SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2005
o TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from.................to...................
Commission
file number 1-8191
PORTA
SYSTEMS CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
11-2203988
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
6851
Jericho Turnpike, Suite 170, Syosset, New York
(Address
of principal executive offices)
11791
(Zip
Code)
516-364-9300
(Company’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by
Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding
12
months
(or for such shorter period that the registrant was required to file such
reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes x
No o
Indicate
by a check mark whether the registrant is an accelerated filer (as defined
in
Rule 12b-2 of the Act).
Yes
o
No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock as of the latest practicable date:
Common
stock (par value $0.01) 10,053,637 shares as of August 5, 2005
PART
I.-
FINANCIAL INFORMATION
Item
1- Financial
Statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands, except shares and par value)
|
|
June
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Assets
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,760
|
|
$
|
2,040
|
|
Accounts
receivable - trade, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
of
$256 in 2005 and $1,045 in 2004
|
|
|
3,262
|
|
|
3,076
|
|
Inventories
|
|
|
4,811
|
|
|
4,576
|
|
Prepaid
expenses and other current assets
|
|
|
626
|
|
|
382
|
|
Total
current assets
|
|
|
11,459
|
|
|
10,074
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,470
|
|
|
1,334
|
|
Goodwill,
net
|
|
|
2,961
|
|
|
2,961
|
|
Other
assets
|
|
|
64
|
|
|
69
|
|
Total
assets
|
|
$
|
15,954
|
|
$
|
14,438
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Senior
debt, including accrued interest
|
|
$
|
25,477
|
|
$
|
25,674
|
|
Subordinated
notes
|
|
|
6,144
|
|
|
6,144
|
|
6%
convertible subordinated debentures
|
|
|
385
|
|
|
385
|
|
Accounts
payable
|
|
|
4,111
|
|
|
4,728
|
|
Accrued
expenses and other
|
|
|
2,891
|
|
|
2,760
|
|
Other
accrued interest payable
|
|
|
4,706
|
|
|
4,533
|
|
Total
current liabilities
|
|
|
43,714
|
|
|
44,224
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
852
|
|
|
875
|
|
Total
long-term liabilities
|
|
|
852
|
|
|
875
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
44,566
|
|
|
45,099
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
10,084,577
shares in 2005 and 10,003,224 shares in 2004
|
|
|
101
|
|
|
100
|
|
Additional
paid-in capital
|
|
|
76,124
|
|
|
76,059
|
|
Accumulated
deficit
|
|
|
(98,614
|
)
|
|
(100,705
|
)
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,285
|
)
|
|
(4,177
|
)
|
|
|
|
(26,674
|
)
|
|
(28,723
|
)
|
Treasury
stock, at cost, 30,940 shares
|
|
|
(1,938
|
)
|
|
(1,938
|
)
|
Total
stockholders’ deficit
|
|
|
(28,612
|
)
|
|
(30,661
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
15,954
|
|
$
|
14,438
|
|
See
accompanying notes to unaudited consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Operations and Comprehensive Income
(In
thousands, except per share amounts)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Sales
|
|
$
|
16,041
|
|
$
|
14,372
|
|
Cost
of sales
|
|
|
9,655
|
|
|
8,875
|
|
Gross
profit
|
|
|
6,386
|
|
|
5,497
|
|
|
Selling,
general and administrative expenses
|
|
|
2,766
|
|
|
2,642
|
|
Research
and development expenses
|
|
|
861
|
|
|
1,021
|
|
Total
expenses
|
|
|
3,627
|
|
|
3,663
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
2,759
|
|
|
1,834
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest income
|
|
|
(646
|
)
|
|
(660
|
)
|
Other
income, net
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
2,114
|
|
|
1,174
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(23
|
)
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,091
|
|
$
|
1,148
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(108
|
)
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
1,983
|
|
$
|
959
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share of common stock
|
|
$
|
0.21
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,005
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
Diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share of common stock
|
|
$
|
0.21
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,036
|
|
|
9,972
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Operations and Comprehensive Income
(In
thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,425
|
|
$
|
6,272
|
|
Cost
of sales
|
|
|
5,183
|
|
|
3,905
|
|
Gross
profit
|
|
|
3,242
|
|
|
2,367
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
1,589
|
|
|
1,176
|
|
Research
and development expenses
|
|
|
439
|
|
|
508
|
|
Total
expenses
|
|
|
2,028
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
1,214
|
|
|
683
|
|
|
|
|
|
|
|
|
|
Interest
expense, net of interest income
|
|
|
(321
|
)
|
|
(337
|
)
|
Other
income, net
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
894
|
|
|
346
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(7
|
)
|
|
(26
|
)
|
|
Net
income
|
|
$
|
887
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(46
|
)
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
841
|
|
$
|
245
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share of common stock
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,038
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
Diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share of common stock
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,067
|
|
|
9,972
|
|
See
accompanying notes to unaudited consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Cash Flows
(In
thousands)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,091
|
|
$
|
1,148
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
204
|
|
|
191
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(186
|
)
|
|
200
|
|
Inventories
|
|
|
(235
|
)
|
|
(117
|
)
|
Prepaid
expenses and other current assets
|
|
|
(245
|
)
|
|
8
|
|
Other
assets
|
|
|
4
|
|
|
12
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(269
|
)
|
|
(1,100
|
)
|
Net
cash provided by operating activities
|
|
|
1,364
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(351
|
)
|
|
(80
|
)
|
Net
cash used in investing activities
|
|
|
(351
|
)
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
in senior debt
|
|
|
178
|
|
|
175
|
|
Repayments
of senior debt
|
|
|
(375
|
)
|
|
—
|
|
Net
cash provided by (used in) financing activities
|
|
|
(197
|
)
|
|
175
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(96
|
)
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
720
|
|
|
248
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of the year
|
|
|
2,040
|
|
|
469
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of the period
|
|
$
|
2,760
|
|
$
|
717
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$
|
375
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
73
|
|
$
|
34
|
|
|
Common
stock issued for accrued director fees
|
|
$
|
66
|
|
$
|
—
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
NOTES
TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Management’s Responsibility For Interim Financial Statements Including All
Adjustments
Necessary For Fair Presentation
Management
acknowledges its responsibility for the preparation of the accompanying
interim
consolidated financial statements which reflect all adjustments, consisting
of
normal recurring adjustments, considered necessary in its opinion for
a fair
statement of its consolidated financial position and the results of its
operations for the interim period presented. These consolidated financial
statements should be read in conjunction with the summary of significant
accounting policies and notes to consolidated financial statements included
in
the Company’s Form 10-K annual report for the year ended December 31, 2004.
These financial statements have been prepared assuming that the Company
will
continue as a going concern and, accordingly, do not include any adjustments
that might result from the outcome of the uncertainties described within.
The
audit opinion included in the December 31, 2004 Form 10-K annual report
contained an explanatory paragraph regarding the Company’s ability to continue
as a going concern. The factors which resulted in the explanatory paragraph
are
continuing. Results for the second quarter or the first six months of
2005 are
not necessarily indicative of results for the year.
Note
2: Inventories
Inventories
are stated at the lower of cost (on the average or first-in, first-out
method)
or market. The composition of inventories at the end of the respective
periods
is as follows:
|
|
June
30, 2005
|
|
December
31, 2004
|
|
|
|
(in
thousands)
|
|
Parts
and components
|
|
$
|
3,170
|
|
$
|
2,650
|
|
Work-in-process
|
|
|
548
|
|
|
654
|
|
Finished
goods
|
|
|
1,093
|
|
|
1,272
|
|
|
|
$
|
4,811
|
|
$
|
4,576
|
|
Note
3: Senior and Subordinated Debt
On
June
30, 2005, the Company’s liability to the holder of its senior debt, including
accrued interest of $842,000, was $25,477,000. 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. Under recent amendments, the loan became due and
payable on
August 1, 2005. On August 5, 2005, we entered into an agreement with
the holder
of the senior debt, dated as of August 1, 2005, to extend the maturity
of our
senior debt to September 30, 2005. The agreement provides for payments
to the
holder of the senior debt of $112,500 on each of August 5, 2005, which
has been
made, August 31, 2005 and September 30, 2005 on account of our senior
debt and a
payment of $100,000 to the holder of the senior debt on account of its
expenses,
including legal expenses, relating to the extension agreement and related
matters. As part of the extension, the holder of the senior debt agreed
to
continue the suspension of the accrual of interest on approximately $23
million
on the senior debt.
As
a
condition to the extension, the Company agreed to take steps to effect
a
restructure of the senior debt in a manner which results in the payment
of a
significant portion of the senior debt and the issuance of secured debt
and
equity for the balance of the senior debt on specified terms. Any such
restructure will require the Company to obtain financing from a new investor.
Although the Company intends to seek such an investor, the Company cannot
give
any assurance that it will be able to obtain an investor on terms that
are
acceptable to the senior debt holder. The Company has also agreed to
engage an
investment banker to assist it in exploring strategic alternatives. If
the
agreement is not extended beyond September 30, 2005, and if the holder
of the
senior debt demands payment of all or a significant portion of the loan
when
due, the Company will not be able to continue in business, and it is
likely that
the Company will seek protection under the Bankruptcy Code.
As
of
June 30, 2005, the Company’s short-term debt also included $6,144,000 of
subordinated debt, which became due on July 3, 2001, and $385,000 of
6%
debentures, which became due on July 2, 2002. Accrued interest on the
subordinated notes was approximately $4,590,000, which represents interest
from
July 2000 through June 30, 2005, and accrued interest on the 6% debentures
was
$116,000. The Company is precluded by the holder of its senior debt from
paying
any principal or interest on the subordinated debt.
Note
4: Accounting for Stock Based Compensation
The
Company applies the intrinsic value method as outlined in APB Opinion
No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations in
accounting for stock options. 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. SFAS No.
123,
“Accounting for Stock-based Compensation,” requires the Company to provide pro
forma information regarding net income and net income 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 and income per share of common stock
as if
the fair value method had been applied to all outstanding and unvested
awards in
each period presented.
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30
|
|
June
30
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
2,091
|
|
$
|
1,148
|
|
$
|
887
|
|
$
|
320
|
|
Deduct:
Total stock-based employee compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
determined
under fair value method for all awards
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Pro
forma net income
|
|
$
|
2,089
|
|
$
|
1,147
|
|
$
|
885
|
|
$
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
0.21
|
|
$
|
0.12
|
|
$
|
0.09
|
|
$
|
0.03
|
|
Basic
and diluted - pro forma
|
|
$
|
0.21
|
|
$
|
0.12
|
|
$
|
0.09
|
|
$
|
0.03
|
|
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete financial information by requiring that
the
compensation cost relating to share-based payment transactions be recognized
in
financial statements. That cost will be measured based on the
fair value
of the equity or liability instruments issued. Statement 123(R)
covers a
wide range of share-based compensation arrangements including stock options,
restricted stock plans, performance-based awards, stock appreciation
rights, and
employee stock purchase plans. Statement 123(R) replaces FASB
Statement
No. 123, Accounting for Stock-Based Compensation, and supersedes APB
Opinion No.
25, Accounting for Stock Issued to Employees. Statement 123,
as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees.
However,
that statement permitted entities the option of continuing to apply the
guidance
in Opinion 25, as long as the footnotes to financial statements disclosed
what
net income would have been had the preferable fair-value-based method
been
used. SFAS 123(R) will be effective for fiscal years beginning
after June
15, 2005, which for the Company is the first quarter of 2006. Currently
we
recognize the expense of options or similar instruments issued to employees
using the intrinsic value based method. Beginning with the first
quarter
of 2006, we will be required to recognize the expense of options or similar
instruments issued to employees using the fair-value-based method of
accounting
for stock-based payments.
Note
5: Segment Data
The
Company has three reportable segments: Line Connection and Protection
Equipment
(“Line”) whose products interconnect copper telephone lines to switching
equipment and provide fuse elements that protect telephone equipment
and
personnel from electrical surges; Signal Processing (“Signal”) whose products
are used in data communication devices that employ high frequency transformer
technology, and Operating Support Systems (“OSS”) whose products automate the
testing, provisioning, maintenance and administration of communication
networks
and the management of support personnel and equipment.
Because
of continuing losses in the OSS division, combined with difficulties
in
marketing OSS products in view of our financial condition, we limit our
OSS
activities to the performance of maintenance and warranty services. For
the six
months ended June 30, 2005, OSS sales were $410,000, which was approximately
2.6% of the Company’s revenue, and the OSS operations generated a loss of
approximately $535,000. For the six months ended June 30, 2004, OSS sales
were
$1,346,000, which was approximately 9.4% of the Company’s revenue and the OSS
operations generated a loss of approximately $900,000. The Company anticipates
that the OSS revenue will represent an increasingly smaller portion of
its
revenue.
The
factors used to determine the above segments focused primarily on the
types of
products and services provided, and the type of customer served. Each
of these
segments is managed separately from the others, and management evaluates
segment
performance based on operating income.
There
has
been no significant change from December 31, 2004 in the basis of measurement
of
segment revenues and profit or loss, and no significant change in the
Company’s
assets.
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
12,281,000
|
|
$
|
10,399,000
|
|
$
|
6,574,000
|
|
$
|
4,427,000
|
|
Signal
|
|
|
3,255,000
|
|
|
2,591,000
|
|
|
1,598,000
|
|
|
1,289,000
|
|
OSS
|
|
|
410,000
|
|
|
1,346,000
|
|
|
202,000
|
|
|
536,000
|
|
|
|
$
|
15,946,000
|
|
$
|
14,336,000
|
|
$
|
8,374,000
|
|
$
|
6,252,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
3,109,000
|
|
$
|
2,755,000
|
|
$
|
1,537,000
|
|
$
|
1,120,000
|
|
Signal
|
|
|
1,387,000
|
|
|
1,036,000
|
|
|
689,000
|
|
|
580,000
|
|
OSS
|
|
|
(535,000
|
)
|
|
(900,000
|
)
|
|
(263,000
|
)
|
|
(602,000
|
)
|
|
|
$
|
3,961,000
|
|
$
|
2,891,000
|
|
$
|
1,963,000
|
|
$
|
1,098,000
|
|
The
following table reconciles segment totals to consolidated totals:
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2004
|
|
June
30, 2005
|
|
June
30, 2004
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue for reportable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
segments
|
|
$
|
15,946,000
|
|
$
|
14,336,000
|
|
$
|
8,374,000
|
|
$
|
6,252,000
|
|
Other
revenue
|
|
|
95,000
|
|
|
36,000
|
|
|
51,000
|
|
|
20,000
|
|
Consolidated
total revenue
|
|
$
|
16,041,000
|
|
$
|
14,372,000
|
|
$
|
8,425,000
|
|
$
|
6,272,000
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
reportable segments
|
|
$
|
3,961,000
|
|
$
|
2,891,000
|
|
$
|
1,963,000
|
|
$
|
1,098,000
|
|
Corporate
and unallocated
|
|
|
(1,202,000
|
)
|
|
(1,057,000
|
)
|
|
(749,000
|
)
|
|
(415,000
|
)
|
Consolidated
total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
income
|
|
$
|
2,759,000
|
|
$
|
1,834,000
|
|
$
|
1,214,000
|
|
$
|
683,000
|
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
Company’s consolidated statements of operations for the periods indicated
below,
shown as a percentage of sales, are as follows:
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of sales
|
|
|
60
|
%
|
|
62
|
%
|
|
62
|
%
|
|
62
|
%
|
Gross
profit
|
|
|
40
|
%
|
|
38
|
%
|
|
38
|
%
|
|
38
|
%
|
Selling,
general and administrative expenses
|
|
|
17
|
%
|
|
18
|
%
|
|
19
|
%
|
|
19
|
%
|
Research
and development expenses
|
|
|
6
|
%
|
|
7
|
%
|
|
5
|
%
|
|
8
|
%
|
Operating
income
|
|
|
17
|
%
|
|
13
|
%
|
|
15
|
%
|
|
11
|
%
|
Interest
expense - net
|
|
|
(4
|
%)
|
|
(5
|
%)
|
|
(4
|
%)
|
|
(5
|
%)
|
Other
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
(1
|
%)
|
Net
income
|
|
|
13
|
%
|
|
8
|
%
|
|
11
|
%
|
|
5
|
%
|
The
Company’s sales by product line for the periods ended June 30, 2005 and 2004 are
as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
$(000)
|
|
|
|
2005
|
|
2004
|
|
Line
connection/protection equipment
|
|
$12,281
|
|
77
|
% |
$10,399
|
|
72
|
% |
Signal
Processing
|
|
|
3,255
|
|
|
20
|
%
|
|
2,591
|
|
|
18
|
%
|
OSS
equipment and maintenance revenue
|
|
|
410
|
|
|
3
|
%
|
|
1,346
|
|
|
10
|
%
|
Other
|
|
|
95
|
|
|
0
|
%
|
|
36
|
|
|
0
|
%
|
|
|
$
|
16,041
|
|
|
100
|
%
|
$
|
14,372
|
|
|
100
|
%
|
|
|
Three
Months Ended June 30,
|
|
|
|
$(000)
|
|
|
|
2005
|
|
2004
|
|
Line
connection/protection equipment
|
|
$
|
6,574
|
|
|
78
|
%
|
$
|
4,427
|
|
|
71
|
%
|
Signal
Processing
|
|
|
1,598
|
|
|
19
|
%
|
|
1,289
|
|
|
21
|
%
|
OSS
equipment and maintenance revenue
|
|
|
202
|
|
|
2
|
%
|
|
536
|
|
|
8
|
%
|
Other
|
|
|
51
|
|
|
1
|
%
|
|
20
|
|
|
0
|
%
|
|
|
$
|
8,425
|
|
|
100
|
%
|
$
|
6,272
|
|
|
100
|
%
|
Overview
We
operate in the telecommunications industry, and our customer base consists
largely of government-owned and privately-owned telecommunications companies.
Our line connection and protection equipment (“Line”) interconnects copper
telephone lines to switching equipment and provides fuse elements that
protect
telephone equipment and personnel from electrical surges. Our signal processing
(“Signal”) equipment is used in data communication devices that employ high
frequency transformer technology. Our Operating Support Systems (“OSS”), which
are no longer a significant part of our business, automate the testing,
provisioning, maintenance and administration of communication networks
and the
management of support personnel and equipment.
Because
of continuing losses in the OSS division, combined with difficulties in
marketing OSS products in view of our financial condition, we limit our OSS
activities to the performance of maintenance and warranty services. In addition,
we are trying to sell our remaining OSS inventory although we did not generate
any sales of OSS inventory in the first half of 2005 and sales of OSS inventory
were minimal during 2004. We expect our OSS business to continue to decline
in
future years, and we do not anticipate that we will enter into new maintenance
contracts when our warranty obligations terminate or renew existing maintenance
contracts when they expire.
Our
Line
equipment is designed to connect copper-wired telecommunications networks
and to
protect telecommunications equipment from voltage surges. We market this
equipment primarily to telephone operating companies outside the United States
and through distribution to designers, engineers and installers in the United
States. Our Line division operated at a profit for the six months ended June
30,
2005 and June 30, 2004. We market Signal equipment principally
for use in defense and aerospace applications. The Signal division generated
operating profit for the six months ended June 30, 2005 and the comparable
period of 2004. We recognize revenue from Line and Signal products when the
product is shipped.
At
June
30, 2005, our senior debt was scheduled to mature on August 1, 2005. On August
5, 2005, we entered into an agreement with the holder of the senior debt,
dated
as of August 1, 2005, to extend the maturity of our senior debt to September
30,
2005. The agreement provides for payments to the holder of the senior debt
of
$112,500 on each of August 5, 2005, which has been made, August 31, 2005
and
September 30, 2005 on account of our senior debt and a payment of $100,000
to
the holder of the senior debt on account of its expenses, including legal
expenses, relating to the extension agreement and related matters. As part
of
the extension, the holder of the senior debt agreed to continue the suspension
of the accrual of interest on approximately $23 million of the senior
debt.
As
a
condition to the extension, the Company agreed to take steps to effect a
restructure of the senior debt in a manner which results in the payment of
a
significant portion of the senior debt and the issuance of secured debt and
equity for the balance of the senior debt on specified terms. Any such
restructure will require the Company to obtain financing from a new investor.
Although the Company intends to seek such an investor, the Company cannot
give
any assurance that it will be able to obtain an investor on terms that are
acceptable to the holder of the senior debt. The Company has also agreed
to
engage an investment banker to assist it in exploring strategic alternatives.
Although the holder of our senior debt has extended the maturity date from
time
to time as we approached an expiration date, the holder may not extend the
loan
beyond September 30, 2005 and if the holder does grant an extension, it may
be
the final extension which the holder grants to us. Any extension may be
contingent upon both our success in our negotiations with a potential investor
to effect the restructuring of the senior debt and/or the status of our
negotiations with respect to other strategic alternatives, and our making
or
agreeing to make significant payments on account of the senior debt, which
may
affect our ability to conduct our business. If payments required by the holder
of the senior debt impair our ability to conduct our business, it is likely
that
we will seek protection under the Bankruptcy Code. If the holder of our senior
debt does not extend the maturity date of our obligations and demands payment
of
all or a significant portion of our obligations due to the holder, we will
not
be able to continue in business, and it is likely that we will seek protection
under the Bankruptcy Code. We cannot assure you that the holder of our senior
debt will not demand payment of all or a significant portion of our obligations
or that we will not seek protection under the Bankruptcy Code in anticipation
of
a decision by the holder to demand payment.
Results
of Operations
Our
sales
for the six months ended June 30, 2005 compared to the six months ended
June 30,
2004 increased by $1,669,000 (12%) from $14,372,000 in 2004 to $16,041,000
in
2005. Sales for the quarter ended June 30, 2005 were $8,425,000, an increase
of
$2,153,000 (34%) from the sales of $6,272,000 for the quarter ended June
30,
2004. The increased sales level resulted primarily from increased sales
of Line
products to British Telecommunications that commenced in the third quarter
of
2003, as a result of an increase by British Telecommunications in the
availability of DSL lines in the United Kingdom, and to a lesser extent,
from
increase in sales of our domestic and other international Line business
and
Signal products. The cash flow generated from the increased sales to British
Telecommunications enabled us to improve our relations with our suppliers
and
increase our sales of Line and Signal equipment in the domestic and other
international markets.
Line
equipment sales for the six months ended June 30, 2005 compared to the
six
months ended June 30, 2004 increased by $1,882,000 (18%) from $10,399,000
to
$12,281,000. Sales for the three months ended June 30 increased by $2,147,000
(48%) from $4,427,000 in 2004 to $6,574,000 in 2005. The
increase in sales for the six and the three months primarily reflects increased
sales volume to British Telecommunications as stated above.
Signal
sales for the six months ended June 30, 2005 were $3,255,000, compared
to
$2,591,000 in the same period of 2004, an increase of $664,000 (26%). Sales
for
the three months ended June 30, 2005 compared to 2004, increased by $309,000
(24%) from $1,289,000 to $1,598,000. These increases resulted from our
ability
to ship orders from backlog on a more timely basis, the result of a better
cash
flow from operations, than in the comparable period of 2004.
OSS
sales
for the six months ended June 30, 2005 were $410,000, compared with $1,346,000
in the same period of 2004, a decrease of $936,000 (70%). OSS sales for
the
three months ended June 30, 2005 were $202,000 compared to $536,000 in
the same
period of 2004, a decrease of $334,000 (62%). The decrease in sales for
the six
and three months resulted from the reduction in the scope of our OSS operations
and marketing effort as stated above.
Gross
margin for the six months ended June 30, 2005 was 40% compared to 38% for
the
six months ended June 30, 2004. Gross margin for the quarter ended June
30, 2005
was 38% compared to 38% for the quarter ended June 30, 2004. This increase
for
the six months is the result of better absorption of manufacturing overhead
created by the increase in revenue from our Line business and reduced OSS
costs,
both of which enabled us to operate more efficiently than in the comparable
periods of 2004.
Selling,
general and administrative expenses increased by $124,000 (5%) from $2,642,000
to $2,766,000 for the six months ended June 30, 2005 compared to 2004.
For the
quarter ended June 30, 2005 selling, general and administrative expenses
increased by $413,000 (35%) from 2004. These increases relate primarily
to a
rent accrual for facilities no longer being utilized in the United Kingdom,
which was partially offset by reduced OSS sales expenses as our marketing
activities for OSS were sharply reduced during 2004 and into the first
half of
2005.
Research
and development expenses decreased by $160,000 and $69,000 for the six and
three
months ended June 30, 2005, respectively, from the comparable periods in 2004.
During the first half of 2004, a significant portion of our research and
development related to OSS, and the elimination of this activity resulted in
an
overall decrease despite an increase in research and development for our Line
business. As
a
result of the above, for the six months ended June 30, 2005, we had an operating
income of $2,759,000 compared with $1,834,000 in the same period of 2004. We
had
an operating income of $1,214,000 for the quarter ended June 30, 2005 as
compared with $683,000 in the same period of 2004.
We
continue to accrue interest on obligations to the holder of $2,225,000 of our
senior debt, which represents interest on senior debt that we incurred
subsequent to March 2002. In
addition, there is outstanding an old term loan, in the principal amount of
approximately $23,000,000, that accrues 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%, or a default rate of 14%, shall be payable.
As
part of the August 2005 extension of the senior debt, the holder of the senior
debt has not required us to pay interest on this amount through September 30,
2005.
Income
tax expense for the six months ended June 30, 2005 relates to state and foreign
taxes. No federal income tax expense has been provided due to the availability
of net operating loss carry forwards.
As
a
result of the foregoing, we generated net income of $2,091,000, $.21 per share
(basic and diluted), for the six months ended June 30, 2005, compared with
$1,148,000, $0.12 per share (basic and diluted), in 2004. The net income for
the
three months ended June 30, 2005 was $887,000, $.09 per share (basic and
diluted), compared with $320,000, $0.03 per share (basic and diluted) in
2004.
Liquidity
and Capital Resources
At
June
30, 2005, we had cash and cash equivalents of $2,760,000 compared with
$2,040,000 at December 31, 2004. Our working capital deficit at June 30, 2005
was $32,255,000 compared to a working capital deficit of $34,150,000 at December
31, 2004, a reduction of $1,895,000 in our working capital deficit. This
decrease in the working capital deficiency reflects our improved operating
results for the six months ended June 30, 2005. Cash of $1,364,000 was provided
by our operations during the six months of 2005. During the six months of 2005,
we commenced making payments to the holder of our senior debt, with payment
of
$150,000, in the first quarter and $225,000 in the second quarter of 2005,
all
of which was applied to accrued interest.
As
of
June 30, 2005, our debt includes $25,477,000 of senior debt, which matures
on
September 30, 2005, $6,144,000 of subordinated debt that became due on July
3,
2001, and $385,000 of 6% debentures that became due on July 2, 2002. We were
unable to pay the interest payment on the subordinated notes of approximately
$4,590,000 that represents interest from July 2000 through June 2005, or the
interest on the subordinated debentures of approximately $116,000. We have
been
notified by the trustee of 6% debentures that the non-payment of the principal
and interest caused an event of default. At June 30, 2005, we did not have
sufficient resources to pay either the senior lender or the subordinated
lenders; it is unlikely that we can generate such cash from our operations,
and
our senior lender has precluded us from making any payments on the subordinated
debt.
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, or seek to sell one or more of our divisions. As a result
of
the significant reduction in the operations of our OSS division, we do not
believe that we will be able to sell that division on terms which would generate
any significant cash. Further, the dependence of our copper business on several
significant customers, principally British Telecommunications, are major
factors
which may impair our ability to sell the copper division or our business
as a
whole or may affect the terms on which we would be able to sell the business.
Further, if we sell only the Line or Signal businesses, we may be unable
to
operate the remaining divisions at a profit.
As
noted
above, as part of the extension agreement with the holder of the senior debt,
we
are required to seek an investor to enable us to restructure the senior debt
in
a manner which provides a significant payment on account of the senior debt
and
the issuance to the holder of the senior debt of senior secured debt and
equity
in respect of the unpaid portion of the senior debt. We may not be able to
negotiate an agreement with any investor to provide us with funds to enable
us
to restructure the senior debt on terms that are acceptable to the holder
of the
senior debt. If we are not able to restructure the senior debt or sell our
business in a manner and on terms that are acceptable to the holder of the
senior debt or if have not made satisfactory progress on either a restructure
or
a sale, the holder of the senior debt may decline to give a further extension
or
may seek to foreclose on its debt. In such event, it is likely that we would
seek protection under the Bankruptcy Code.
Forward
Looking Statements
Statements
contained in this Form 10-Q include forward-looking statements that are subject
to risks and uncertainties. In particular, statements in this Form 10-Q that
state the Company’s intentions, beliefs, expectations, strategies, predictions
or any other statements relating to our future activities or other future
events
or conditions are “forward-looking statements.” Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under “Risk Factors,” in our Form 10-K for the year ended
December 31, 2004 and those described in “Management’s Discussion and Analysis
of Financial Conditions and Results of Operations” in our Form 10-K and this
Form 10-Q, and those described in any other filings by us with the Securities
and Exchange Commission, as well as general economic conditions and economic
conditions affecting the telecommunications industry, any one or more of
which
could cause actual results to differ materially from those stated in such
statements.
Item
3. 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.
Item
4. 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.
Internal
Control over Financial Reporting
There
has
been no change in our internal control over financial reporting that occurred
during the fiscal covered by this quarterly report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
3. Defaults Upon Senior Securities.
See
Note
3 of Notes to Unaudited Consolidated Financial Statements and “Management’s
Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and
Capital Resources” for information concerning defaults on our subordinated
debt.
Item
6. Exhibits
Exhibits
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certificate
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 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. |
|
|
|
Dated:
August 11, 2005
|
By: |
/s/William
V. Carney |
|
William
V. Carney |
|
Chairman
of the Board and Chief Executive
Officer |
|
|
|
|
|
|
|
|
Dated:
August 11, 2005
|
By: |
/s/Edward
B. Kornfeld |
|
Edward
B. Kornfeld |
|
President,
Chief Operating Officer
and
Chief Financial Officer
|