers. We attempt to assure ourselves that the
components are available from more than one source.
Significant
Customers
Our five
largest customers accounted for sales of $15,443,000, or approximately 53% of
sales, for 2004; $8,507,000, or approximately 43% of sales, for 2003;
and
$9,784,000,
or approximately 46% of sales, for
2002.
Fujitsu, a
system integrator for British Telecommunications, was our largest customer for
2004 and 2003, accounting for sales of $4,772,000, or approximately 16% for 2004
and $3,150,000, or approximately 16% for 2003. Direct
sales to British Telecommunications were
$2,652,000, or 9% of sales for 2004, which included line connecting/protecting
products of $2,259,000 and the balance OSS maintenance services, $1,480,000, or
8% of sales for 2003 and $2,306,000, or 11% of sales for 2002. Total
sales for British Telecommunications, consisting of direct sales and sales to
systems integrators for British Telecommunications (including Fujitsu) were
$14,055,000 (48% of sales) for 2004, $7,077,000 (36%) for 2003 and $5,128,000
(24%) for 2002. During 2004, sales to Telmex accounted for $3,139,000, or
approximately 11% of sales. Philippine
Long Distance Telephone was our
largest customer for 2002, accounting for sales of
$2,725,000, or approximately 13% of
sales. The revenue from Philippine Long Distance Telephone related to the sale
and installation of an OSS system, which was completed in 2004. No other
customers account for 10% or more of our sales in 2004, 2003 or 2002.
The
former Bell operating companies continue to be the ultimate purchasers of a
significant portion of our products sold in the United States, while sales to
foreign telephone operating companies constitute the major portion of our
foreign sales. Our contracts with these customers require no minimum purchases
by such customers. Significant customers for the signal processing products
include major United States aerospace companies, the Department of Defense and
original equipment manufacturers in the medical imaging and process control
equipment industries. We sell both catalog and custom designed products to these
customers. Some contracts are multi-year procurements.
Backlog
At
December 31, 2004, our backlog was approximately $5,300,000 compared with
approximately $6,000,000 at December 31, 2003. The decrease in the backlog
reflects our ability to manufacture and ship inventory during 2004 in a more
timely manner than in 2003 because of our improved cash flow. Of the December
31, 2004 backlog, approximately $2,800,000 represented orders from foreign
telephone operating companies. We expect to ship substantially all of our
December 31, 2004 backlog during 2005.
Intellectual
Property Rights
We own a
number of domestic utility and design patents and have pending patent
applications for these products. In addition, we have foreign patent protection
for a number of our products.
From time
to time we enter into licensing and technical information agreements under which
we receive or grant rights to produce certain subcomponents used in our
products. These agreements are for varying terms and provide for the payment or
receipt of royalties or technical license fees.
While we
consider patent protection important to the development of our business, we
believe that our success depends primarily upon our engineering, manufacturing
and marketing skills. Accordingly, we do not believe that a denial of any of our
pending patent applications, expiration of any of our patents, a determination
that any of the patents which have been granted to us are invalid or the
cancellation of any of our existing license agreements would have a material
adverse effect on our business.
Under our
agreement with British Telecommunications, we gave British Telecommunications
the right to use our connection/protection technology or have products using our
technology manufactured for it by others.
Competition
The
telephone equipment market in which we do business is characterized by intense
competition, rapid technological change and a movement to consolidation and
private ownership of telecommunications networks. In competing for telephone
operating company business, the purchase price of equipment and associated
operating expenses have become significant factors, along with product design
and long-standing equipment supply relationships. In the customer premises
equipment market, we are functioning in a market characterized by distributors
and installers of equipment and by price competition.
We
compete directly with a number of large and small telephone equipment
manufacturers in the United States, with CommScope, Inc., which acquired the
business from Lucent Technologies, being our principal United States competitor.
CommScope’s greater resources, extensive research and development facilities,
long-standing equipment supply relationships with the operating companies of the
regional holding companies and history of manufacturing and marketing products
similar in function to those produced by us continue to be significant factors
in our competitive environment. Currently, CommScope and a number of companies
with greater financial resources than us produce, or have the design and
manufacturing capabilities to produce, products competitive with our products.
In meeting this competition, we rely primarily on the engineered performance and
design characteristics of our products to achieve comparable performance and we
endeavor to offer our products at prices that will make our products compete
worldwide.
However, our ability to compete is hampered by our financial condition and our
history of losses.
In
connection with overseas sales of our line connecting/protecting equipment, we
have met with significant competition from United States and foreign
manufacturers of comparable equipment and we expect this competition to
continue. In addition to CommScope, a number of our overseas competitors have
significantly greater resources than we do.
Research
and Development Activities
We spent
approximately $2,000,000 in 2004, $2,100,000 in 2003, and $2,500,000 in 2002 on
research and development activities. Most of
the research and development expenses in 2004 related to copper
connection/protection products, and was
oriented more toward modest enhancements on our existing products rather than
development of new technology. All
research and development was Company sponsored and is expensed as incurred.
During 2004, we increased our research and development efforts in the
connection/protection business and, as part of our scale-back of our OSS
business, we terminated our research and development activities in that segment.
Employees
As of
December 31, 2004, we had 305 employees, of which 48 were employed in the United
States, 237 in Mexico, 12 in the United Kingdom, and 8 in China. We believe that
our relations with our employees are good, and we have never experienced a work
stoppage. Our employees are not covered by collective bargaining agreements,
except for our hourly employees in Mexico who are covered by two collective
bargaining agreements that expire on December 31, 2006 and May 20,
2006.
Item
2.
Properties
We
currently lease approximately 14,500 square feet of executive, sales, marketing
and research and development space and 4,200 square feet of manufacturing space
in Syosset, New York. These facilities represent substantially all of our
office, plant and warehouse space in the United States. The Syosset, New York
leases expire February 2008 and May 2007, respectively. The annual rental
payable under these leases is approximately $285,000 and is subject to customary
escalation clauses.
Our
wholly-owned United Kingdom subsidiary leases an approximately 11,000 square
foot facility in Coventry, England, which facility comprises all of our office,
plant and warehouse space. The lease expires in 2019. The aggregate current
annual rental is approximately $375,000 and is subject to customary escalation
clauses. During 2002 and 2003, we subleased a portion of these facilities and
are currently seeking a new sublessee.
Our
wholly-owned Mexican subsidiary owns an approximately 40,000 square foot
manufacturing facility, and approximately 50,000 square feet of adjacent land,
in Matamoros, Mexico.
We
believe our properties are adequate for our needs.
Item
3.
Legal
Proceedings
In June
2002, BMS Corp. commenced an arbitration proceeding against us in New York City
seeking damages of approximately $3,000,000 and alleging that we
breached our agreement to market and sell an update to our
OSS product
which BMS was to develop for
us. We
believe that we have defenses to the claims by BMS and we
have
filed a counterclaim to recover the $350,000 we advanced to BMS under the
contract. As of
December 31, 2004, we have recorded a liability of $727,000, based on our
estimate of the present value of the Company's liability to BMS based upon the
terms of a proposed settlement with BMS. However, we can give no assurance that
we will be able to settle the action on such terms.
In July
1996, an action was commenced against us and certain present and former
directors in the Supreme Court of the State of New York, New York County by
certain of the Company’s stockholders and warrant holders who acquired their
securities in connection with our acquisition of Aster Corporation. The
complaint alleged breach of contract against us and breach of fiduciary duty
against our directors arising out of an alleged failure to register certain
restricted shares and warrants owned by the plaintiffs. The complaint sought
damages of $413,000. The case
has been administratively dismissed for failure to prosecute.
In July
2001, the holder of a subordinated note in the principal amount of $500,000
commenced an action against us in the United States District Court for the
Southern District of New York seeking payment of the principal and accrued
interest on their subordinated notes which were payable in July 2001. The
payment of the note is subordinated to payment of our senior debt. The
plaintiff's motion for a summary judgment was denied by the court in January
2002, on the grounds that the terms of the note did not give them permission to
obtain a judgment while we remained in default to the senior debt holder. Since
that time, the action has remained inactive. Our obligations under the
subordinated notes are reflected as current liabilities on our balance sheet.
Item
4.
Submission
of Matters to a Vote of Securities Holders
During
the fourth quarter of 2004, no matters were submitted to a vote of our security
holders.
Part
II
Item
5.
Market
for Registrant's Common Equity and Related Stockholder
Matters
Our
common stock is traded on the OTC Bulletin Board under the symbol PYTM. The
following table sets forth, for 2004 and 2003, the quarterly high and low sales
prices for our common stock on the OTC Bulletin Board.
|
|
|
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
2004 |
|
|
First
Quarter |
|
$ |
0.15 |
|
$ |
0.03 |
|
|
|
|
Second
Quarter |
|
|
0.23 |
|
|
0.05 |
|
|
|
|
Third Quarter |
|
|
0.23 |
|
|
0.07 |
|
|
|
|
Fourth Quarter |
|
|
0.21 |
|
|
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
First
Quarter |
|
$ |
0.05 |
|
$ |
0.01 |
|
|
|
|
Second
Quarter |
|
|
0.05 |
|
|
0.02 |
|
|
|
|
Third
Quarter |
|
|
0.04 |
|
|
0.01 |
|
|
|
|
Fourth
Quarter |
|
|
0.04 |
|
|
0.02 |
|
We did
not declare or pay any cash dividends in 2004 or 2003, and we do not anticipate
paying cash dividends in the foreseeable future. Our agreement with the holder
of our senior debt prohibits us from paying cash dividends on our common stock.
As of
March 15, 2005, we had approximately 798 stockholders of record, and the closing
price of our common stock was $0.19.
We did
not issue any unregistered securities during 2004.
Equity
Compensation Plan Information
The
following table summarizes the equity compensation plans under which our
securities may be issued as of December 31, 2004.
Equity
Compensation Plan Information as of December 31, 2004
Plan
Category |
|
Number
of securities to be issued upon exercise of outstanding options and
warrants |
|
Weighted-average
exercise price of outstanding options
and warrants |
|
Number
of securities remaining available for future issuance
under equity
compensation plans |
|
Equity
compensation plans approved by security holders |
|
565,280 |
|
|
$1.60 |
|
|
734,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plan not
approved by security holders |
|
-0- |
|
|
-0- |
|
|
95,750 |
|
|
|
|
565,280 |
|
|
|
|
|
830,220 |
|
|
The plan
that was not approved by security holders is a stock bonus plan that permits
issuance of stock to employees on a discretionary basis.
Item
6.
Selected
Financial Data
The
following table sets forth certain selected consolidated financial information.
For further information, see the Consolidated Financial Statements and other
information set forth in Item 8 and Management's Discussion and Analysis of
Financial Condition and Results of Operations set forth in Item 7.
|
|
Year
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
|
(In
thousands, except per share data) |
|
Income
Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
29,168 |
|
$ |
19,590 |
|
$ |
21,417 |
|
$ |
28,062 |
|
$ |
51,140 |
|
Operating
income (loss) |
|
|
4,153 |
|
|
(2,352 |
) |
|
(2,881 |
) |
|
(11,453 |
) |
|
(
5,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
2,675 |
|
|
(3,357 |
) |
|
(4,114 |
) |
|
(14,774 |
) |
|
(
10,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share |
|
$ |
0.27 |
|
$ |
(0.34 |
) |
$ |
(0.41 |
) |
$ |
(1.50 |
) |
$ |
(1.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in calculating net income (loss) per share:
Basic |
|
|
9,972 |
|
|
9,972 |
|
|
9,972 |
|
|
9,878 |
|
|
9,763 |
|
Diluted |
|
|
9,988 |
|
|
9,972 |
|
|
9,972 |
|
|
9,878 |
|
|
9,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
14,438 |
|
$ |
12,355 |
|
$ |
14,228 |
|
$ |
17,833 |
|
$ |
34,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficit) |
|
$ |
(34,150 |
) |
$ |
(36,825 |
) |
$ |
(34,199 |
) |
$ |
(31,236 |
) |
$ |
(24,152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
debt maturities, including accrued interest |
|
$ |
36,736 |
|
$ |
35,479 |
|
$ |
34,238 |
|
$ |
30,124 |
|
$ |
27,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current maturities |
|
$ |
-0- |
|
$ |
-0- |
|
$ |
-0- |
|
$ |
-0- |
|
$ |
$
376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit |
|
$ |
(30,661 |
) |
$ |
(33,238 |
) |
$ |
(29,935 |
) |
$ |
(25,849 |
) |
$ |
(10,792 |
) |
Item
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
conformity with accounting principles accepted in the United States. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements. These judgments can be
complex and consequently actual results could differ from those estimates. Among
the more significant estimates included in these consolidated financial
statements are allowance for doubtful accounts receivable, inventory reserves,
goodwill valuation and the deferred tax asset valuation allowance. Because
we have
suffered substantial recurring losses from operations in two of the last three
years, and
because of our stockholders’ deficit of $30,661,000 and working capital deficit
of $34,150,000 as of December 31, 2004, our independent auditors included in
their report an explanatory paragraph about our ability to continue as a going
concern. Further,
at December 31, 2004, we had outstanding senior debt of approximately $26
million and subordinated debt of approximately $10 million. Although we have
received an extension to July 1, 2005, if the note is called, we will be unable
to pay the note and it would be necessary for us to seek protection under the
Bankruptcy Act. Note 1 of
Notes to Consolidated Financial Statements, included elsewhere in this annual
report on Form 10-K, includes a summary of the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
Allowance
for Doubtful Accounts Receivable
We record
an allowance for doubtful accounts receivable based on specifically identified
amounts that we believe to be uncollectible. We also record additional
allowances based on certain percentages of our aged receivables, which are
determined based on historical experience and our assessment of the general
financial conditions affecting our customer base. If our actual collections
experience changes, revisions to our allowance may be required. We have a
limited number of customers with individually large amounts due at any given
balance sheet date. Any unanticipated change in one of those customers’
creditworthiness, or
other matters affecting the collectability of amounts due from such customers,
could have a material effect on our results of operations in the period in which
such changes or events occur. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance.
We
established an allowance for doubtful accounts receivable of
$1,045,000 at December
31, 2004 and $1,091,000
at December 31, 2003. Our
allowance for doubtful accounts is a subjective critical estimate that has a
direct impact on reported net income (loss). This reserve is based upon the
evaluation of accounts receivable aging and specific exposures.
Inventory
Reserves
Inventories
are stated at the lower of cost (on the average or first-in, first-out methods)
or fair market value. Our stated inventory reflects an inventory obsolescence
reserve that represents the difference between the cost of the inventory and its
estimated market value. This reserve is calculated based on historical usage and
forecasted sales. Actual results may differ from our estimates.
Goodwill
Goodwill represents the difference
between the purchase price and the fair market value of net assets acquired in
business combinations treated as purchases. Commencing January 1, 2002, goodwill
is an indefinite lived asset and as such is not amortized. On an annual basis,
we test the goodwill for impairment. We determine the market value of the
reporting unit by considering the projected cash flows generated from the
reporting unit to which the goodwill relates. As of December 31, 2004 and 2003,
all of our goodwill related to our signal processing division. In 2002,
following the termination of negotiations to sell that division, we reduced
goodwill by $800,000. We cannot give assurances that further write-downs will
not be necessary, although management believes that no additional goodwill
impairment charges are necessary at this time.
Deferred
Income Tax Valuation Allowance
Deferred
taxes result from temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. The
temporary differences result from costs required to be capitalized for tax
purposes by the United States Internal Revenue Code, and certain items accrued
for financial reporting purposes in the year incurred but not deductible for tax
purposes until paid. Due to our losses in 2003 and 2002, a valuation allowance
for the entire deferred tax asset was provided due to the uncertainty as to
future realization and uncertainties associated with projections of future
taxable income.
Other
Matters
Senior
Debt
Our
senior debt matures on July 1, 2005. During the fourth quarter of 2004,
SHF IX
LLC, an affiliate of Minnesota-based Stonehill Financial, LLC, purchased the
Company’s senior debt of approximately $25,000,000 from Wells Fargo Foothill,
Inc. Although SHF IX has given us four extensions of the maturity of the debt,
in connection with the recent extensions, it has required us to make payments on
account of the debt. SHF IX has not made any advances to us. At each
maturity date, the holder reviews our financial condition, business plan and
prospects, including our ability to make regular payments on account of the
senior debt. We cannot
assure you that SHF IX will continue to extend the maturity of the senior debt,
and its willingness to grant further extensions may be dependent upon its
perception of our ability to provide cash flow with respect to the debt, either
from operations or from the sale of one or more of our divisions. Further,
any
adverse event, including declines in business or attempts by creditors,
including judgment creditors, to realize on their claims or judgments could have
an effect on the decision of SHF IX to extend or demand payment on our notes. If
SHF IX demands payment, we would be unable to refinance the debt and it would be
necessary for us to seek protection under the Bankruptcy Code.
Interest
Under the
terms of our senior debt agreements, we have not paid or accrued interest on
$22,600,000 of senior debt since March 2002. As a result, our statement of
operations does not reflect any interest charges on the senior debt for 2004,
2003 and the last nine months of 2002. The holder of the senior debt has the
right at any time to require us to pay interest at a rate of 12%, and in the
case of default 14%; however, our obligation to pay interest will not require us
to pay interest on such senior debt for periods prior to the date that we were
required to commence interest payments. We continue to accrue interest on
obligations to the holder of our senior debt which were incurred subsequent to
March 2002.
Continuation
of Our Businesses
During
the past several years we have, on a number of occasions, engaged in
negotiations with respect to the sale of one or more of our divisions. None of
our discussions resulted in an agreement. We may continue to engage in such
negotiations in the future.
Because
of the decline in sales volume and margins, we have determined that we cannot
operate our OSS business profitably. As a result, we currently perform
contractual maintenance and warranty services for our existing customers and we
are seeking to sell the balance of our OSS inventory to existing OSS users.
During 2004, we made modest sales of inventory and completed contracts for OSS
installations pursuant to contracts which we entered into in prior years.
Recent
Increase in Copper Sales; Dependence on British
Telecommunications
Since the
fourth quarter of 2003, we have experienced an increase in our copper connection
business primarily as a result of the requirements of British Telecommunications
to provide increased DSL service. We anticipate that British Telecommunications
will continue to require copper connection products while it is expanding its
DSL service. During the past three years, sales for British Telecommunications,
consisting of both direct sales and sales to systems integrators for British
Telecommunications (including Fujitsu), represented an increasing percentage of
our total sales, accounting for 48% of sales for 2004, 36% of sales for 2003 and
24% of sales for 2002. Almost all of such sales were sales of copper connection
products. We cannot predict how long British Telecommunications will continue to
place orders with us. If British Telecommunications and its systems integrators
cease or significantly reduce purchases from us, we may be unable to operate
profitably, and it may be necessary for us to seek protection under the
Bankruptcy Code.
Results
of Operations
The
following table sets forth our
consolidated statements of operations for the three years ended December 31,
2004, 2003 and 2002, as a
percentage of sales:
|
|
Years
Ended December 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Sales |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
Cost
of sales |
|
|
61 |
% |
|
72 |
% |
|
68 |
% |
Gross
profit |
|
|
39 |
% |
|
28 |
% |
|
32 |
% |
Selling,
general and administrative expenses |
|
|
18 |
% |
|
29 |
% |
|
30 |
% |
Research
and development expenses |
|
|
7 |
% |
|
11 |
% |
|
12 |
% |
Goodwill
impairment |
|
|
0 |
% |
|
0 |
% |
|
3 |
% |
Operating
income (loss) |
|
|
14 |
% |
|
(12 |
%) |
|
(13 |
%) |
Interest
expense |
|
|
(4 |
)% |
|
(6 |
%) |
|
(8 |
%) |
Gain
on sale of investment in joint venture |
|
|
- |
|
|
- |
|
|
2 |
% |
Income
(loss) before income taxes |
|
|
10 |
% |
|
(18 |
%) |
|
(19 |
%) |
Income
tax benefit (expense) |
|
|
(1 |
%) |
|
1 |
% |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
9 |
% |
|
(17 |
%) |
|
(19 |
%) |
Results
of Operations
Years
Ended December 31, 2004 and 2003
Our sales
for 2004 were $29,168,000 compared to $19,590,000 in 2003, an increase of
$9,578,000 (49%). The increase in revenue is primarily attributed to the
increase in sales of DSL line products to British Telecommunications.
Line
connection/protection equipment sales for 2004 increased approximately
$10,211,000 (90%) from $11,334,000 in 2003 to $21,545,000 in 2004. The increased
sales level resulted
primarily from an increased level of sales to British Telecommunications, and
systems integrators, as a result of British Telecommunications increasing the
availability of DSL lines in the United Kingdom. Direct sales to British
Telecommunications increased 161% from $867,000 to $2,259,000. Sales to systems
integrators increased from $5,597,000 to $11,403,000, or 104%, from 2003 to
2004. Sales also increased, to a lesser extent, in the U.S. and other
international markets. The direct sales to British Telecommunications do not
include sales to Fujitsu and other systems integrators for British
Telecommunications (see
“Significant Customers”).
Signal
processing revenue for 2004 compared to 2003 increased by $1,298,000 (31%) from
$4,253,000 to $5,551,000. The increase in sales primarily reflects increased
demand for our products and our ability to meet targeted shipment dates due to
our improved ability to secure materials.
OSS sales
for 2004 were $2,003,000, compared to 2003 sales of $3,249,000, a decrease of
$1,246,000 (38%). The decline
in OSS sales in 2004 reflects our strategic business decision to scale back our
product offering and limit the markets we are servicing. During
2004, 91% of the OSS revenue resulted from maintenance services for existing OSS
installations. During 2003, 44% of the OSS revenue resulted from sales and 56%
from maintenance for existing OSS installations.
Gross
margin increased from 28% in 2003 to 39% in 2004. The line
protection/connection and signal processing margins increased, but were offset
by lower OSS margins. The gains were the result of better absorption of
manufacturing overhead created by the increased copper connection and signal
processing levels of business
Selling,
general and administrative expenses decreased by $475,000 (8%) from $5,729,000
in 2003 to $5,254,000 in 2004. This decrease relates primarily to our scale-back
in our OSS division.
Research
and development expenses decreased by $145,000 (7%) from $2,066,000 in 2003 to
$1,921,000 in 2004. This decrease was primarily due to the scale-back of the OSS
division. Prior to 2004, a significant portion of our research and development
was dedicated to new and enhanced OSS products. The research and development for
our line and signal divisions is not substantial, and is oriented more toward
modest enhancements on our existing products rather than development of new
technology. Our absence of significant research and development could impair our
business over the long term.
As a
result of the above, we had an operating income of $4,153,000 in 2004 versus an
operating loss of $2,352,000 in 2003.
Interest
expense for 2004 increased by $39,000 from $1,278,000 for 2003 to $1,317,000 in
2004. Such interest excludes interest on our old term loan, in the principal
amount of approximately $23,000,000, as our related loan agreement provides that
no interest is due commencing March 1, 2002, until such time as the holder of
the debt, in its sole discretion, notifies us that interest, at a rate of 12%
or, in the case of default 14%, shall be payable.
The tax
provision for 2004 is lower than the statutory rate principally as a result of
the utilization of available net operating loss carryforwards. The tax
benefit for 2003 resulted principally from the settlement of an outstanding tax
obligation of $274,000 of one of our subsidiaries for $30,000.
As the
result of the foregoing, the 2004 net income was $2,675,000, $0.27 per share
(basic and diluted), compared with a net loss of $3,357,000, $0.34 per share
(basic and diluted) for 2003.
Even
though we were profitable in 2004, we cannot assure you that we will be able to
operate profitably in the future. If we are unable to operate profitably, it may
be necessary for us to seek protection under the Bankruptcy Code.
Results
of Operations
Years
Ended December 31, 2003 and 2002
Our sales
for 2003 were $19,590,000 compared to $21,417,000 in 2002, a decrease of
$1,827,000 (9%). The decrease in revenue is primarily attributed to the decline
in sales of OSS products which more than offset increases in sales from our line
connection/protection equipment.
Line
connection/protection equipment sales for 2003 increased approximately
$1,736,000 (18%) from $9,598,000 in 2002 to $11,334,000 in 2003. The increased
sales level results
primarily from an increased level of sales to British Telecommunications
commencing in the third quarter of 2003 as a result of British
Telecommunications increasing the availability of DSL lines. These gains were
offset by a decrease in sales to other customers.
Signal
processing revenue for 2003 compared to 2002 decreased by $270,000 (6%) from
$4,523,000 to $4,253,000. The decrease in sales primarily reflects delays in
shipments from the backlog due to shortages of materials due to our tight cash
situation.
OSS sales
for 2003 were $3,249,000, compared to 2002 sales of $6,414,000, a decrease of
$3,165,000 (49%). The decline
in OSS sales in 2003 represented an accelerated decline in this line of business
which had sustained significant declines in previous years as well. OSS
contracts require performance over a relatively long term, and the customers are
generally national telephone companies in developing markets many of which are
operated or regulated by a government agency. As a result, our ability to
maintain OSS business has been impaired both by our financial condition, since
our financial condition may give customers concern about our ability to perform,
and the worldwide slowdown in this segment of the telecommunications industry.
In addition, our failure to provide a significant component for a major OSS
customer has resulted in a decision by that customer not to give us new OSS
contracts. Sales of
OSS systems are not made on a recurring basis to customers, but are the result
of extended negotiations that frequently cover many months and do not always
result in a contract. In addition, OSS contracts may include conditions
precedent, such as the customer obtaining financing or bank approval, and the
contracts are not effective until the conditions are satisfied.
Gross
margin decreased from 32% in 2002 to 28% in 2003. The line
protection/connection and signal processing margins increased, but were offset
by lower OSS margins. The gains were the result of better absorption of
manufacturing overhead created by the increased copper/connection level of
business, particularly in the second half of 2003.
Selling,
general and administrative expenses decreased by $654,000 (10%) from $6,383,000
in 2002 to $5,729,000 in 2003. This decrease relates primarily to reduced
salaries and benefits, consulting services and commissions reflecting our
current level of business.
Research
and development expenses decreased by $450,000 (18%) from $2,516,000 in 2002 to
$2,066,000 in 2003. This decrease resulted from our efforts to reduce expenses
in all divisions to better match expense levels to sales levels.
At
December 31, 2001, our goodwill was $3,761,000, all of which related to our
Signal division. We determined that this goodwill had been impaired as of June
30, 2002. We engaged in discussions with respect to the sale of that division
during the second quarter of 2002, and based on those discussions we estimated
that the impairment loss was approximately $800,000. This amount was charged to
operations in the quarter ended June 30, 2002. Furthermore, the negotiations
relating to the sale of the Signal division have been discontinued. There was no
impairment adjustment required in 2003. We cannot give any assurances that
further write-downs will not
be necessary in the future, although management believes that no additional
goodwill impairment charges are necessary at this time.
As a
result of the above, we had an operating loss of $2,352,000 in 2003 versus an
operating loss of $2,881,000 in 2002.
Interest
expense for 2003 decreased by $520,000 from $1,798,000 for 2002 to $1,278,000 in
2003. The reduced level of interest expense is attributable to our amended
agreement with the holder of our senior debt whereby the old term loan, in the
principal amount of approximately $23,000,000, bears no interest commencing
March 1, 2002, until such time as the holder of the debt, in its sole
discretion, notifies us that interest, at a rate of 12%, shall be
payable.
The tax
benefit for 2003 resulted principally from the settlement of an outstanding tax
obligation of $274,000 of one of our subsidiaries for $30,000.
In April
2002, we sold our 50% interest in our Korean joint venture for $450,000 to our
joint venture partner. Payment was made by the forgiveness of commissions,
totaling $450,000, which we owed to our sales representation company owned by
our joint venture partner, with respect to sales made by the Korean joint
venture in Korea. There
were no sales in Korea in 2002 or 2003.
As the
result of the foregoing, the 2003 net loss was $3,357,000, $0.34 per share
(basic and diluted), compared with a net loss of $4,114,000, $0.41 per share
(basic and diluted) for 2002.
Liquidity
and Capital Resources
At
December 31, 2004, we had cash and cash equivalents of $2,040,000 compared with
$469,000 at December 31, 2003. Our working capital deficit was $34,150,000 at
December 31, 2004, compared to a working capital deficit of $36,825,000 at
December 31, 2003, a
reduction of $2,675,000 in our working capital deficit. This improvement was a
result of our improved operating results for 2004. During the year ended
December 31, 2004 our operations generated net cash of $1,659,000, as compared
with the year ended December 31, 2003, in which we used cash of $525,000 in our
operations. Since
late 2003, neither our senior lender nor the present holder of our senior debt,
which acquired the senior debt in the fourth quarter of 2004, advanced us any
funds. As a result, our only source of funds was from operations. To the extent
that we are not able to generate sufficient funds to cover our expenses, we may
have to consider protection under the Bankruptcy Code.
As of
December 31, 2004, our debt includes $25,674,000 of senior debt which matures on
July 1,
2005, and
$6,144,000 principal amount of subordinated debt which became due on July 3,
2001. We were unable to pay the interest payment on the subordinated notes of
approximately $4,129,000 which represents interest from July 2000 through
December 2004. As of
December 31, 2004, we also had
$385,000 outstanding of 6% Debentures which matured July 2, 2002. The interest
accrued at
December 31, 2004 was $104,000. At
December 31, 2004, we did not have sufficient resources to pay either the senior
debt or the subordinated debt and it is unlikely that we can generate such cash
from our operations in the foreseeable future. Further, the holder of our senior
debt has precluded us from making payments on the subordinated
debt.
Effective
April 1, 2005, the holder of our senior debt agreed to an extension of the
maturity date of our senior debt to July 1, 2005. As of December 31, 2004, we
did not have resources to pay the senior debt, and, in the event that the holder
of the senior debt does not grant an extension, it may be necessary for us to
seek protection under the Bankruptcy Code.
We
have
sought to
address our need for liquidity by exploring alternatives, including the possible
sale of one or more of our divisions. During 2003 and 2004, we were engaged in
discussions with respect to the possible sale of our divisions; however, those
negotiations were terminated without an agreement having been reached, and we
may not be able to sell those divisions on acceptable, if any, terms.
Furthermore, if we sell a division, we anticipate that a substantial
portion, if not
all, of the
net proceeds will be paid to the holder of our senior debt, and we will not
receive any significant amount of working capital from such a sale. We continue
our efforts to reduce costs while we seek additional business from new and
existing customers. The significant reduction in the operations of our OSS
division will impair our ability to sell that division, and such reduction, and
the dependence of our copper business on British Telecommunications and its
systems integrators, are major factors which may impair our ability to sell the
copper division or our business as a whole.
Because
of our present stock price, we cannot raise funds through the sales of our
equity securities, and our financial condition prevents us from issuing debt
securities. In the event that we are unable to extend our debt obligations and
sell one or more of our divisions, we cannot assure you that we will be able to
continue in operations. Furthermore, we believe that our losses in two of the
last three years and our financial position are having, and will continue to
have, an adverse effect upon our ability to develop new business as competitors
and potential customers question our ability both to perform our obligations
under any agreements we may enter and to continue in business.
As of
December 31, 2004, we did not have any material off-balance sheet arrangements
that have or are reasonably likely to have a material effect on our current or
future financial condition, results of operations, liquidity, or capital
resources.
The
following table summarizes our principal contractual obligations as of December
31, 2004 and the effects such obligations are expected to have on our liquidity
and cash flow in future periods.
Payments
Due by Period
Contractual |
|
|
|
|
|
|
|
|
|
|
Obligations |
|
|
2005 |
|
2006-2007 |
|
2008-2009 |
|
Thereafter |
|
|
|
|
(in
thousands) |
|
Long-term
debt, including accrued interest |
|
|
$ |
36,736 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases |
|
|
|
594 |
|
|
1,138 |
|
|
584 |
|
|
2,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation obligations |
|
|
|
109 |
|
|
217 |
|
|
218 |
|
|
1,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations |
|
|
|
2,272 |
|
|
- |
|
|
- |
|
|
-
|
|
Total |
|
|
$ |
39,711 |
|
$ |
1,355 |
|
$ |
802 |
|
$ |
3,721 |
|
Recently
Issued Accounting Standards
On
December 31, 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and FASB
Staff Position No. FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" ("FSP No. 109-2"). These staff positions provide accounting guidance on
how companies should account for the effects of the American Jobs Creation Act
of 2004 that was signed into law on October 22, 2004. FSP No. 109-1 states that
the tax relief (special tax deduction for domestic manufacturing) from this
legislation should be accounted for as a "special deduction" instead of a tax
rate reduction. FSP No. 109-2 gives a company additional time to evaluate the
effects of the legislation on any plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement No. 109. We are
investigating the repatriation provision to determine whether it might
repatriate extraordinary dividends, as defined in the American Jobs Creation Act
of 2004 (“AJCA”). We are currently evaluating all available U.S. Treasury
guidance, as well as awaiting anticipated further guidance. We expect to
complete this evaluation within a reasonable amount of time after additional
guidance is published. We estimate the potential income tax effect of any such
repatriation would be to record a tax liability based on the effective 5.25%
rate provided by the AJCA. The actual income tax impact to us will become
determinable once further technical guidance has been issued.
In
December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"). This statement
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes
APB No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all
stock-based compensation to be recognized as an expense in the financial
statements and that such cost be measured according to the fair value of stock
options. SFAS 123(R) will be effective for quarterly periods beginning after
June 15, 2005, which is our third quarter of 2005. While we currently provide
the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," on a quarterly basis (see "Note 1 -
Accounting for Stock-Based Compensation"), we are currently evaluating the
impact this statement will have on our consolidated financial
statements.
In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of
ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all companies to
recognize a current-period charge for abnormal amounts of idle facility expense,
freight, handling costs and wasted materials. This statement also requires that
the allocation of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 will be
effective for fiscal years beginning after June 15, 2005. We are currently
evaluating the effect that this statement will have on our consolidated
financial statements, but do not expect it to be material.
Item
7A.
Quantitative
and Qualitative Disclosure About Market Risk.
We
conduct certain operations outside the United States. A substantial portion of
our revenue and expenses from our United Kingdom operations are denominated in
Sterling. Any Sterling-denominated receipts are promptly converted into United
States dollars. We do not engage in any hedging or other currency transactions.
For 2004, the currency translation adjustment was not significant in relation to
our total revenue.
Item
8. Financial
Statements and Supplementary Data.
See
Exhibit I
Item
9.
Changes
In and Disagreements With Accountants On Accounting and Financial
Disclosure.
Not
Applicable
Item
9A. Controls
and Procedures.
Disclosure
Controls and Procedures
As of the
end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of our disclosure controls and
procedures. Based on their evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that our disclosure controls and procedures
are effective in alerting them to material information that is required to be
included in the reports that we file or submit under the Securities Exchange Act
of 1934.
Internal
Control Over Financial Reporting
There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information.
None
Part
III
Item
10. Directors
and Executive Officers
Set forth
below is information concerning our directors:
Name |
Principal
Occupation or Employment |
Director
Since |
Age |
William
V. Carney1 |
Chairman
of the board and chief executive officer |
1970 |
68 |
|
|
|
|
Michael
A. Tancredi |
Senior
vice president, secretary and treasurer |
1970 |
75 |
|
|
|
|
Warren
H. Esanu1,2 |
Of
counsel to Esanu Katsky Korins & Siger, LLP, attorneys at
law |
1997 |
62 |
|
|
|
|
Herbert
H. Feldman1,2 |
President,
Alpha Risk Management, Inc., independent risk management
consultants |
1989 |
71 |
|
|
|
|
Marco
M. Elser2 |
Managing
director of Advicorp, PLC., an investment advisory firm |
2000 |
46 |
_____________________
1 |
Member
of the executive committee. |
2 |
Member
of the audit and compensation committees. |
Mr.
Carney has been chairman of the board and chief executive officer since October
1996. He was vice chairman from 1988 to October 1996, senior vice president from
1989 to October 1996, chief technical officer since 1990 and secretary from 1977
to October 1996. He also served as senior vice president-mechanical engineering
from 1988 to 1989, senior vice president-connector products from 1985 to 1988,
senior vice president-manufacturing from 1984 to 1985 and senior vice
president-operations from 1977 to 1984. Since December 2002, Mr. Carney has
worked for us on a part-time basis.
Mr.
Tancredi has been senior vice president, secretary and treasurer since January
1997. He has been vice president-administration since 1995 and treasurer since
1978, having served as vice president-finance and administration from 1989 to
1995 and vice president-finance from 1984 to 1989.
Mr. Esanu
has been a director since April 1997 and also served as a director from 1989 to
1996. He was also our chairman of the board from March 1996 to October 1996. He
has been of counsel to Esanu Katsky Korins & Siger, LLP, attorneys at law,
for more than the past five years. Mr. Esanu is also a founding partner and
chairman of Paul Reed Smith Guitars Limited Partnership (Maryland), a leading
manufacturer of premium-priced electrical guitars. He is also a senior officer
and director of a number of privately held real estate investment and management
companies.
Mr. Elser
has been the managing director of Advicorp, PLC., an investment advisory firm,
for more than the past five years. He has also been associated with Northeast
Securities, a US-based broker dealer and is responsible for the Italian office,
which he founded in 1994.
Mr.
Feldman has been president of Alpha Risk Management, Inc., independent risk
management consultants, for more than the past five years.
Set forth
is information concerning our executive officers:
Name
of Executive Officer |
Position |
Age |
William
V. Carney |
Chairman
of the board and chief executive officer |
68 |
Michael
A. Tancredi |
Senior
vice president, secretary and treasurer |
75 |
Edward
B. Kornfeld |
President,
chief operating officer and chief financial officer |
61 |
All of
our officers serve at the pleasure of the board of directors. Messrs. Carney and
Tancredi are also members of the board of directors as stated above. There is no
family relationship between any of the executive officers listed
below.
Mr.
Kornfeld, 61, has been president, chief operating and financial officer since
April 2004. He was senior vice president-operations since 1996 and chief
financial officer since October 1995. Since June 2002, Mr. Kornfeld has also
been a partner of the firm of Tatum CFO Partners, which provides chief financial
officer services to medium and large companies; however, he continues to devote
full time effort to our business. He was vice president-finance from October
1995 until 1996. For more than five years prior thereto, Mr. Kornfeld held
positions with several companies for more than five years, including Excel
Technology Inc. (Quantronix Corp.) and Anorad Corporation.
We
maintain a code of ethics that applies to all of our executive officers,
including our principal executive, financial and accounting officers, our
directors, our financial managers and all employees. Any waiver of the code must
be approved by the Audit Committee and must be disclosed in accordance with SEC
rules. We also have a standard of conduct which is applicable to all
employees.
Our board
of directors has determined that Mr. Marco Elser, based on his experience as a
financial investment advisor, is an audit committee financial expert, as defined
in Item 402(h) of Regulation S-K.
Section
16(a) Beneficial Ownership Reporting Compliance
Pursuant
to our stock option plans, our non-employee directors receive an automatic grant
of options to purchase 5,000 shares of common stock on May 1 of each year. The
exercise price of such shares is the average of closing price on the ten trading
days prior to May 1. Although the options were granted, we did not issue any
option grants to the non-employee directors for the options to purchase 5,000
shares for these options granted subsequent to 1999, and the directors did not
file a Form 4 for such grants. These non-employee directors are Mr. Esanu and
Mr. Feldman for 1999 through 2004 and Mr. Elser from 2001 through 2004. Mr.
Elser was elected as a director by the board of directors in 2000, and he was
delinquent in filing his Form 3.
We had a
qualified employee stock purchase plan pursuant to which employees, including
officers, can purchase shares of common stock at a discount from market. During
2000 and 2001, our officers purchased shares of common stock pursuant to this
plan which were not reported on a Form 4. These officers are Mr. Carney, as to
54,749 shares, Mr. Kornfeld, as to 14,317 shares, and Mr. Tancredi, as to 17,581
shares.
We have
implemented a procedure designed to enable our officers and directors to file
their Form 4 in a timely manner with respect to options granted or shares issued
by us.
Item
11. Executive
Compensation
The
following table shows the compensation we paid to our chief executive officer
and the only executive officer, other than the chief executive officer, whose
salary and bonus earned exceeded $100,000 for the year ended December 31,
2004.
Summary
Compensation Table
|
|
Annual
Compensation |
|
Long-Term Compensation
(Awards) |
|
|
|
Name
and Principal Position |
|
Year |
|
Salary |
|
Bonus
|
|
Restricted Stock Awards (Dollars) |
|
Options, SARs (Number) |
|
All
other Compensation |
|
William
V. Carney, Chairman |
|
|
2004 |
|
$ |
122,000
|
|
$ |
5,000 |
|
|
-- |
|
|
-- |
|
$ |
6,101 |
|
of
the board and chief |
|
|
2003 |
|
|
133,000 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
7,734 |
|
executive
officer |
|
|
2002 |
|
|
240,000 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
9,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
B. Kornfeld, |
|
|
2004 |
|
|
206,000 |
|
|
15,000 |
|
|
-- |
|
|
-- |
|
|
6,639 |
|
President,
chief operating |
|
|
2003 |
|
|
192,000 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
5,022 |
|
officer
and chief financial |
|
|
2002 |
|
|
192,000 |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
5,022 |
|
officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
“All
Other Compensation” includes a payment to the executive’s account pursuant to
our 401(k) Plan, group life insurance in amounts greater than that available to
all employees and special long term disability coverage.
Compensation
to Mr. Kornfeld does not include fees of $36,000 paid in both 2004 and 2003 to
Tatum CFO Partners, of which Mr. Kornfeld is a partner, for services rendered to
us by Mr. Kornfeld.
Set forth
below is a chart that shows, for 2004, the components of “All Other
Compensation” listed in the Summary Compensation Table.
|
|
Mr.
Carney |
|
Mr.
Kornfeld |
|
401(k)
Match |
|
$ |
1,910 |
|
$ |
3,075 |
|
Supplemental
Insurance |
|
|
4,191
|
|
|
3,564
|
|
During
2004, we did not grant Mr. Carney or Mr. Kornfeld any options, and neither of
them exercised any options to purchase shares of our common stock. As of
December 31, 2004, Mr.
Carney held options to purchase 86,250 shares of common stock and Mr. Kornfeld
held options to purchase 23,000 shares of common stock. All of these options are
currently exercisable and, because the exercise price is less than the
market price of the common stock, they were not in-the-money options and,
accordingly, their options had nominal value at December 31, 2004.
Employment
Agreements. During
2003, we amended our employment agreement with Mr. Carney whereby he is required
to work at a rate of two and one-half days per week, and half of his current
base pay is deferred until the termination of his amended employment agreement
on March 31, 2006. No further compensation shall be paid to Mr. Carney,
including the deferred amount, if we do not terminate Mr. Carney’s employment
prior to March 31, 2006.
We
entered into a new employment agreement with Mr. Kornfeld, effective April 1,
2004. This agreement has a term which expires December 31, 2006 and continues on
a year-to-year basis thereafter unless terminated by either party on not less
than 90 days’ prior written notice. Salary is determined by the board, except
that the salary may not be reduced except as a part of a salary reduction
program applicable to all executive officers. Upon death or termination of
employment as a result of a disability, Mr.
Kornfeld or his
estate is to receive a payment equal to three months salary. Upon a termination
without cause, Mr. Kornfeld is entitled to receive his then current salary for
twelve months plus one month for each full year of service up to a maximum
aggregate of 36 months. In the event that Mr.
Kornfeld is
covered by an executive severance agreement, including the salary continuation
agreements (as described below), which provides for payments upon termination
subsequent to a “change of control,” the executive would be entitled to the
greater of the severance arrangements as described in this paragraph or the
severance payments under the executive severance agreements. We also have a
month-to-month agreement with Tatum CFO Partners of which Mr. Kornfeld is a
partner, pursuant to which we pay Tatum CFO Partners $3,000 per month for Mr.
Kornfeld’s services.
Salary
Continuation Agreement. We are
party to a salary continuation agreement with Mr. Kornfeld. The salary
continuation agreement provides that, in the event that a change of control
occurs and Mr.
Kornfeld’s
employment with us is subsequently terminated by us other than for cause, death
or disability, or is terminated by Mr.
Kornfeld as a
result of a substantial alteration in his duties,
compensation or other benefits, the executive shall be entitled to the payment
of an amount equal to his monthly salary at the rate in effect as of the date of
his termination (or, if higher, as in effect immediately prior to the change in
control) plus the pro rata monthly amount of his most recent annual bonus paid
immediately before the change of control multiplied by 36. For purposes of the
salary continuation agreement, a change of control is defined as one which would
be required to be reported in response to the proxy rules
under the Securities Exchange Act of 1934, as amended, the
acquisition of beneficial ownership, directly or indirectly, by a person or
group of persons of our securities representing 25% or more of the combined
voting power of our then outstanding securities, or, during any period of two
consecutive years, if individuals who at the beginning of such period
constituted the board cease for any reason to constitute at least a majority
thereof unless the election of each new director was nominated or ratified by at
least two-thirds of the directors then still in office who were directors at the
beginning of the period. The change of control must occur during the term of the
salary continuation agreement, which is currently through December 31,
2005 and is
renewed automatically unless we give timely notice prior to January 1 of any
year of our election not to renew the agreement. If such a change of control
occurs during the effectiveness of the salary continuation agreement, any
termination of Mr. Kornfeld during the 18 months following the change of control
will result in the payment of the compensation described above.
Directors’
Fees. On March
22, 2005, directors’ fees payable to the non-management directors were increased
from $4,250 per quarter to $6,250 per quarter, and meeting fees were increased
from $1,200 to $1,500.
In 2000,
we authorized the issuance of an aggregate of 175,630 shares of common stock in
lieu of the cash payment of directors’ fees, based on the fair market value of
the shares on August 8, 2000. These shares have not been issued, and they will
be issued in the second quarter of 2005 to those individuals who were
non-employee directors in 2000. Mr. Esanu and Mr. Feldman were directors
for all of 2000, and they will receive 35,938 and 39,630 shares,
respectively. Mr.
Elser was a director for a portion of 2000, and he will receive 5,784 shares.
The remaining shares will be issued to individuals who are no longer our
directors.
Item
12. Principal
Holders of Securities and Security Holdings of
Management
The
following table and discussion provides information as to the shares of common
stock beneficially owned on March 15, 2005 by:
• |
each
officer named in the summary compensation
table; |
• |
each
person owning of record or known by us, based on information provided to
us by the persons named below, to own beneficially at least 5% of our
common stock; and |
• |
all
directors and executive officers as a group.
|
Name |
|
Shares
of Common Stock
Beneficially Owned |
|
Percentage
of Outstanding Common
Stock |
|
William
V. Carney |
|
|
209,272 |
|
|
2.1% |
|
Michael
A. Tancredi |
|
|
81,768 |
|
|
* |
|
Warren
H. Esanu |
|
|
99,000
|
|
|
* |
|
Herbert
H. Feldman |
|
|
71,000
|
|
|
* |
|
Marco
M. Elser |
|
|
330,592 |
|
|
3.3% |
|
Edward
B. Kornfeld |
|
|
49,317 |
|
|
* |
|
All
directors and executive officers as a group (6
individuals) |
|
|
840,949 |
|
|
8.4% |
|
|
|
|
|
|
|
|
|
__________________
* Less
than 1%
Except as
otherwise indicated, each person has the sole power to vote and dispose of all
shares of common stock listed opposite his name.
The
number of shares owned by our directors and officers named in the summary
compensation table includes shares of common stock which are issuable upon
exercise of options and warrants that are exercisable at March 15, 2005 or will
become exercisable within 60 days after that date. Set forth below is the number
of shares of common stock issuable upon exercise of those options and warrants
for each of these directors and officers.
Name |
|
Shares
|
|
William
V. Carney |
|
|
86,250 |
|
Michael
A. Tancredi |
|
|
42,530 |
|
Warren
H. Esanu |
|
|
49,000 |
|
Herbert
H. Feldman |
|
|
51,000 |
|
Marco
M. Elser |
|
|
20,000 |
|
Edward
B. Kornfeld |
|
|
23,000 |
|
All
officers and directors as a group |
|
|
271,780 |
|
|
|
|
|
|
Item
13. Certain
Relationships and Related Transactions
During
2004, Warren H. Esanu, a director, served as a member of our audit and
compensation committees. During 2004, the law firm of Esanu Katsky Korins &
Siger, LLP, to which Mr. Esanu is of counsel, provided legal services to us, for
which it received fees of $410,445. Esanu Katsky Korins & Siger, LLP is
continuing to render legal services to us during 2005.
Item
14. Principal
Accountant Fees and Services.
The
following is a summary of the fees for professional services rendered by our
independent accountants, BDO Seidman, LLP, for the years ended December 31,
2004 and December 31, 2003:
|
|
Fees |
|
Fee
Category |
|
2004 |
|
2003 |
|
Audit
fees |
|
$ |
153,700 |
|
$ |
170,200 |
|
Audit-related
fees |
|
|
10,650 |
|
|
10,000 |
|
Tax
fees |
|
|
12,490 |
|
|
5,500
|
|
Total
Fees |
|
$ |
176,840 |
|
$ |
185,700 |
|
Audit
fees. Audit
fees represent fees for professional services performed by BDO Seidman, LLP for
the audit of our annual financial statements and the review of our quarterly
financial statements, as well as services that are normally provided in
connection with statutory and regulatory filings or engagements.
Audit-related
fees. Audit-related
fees represent fees for assurance and related services performed by BDO Seidman,
LLP that are reasonably related to the performance of the audit or review of our
financial statements. The specific service was the audit of our retirement plan.
Tax
Fees. Tax fees
represent fees for tax compliance services performed by BDO Seidman,
LLP.
All
other fees. BDO
Seidman, LLP did not perform any services other than the services described
above.
Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
The Audit
Committee’s policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. The
independent auditors and management are required to periodically report to the
Audit Committee regarding the extent of services provided by the independent
auditors in accordance with this pre-approval, and the fees for the services
performed to date. The Audit Committee may also pre-approve particular services
on a case-by-case basis. All services were pre-approved by the Audit
Committee.
Part
IV
Item
15. Exhibits,
Financial Statements Schedules.
(a) |
Document
filed as part of this Annual Report on Form 10-K: |
|
|
|
|
(i) |
Financial
Statements. |
|
|
|
|
|
See
Index to Consolidated Financial Statements under Item 8
hereof. |
|
|
|
|
(ii) |
Financial
Statement Schedules. |
|
|
|
|
|
None |
Schedules
not listed above have been omitted for the reasons that they were inapplicable
or not required or the information is given elsewhere in the financial
statements.
Separate
financial statements of the registrant have been omitted since restricted net
assets of the consolidated subsidiaries do not exceed 25% of consolidated net
assets.
Exhibit
No. |
|
Description
of Exhibit |
|
|
|
3.1 |
|
Certificate
of Incorporation of the Company, as amended to date, incorporated by
reference to Exhibit 4 (a) of the Company’s Annual Report on Form 10-K for
the year ended December 31, 1991. |
|
|
|
3.2 |
|
Certificate
of Designation of Series B Participating Convertible Preferred Stock,
incorporated by reference to Exhibit 3.2 of the Company’s Annual Report on
Form 10-K for the year ended December 31, 1995. |
|
|
|
3.3 |
|
By-laws
of the Company, as amended to date, incorporated by reference to Exhibit
3.3 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 1995. |
|
|
|
4.1 |
|
Amended
and Restated Loan and Security Agreement dated as of November 28, 1994,
between the Company and Foothill ("Foothill") Capital Corporation,
incorporated by reference to Exhibit 2 to the Company’s Current Report on
Form 8-K dated November 30, 1994. |
|
|
|
4.2 |
|
Amended
and Restated Secured Promissory Note dated February 13, 1995, incorporated
by reference to Exhibit 4.9 of the Company’s Annual Report on Form 10K for
the year ended December 31, 1995. |
|
|
|
4.3 |
|
Warrant
to Purchase Common Stock of the Company dated November 28, 1994 executed
by the Company in favor of Foothill, incorporated by reference to Exhibit
6 to the Company’s Current Report on Form 8-K dated November 30, 1994.
|
|
|
|
Exhibit
No. |
|
Description
of Exhibit |
|
|
|
4.4 |
|
Lockbox
Operating Procedural Agreement dated as of November 28, 1994 among
Chemical Bank, the Company and Foothill, incorporated by reference to
Exhibit 7 to the Company’s Current Report on Form 8-K dated November 30,
1994. |
|
|
|
4.5 |
|
Amendment
Number Sixteen to the Amended and Restated Loan Security Agreement, dated
February 1, 2005. |
|
|
|
4.6 |
|
Amendment
Number Seventeen to the Amended and Restated Loan and Security Agreement,
dated April 1, 2005. |
|
|
|
10.1 |
|
Form
of Executive Salary Continuation Agreement, incorporated by reference to
Exhibit 19 (cc) of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1985. |
|
|
|
10.2 |
|
Lease
dated November 6, 2002 between the Company and Long Island Industrial
Group LLC., incorporated by reference to Exhibit 10.2 of the Company’s
Annual Report on Form 10K for the year ended December 31,
2002. |
|
|
|
10.3 |
|
Lease
dated May 1, 2002 between the Company and Long Island Industrial Group
LLC., incorporated by reference to Exhibit 10.3 of the Company’s Annual
Report on Form 10K for the year ended December 31,
2002. |
|
|
|
10.4 |
|
Employment
Agreement between the Company and Edward B. Kornfeld dated April 1,
2004. |
|
|
|
10.5 |
|
Amendment
to Employment Agreement between the Company and William V. Carney, dated
July 21, 2003. |
|
|
|
14.1 |
|
Code
of Ethics of the Company, dated March 23, 2004, incorporated by reference
to Exhibit 14.1 of the Company's Annual Report on Form 10K for the year
ended December 31, 2003. |
|
|
|
14.2 |
|
Standard
of Conduct of the Company. |
|
|
|
22
|
|
Subsidiaries
of the Company, incorporated by reference to Exhibit 22.1 of the Company’s
Annual Report on Form 10K for the year ended December 31,
1995. |
|
|
|
23
|
|
Consent
of Independent Registered Public Accounting Firm. |
|
|
|
31.1 |
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
31.2 |
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.1 |
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002. |
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(b) 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.
|
|
|
|
PORTA SYSTEMS
CORP. |
|
|
|
Date: March 31,
2005 |
By: |
/s/ William V.
Carney |
|
William V. Carney |
|
Chairman
of the Board and Chief
Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. Each person whose signature
appears below hereby authorizes William V. Carney and Edward B. Kornfeld or
either of them acting in the absence of the others, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/William
V. Carney |
|
Chairman
of the Board, |
|
March
31, 2005 |
William
V. Carney |
|
Chief
Executive Officer and Director (Principal Executive
Officer) |
|
|
|
|
|
|
|
/s/Edward
B. Kornfeld |
|
President |
|
March
31, 2005 |
Edward
B. Kornfeld |
|
Chief
Operating Officer and Chief Financial Officer (Principal Financial and
Accounting Officer) |
|
|
|
|
|
|
|
/s/Warren
H. Esanu |
|
Director |
|
March
31, 2005 |
Warren
H. Esanu |
|
|
|
|
|
|
|
|
|
/s/Michael
A. Tancredi |
|
Director |
|
March
31, 2005 |
Michael
A. Tancredi |
|
|
|
|
|
|
|
|
|
/s/Herbert
H. Feldman |
|
Director |
|
March
31, 2005 |
Herbert
H. Feldman |
|
|
|
|
|
|
|
|
|
/s/Marco
Elser |
|
Director |
|
March
31, 2005 |
Marco
Elser |
|
|
|
|
Exhibit
I
Item
8. Financial Statements and Supplementary Data
Index |
|
Page |
|
|
|
Report
of Independent Registered Public Accounting Firm |
|
F-2 |
|
|
|
Consolidated
Financial Statements and Notes: |
|
|
|
|
|
Consolidated
Balance Sheets, December 31, 2004 and 2003 |
|
F-3 |
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss),Years Ended
December 31, 2004, 2003 and 2002 |
|
F-4 |
|
|
|
Consolidated
Statements of Stockholders’ Deficit,
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 |
Report of Independent Registered Public Accounting
Firm
The Board
of Directors and Stockholders
Porta
Systems Corp.
Syosset,
New York
We have
audited the accompanying consolidated balance sheets of Porta Systems Corp. and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations and comprehensive income (loss), stockholders’ deficit,
and cash flows for each of the three years in the period 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 control over
financial reporting. Our
audits included 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Porta Systems Corp. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their 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 financial statements have been prepared assuming that the Company
will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered substantial recurring losses from operations in two of the last three
years and, as of December 31, 2004, has a stockholders’ deficit of $30,661,000
and a working capital deficit of $34,150,000. These factors raise substantial
doubt about the Company’s ability
to continue as a going concern. Management’s plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/BDO
SEIDMAN, LLP
BDO
SEIDMAN, LLP
Melville,
New York
March
25,
2005
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2004 and 2003
(in
thousands, except shares and par value)
Assets |
|
2004 |
|
2003 |
|
Current
assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
2,040 |
|
|
469 |
|
Accounts
receivable - trade, less allowance for doubtful accounts of $1,045 in
2004 and $1,091 in 2003 |
|
|
3,076 |
|
|
3,898 |
|
Inventories |
|
|
4,576 |
|
|
3,004 |
|
Prepaid
expenses and other current assets |
|
|
382 |
|
|
472 |
|
Total
current assets |
|
|
10,074 |
|
|
7,843 |
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net |
|
|
1,334 |
|
|
1,466 |
|
Goodwill |
|
|
2,961 |
|
|
2,961 |
|
Other
assets |
|
|
69 |
|
|
85 |
|
Total
assets |
|
$ |
14,438 |
|
|
12,355 |
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
debt, including accrued interest |
|
$ |
25,674 |
|
|
25,387 |
|
Subordinated
notes |
|
|
6,144 |
|
|
6,144 |
|
6%
Convertible subordinated debentures |
|
|
385 |
|
|
385 |
|
Accounts
payable |
|
|
4,728 |
|
|
5,635 |
|
Accrued
expenses and other |
|
|
2,760 |
|
|
3,554 |
|
Other
accrued interest payable |
|
|
4,533 |
|
|
3,563 |
|
Total
current liabilities |
|
|
44,224 |
|
|
44,668 |
|
|
|
|
|
|
|
|
|
Deferred
compensation |
|
|
875 |
|
|
925 |
|
Total
long-term liabilities |
|
|
875 |
|
|
925 |
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
45,099 |
|
|
45,593 |
|
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value; authorized 1,000,000 shares, none
issued |
|
|
- |
|
|
- |
|
Common
stock, par value $.01; authorized 20,000,000 shares, issued 10,003,224
shares in both 2004 and 2003 |
|
|
100 |
|
|
100 |
|
Additional
paid-in capital |
|
|
76,059 |
|
|
76,059 |
|
Accumulated
deficit |
|
|
(100,705 |
) |
|
(103,380 |
) |
Accumulated
other comprehensive loss: |
|
|
|
|
|
|
|
Foreign
currency translation adjustment |
|
|
(4,177 |
) |
|
(4,079 |
) |
|
|
|
(28,723 |
) |
|
(31,300 |
) |
Treasury
stock, at cost, 30,940 shares |
|
|
(1,938 |
) |
|
(1,938 |
) |
Total
stockholders’ deficit |
|
|
(30,661 |
) |
|
(33,238 |
) |
Total
liabilities and stockholders’ deficit |
|
$ |
14,438 |
|
|
12,355 |
|
See
accompanying notes to consolidated financial statements.
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Operations and Comprehensive Income (Loss)
Years
ended December 31, 2004, 2003 and 2002
(in
thousands, except per share amounts)
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
29,168 |
|
|
19,590 |
|
|
21,417 |
|
Cost
of sales |
|
|
17,840 |
|
|
14,147 |
|
|
14,599 |
|
Gross
profit |
|
|
11,328 |
|
|
5,443 |
|
|
6,818 |
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
|
5,254 |
|
|
5,729 |
|
|
6,383 |
|
Research
and development expenses |
|
|
1,921 |
|
|
2,066 |
|
|
2,516 |
|
Goodwill
impairment |
|
|
- |
|
|
- |
|
|
800 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses |
|
|
7,175 |
|
|
7,795 |
|
|
9,699 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) |
|
|
4,153 |
|
|
(2,352 |
) |
|
(2,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
(1,317 |
) |
|
(1,278 |
) |
|
(1,798 |
) |
Interest
income |
|
|
- |
|
|
1 |
|
|
7 |
|
Gain
on sale of investment in joint venture |
|
|
- |
|
|
- |
|
|
450 |
|
Other
income, net |
|
|
8 |
|
|
- |
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes |
|
|
2,844 |
|
|
(3,629 |
) |
|
(4,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense) |
|
|
(169 |
) |
|
272 |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
2,675 |
|
|
(3,357 |
) |
|
(4,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments |
|
|
(98 |
) |
|
54 |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) |
|
$ |
2,577 |
|
|
(3,303 |
) |
|
(4,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
per share amounts: |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock |
|
$ |
0.27 |
|
|
(0.34 |
) |
|
(0.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding |
|
|
9,972 |
|
|
9,972 |
|
|
9,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
per share amounts: |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock |
|
$ |
0.27 |
|
|
(0.34 |
) |
|
(0.41 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding |
|
|
9,988 |
|
|
9,972 |
|
|
9,972 |
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Deficit
Years
ended December 31, 2004, 2003 and 2002
(In
thousands)
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
Total |
|
|
|
Common
Stock |
|
Additional |
|
Other |
|
|
|
|
|
Stock- |
|
|
|
No.
of |
|
Par
Value |
|
Paid-in |
|
Comprehensive |
|
Accumulated |
|
Treasury |
|
holders’ |
|
|
|
Shares |
|
Amount |
|
Capital |
|
(Loss) |
|
Deficit |
|
Stock |
|
Deficit |
|
Balance
at December 31, 2001 |
|
|
9,947 |
|
$ |
99 |
|
$ |
76,056 |
|
$ |
(4,157 |
) |
$ |
(95,909 |
) |
$ |
(1,938 |
) |
$ |
(25,849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss 2002 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(4,114 |
) |
|
- |
|
|
(4,114 |
) |
Common
stock issued |
|
|
56 |
|
|
1 |
|
|
3 |
|
|
- |
|
|
- |
|
|
- |
|
|
4 |
|
Foreign
currency translation adjustment |
|
|
- |
|
|
- |
|
|
- |
|
|
24 |
|
|
- |
|
|
- |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002 |
|
|
10,003 |
|
|
100 |
|
|
76,059 |
|
|
(4,133 |
) |
|
(100,023 |
) |
|
(1,938 |
) |
|
(29,935 |
) |
Net
loss 2003 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(3,357 |
) |
|
- |
|
|
(3,357 |
) |
Foreign
currency translation adjustment |
|
|
- |
|
|
- |
|
|
- |
|
|
54 |
|
|
- |
|
|
- |
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003 |
|
|
10,003 |
|
|
100 |
|
|
76,059 |
|
|
(4,079 |
) |
|
(103,380 |
) |
|
(1,938 |
) |
|
(33,238 |
) |
Net
income 2004 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,675 |
|
|
- |
|
|
2,675 |
|
Foreign
currency translation adjustment |
|
|
- |
|
|
- |
|
|
- |
|
|
(98 |
) |
|
- |
|
|
- |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
|
10,003 |
|
$ |
100 |
|
$ |
76,059 |
|
$ |
(4,177 |
) |
$ |
(100,705 |
) |
$ |
(1,938 |
) |
$ |
(30,661 |
) |
See
accompanying notes to consolidated financial statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Note 20)
Years
ended December 31, 2004, 2003 and 2002
(In
thousands)
|
|
2004 |
|
2003 |
|
2002 |
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
Net
income (loss) |
|
$ |
2,675 |
|
|
(3,357 |
) |
|
(4,114 |
) |
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
409 |
|
|
483 |
|
|
713 |
|
Goodwill
impairment |
|
|
- |
|
|
- |
|
|
800 |
|
Amortization
of debt discounts |
|
|
- |
|
|
- |
|
|
3 |
|
Gain
on sale of investment in joint venture |
|
|
- |
|
|
- |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
822 |
|
|
756 |
|
|
(370 |
) |
Inventories |
|
|
(1,572 |
) |
|
359 |
|
|
1843 |
|
Prepaid
expenses |
|
|
91 |
|
|
(143 |
) |
|
523 |
|
Other
assets |
|
|
17 |
|
|
255 |
|
|
(142 |
) |
Accounts
payable, accrued expenses and other liabilities |
|
|
(783 |
) |
|
1,122 |
|
|
(2,044 |
) |
Net
cash provided by (used in) operating activities |
|
|
1,659 |
|
|
(525 |
) |
|
(3,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net |
|
|
(259 |
) |
|
(72 |
) |
|
(124 |
) |
Net
cash used in investing activities |
|
|
(259 |
) |
|
(72 |
) |
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Increase
in senior debt |
|
|
357 |
|
|
317 |
|
|
2,975 |
|
Repayments
of senior debt |
|
|
(70 |
) |
|
- |
|
|
- |
|
Proceeds
from the issuance of common stock |
|
|
- |
|
|
- |
|
|
4 |
|
Repayments
of notes payable/short-term loans |
|
|
- |
|
|
(8 |
) |
|
(3 |
) |
Net
cash provided by financing activities |
|
|
287 |
|
|
309 |
|
|
2,976 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents |
|
|
(116 |
) |
|
(22 |
) |
|
(39 |
) |
Decrease
in cash and cash equivalents |
|
|
1,571 |
|
|
(310 |
) |
|
(425 |
) |
Cash
and equivalents - beginning of year |
|
|
469 |
|
|
779 |
|
|
1,204 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and equivalents - end of year |
|
$ |
2,040 |
|
|
469 |
|
|
779 |
|
See
accompanying notes to consolidated financial statements.
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2004 and 2003
(1) Summary
of Significant Accounting Policies
Nature
of Operations and Principles of Consolidation
Porta
Systems Corp. (“Porta” or the “Company”) designs, manufactures and markets
systems for the connection, protection, testing and administration of public and
private telecommunications lines and networks. The Company has various patents
for copper and software based products and systems that support voice, data,
image and video transmission. Porta’s principal customers are the U.S. regional
telephone operating companies and foreign telephone companies.
The
accompanying consolidated financial statements include the accounts of Porta and
its majority-owned or controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Revenue
Recognition
Revenue,
other than from long-term contracts for specialized products, is recognized when
a product is shipped. Revenues and earnings relating to long-term contracts for
specialized products are recognized on the percentage-of-completion basis
primarily measured by the attainment of milestones. Anticipated losses, if any,
are recognized in the period in which they are identified.
Concentration
of Credit Risk
Financial
instruments, which potentially subject Porta to concentrations of credit risk,
consist principally of cash and accounts receivable. At times such cash in banks
exceeds the FDIC insurance limit.
Cash
Equivalents
The
Company considers investments with original maturities of three months or less
at the time of purchase to be cash equivalents. Cash equivalents consist of
commercial paper.
Accounts
Receivable
Accounts
receivables are customer obligations due under normal trade terms. The Company
sells its products directly to customers, to distributors and original equipment
manufacturers involved in a variety of industries, principally
telecommunications and military/aerospace. The Company performs continuing
credit evaluations of its customers’
financial condition and although it generally does not require collateral,
letters of credit may be required from customers in certain
circumstances.
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
The
Company records an allowance for doubtful accounts receivable based on
specifically identified amounts that it believes to be uncollectible. The
Company also records additional allowances based on certain percentages of its
aged receivables, which are determined based on historical experience and its
assessment of the general financial conditions affecting its customer base. If
the Company’s actual collections experience changes, revisions to its allowance
may be required.
The
Company has a limited number of customers with individually large amounts due at
any given balance sheet date.
Inventories
Inventories
are stated at the lower of cost (on the average or first-in, first-out methods)
or market.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost. Leasehold improvements are amortized
over the shorter of the term of the lease or the estimated lives of the related
assets. Depreciation is computed using the straight-line method over the related
assets’ estimated lives.
Goodwill
Goodwill
represents the difference between the purchase price and the fair market value
of net assets acquired in business combinations. Commencing January 1, 2002,
goodwill is an indefinite lived asset and as such is not amortized. On an annual
basis, or more frequently if certain events occur, the Company tests the
goodwill for impairment. The Company determines the estimated fair value of the
goodwill by considering the projected cash flows generated from the reporting
unit to which the goodwill relates.
Goodwill at December 31, 2004 and 2003, related only to the Company’s signal
processing division.
Income
Taxes
Deferred
income taxes are recognized based on the differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years, and tax
benefits of net operating loss carryforwards. Further, the effects of tax law or
rate changes are included in income as part of deferred tax expense or benefit
for the period that includes the enactment date. A valuation allowance is
recorded to reduce net deferred tax assets to amounts that are more likely than
not to be realized (note 14).
Foreign
Currency Translation
Assets
and liabilities of foreign subsidiaries are translated at year-end rates of
exchange, and revenues and expenses are translated at the average rates of
exchange for the year. Gains and losses resulting from translation are
accumulated in a separate component of stockholders’ equity. Gains and losses
resulting from foreign currency transactions (transactions denominated in a
currency other than the functional currency) are included in
operations.
Shipping
and Handling Costs
Shipping and
handling costs are included as a component of cost of sales.
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements,
continued
Net
Income (Loss) Per Share
Basic net
income (loss) per share is based on the weighted average number of shares
outstanding. Diluted net income (loss) per share is based on the weighted
average number of shares outstanding plus the dilutive effect of potential
shares of common stock, as if such shares had been issued. For 2003 and 2002, no
dilutive potential shares of common stock were added to compute diluted loss per
share because the effect would be anti-dilutive.
Reclassifications
Certain
reclassifications have been made to conform prior years’ consolidated financial
statements to the 2004 presentation.
Accounting
for Stock-Based Compensation
The
Company applies the intrinsic value method as outlined in Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and
related Interpretations in accounting for stock options granted to employees.
Under the intrinsic value method, no compensation expense is recognized if the
exercise price of the Company’s employee stock options equals the market price
of the underlying stock on the date of the grant. Accordingly, no compensation
cost has been recognized. Statement of Financial Accounting Standard (“SFAS”)
No. 123, “Accounting for Stock-Based Compensation,” requires
the Company to provide pro forma information regarding net income (loss) and net
income (loss) per common share as if compensation cost for the Company’s stock
option programs had been determined in accordance with the fair value method
prescribed therein. The following table illustrates the effect on net income
(loss) and income (loss) per share of common stock as if the fair value method
had been applied to all outstanding and unvested awards in each period
presented.
|
|
Year
Ended
December
31 |
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
(In
thousands, except per share data) |
|
Net
income (loss),
as reported |
|
$ |
2,675 |
|
$ |
(3,357 |
) |
$ |
(4,114 |
) |
Deduct:
Total stock-based employee compensation expense
determined under fair value method for all awards |
|
|
(1 |
) |
|
(1 |
) |
|
(1 |
) |
Pro
forma net income (loss) |
|
$ |
2,674 |
|
$ |
(3,358 |
) |
$ |
(4,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock: |
|
|
|
|
|
|
|
|
|
|
Basic
and diluted - as reported |
|
$ |
0.27 |
|
$ |
(0.34 |
) |
$ |
(0.41 |
) |
Basic
and diluted - pro forma |
|
$ |
0.27 |
|
$ |
(0.34 |
) |
$ |
(0.41 |
) |