UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For
the fiscal year ended December
31, 2005
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission
file number 1-8191
PORTA
SYSTEMS CORP.
(Exact
name of registrant as specified in its charter)
Delaware
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11-2203988
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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6851
Jericho Turnpike, Syosset, New York
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11791
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
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(516)
364-9300
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Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.01 per share
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to
this
Form 10K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act. o
Yes x
No
State
aggregate market value of the voting stock held by non-affiliates of the
registrant: $1,558,314 as of June 30, 2005.
Indicate
the number of shares outstanding of each of the registrant's class of common
stock, as of the latest practicable date: 10,053,638 shares of Common Stock,
par
value $.01 per share, as of March 15, 2006.
DOCUMENTS
INCORPORATED BY REFERENCE
None
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 - operations support systems,
which we call OSS. During 2003 we began to scale back our OSS operations
and we
continued to scale back these operations through 2005. 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 2005, and we do not
plan
to add additional inventory. 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.
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, and 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
in 2005 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. 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
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Years
Ended December 31,
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2005
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2004
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2003
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(Dollars
in thousands)
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Line
Connecting/Protecting Equipment
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$
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21,982
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77
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%
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$
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21,545
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74
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%
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$
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11,334
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58
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%
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Signal
Processing
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5,710
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20
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%
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5,551
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19
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%
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4,253
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21
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%
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OSS
Systems
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785
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3
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%
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2,003
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7
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%
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3,249
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17
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%
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Other
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127
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0
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%
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69
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0
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%
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754
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4
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%
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Total
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$
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28,604
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|
100
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%
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$
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29,168
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|
|
100
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%
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$
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19,590
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100
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%
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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
2005, approximately
77% 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
2005, signal processing equipment accounted for approximately 20% of our
sales.
During
2005, approximately 3% of our sales consisted principally of maintenance
services and, to a lesser extent, of the sale of existing OSS inventory.
None of
our current maintenance agreements extend beyond 2007, and we do not expect
to
enter into new maintenance agreements. As a result, 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 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 $5,641,000
(20% of sales) in 2005, $2,259,000 (8% of sales) in 2004, and $867,000 (4%
of
sales) in 2003. 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 $3,170,000 in 2005, $4,772,000 in 2004, and $3,150,000 in 2003. We
have
an agreement with British Telecommunications which, in effect, enables British
Telecommunications to use certain of our proprietary information to modify
or
enhance products provided to British Telecommunications and permits British
Telecommunications to manufacture or engage others to manufacture those
products.
Our
signal processing products are sold primarily to United States military and
aerospace prime contractors, and domestic original equipment manufacturers
and
end users.
The
following table sets forth, for the last three fiscal years, our sales to
customers by geographic region:
Sales
to Customers by Geographic Region (1)
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Year
Ended December 31,
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2005
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2004
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2003
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(Dollars
in thousands)
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North
America
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$
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13,277
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|
46
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%
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$
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12,948
|
|
|
45
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%
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$
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9,647
|
|
|
49
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%
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United
Kingdom
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|
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14,998
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|
|
53
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%
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14,911
|
|
|
51
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%
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|
7,523
|
|
|
38
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%
|
Asia/Pacific
|
|
|
10
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|
|
0
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%
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|
694
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|
|
2
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%
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|
954
|
|
|
6
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%
|
Other
Europe
|
|
|
319
|
|
|
1
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%
|
|
457
|
|
|
2
|
%
|
|
1,228
|
|
|
6
|
%
|
Latin
America
|
|
|
0
|
|
|
0
|
%
|
|
158
|
|
|
1
|
%
|
|
238
|
|
|
1
|
%
|
Total
Sales
|
|
$
|
28,604
|
|
|
100
|
%
|
$
|
29,168
|
|
|
100
|
%
|
$
|
19,590
|
|
|
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 19 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 and assembly 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
Total
sales for British Telecommunications, consisting of direct sales and sales
to
systems integrators for British Telecommunications (including Fujitsu) were
$14,339,000 (50% of sales) for 2005, $14,055,000 (48%) for 2004 and $7,077,000
(36%) for 2003. During 2005, sales to Telmex accounted for $3,157,000, or
approximately 11% of sales and $3,139,000 or approximately 11% of sales for
2004. No other customers account for 10% or more of our sales in 2005, 2004
or
2003.
Our
five
largest customers, consisting of British Telecommunications, Fujitsu and
two
other systems integrators for British Telecommunications, and Telmex, accounted
for sales of $17,431,000, or approximately 61% of sales, for 2005; $15,443,000,
or approximately 53% of sales, for
2004;
and $8,507,000,
or approximately 43% of sales, for
2003.
British
Telecommunications was our largest customer for 2005, accounting for sales
of
$5,933,000, or approximately 21%
of our
revenue, and
Fujitsu
was our largest customer for 2004, accounting for sales of $4,772,000,
or approximately 16%.
Direct sales to British Telecommunications were
$5,933,000, or 21% of sales for 2005; $2,652,000, or 9% of sales, for 2004;
and
$1,480,000, or 8% of sales, for 2003.
Almost
all of these sales were sales of connection/protection products, with the
balance being revenue for OSS maintenance contracts.
Distributors
of our customer premise equipment are 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, 2005, our backlog was approximately $4,188,000 compared with
approximately $5,265,000 at December 31, 2004. The decrease in the backlog
reflects our ability to manufacture and ship inventory during 2005 in a more
timely manner than in 2004 because of our improved cash flow and a reduced
level, as of December 31, 2005, of signal processing orders. Of the December
31,
2005 backlog, approximately $2,700,000 represented orders from foreign telephone
operating companies. We expect to ship substantially all of our December
31,
2005 backlog during 2006.
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. There are no such arrangements
as of December 31, 2005.
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 historical financial
condition, our continuing working capital deficit and our reliance on the
agreement of the holder of our senior debt to continue to defer the maturity
of
our senior debt.
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 $1,700,000 in 2005, $2,000,000 in 2004, and $2,100,000
in
2003 on research and development activities. Most of the research and
development expenses in 2005 related to copper connection/protection
products,
and was
oriented toward development of new products. All
research and development was Company sponsored and is expensed as incurred.
During 2005, 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, 2005 we had 302 employees, of which 55 were employed in the
United
States, 233 in Mexico, 9 in the United Kingdom, and 5 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 May 20, 2006 and December 31,
2006.
Item
1 A. 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, 2005
of
$33,778,000. As of December 31, 2005, our current liabilities included
$24,675,000 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 $11,197,000 due
at December 31, 2005 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 payments 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
senior debt holder has required us to agree to restructure our company, which
may impair the rights of the holders of our common stock.
Our
senior debt matures on May 1, 2006. The holder of our senior debt has required,
as
a
condition to the extensions in the maturity date that we agree 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. Any such restructure will require
us to obtain financing from a new investor. Although we are seeking such
an
investor, we cannot give any assurance that we will be able to obtain an
investor on terms that are acceptable to the senior debt holder. If the maturity
of our senior debt is not extended beyond May 1, 2006, or if the holder of
the
senior debt demands payment of all or a significant portion of the senior
debt
when due, whether on May 1, 2006 or upon the expiration of a subsequent
extension, we will not be able to continue in business, and it is likely
that we
will seek protection under the Bankruptcy Code. Any restructure of our company
may result in very significant dilution to the holders of our common stock
and
it is possible that a restructure may involve a filing under the Bankruptcy
Code.
Our
independent registered public accounting firm has included an explanatory
paragraph relating to our ability to continue
as a going concern in its report on our financial statements.
Because
we have suffered substantial losses from operations in previous years, and
because of our stockholders’ deficit of
$30,185,000, our working capital deficit of $33,778,000 as of December 31,
2005
and our dependence upon the continued agreement of the holder of our senior
debt
to defer the maturity date of our senior debt, our accounting firm included
in
its report an explanatory paragraph about our ability to continue
as a going concern.
Our
sales in our copper connection/protection segment are based on specific market
factors and the requirements of British Telecommunications, which may not
continue.
Total
sales to British Telecommunications, consisting of direct sales and sales
to
systems integrators for British Telecommunications (including Fujitsu
Telecommunications Europe LTD), were $14,339,000 (50% of sales) for 2005,
$14,055,000 (48% of sales) for 2004 and $7,077,000 (36%) for 2003. Almost
all of
such sales were sales of copper connection products. To the extent that British
Telecommunications 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.
Our
sales are dependent upon the requirements of the telecommunications
industry.
Our ability to operate profitably will be impaired by any factors which affect
the telecommunications industry generally or to the extent that our customers’
needs, particularly British Telecommunications, change either as a result
of
regulatory conditions or changes in technology or the completion of projects
which require our products.
We
are heavily dependent on foreign sales. Approximately
65% of our sales in 2005, 66%
of
our sales in 2004 and 56% of our sales in 2003, were made to foreign telephone
operating companies, particularly British Telecommunications. 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 historical financial condition has impaired and may continue
to
impair 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 historical 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 historical
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 develop
or
obtain licenses for state-of-the-art technology. Because
of our historical financial problems, we were not able to devote a significant
effort to research and development, which could increase our difficulties
in
making sales of our current products and introducing any significant new
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.
Item
1B. Unresolved
Staff Comments
None.
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 $305,000 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. In January 2006, we negotiated an agreement with the landlord to
cancel
the remaining approximate 16 years of the lease for three years rent plus
a
cancellation fee. We anticipate the signing of the agreement at the end of
March
2006.
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
January 2006, we settled the previously reported arbitration proceeding by
BMS
Corp. against us. The settlement provides for us to pay $1,000,000 in monthly
installments through March 2010, secured by a confession of judgment. Based
on
the settlement, we
recorded a liability
of $824,000 at December 31, 2005, as per our estimate of the present value
of
our payments to BMS. Through March 23, 2006 we have paid $135,000 pursuant
to
the settlement agreement.
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 note which was 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 2005, 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 2005 and 2004, the quarterly high and low
sales
prices for our common stock on the OTC Bulletin Board.
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
First
Quarter
|
|
$
|
0.30
|
|
$
|
0.17
|
|
|
|
|
Second
Quarter
|
|
|
0.25
|
|
|
0.14
|
|
|
|
|
Third
Quarter
|
|
|
0.56
|
|
|
0.15
|
|
|
|
|
Fourth
Quarter
|
|
|
0.50
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
We
did not declare or pay any cash dividends in 2005 or 2004, 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 20, 2006, we had approximately 794 stockholders of record, and the
closing
price of our common stock was $0.15.
We
did
not issue any unregistered securities during 2005.
Equity
Compensation Plan Information
The
following table summarizes the equity compensation plans under which our
securities may be issued as of December 31, 2005.
Equity
Compensation Plan Information as of December 31, 2005
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
|
|
|
337,780
|
|
$
|
1.3922
|
|
|
962,220
|
|
Equity
compensation plan not approved by security holders
|
|
|
-0-
|
|
|
-0-
|
|
|
95,750
|
|
|
|
|
337,780
|
|
$
|
1.3922
|
|
|
1,057,970
|
|
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,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
(In
thousands, except per share data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
28,604
|
|
$
|
29,168
|
|
$
|
19,590
|
|
$
|
21,417
|
|
$
|
28,062
|
|
Operating
income (loss)
|
|
|
2,
021
|
|
|
4,153
|
|
|
(2,352
|
)
|
|
(
2,881
|
)
|
|
(
11,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
810
|
|
|
2,675
|
|
|
(3,357
|
)
|
|
(
4,114
|
)
|
|
(
14,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income (loss) per share
|
|
$
|
0.08
|
|
$
|
0.27
|
|
$
|
(0.34
|
)
|
$
|
(0.41
|
)
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in calculating net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,054
|
|
|
9,972
|
|
|
9,972
|
|
|
9,972
|
|
|
9,878
|
|
Diluted
|
|
|
10,093
|
|
|
9,988
|
|
|
9,972
|
|
|
9,972
|
|
|
9,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
14,661
|
|
$
|
14,438
|
|
$
|
12,355
|
|
$
|
14,228
|
|
$
|
17,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficit)
|
|
$
|
(33,778
|
)
|
$
|
(34,150
|
)
|
$
|
(36,825
|
)
|
$
|
(34,199
|
)
|
$
|
(31,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
debt maturities, including accrued interest
|
|
$
|
36,384
|
|
$
|
36,736
|
|
$
|
35,479
|
|
$
|
34,238
|
|
$
|
30,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current maturities
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit
|
|
$
|
(30,185
|
)
|
$
|
(30,661
|
)
|
$
|
(33,238
|
)
|
$
|
(29,935
|
)
|
$
|
(25,849
|
)
|
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. At
December 31, 2005, we had outstanding senior debt of approximately $25 million
and subordinated debt of approximately $11 million. Although we have received
an
extension to
May 1,
2006,
if the senior debt 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. Because we have suffered substantial losses from operations in
previous years, because of our stockholders’ deficit of $30,185,000 and working
capital
deficit of $33,778,000 as of December 31, 2005, and because we are dependent
upon the holder of our senior debt continuing to extend the maturity of our
senior debt, our independent registered public accounting firm included in
its
report an explanatory paragraph about our ability to continue as a going
concern.
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 $256,000
at
December 31, 2005 and $1,045,000
at December 31, 2004.
Our allowance for doubtful accounts is a subjective critical estimate that
has a
direct impact on reported net income. This reserve is based upon the evaluation
of accounts receivable aging and specific exposures. The allowance was reduced
after we wrote off approximately $778,000 in old Accounts Receivable for
our OSS
segment, which had previously been fully reserved.
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. Approximately
$600,000 of inventory that is fully reserved and not required for current
or
future operations is included in the reserve of $2,583,000, and will be disposed
of.
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, 2005 and 2004, all of our goodwill related to our signal
processing division. 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.
Restructuring
Costs
Expenses
for restructuring costs were $877,000. The costs were for investment banking,
legal and accounting, including payment of legal fees and other expenses
of the
holder of our senior debt, resulting from the requirement of the holder of
our
senior debt that we restructure our company to provide payments on account
of
the senior debt.
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 previous years, a valuation allowance
for the entire deferred tax asset was provided, which management believes
is
still appropriate, due to the uncertainty as to future realization and
uncertainties associated with projections of future taxable income and the
effects of a potential restructuring.
Other
Matters
Senior
Debt
Our
senior debt matures on May 1, 2006. 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 extensions of the maturity of the debt,
as a
condition to the extensions, we 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. Any such restructure will require us to obtain
financing from a new investor. Although we are seeking such an investor,
we
cannot give any assurance that we will be able to obtain an investor on terms
that are acceptable to the senior debt holder. Pursuant to the agreement
with
the holder of the senior debt, we engaged an investment banker to assist
us in
exploring strategic alternatives, which could include a sale of our business.
If
the senior debt is not extended beyond May 1, 2006, or if the holder of the
senior debt demands payment of all or a significant portion of the loan when
due, whether on May 1, 2006 or upon the expiration of a subsequent extension,
we
will not be able to continue in business, and it is likely that we will seek
protection under the Bankruptcy Code. Further, it is possible that a restructure
may involve a filing 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 2005,
2004 and 2003.
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 a 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.
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 in the United Kingdom and, in 2005, as a
result
of British Telecommunications’ implementation of the local loop unbundling
program, demanded by regulators to enable third party providers of telephone
service to gain access to British Telecommunications’ systems. We anticipate
that British Telecommunications will continue to require our copper connection
products while it is expanding its DSL service and providing the required
local
loop unbundling services. During the past three years, sales to 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 50% of sales for
2005,
48% of sales for 2004 and 36% of sales for 2003. 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,
2005, 2004 and 2003, as a percentage of sales:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of sales
|
|
|
64
|
%
|
|
61
|
%
|
|
72
|
%
|
Gross
profit
|
|
|
36
|
%
|
|
39
|
%
|
|
28
|
%
|
Selling,
general and administrative expenses
|
|
|
20
|
%
|
|
18
|
%
|
|
29
|
%
|
Research
and development expenses
|
|
|
6
|
%
|
|
7
|
%
|
|
11
|
%
|
Restructuring
expenses
|
|
|
3
|
%
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
7
|
%
|
|
14
|
%
|
|
(12
|
%)
|
Interest
expense
|
|
|
(4
|
)%
|
|
(4
|
%)
|
|
(6
|
%)
|
Income
(loss) before income taxes
|
|
|
3
|
%
|
|
10
|
%
|
|
(18
|
%)
|
Income
tax benefit (expense)
|
|
|
(1
|
%)
|
|
(1
|
%)
|
|
1
|
% |
Net
income (loss)
|
|
|
3
|
%
|
|
9
|
%
|
|
(17
|
%)
|
Years
Ended December 31, 2005 and 2004
Our
sales for 2005 were $28,604,000 compared to $29,168,000 in 2004, which is
a
decrease of $564,000 (2%). Although
both copper protection/connection and signal processing sales increased from
2004 to 2005, the decrease in sales of OSS products more than offset those
increases.
Line
connection/protection equipment sales for 2005 increased
$564,000 (3%) from $21,545,000 in 2004 to $22,109,000 in 2005. This increase
resulted primarily
from sales to British Telecommunications as a result of British
Telecommunications’ continuing rollout of the availability of DSL lines, and its
requirement to provide local loop unbundling service demanded by the regulatory
authority in the United Kingdom. During 2005, direct sales to
British
Telecommunications increased 150% from $2,259,000 to
$5,641,000,
while sales to systems integrators decreased from $11,403,000 to $8,406,000,
or
26%, for the same period.
Both of
these changes were due to a change in product mix from an increase in sales
to
British Telecommunications of local loop unbundling products and a decrease
in
sales of DSL products to the systems integrators. The direct sales to
British
Telecommunications do not include sales to Fujitsu and other systems integrators
for British Telecommunications (see
“Significant Customers”).
Sales of
connection/protection products also increased, to a lesser extent, in the
U.S.
and other international markets.
Signal
processing revenue for 2005 compared to 2004 increased slightly by
$159,000 (3%)
from $5,551,000 to $5,710,000. The
increase in sales primarily reflects our ability to meet targeted shipment
dates
due to our improved ability to secure materials.
OSS
sales for 2005 were $785,000, compared to 2004 sales of $2,003,000, a decrease
of $1,218,000 (61%). The decline
in OSS sales in 2005 reflects our strategic business decision to scale back
our
product offering and limit the markets we are servicing. During 2005, 100%
of
the OSS revenue resulted from maintenance services for existing OSS
installations. During 2004, 91% of the OSS revenue resulted from maintenance
for
existing OSS installations.
Gross
margin decreased from 39% in 2004 to 36% in 2005. The
decrease is directly related to a change in products sold to British
Telecommunications from the higher gross margin DSL products to the lower
margin
local loop unbundling products during the second half of 2005.
Selling,
general and administrative expenses increased by $590,000 (11%) from $5,254,000
in 2004 to $5,844,000 in 2005. This increase relates primarily to an additional
accrual related to the scaleback of the OSS division (approximately $230,000)
as
well as the recording of the lease termination in the UK (approximately
$715,000).
Research
and development expenses decreased by $257,000 (13%) from $1,921,000 in 2004
to
$1,664,000 in 2005. This decrease was primarily due to the scale-back of
the OSS
division, which was offset by additional spending by our line
connection/protection division to enhance our existing line products and
develop
new products. Our absence of significant research and development could impair
our business over the long term.
Expenses
for restructuring costs were $877,000. The costs were for investment banking,
legal and accounting, including payment of legal fees and other expenses
of the
holder of our senior debt, resulting from the requirement of the holder of
our
senior debt that we restructure our company to provide payments on account
of
the senior debt.
As
a result of the above, we had an operating income of $2,021,000 in 2005 versus
an operating income of $4,153,000 in 2004.
Interest
expense for 2005 decreased by $261,000 from $1,317,000 in 2004 to $1,056,000
in
2005 primarily because of an adjustment for interest expense accrued in prior
periods. 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
provisions for 2005 and 2004 were lower
than the statutory rate principally as a result of the utilization of available
net operating loss carryforwards.
As
the result of the foregoing, the 2005 net income was $810,000, $0.08 per
share
(basic and diluted), compared with a net income of $2,675,000, $0.27 per
share
(basic and diluted) for 2004.
Even
though we were profitable in 2005, 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.
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 an 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 was not substantial, and was 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.
Liquidity
and Capital Resources
At
December 31, 2005, we had cash and cash equivalents of $1,254,000 compared
with
$2,040,000 at December 31, 2004. Our working capital deficit was $33,778,000
at
December 31, 2005, compared to a working capital deficit of $34,150,000 at
December 31, 2004, a
reduction of $372,000 in our working capital deficit.
This improvement was a result of our positive operating results for 2005.
During
2005 our operations generated net cash of $1,095,000 as compared with 2004,
in
which we generated cash of $1,659,000 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. Furthermore, in connection with seven extensions of our senior debt
during 2004 and 2005, we made payments to the holder of our senior debt in
the
amount of $1,425,000 in 2005 and $50,000 in 2004, of which $1,125,000
represented payments on account of principal ($788,000) and interest ($337,000)
on our senior debt, and $300,000 represented payment on account of expenses
incurred by the holder of the senior debt in connection with the extensions
and
related matters. 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, including payments required by the holder of our senior debt, we
may
have to consider protection under the Bankruptcy Code.
As
of December 31, 2005, our debt includes $24,675,000 of senior debt which
matures
on May 1, 2006, 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 $5,053,000 which represents interest
from
July 2000 through December 2005. As
of December 31, 2005, we also
had $385,000 outstanding of 6% debentures which matured July 2, 2002. The
interest accrued on the 6% debentures at December 31, 2005 was $127,000.
At
December 31, 2005, 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.
On
February 24, 2006 the holder of our senior debt agreed to an extension of
the
maturity date of our senior debt to May 1, 2006. As of December 31, 2005,
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 financial position
is
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
a condition to the extension of our senior debt, we
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
potential issuance of secured debt and equity for the balance of the senior
debt
on specified terms. Any such restructure will require us to obtain financing
from a new investor, and may involve the sale of our business. Although we
are
seeking such an investor, we cannot give any assurance that we will be able
to
obtain an investor on terms that are acceptable to the senior debt holder.
Pursuant to the agreement with the holder of the senior debt, we engaged
an
investment banker to assist us in exploring strategic alternatives. Further,
it
is possible that such reorganization may involve a sale of our assets in
a
reorganization under the Bankruptcy Code.
As
of December 31, 2005, we did not have any 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, 2005 and the effects such obligations are expected to have on our liquidity
and cash flow in future periods.
|
|
Payments
Due by Period
|
|
Contractual
Obligations
|
|
2006
|
|
2007-2008
|
|
2009-2010
|
|
Thereafter
|
|
Total
debt, including accrued
interest
|
|
$
|
36,383
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
Operating
leases
|
|
|
620
|
|
|
885
|
|
|
528
|
|
|
2,445
|
|
Deferred
compensation obligations
|
|
|
109
|
|
|
217
|
|
|
181
|
|
|
905
|
|
Purchase
obligations
|
|
|
2,914
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,026
|
|
$
|
1,102
|
|
$
|
709
|
|
$
|
3,350
|
|
Recently
Issued Accounting Standards
In
December 2004, the FASB issued SFAS 123R which requires the measurement of
all
employee share based payments to employees, including grants of employee
stock
options, using a fair-value-based method and the recording of such expense
in
our consolidated statements of operations. The accounting provisions of SFAS
123R were originally effective for reporting periods beginning after June
15,
2005. On April 14, 2005 the U.S. Securities and Exchange Commission (the
“SEC”)
announced a deferral of the effective date of SFAS 123R for calendar year
companies until the beginning of 2006. The pro forma disclosures previously
permitted under SFAS 123 will no longer be an alternative to financial statement
recognition beginning in the first fiscal quarter of 2006. See “Stock-Based
Compensation” (Note 1) for the pro forma net income (loss) and net income (loss)
per share amounts, for the years ended December 31, 2005, 2004, and 2003,
as if
we had used a fair-value method similar to the methods required under SFAS
123
to measure compensation expense for employees stock incentive awards. Although
we have not yet determined whether the adoption of SFAS 123R will result
in
amounts that are similar to the current pro forma disclosures under SFAS
123R,
to the extent that we use options or other equity-based incentives as an
element
of employee compensation, we do not expect the adoption to have a material
impact on our consolidated statements of operations and net income (loss)
per
share.
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.
In
May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”
which replaces Accounting Principles Board Opinion No. 20 “Accounting Changes”
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements - An
Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes
retrospective application, or the earliest practicable date, as the required
method for reporting a change in accounting principle and restatement with
respect to a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first fiscal
quarter of 2006. The implementation of SFAS 154 is not expected to have a
material impact on the Company’s operations.
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 2005 and 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 his evaluation, the chief executive officer and chief
financial officer concluded that our disclosure controls and procedures
are effective in alerting him 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 and executive
officers:
Name
|
|
Positions
|
|
Age
|
Edward
B. Kornfeld
|
|
Chief
executive officer and chief financial officer
|
|
62
|
William
V. Carney1
|
|
Chairman
of the board, director and consultant
|
|
69
|
Michael
A. Tancredi
|
|
Senior
vice president, secretary, treasurer and director
|
|
76
|
Warren
H. Esanu1,2
|
|
Director
|
|
63
|
Herbert
H. Feldman1,2
|
|
Director
|
|
72
|
Marco
M. Elser2
|
|
Director
|
|
47
|
|
|
|
|
|
1 |
Member
of the executive committee
|
2 |
Member
of the audit and compensation committees.
|
Mr.
Kornfeld, 62, has been an executive officer of the Company since 1995. Mr.
Kornfeld was president and chief operating officer from April 2004 until
March
2006 and he has been chief financial officer since October 1995. He was senior
vice president-operations from 1996 until April 2004 and vice president-finance
from October 1995 until 1996. 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 the Company’s business for which we pay Tatum CFO
partners.
Mr.
Carney has been chairman of the board since October 1996, chief executive
officer from October 1996 until March 2006, and a consultant since March
2006.
As chairman of the board, Mr. Carney is not an executive officer. 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. From December 2002 through March 13, 2006, Mr. Carney
worked
for us on a part-time basis. In March 2006, Mr. Carney resigned as an officer
of
the Company but has been engaged as a consultant to the Company in the area
of
product development. Mr. Carney has been a director since 1970.
Mr.
Tancredi has been a director since 1970, senior vice president and secretary
since 1997 and treasurer since 1978. He has been vice president-administration
since 1995 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 is senior counsel to Katsky Korins LLP, attorneys at law, and was
counsel for such firm 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 a director since 2000 and 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 a director since 1989. He has been president of Alpha Risk
Management, Inc., independent risk management consultants, for more than
the
past five years.
All
of our officers serve at the pleasure of the board of directors. There is
no
family relationship between any of the executive officers listed
above.
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 the closing price on the
ten
trading days prior to May 1. These non-employee directors are Mr. Esanu and
Mr.
Feldman from 1999 through 2005 and Mr. Elser from 2001 through 2005. All
Form
4’s for 2005, if required, were filed on time.
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,
2005.
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
of the board and
chief
executive officer
|
|
|
2005
2004
2003
|
|
$
|
128,000
122,000
133,000
|
|
$
|
10,000
5,000
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
$
|
6,257
6,101
7,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
B. Kornfeld,
President,
chief operating officer and
chief
financial officer
|
|
|
2005
2004
2003
|
|
|
237,000
206,000
192,000
|
|
|
50,000
15,000
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
6,714
6,639
5,022
|
|
“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 each of 2005 and
2004
to Tatum CFO Partners, of which Mr. Kornfeld is a partner, for services rendered
to us by Mr. Kornfeld. We are continuing to pay Tatum CFO Partners for Mr.
Kornfeld’s services.
Set
forth below is a chart that shows, for 2005, the components of “All Other
Compensation” listed in the Summary Compensation Table.
|
|
Mr.
Carney
|
|
Mr.
Kornfeld
|
|
401(k)
Match
|
|
$
|
2,065
|
|
$
|
3,150
|
|
|
|
|
|
|
|
|
|
Supplemental
Insurance
|
|
|
4,191
|
|
|
3,564
|
|
During
2005, 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, 2005, 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 greater 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,
2005.
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 13, 2006. On
March 14, 2006, Mr. Carney resigned as an officer of the Company but has
been
engaged as a consultant to the Company in the area of product
development.
We
have an employment agreement and a salary continuation agreement with Mr.
Kornfeld. The employment 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. In March 2006,
Mr. Kornfeld was elected as chief executive officer and his annual salary
rate
was increased from $245,000 to $260,000. 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,” Mr. Kornfeld 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.
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, 2006
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. On March 23, 2006, directors’ fees were set at $6,875 per
quarter plus $1,650 per meeting.
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 were 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 received 35,938
and 39,630 shares, respectively. Mr. Elser was a director for a portion of
2000, and he received 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, 2006 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
|
|
|
139,938
|
|
|
1.4
|
%
|
Herbert
H. Feldman
|
|
|
115,631
|
|
|
1.1
|
%
|
Marco
M. Elser
|
|
|
341,376
|
|
|
3.4
|
%
|
Edward
B. Kornfeld
|
|
|
49,317
|
|
|
*
|
|
All
directors and executive officers
as a group (6 individuals)
|
|
|
937,302
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
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, 2006 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
|
|
|
54,000
|
|
Herbert
H. Feldman
|
|
|
56,000
|
|
Marco
M. Elser
|
|
|
25,000
|
|
Edward
B. Kornfeld
|
|
|
23,000
|
|
All
officers and directors as
a group
|
|
|
286,780
|
|
Item
13. Certain
Relationships and Related Transactions
During
2005, Warren H. Esanu, a director, served as a member of our audit and
compensation committees. During 2005, the law firm of Katsky Korins LLP to
which
Mr. Esanu is senior counsel, provided legal services to us, for which it
received fees of $490,703. Katsky Korins LLP is continuing to render legal
services to us during 2006.
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,
2005 and December 31, 2004:
|
|
Fees
|
|
Fee
Category
|
|
2005
|
|
2004
|
|
Audit
fees
|
|
$
|
177,623
|
|
$
|
153,700
|
|
Audit-related
fees
|
|
|
15,031
|
|
|
10,650
|
|
Tax
fees
|
|
|
55,899
|
|
|
12,490
|
|
Total
Fees
|
|
$
|
248,553
|
|
$
|
176,840
|
|
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 registered public accounting firm. These
services may include audit services, audit-related services, tax services
and
other services. The independent registered public accounting firm and management
are required to periodically report to the Audit Committee regarding the
extent
of services provided by the independent registered public accounting firm
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
|
|
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.
|
|
|
|
|
|
Amendment
Number Twenty Two to the Amended and Restated Loan and Security
Agreement
between the Company and SHF IX, LLC, dated February 1, 2006.
|
|
|
|
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.
|
|
|
|
|
|
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.
|
|
|
|
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
Certification
of chief executive officer and chief financial officer pursuant
to Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
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.
Dated:
March 30, 2006
By:
/s/ Edward B. Kornfeld
Chief
Executive Officer and Chief
Financial 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 Edward B. Kornfeld 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/Edward
B. Kornfeld
|
|
Chief
Executive Officer and Chief
Financial Officer
|
|
March
30, 2006
|
Edward
B. Kornfeld
|
|
(Principal
Executive, Financial and Accounting
Officer)
|
|
|
|
|
|
|
|
/s/William
V. Carney
|
|
Director
|
|
March
30, 2006
|
William
V. Carney
|
|
|
|
|
|
|
|
|
|
/s/Warren
H. Esanu
|
|
Director
|
|
March
30, 2006
|
Warren
H. Esanu
|
|
|
|
|
|
|
|
|
|
/s/Michael
A. Tancredi
|
|
Director
|
|
March
30, 2006
|
Michael
A. Tancredi
|
|
|
|
|
|
|
|
|
|
/s/Herbert
H. Feldman
|
|
Director
|
|
March
30, 2006
|
Herbert
H. Feldman
|
|
|
|
|
|
|
|
|
|
/s/Marco
Elser
|
|
Director
|
|
March
30, 2006
|
Marco
Elser
|
|
|
|
|
|
|
|
|
|
Exhibit
I
Item
8. Financial Statements and Supplementary Data
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, 2005 and 2004, 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,
2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period
ended
December 31, 2005, 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 losses from operations in previous years, as of December
31, 2005, has a stockholders’ deficit of $30,185,000 and a working capital
deficit of $33,778,000, and is dependent on the continued agreement of the
holder of its senior debt to defer the maturity date of such debt. 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.
BDO
SEIDMAN, LLP
Melville,
New York
March
10,
2006
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
December
31, 2005 and 2004
(in
thousands, except shares and par value)
|
|
|
|
|
|
Assets
|
|
2005
|
|
2004
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,254
|
|
|
2,040
|
|
Accounts
receivable - trade, less allowance for doubtful accounts of
$256 in 2005 and $1,045 in 2004
|
|
|
3,655
|
|
|
3,076
|
|
Inventories
|
|
|
4,851
|
|
|
4,576
|
|
Prepaid
expenses and other current assets
|
|
|
481
|
|
|
382
|
|
Total
current assets
|
|
|
10,241
|
|
|
10,074
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,409
|
|
|
1,334
|
|
Goodwill
|
|
|
2,961
|
|
|
2,961
|
|
Other
assets
|
|
|
50
|
|
|
69
|
|
Total
assets
|
|
$
|
14,661
|
|
|
14,438
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
debt, including accrued interest
|
|
$
|
24,675
|
|
|
25,674
|
|
Subordinated
notes
|
|
|
6,144
|
|
|
6,144
|
|
6%
Convertible subordinated debentures
|
|
|
385
|
|
|
385
|
|
Accounts
payable
|
|
|
4,614
|
|
|
4,728
|
|
Accrued
expenses and other
|
|
|
3,021
|
|
|
2,760
|
|
Other
accrued interest payable
|
|
|
5,180
|
|
|
4,533
|
|
Total
current liabilities
|
|
|
44,019
|
|
|
44,224
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
827
|
|
|
875
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
44,846
|
|
|
45,099
|
|
|
|
|
|
|
|
|
|
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
10,084,577 shares in 2005 and 10,003,244 in 2004
|
|
|
101
|
|
|
100
|
|
Additional
paid-in capital
|
|
|
76,124
|
|
|
76,059
|
|
Accumulated
deficit
|
|
|
(99,895
|
)
|
|
(100,705
|
)
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,577
|
)
|
|
(4,177
|
)
|
|
|
|
(28,247
|
)
|
|
(28,723
|
)
|
Treasury
stock, at cost, 30,940 shares
|
|
|
(1,938
|
)
|
|
(1,938
|
)
|
Total
stockholders’ deficit
|
|
|
(30,185
|
)
|
|
(30,661
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
14,661
|
|
|
14,438
|
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
28,604
|
|
|
29,168
|
|
|
19,590
|
|
Cost
of sales
|
|
|
18,198
|
|
|
17,840
|
|
|
14,147
|
|
Gross
profit
|
|
|
10,406
|
|
|
11,328
|
|
|
5,443
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,844
|
|
|
5,254
|
|
|
5,729
|
|
Research
and development expenses
|
|
|
1,664
|
|
|
1,921
|
|
|
2,066
|
|
Reorganization
expense
|
|
|
877
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
8,385
|
|
|
7,175
|
|
|
7,795
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
2,021
|
|
|
4,153
|
|
|
(2,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,056
|
)
|
|
(1,317
|
)
|
|
(1,278
|
)
|
Interest
income
|
|
|
|
|
|
|
|
|
1
|
|
Other
income, net
|
|
|
5
|
|
|
8
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
970
|
|
|
2,844
|
|
|
(3,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
(160
|
)
|
|
(169
|
)
|
|
272
|
|
Net
income (loss)
|
|
$
|
810
|
|
|
2,675
|
|
|
(3,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(400
|
)
|
|
(98
|
)
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
410
|
|
|
2,577
|
|
|
(3,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock
|
|
$
|
0.08
|
|
|
0.27
|
|
|
(0.34
|
)
|
Weighted
average shares of common stock outstanding
|
|
|
10,054
|
|
|
9,972
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
per share amounts:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share of common stock
|
|
$
|
0.08
|
|
|
0.27
|
|
|
(0.34
|
)
|
Weighted
average shares of common stock outstanding
|
|
|
10,093
|
|
|
9,988
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(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, 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
|
)
|
Net
income 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
810
|
|
|
|
|
|
810
|
|
Common
stock issued
|
|
|
81
|
|
|
1
|
|
|
65
|
|
|
--
|
|
|
|
|
|
|
|
|
66
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
(400
|
)
|
Balance
at December 31, 2005
|
|
|
10,084
|
|
$
|
101
|
|
$
|
76,124
|
|
$
|
(4,577
|
)
|
$
|
(99,895
|
)
|
$
|
(1,938
|
)
|
$
|
(30,185
|
)
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Years
ended December 31, 2005, 2004 and 2003
(In
thousands)
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
810
|
|
|
2,675
|
|
|
(3,357
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
407
|
|
|
409
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(579
|
)
|
|
822
|
|
|
756
|
|
Inventories
|
|
|
(275
|
)
|
|
(1,572
|
)
|
|
359
|
|
Prepaid
expenses
|
|
|
(99
|
)
|
|
91
|
|
|
(143
|
)
|
Other
assets
|
|
|
19
|
|
|
17
|
|
|
255
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
812
|
|
|
(783
|
)
|
|
1,122
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,095
|
|
|
1,659
|
|
|
(525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(482
|
)
|
|
(259
|
)
|
|
(72
|
)
|
Net
cash used in investing activities
|
|
|
(482
|
)
|
|
(259
|
)
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Increase
in senior debt
|
|
|
337
|
|
|
357
|
|
|
317
|
|
Repayments
of senior debt
|
|
|
(1,336
|
)
|
|
(70
|
)
|
|
|
|
Repayments
of notes payable/short-term loans
|
|
|
|
|
|
|
|
|
(8
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(999
|
)
|
|
287
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(400
|
)
|
|
(116
|
)
|
|
(22
|
)
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(786
|
)
|
|
1,571
|
|
|
(310
|
)
|
Cash
and equivalents - beginning of year
|
|
|
2,040
|
|
|
469
|
|
|
779
|
|
Cash
and equivalents - end of year
|
|
$
|
1,254
|
|
|
2,040
|
|
|
469
|
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
December
31, 2005 and 2004
(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.
(Continued)
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 collection 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 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. As of December
31, 2005, approximately $600,000 of inventory that is fully reserved and not
required for current or future operations is included in the reserve of
$2,583,000, and will be disposed of.
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, 2005 and 2004,
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 12).
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
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.
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.
Reclassifications
Certain
reclassifications have been made to conform prior years’ consolidated financial
statements to the 2005 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 share of common stock 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.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
December
31
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands, except per share data)
|
|
Net
income (loss),
as reported
|
|
$
|
810
|
|
$
|
2,675
|
|
$
|
(3,357
|
)
|
Deduct:
Total stock-based employee compensation expense
determined
under
fair value method for all awards
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Pro
forma net income (loss)
|
|
$
|
808
|
|
$
|
2,674
|
|
$
|
(3,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
.08
|
|
$
|
0.27
|
|
$
|
(0.34
|
)
|
Basic
and diluted - pro forma
|
|
$
|
.08
|
|
$
|
0.27
|
|
$
|
(0.34
|
)
|
Accounting
for the Impairment of Long-Lived Assets
The
Company follows SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Long-lived assets other than goodwill are evaluated for
impairment when events or changes in circumstances indicate the carrying amount
of the assets may not be recoverable through the estimated undiscounted future
cash flows from the use of these assets.
Restructuring
Costs
Expenses
for restructuring costs were $877,000. The
costs were for investment banking, legal and accounting, including payment
of
legal fees and other expenses of the holder of our
senior debt, resulting from the requirement of the holder of our senior debt
that we restructure our company to provide payments on account of the senior debt.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
Use
of
Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Among the more
significant estimates included in these consolidated financial statements are
the estimated allowance for doubtful accounts receivable, inventory reserves,
percentage of completion for long-term contracts, accrued expenses, goodwill
valuation and the deferred tax asset valuation allowance. Actual results could
differ from the estimates.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS 123R which requires the measurement of
all
employee share based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense
in
the Company’s consolidated statements of operations. The accounting provisions
of SFAS 123R were originally effective for reporting periods beginning after
June 15, 2005. On April 14, 2005 the U.S. Securities and Exchange Commission
(the “SEC”) announced a deferral of the effective date of SFAS 123R for calendar
year companies until the beginning of 2006. The pro forma disclosures previously
permitted under SFAS 123 will no longer be an alternative to financial statement
recognition beginning in the first fiscal quarter of 2006. See “Stock-Based
Compensation” (Note 1) for the pro forma net income (loss) and net income (loss)
per share amounts, for the years ended December 31, 2005, 2004, and 2003, as
if
the Company had used a fair-value method similar to the methods required under
SFAS 123 to measure compensation expense for employees stock incentive awards.
Although the Company has not yet determined whether the adoption of SFAS 123R
will result in amounts that are similar to the current pro forma disclosures
under SFAS 123R and, to the extent that it includes options or other
equity-based incentives as part of compensation to employees, the Company does
not expect the adoption to have a material impact on its consolidated statements
of operations and net income (loss) per share.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
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. The
Company is currently evaluating the effect that this statement will have on
its
consolidated financial statements, but presently anticipates that such effect
will be immaterial.
In
May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”
which replaces Accounting Principles Board Opinion No. 20 “Accounting Changes”
and SFAS 3, “Reporting Accounting Changes in Interim Financial Statements - An
Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. It establishes
retrospective application, or the earliest practicable date, as the required
method for reporting a change in accounting principle and restatement with
respect to a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first fiscal
quarter of 2006. The implementation of SFAS 154 is not expected to have a
material impact on the Company’s operations.
As
of December 31, 2005, the Company’s
debt included (a)
$24,675,000
of senior debt, including principal and interest, as a result of a
February 24, 2006
extension, which matures on
May
1, 2006;
(b)
$6,144,000 principal
amount of
subordinated debt, which matured on July 3, 2001;
and (c) $385,000
of 6% Debentures which matured on July 2, 2002.
The Company was unable to pay the principal ($6,144,000) or accrued interest
($5,053,000)
on the subordinated notes
or the principal ($385,000) or interest ($127,000)
on the 6% Debentures. Accordingly,
the senior debt and subordinated debt are classified as current liabilities
(notes 7, 8 and 9). In addition, the Company can not give any assurance that
the
holder of its senior debt will extend the loan beyond May 1, 2006. If the holder
of the senior debt does not extend the maturity date of the obligations or
demands payment of all or a significant portion of the obligations due to the
holder of the senior debt, the Company will not be able to continue in
business.
Although
the Company has realized
profits from operations in each of the last two years, after incurring losses
in
several previous years, its liquidity is impaired by both its working capital
deficit, which was $33,778,000 at December 31, 2005, as well as its dependence
upon the willingness of the holder of its senior debt to continue to extend
the
maturity of the senior debt.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
As
a result of its continuing financial difficulties:
|
•
|
the
Company is having and may continue to have difficulty performing
its
obligations under its contracts, which could result in the cancellation
of
contracts or the loss of future business and penalties for
non-performance;
|
|
•
|
the
Company significantly scaled back its Operating Support Systems (“OSS”)
operations,
so that the operations of that division are currently limited almost
exclusively to performing warranty and maintenance services.
|
The
Company is seeking to address its need for liquidity by exploring alternatives,
including the possible sale of one or more of its divisions. If
the Company sells any or all of its divisions,
the
agreement with the Company’s holder of its senior debt requires it to pay the
net proceeds to the holder of its senior debt. As a result of this provision
and
the Company’s obligations to the holders of subordinated debt, unless the
lenders consent to the Company retaining a portion of the net proceeds from
any
sale of its operations, the Company will not receive any significant amount,
and
may not receive any of the net proceeds from any such sale for working
capital.
During
2005, 2004 and 2003,
the Company was engaged in discussions with respect to the possible sale of
either its business or one or more of its divisions; however, those negotiations
were terminated without an agreement having been reached.
During
2005 and 2006, the maturity date of the Company’s obligations to the holder of
its senior debt was extended seven times, most recently to May 1, 2006, at
which
time, the entire principal and interest on the senior debt becomes due and
payable. The
extension of the senior debt was granted by SHF IX LLC, an affiliate of
Stonehill Financial, LLC who purchased the Company’s senior debt from Wells
Fargo Foothill, Inc during the third quarter of 2004. As
a
condition to the most recent extensions, 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. Any such restructure will require
the Company to obtain financing from a new investor, although the holder of
its
senior debt, or its designee, has certain rights to acquire a debt and equity
interest in the Company or require the Company to sell its businesses. Although
the Company is seeking 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. Pursuant to the agreement with the holder of the senior debt,
the
Company engaged an investment banker to assist it in exploring strategic
alternatives. If the agreement is not extended beyond May 1, 2006, or 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. Further,
if the Company does find a buyer for its business on terms acceptable to the
holder of the senior debt, a sale of the Company’s business may involve
reorganization under the Bankruptcy Code.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
At
December 31, 2005, the Company did not have sufficient resources to pay either
the holder of the senior debt or the subordinated lenders; and it is unlikely
that it can generate such cash from its operations, and the holder of the senior
debt continues to preclude the Company from making payments on any subordinated
indebtedness, other than accounts payable in the normal course of business.
Accordingly, all senior and subordinated debts are classified as current
liabilities (note 7).
The
holder of the senior debt has granted the Company extensions in the
past.
However, at each maturity date, the holder of the senior debt reviews the
Company’s financial condition, business plan and prospects, including prospects
relating to restructuring the senior debt or selling the Company’s business. The
Company cannot determine whether the holder of the senior debt will continue
to
extend the loans. 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 the holder of the senior
debt
to extend or demand payment on the notes. In such event, it would be necessary
for the Company to seek protection under the Bankruptcy Code.
During
the last several years, the Company has taken steps to reduce overhead,
including a reduction in personnel and the hiring of lower wage personnel in
its
Mexico facility. The Company will continue to look to reduce costs while it
seeks additional business from new and existing customers. Because of its
present stock price, the Company may not be able to raise funds through the
sales of its equity securities, and the Company’s financial condition prevents
it from issuing debt securities. In the event that the Company is unable to
extend or restructure its debt obligations and sell one or more of its
divisions, it cannot be assured that the Company will be able to continue in
operations. Furthermore, the Company believes that its historic financial
position is having an adverse effect upon its ability to develop new business,
as competitors and potential customers question its ability both to perform
obligations under any agreements it may enter and to continue in
business.
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 above.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
Accounts
receivable 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. Senior management reviews accounts
receivable on a monthly basis to determine if any receivables will potentially
be uncollectible. Included in the overall allowance for doubtful accounts are
any accounts receivable balances that are determined to be uncollectible, along
with a general reserve. After all attempts to collect a receivable have failed,
the receivable is written off against the allowance. Based on the information
available to the Company, it believes the allowance for doubtful accounts as
of
December 31, 2005 is adequate. However, actual write-offs may differ from the
recorded allowance.
The
allowance for doubtful accounts receivable was $256,000
and $1,045,000 as of December 31, 2005 and 2004, respectively. In 2005, the
Company wrote off approximately $778,000 of fully reserved old OSS accounts
receivable.
Inventories
consist of the following (net of $2,583,000 in reserve for 2005 and $2,626,000
for 2004):
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Parts
and components
|
|
$
|
3,196,000
|
|
|
2,650,000
|
|
Work-in-process
|
|
|
460,000
|
|
|
654,000
|
|
Finished
goods
|
|
|
1,195,000
|
|
|
1,272,000
|
|
|
|
$
|
4,851,000
|
|
|
4,576,000
|
|
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. As of December
31, 2005, approximately $600,000 of inventory that is fully reserved and not
required for current or future operations is included in the reserve of
$2,583,000, and will be disposed of.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
(5) |
Property,
Plant and Equipment
|
Property,
plant and equipment consist of the following:
|
|
December
31
|
|
Estimated
|
|
|
|
2005
|
|
2004
|
|
useful
lives
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
132,000
|
|
|
132,000
|
|
|
|
|
Buildings
|
|
|
871,000
|
|
|
1,119,000
|
|
|
20
years
|
|
Machinery
and equipment
|
|
|
3,160,000
|
|
|
8,190,000
|
|
|
3-8
years
|
|
Furniture
and fixtures
|
|
|
319,000
|
|
|
2,294,000
|
|
|
5-10
years
|
|
Transportation
equipment
|
|
|
33,000
|
|
|
55,000
|
|
|
4
years
|
|
Tools
and molds
|
|
|
1,303,000
|
|
|
3,984,000
|
|
|
8
years
|
|
Leasehold
improvements
|
|
|
200,000
|
|
|
893,000
|
|
|
Lesser
of term of lease
|
|
|
|
|
6,018,000
|
|
|
16,667,000
|
|
|
or
estimated life of asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
4,609,000
|
|
|
15,333,000
|
|
|
|
|
|
|
$
|
1,409,000
|
|
|
1,334,000
|
|
|
|
|
Total
depreciation expense for 2005, 2004 and 2003 amounted to approximately $407,000,
$409,000 and $483,000, respectively.
During
2005, the Company wrote off previously fully depreciated assets of approximately
$10,872,000, which have been disposed of.
The
Company measures the fair value of the goodwill at least annually, instead
of
amortizing goodwill over a fixed period of time, to determine if goodwill has
been impaired.
As
of December 31, 2005 and 2004, goodwill was $2,961,000. At
such dates, all of the goodwill related to the Company’s Signal division.
The
Company cannot give assurances that future write-downs will not be necessary,
although management believes that no goodwill impairment charges are necessary
at this time.
On
December 31, 2005 and 2004, the Company’s senior debt consisted of debt in the
amount of $24,675,000 and $25,674,000, respectively. Substantially all of the
Company’s assets are pledged as collateral for the senior debt. The current
agreement with the holder of the senior debt will expire on May1, 2006 and,
accordingly, the senior debt has been classified as a current liability (see
note 2).
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
In
March
2002, the senior lender agreed to an amended and restated loan and security
agreement whereby a new term loan was established with a maximum principal
amount of $1,500,000 and subsequently increased in May 2002 to $2,250,000.
The
agreement provides that all indebtedness prior to March 1, 2002 is reflected
as
an old term loan in the amount of $22,610,000, which includes the principal
balance due at December 31, 2001 plus accrued interest through March 1, 2002.
The old term loan bears no interest until such time as the holder of the senior
debt, in its sole discretion, notifies the Company that interest shall be
payable at a rate of 12%, or a default rate of 14% on a going-forward basis.
Additionally, the holder of the senior debt prohibited the Company from making
any payments on indebtedness to any subordinated creditors or from paying any
dividends on common stock, but the Company is not prohibited from paying
accounts payable in the ordinary course of business. Finally, the agreement
allowed for standby letters of credit not to exceed a maximum of $573,000.
As of
December 31, 2005, the Company did not have any standby letters of credit
outstanding. Borrowings under this facility are included in senior debt as
described in the preceding paragraph. The holder of the senior debt has no
obligation to make any further loans to the Company.
(8) |
6%
Convertible Subordinated
Debentures
|
As
of December 31, 2005 and 2004, the Company had outstanding $385,000 of its
6%
convertible subordinated debentures due July 1, 2002 (the “Debentures”). The
Company has not paid interest on these Debentures since July 2000, and the
holder of its senior debt prohibits it from making any payments of principal
and
interest (see note 7). At December 31, 2005 and 2004, accrued interest on the
debentures was $127,000 and $104,000, respectively. The trustee of the
Debentures gave notice to the Company that the
non-payment caused an event of default. The convertibility feature associated
with the Debentures expired upon their maturity.
As
of December 31, 2005 and 2004, subordinated notes in the principal amount of
$6,144,000 were outstanding. As of December 31, 2005, $5,053,000 of accrued
interest was also due and payable. However, the Company does
not have the resources to pay either the $6,144,000 principal or the $5,053,000
interest due on the subordinated notes. In addition,
the holder of its senior debt has precluded the Company from making payments
on
the subordinated debt
(note 7).
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
(10) |
Employee
Benefit Plans
|
The
Company has unfunded deferred compensation agreements with certain present
and
former officers and employees, with benefits commencing at retirement equal
to
50% of the employee’s base salary, as defined. The amount of payments is based
on a 2004 modification of the plan whereby the former officers and employees
agreed to spread their payments over a longer period of time than the original
plan, ranging from approximately 15 to approximately 25 years although they
may
be accelerated under certain conditions. In 2004 and 2003, under the modified
requirements, the accrued liability was reduced by approximately $109,000 and
$137,000 respectively. Total deferred compensation obligations as of December
31, 2005, before discounting at a rate of 6.5%, were $1,304,000.
The
Company maintains the Porta Systems Corp. 401(k) Savings Plan for the benefit
of
eligible employees, as defined in the Savings Plan. Participants contribute
a
specified percentage of their base salary up to a maximum of 15%. Porta will
match a participant’s contribution by an amount equal to 25% of the first 6%
contributed by the participant. A participant is 100% vested in all balances
credited to his account, including the Company’s contribution. For the years
ended December 31, 2005, 2004 and 2003, the Company’s contribution amounted to
$41,000, $38,000 and $37,000, respectively.
During
1999, the Company established an Employee Stock Bonus Plan whereby stock may
be
given to employees who are not officers or directors to recognize their
contributions. A maximum of 95,750 shares of common stock is reserved for
issuance pursuant to the Bonus Plan. No shares of common stock were issued
pursuant to the Bonus Plan during 2005, 2004 and 2003.
The
Company’s 1998 Non-Qualified Stock Option Plan (“1998 Plan”) covers 450,000
shares of common stock. Options under the 1998 Plan may be granted to key
employees, including officers and directors of the Company and its subsidiaries.
The exercise prices for all options granted were equal to the fair market value
at the date of grant and vest as determined by the board of
directors.
The
Company’s 1999 Incentive and Non-Qualified Stock Option Plan (“1999 Plan”)
covers 400,000 shares of common stock. Incentive stock options cannot be issued
subsequent to ten years from the date the 1999 Plan was approved. Options under
the 1999 Plan may be granted to key employees, including officers and directors
of the Company and its subsidiaries, except that members and alternate members
of the stock option committee are not eligible for options under the 1999 Plan.
The exercise prices for all options granted were equal to the fair market value
at the date of grant and vest as determined by the board of directors. In
addition, the 1999 Plan provides for the automatic grant to non-management
directors of non-qualified options to purchase 5,000 shares on May 1st of each
year commencing May 1, 1999, based upon the average closing price of the last
ten trading days of April of each year.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
The
weighted-average fair values of options granted were $0.02 per share for options
granted in 2003, $0.05 per share for options granted in 2004 and $0.07 per
share
for options granted in 2005. The fair value of each option grant is estimated
on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions for 2005, 2004 and 2003:
|
|
2005
|
|
2004
|
|
2003
|
|
Dividends:
|
|
$
|
0.00
per share
|
|
$
|
0.00
per share
|
|
$
|
0.00
per share
|
|
Volatility:
|
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Risk-free
interest:
|
|
|
4.35
|
%
|
|
4.22
|
%
|
|
4.22%-5.48
|
%
|
Expected
term:
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
A
summary
of the status of the Company’s stock option plans as of December 31, 2005, 2004,
and 2003, and changes during the years ending on those dates is presented below:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Shares
|
|
Weighted
|
|
Shares
|
|
Weighted
|
|
Shares
|
|
Weighted
|
|
|
|
Under
|
|
Average
|
|
Under
|
|
Average
|
|
Under
|
|
Average
|
|
|
|
Option
|
|
Exercise
Price
|
|
Option
|
|
Exercise
Price
|
|
Option
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
beginning of year
|
|
|
322,780
|
|
$
|
1.52
|
|
|
552,530
|
|
$
|
2.27
|
|
|
601,530
|
|
$
|
2.43
|
|
Granted
|
|
|
15,000
|
|
|
.11
|
|
|
15,000
|
|
|
.07
|
|
|
15,000
|
|
|
0.03
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
(244,750
|
)
|
|
3.23
|
|
|
(64,000
|
)
|
|
3.21
|
|
Outstanding
end of year
|
|
|
337,780
|
|
$
|
1.39
|
|
|
322,780
|
|
$
|
1.45
|
|
|
552,530
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
|
337,780
|
|
|
|
|
|
318,780
|
|
|
|
|
|
542,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes information about stock options outstanding under
the
stock option plans at December 31, 2005.
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
Range
of
|
|
Outstanding
|
|
Remaining
|
|
Weighted-average
|
|
Exercisable
|
|
Weighted-Average
|
|
Exercise
Prices
|
|
at
12/31/05
|
|
Contractual
Life
|
|
Exercise
Price
|
|
at
12/31/05
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
<$1.00
|
|
|
80,000
|
|
|
6.9
years
|
|
$
|
0.14
|
|
|
80,000
|
|
$
|
0.14
|
|
$1.00
- 1.99
|
|
|
213,280
|
|
|
1.4
years
|
|
$
|
1.51
|
|
|
213,280
|
|
$
|
1.51
|
|
$2.00
- 2.99
|
|
|
10,000
|
|
|
4.3
years
|
|
$
|
2.03
|
|
|
10,000
|
|
$
|
2.03
|
|
$3.00
- 3.85
|
|
|
34,500
|
|
|
.5
years
|
|
$
|
3.39
|
|
|
34,500
|
|
$
|
3.39
|
|
|
|
|
337,780
|
|
|
|
|
|
|
|
|
337,780
|
|
|
|
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
The
provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Federal
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and foreign
|
|
|
128,000
|
|
|
|
|
|
169,000
|
|
|
|
|
|
(272,000
|
)
|
|
|
|
Total
|
|
$
|
160,000
|
|
|
|
|
|
169,000
|
|
|
|
|
|
(272,000
|
)
|
|
|
|
The
domestic and foreign components of income (loss) before provision (benefit)
for
income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
United
States
|
|
$
|
1,064,000
|
|
|
732,000
|
|
|
(2,989,000
|
)
|
Foreign
|
|
|
(94,000
|
)
|
|
2,112,000
|
|
|
(640,000
|
)
|
Income
(loss) before provision (benefit) for income taxes
|
|
$
|
970,000
|
|
|
2,844,000
|
|
|
(3,629,000
|
)
|
A
reconciliation of the Company’s income tax provision and the amount computed by
applying the statutory U.S. federal income tax rate of 34% to loss before income
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Tax
provision (benefit) at statutory rate
|
|
$
|
330,000
|
|
|
967,000
|
|
|
(1,234,000
|
)
|
Increase
(decrease) in income tax (benefit) resulting from:
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in valuation allowance
|
|
|
(308,000
|
)
|
|
(1,038,000
|
)
|
|
1,379,000
|
|
State
taxes, less applicable federal benefits
|
|
|
23,000
|
|
|
|
|
|
(114,000
|
)
|
Other
expenses not deductible for tax purposes
|
|
|
6,000
|
|
|
6,000
|
|
|
8,000
|
|
Foreign
income taxed at rates different from U.S. statutory rate
|
|
|
125,000
|
|
|
195,000
|
|
|
(16,000
|
)
|
Reversal
and adjustments of prior year’s accrual
|
|
|
|
|
|
|
|
|
(275,000
|
)
|
Other
|
|
|
(16,000
|
) |
|
39,000
|
|
|
(20,000
|
)
|
|
|
$
|
160,000
|
|
|
169,000
|
|
|
(272,000
|
)
|
Porta
has
unused United States tax net operating loss (NOL) carryforwards of approximately
$47,850,000 expiring at various dates between 2008 and 2025. Due to the 1997
change in ownership which resulted from the conversion of Porta’s zero coupon
subordinated convertible notes to common stock, Porta’s usage of its NOL will be
limited in accordance with Internal Revenue Code section 382. Porta’s
carryforward utilization of the NOL is limited to $1,767,000 per year with
respect to approximately $23.9 million of the NOL, representing the portion
that
arose prior to the change in control. The carryforward amounts are subject
to
review by the Internal Revenue Service (IRS). In addition, Porta has foreign
NOL
carryforwards of approximately $6,463,000 with indefinite expiration
dates.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
The
components of the deferred tax assets, the net balance of which total zero
after
the valuation allowance, as of December 31, 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Deferred
tax assets:
|
|
|
|
|
|
Inventory
|
|
$
|
1,254,000
|
|
|
1,413,000
|
|
Allowance
for doubtful accounts receivable
|
|
|
99,000
|
|
|
402,000
|
|
Benefits
of tax loss carryforwards
|
|
|
20,361,000
|
|
|
20,425,000
|
|
Benefit
plans
|
|
|
421,000
|
|
|
436,000
|
|
Accrued
commissions
|
|
|
77,000
|
|
|
105,000
|
|
Other
|
|
|
2,762,000
|
|
|
2,494,000
|
|
Depreciation
|
|
|
364,000
|
|
|
371,000
|
|
|
|
|
25,338,000
|
|
|
25,646,000
|
|
Valuation
allowance
|
|
$
|
(25,338,000
|
)
|
|
(25,646,000
|
)
|
|
|
$ |
—
|
|
|
|
|
Deferred
tax assets as of December 31, 2004 have been adjusted based on actual tax
returns filed.
Because
of Porta’s losses in previous
years and
uncertainties associated with projections of future taxable income and the
possibility of a change in ownership,
a valuation allowance for the entire deferred tax asset was provided and is
still considered appropriate due to the uncertainty of future
realization.
In
January 2003, Porta accepted an offer to pay $30,000 in
full settlement of a tax liability of its Puerto Rico subsidiary; accordingly
the related tax and accrued interest liability of $274,000 was reversed in
2003.
No
provision was made for U.S. income taxes on the undistributed earnings of
Porta’s foreign subsidiaries as it is management’s intention to utilize those
earnings in the foreign operations for an indefinite period of time or
repatriate such earnings only when tax effective to do so. At
December 31, 2005, undistributed earnings of the foreign subsidiaries amounted
to approximately $1,437,000. It is not practicable to determine the amount
of
income or withholding tax that would be payable upon the remittance of those
earnings.
At
December 31, 2005, the Company and its subsidiaries leased manufacturing and
administrative facilities, equipment and automobiles under a number of operating
leases. The Company is required to pay increases in real estate taxes on the
facilities in addition to minimum rents. Total rent expense for 2005, 2004,
and
2003 amounted to approximately $594,000, $581,000 and $537,000, respectively.
The Company also subleased a portion of one of its facilities during 2003;
the
rent expense for 2003 was reduced accordingly, by $164,000. For 2005 and 2004,
there was no reduction in rent expense. Minimum rental commitments, exclusive
of
future escalation charges, for each of the next five years are as
follows:
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
|
|
|
|
|
2006
|
|
$
|
620,000
|
|
2007
|
|
|
591,000
|
|
2008
|
|
|
294,000
|
|
2009
|
|
|
264,000
|
|
2010
|
|
|
264,000
|
|
Thereafter
|
|
|
2,445,000
|
|
|
|
$
|
4,478,000
|
|
In
January 2006, the Company negotiated an agreement with the landlord of its
United Kingdom facility to cancel the remaining approximate 16 years of the
lease for three years rent plus a cancellation fee, which comes to approximately
$715,000. We anticipate the signing at the end of March 2006. The above table
does not include the effects of the settlement.
Porta’s
five largest
customers accounted for sales of $17,431,000, or approximately 61% of sales,
for
2005, $15,443,000,
or approximately 53% of sales, for
2004 and
$8,507,000, or approximately 43% of sales, for
2003. British
Telecommunications PLC
was Porta’s largest customer for 2005, accounting for sales of $5,933,000, or
approximately 21%,
and
Fujitsu Telecommunications Europe LTD was the largest customer for 2004,
accounting for sales of $4,772,000,
or approximately 16%.
A
significant amount of sales of the Company’s products for use by British
Telecommunications were sold to Fujitsu as purchasing agent for British
Telecommunications. As a result, most of the sales
to
Fujitsu Telecommunications were for use by British Telecommunications. Direct
sales to British Telecommunications were $2,652,000, or 9% of sales, for 2004,
$1,480,000, or 8% of sales, for 2003.
Sales to Telmex in 2005 were $3,157,000, or approximately 11% of sales. Sales
to
Marconi in 2005 were $3,550,000, or approximately 12% of sales. No
other
customers account for 10% or more of the Company’s sales in 2005, 2004
or
2003.
(15) |
Fair
Values of Financial Instruments
|
Cash
equivalents, accounts receivable and accounts payable are reflected in the
consolidated financial statements at fair value because of the short term
maturity of these instruments.
The
fair value of the Company’s senior and subordinated debt and related interest
cannot be reasonably estimated due to the lack of marketability of such
instruments. However, management believes, because of the Company’s financial
position and, with respect to the senior debt, the sale of the senior debt
by
the Company’s former senior lender, that the fair value of these instruments is
significantly less than their aggregate carrying amount.
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
(16) |
Net
Income (Loss) Per Share
|
In
both
2005 and 2004, the weighted average shares of common stock outstanding for
purposes of computing diluted net income per share include 45,000 dilutive
potential shares of common stock related to stock options for which the options’
exercise price was less than the weighted average market price of the Company’s
common stock for the year. Options to purchase 292,780, 277,780, and 552,530
shares of common stock for 2005, 2004 and 2003, respectively, with exercise
prices ranging from $0.30 to $3.85, $0.30 to $3.85 and $0.02 to $3.85 for 2005,
2004 and 2003, respectively, were outstanding but not included in the
computation of diluted net income (loss) per share, because the effect of doing
so would be anti-dilutive.
Warrants
to purchase 242,500 shares of common stock, with exercise prices ranging from
$0.25 to $3.00, were outstanding as of December 31, 2005 and 2004 but not
included in the computation of diluted net income (loss) per share because
the
exercise prices were greater than the average market price of common stock
during such years, and the effect of doing so would be
anti-dilutive.
In
January 2006, the Company settled the previously reported arbitration proceeding
by BMS Corp. against it. The settlement provides for the Company to pay a total
of $1,000,000, in monthly installments through March 2010, secured by a
confession of judgment. Based on the settlement, the
Company recorded a liability of $824,000 at December 31, 2005, which represents
the present value of its payments to BMS.
In
July
2001, the holder of a subordinated note in the principal amount of $500,000
commenced an action against the Company in the United States District Court
for
the Southern District of New York seeking payment of the principal and accrued
interest on their subordinated note which was payable in July 2001. The payment
of the note is subordinated to payment of Porta’s 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 the Company remained in default to the senior debt holder. Since
that time, the action has remained inactive.
(18) |
Cash
Flow Information
|
Supplemental
cash flow information for the years ended December 31, is as
follows:
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
paid for interest
|
|
$
|
1,130
|
|
|
116
|
|
|
6
|
|
Cash
paid for income taxes
|
|
$
|
115
|
|
|
69
|
|
|
11
|
|
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, continued
(19) |
Segment
and Geographic Data
|
Porta
has
three reportable segments: Line Connection and Protection Equipment (“Line”)
whose products interconnect copper telephone lines to switching equipment and
provides 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. During 2005, the activity of the OSS
division was limited to the performance of warranty and maintenance services.
In
2004, OSS activities were limited to warranty and maintenance services and
the
completion of installations of OSS systems pursuant to contracts entered into
in
prior years.
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.
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenue:
|
|
|
|
|
|
|
|
Line
|
|
$
|
21,982,000
|
|
|
21,545,000
|
|
|
11,334,000
|
|
Signal
|
|
|
5,710,000
|
|
|
5,551,000
|
|
|
4,253,000
|
|
OSS
|
|
|
785,000
|
|
|
2,003,000
|
|
|
3,249,000
|
|
|
|
$
|
28,477,000
|
|
|
29,099,000
|
|
|
18,836,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
4,344,000
|
|
|
5,784,000
|
|
|
1,634,000
|
|
Signal
|
|
|
2,134,000
|
|
|
2,124,000
|
|
|
1,393,000
|
|
OSS
|
|
|
(1,044,000
|
)
|
|
(1,662,000
|
)
|
|
(3,072,000
|
)
|
|
|
$
|
5,434,000
|
|
|
6,246,000
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
241,000
|
|
|
218,000
|
|
|
253,000
|
|
Signal
|
|
|
31,000
|
|
|
27,000
|
|
|
22,000
|
|
OSS
|
|
|
62,000
|
|
|
95,000
|
|
|
136,000
|
|
|
|
$
|
334,000
|
|
|
340,000
|
|
|
411,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
7,626,000
|
|
|
6,368,000
|
|
|
4,099,000
|
|
Signal
|
|
|
4,775,000
|
|
|
4,561,000
|
|
|
4,293,000
|
|
OSS
|
|
|
588,000
|
|
|
945,000
|
|
|
2,932,000
|
|
|
|
$
|
12,989,000
|
|
|
11,874,000
|
|
|
11,324,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
445,000
|
|
|
167,000
|
|
|
46,000
|
|
Signal
|
|
|
37,000
|
|
|
71,000
|
|
|
4,000
|
|
OSS
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
$
|
482,000
|
|
|
238,000
|
|
|
50,000
|
|
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
The
following table reconciles segment totals to consolidated totals:
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenue:
|
|
|
|
|
|
|
|
Total
revenue for reportable segments
|
|
$
|
28,477,000
|
|
|
29,099,000
|
|
|
18,836,000
|
|
Other
revenue
|
|
|
127,000
|
|
|
69,000
|
|
|
754,000
|
|
Consolidated
total revenue
|
|
$
|
28,604,000
|
|
|
29,168,000
|
|
|
19,590,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
Total
segment income (loss) for reportable segments
|
|
$
|
5,434,000
|
|
|
6,246,000
|
|
|
(45,000
|
)
|
Corporate
and unallocated
|
|
|
(3,413,000
|
)
|
|
(2,093,000
|
)
|
|
(2,307,000
|
)
|
Consolidated
total operating income (loss)
|
|
$
|
2,021,000
|
|
|
4,153,000
|
|
|
(2,352,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
334,000
|
|
|
340,000
|
|
|
411,000
|
|
Corporate
and unallocated
|
|
|
73,000
|
|
|
69,000
|
|
|
72,000
|
|
Consolidated
total deprecation and amortization
|
|
$
|
407,000
|
|
|
409,000
|
|
|
483,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
12,989,000
|
|
|
11,874,000
|
|
|
11,324,000
|
|
Corporate
and unallocated
|
|
|
1,672,000
|
|
|
2,564,000
|
|
|
1,031,000
|
|
Consolidated
total assets
|
|
$
|
14,661,000
|
|
|
14,438,000
|
|
|
12,355,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
482,000
|
|
|
238,000
|
|
|
50,000
|
|
Corporate
and unallocated
|
|
|
0
|
|
|
21,000
|
|
|
22,000
|
|
Consolidated
total capital expenditures
|
|
$
|
482,000
|
|
|
259,000
|
|
|
72,000
|
|
The
following table presents information about the Company by geographic
area:
|
|
2005
|
|
2004
|
|
2003
|
|
Revenue:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
10,120,000
|
|
|
9,809,000
|
|
|
8,610,000
|
|
United
Kingdom
|
|
|
14,998,000
|
|
|
14,911,000
|
|
|
7,523,000
|
|
Asia/Pacific
|
|
|
10,000
|
|
|
128,000
|
|
|
428,000
|
|
Other
Europe
|
|
|
319,000
|
|
|
457,000
|
|
|
1,228,000
|
|
Latin
America
|
|
|
0
|
|
|
158,000
|
|
|
238,000
|
|
Other
North America
|
|
|
3,157,000
|
|
|
3,139,000
|
|
|
1,037,000
|
|
Other
|
|
|
0
|
|
|
566,000
|
|
|
526,000
|
|
Consolidated
total revenue
|
|
$
|
28,604,000
|
|
|
29,168,000
|
|
|
19,590,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
4,055,000
|
|
|
3,843,000
|
|
|
3,859,000
|
|
United
Kingdom
|
|
|
77,000
|
|
|
169,000
|
|
|
255,000
|
|
Other
North America
|
|
|
288,000
|
|
|
352,000
|
|
|
393,000
|
|
Asia/Pacific
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Latin
America
|
|
|
0
|
|
|
0
|
|
|
5,000
|
|
Other
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
4,420,000
|
|
|
4,364,000
|
|
|
4,512,000
|
|
Current
and other assets
|
|
|
10,241,000
|
|
|
10,074,000
|
|
|
7,843,000
|
|
Consolidated
total assets
|
|
$
|
14,661,000
|
|
|
14,438,000
|
|
|
12,355,000
|
|
(Continued)
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements, Continued
(20) |
Quarterly
Information (Unaudited)
|
The
following presents certain unaudited quarterly financial data:
|
|
Quarter
Ended
|
|
|
|
March
31, 2005
|
|
June
30, 2005
|
|
September
30, 2005
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,615,000
|
|
$
|
8,425,000
|
|
$
|
7,021,000
|
|
$
|
5,543,000
|
|
Gross
profit
|
|
|
3,143,000
|
|
|
3,242,000
|
|
|
2,534,000
|
|
|
1,487,000
|
|
Net
income (loss)
|
|
|
1,203,000
|
|
|
887,000
|
|
|
107,000
|
|
|
(1,387,000
|
)
|
Basic
and diluted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss)
per share:
|
|
$
|
0.12
|
|
$
|
0.09
|
|
$
|
0.01
|
|
$
|
(0.14
|
)
|
|
|
Quarter
Ended
|
|
|
|
March
31, 2004
|
|
June
30, 2004
|
|
September
30, 2004
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8,100,000
|
|
$
|
6,272,000
|
|
$
|
7,883,000
|
|
$
|
6,913,000
|
|
Gross
profit
|
|
|
3,130,000
|
|
|
2,368,000
|
|
|
3,047,000
|
|
|
2,783,000
|
|
Net
income
|
|
|
829,000
|
|
|
319,000
|
|
|
1,058,000
|
|
|
469,000
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.08
|
|
$
|
0.03
|
|
$
|
0.11
|
|
$
|
0.05
|
|
During
the first three quarters of 2005, the Company had incurred approximately
$450,000 in restructuring costs attributed to investment banking, legal and
accounting expenses as well as legal and other expenses incurred by the holder
of our senior debt. The expenses were included in “Prepaid
expenses and other current assets.” In
the
fourth quarter of 2005 the Company incurred additional expenses of $427,000.
At
December 31, 2005, the Company expensed the $877,000.
The
Board
of Directors and Stockholders
Porta
Systems Corp.
Syosset,
New York
The
audits referred to in our report, dated March 10, 2006, relating to the
consolidated financial statements of Porta Systems Corp., which are included
in
item 8 of this Form 10-K, included the audit of the financial statement Schedule
II - Valuation and Qualifying Accounts for the three-year period ended December
31, 2005. The financial statement schedule is the responsibility of the
Company’s management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In
our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
Melville,
New York
March
10,
2006
SCHEDULE
II
d) |
Financial
Statement Schedule
|
PORTA
SYSTEMS CORP
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
Column
A
|
|
Column
B
|
|
Column
C
|
|
Column
D
|
|
Column
E
|
|
|
|
Balance
at
|
|
Charged
to
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
Costs
and
|
|
|
|
End
of
|
|
Description
|
|
of
Period
|
|
Expenses
|
|
Deductions
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
and allowance deducted from Asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,045
|
|
$
|
19
|
|
$
|
808
|
|
$
|
256
|
|
Inventory
reserve
|
|
|
2,626
|
|
|
626
|
|
|
669
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,091
|
|
$
|
34
|
|
$
|
80
|
|
$
|
1,045
|
|
Inventory
reserve
|
|
|
2,936
|
|
|
515
|
|
|
825
|
|
|
2,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
1,967
|
|
$
|
210
|
|
$
|
1,086
|
|
$
|
1,091
|
|
Inventory
reserve
|
|
|
3,072
|
|
|
863
|
|
|
999
|
|
|
2,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|