Unassociated Document
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, 2006
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
|
11-2203988
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
6851
Jericho Turnpike, Syosset, New York
|
11791
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (516)
364-9300
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: $1,206,434 as of June 30, 2006.
Indicate
the number of shares outstanding of each of the registrant's class of common
stock, as of the latest practicable date: 10,075,561 shares of Common Stock,
par
value $.01 per share, as of March 12, 2007.
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 called OSS. We began to scale back our OSS operations in 2003 and
we
scaled back these operations further through 2006. We
currently limit our OSS activities to the performance of contractual maintenance
and warranty services which are anticipated to expire in June 2007 (see Note
10
to the Consolidated Financial Statements). The
assets
and liabilities and results of operations of the OSS division have been
segregated and reported separately as discontinued operations on our
consolidated financial statements.
We are
also seeking to sell our existing OSS inventory, and we do not plan
to add
additional inventory. In addition, we continue to pursue the sale of the OSS
technology and remaining inventory. We hope to complete the sale in 2007, but
we
give no assurances that we will be successful. We do not expect OSS operations
to be material in 2007.
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.
Sales
by Product Category
The
table
below shows, for the last three fiscal years, the contribution to sales from
continuing operations made by each of our major categories of the
telecommunications industry:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
Line
Connecting/Protecting Equipment
|
|
$
|
27,188
|
|
|
83
|
%
|
$
|
21,982
|
|
|
79
|
%
|
$
|
21,545
|
|
|
79
|
%
|
Signal
Processing
|
|
|
5,292
|
|
|
16
|
%
|
|
5,710
|
|
|
21
|
%
|
|
5,551
|
|
|
21
|
%
|
Other
|
|
|
338
|
|
|
1
|
%
|
|
127
|
|
|
0
|
%
|
|
69
|
|
|
0
|
%
|
Total
|
|
$
|
32,818
|
|
|
100
|
%
|
$
|
27,819
|
|
|
100
|
%
|
$
|
27,165
|
|
|
100
|
%
|
Discontinued
Operations
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. OSS
systems
focus on the access loop and are components of telephone companies’ service
assurance and service delivery initiatives. These 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. Because
of continuing losses in this division, combined with difficulties in marketing
OSS products in view of our financial condition, commencing in 2003 we began
to
scale down these activities and in 2006 we limited our OSS activities to the
performance of maintenance and warranty services
under
existing agreements all of which we anticipated will expire by June 30,
2007.
Although we are trying to sell the OSS technology and our remaining OSS
inventory, we hope to complete the sale in 2007, but we can give no assurance
that these efforts will be successful. Additionally, we do not expect OSS
operations to be material in 2007. Effective
as of June 30, 2006, the
assets
and liabilities and results of operations of the OSS division have been
segregated and reported separately as discontinued operations on our
consolidated financial statements.
Sales
of OSS products and related services were $333,000 for 2006, $785,000 for 2005
and $2,003,000 for 2004.
Markets
As
a
telephone company expands the number of its subscriber lines and additional
services such as DSL, 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.
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
2006,
approximately 83% 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
2006,
signal processing equipment accounted for approximately 16% of our
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 few personnel primarily 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, PLC purchased line connecting/protecting products in the
amount of $9,614,000 (29% of sales) in 2006, $5,641,000 (20% of sales) in 2005,
and $2,259,000 (8% of sales) in 2004. During these years, we also sold our
products to unaffiliated suppliers for resale to British Telecommunications,
the
most significant of which was Fujitsu Telecommunications Europe LTD, a systems
integrator for British Telecommunications, to whom we sold $8,609,000 (26%
of
sales) in 2006, $3,170,000 (11% of sales) in 2005, and $4,772,000 (18% of sales)
in 2004.
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
from Continuing Operations by Customers’ Geographic Region (1)
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Dollars
in thousands)
|
|
North
America
|
|
$
|
12,093
|
|
|
37
|
%
|
$
|
13,277
|
|
|
48
|
%
|
$
|
12,761
|
|
|
47
|
%
|
United
Kingdom
|
|
|
20,725
|
|
|
63
|
%
|
|
14,542
|
|
|
52
|
%
|
|
14,217
|
|
|
52
|
%
|
Asia/Pacific
|
|
|
0
|
|
|
0
|
%
|
|
0
|
|
|
0
|
%
|
|
0
|
|
|
0
|
%
|
Other
-- Europe
|
|
|
0
|
|
|
0
|
%
|
|
0
|
|
|
0
|
%
|
|
29
|
|
|
less
than 1
|
%
|
Latin
America (excl. Mexico)
|
|
|
0
|
|
|
0
|
%
|
|
0
|
|
|
0
|
%
|
|
158
|
|
|
less
than 1
|
%
|
Total
Sales
|
|
$
|
32,818
|
|
|
100
|
%
|
$
|
27,819
|
|
|
100
|
%
|
$
|
27,165
|
|
|
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 many 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 supplement our production activities and periodically
explore the feasibility of conducting operations at lower cost manufacturing
facilities located abroad. We are no longer manufacturing or purchasing new
inventory for OSS products.
Source
and Availability of Components
We
generally purchase the standard components used in the manufacture of our
products from a number of suppliers. We attempt to assure ourselves that the
components are available from more than one source.
Significant
Customers
Our
five
largest customers, consisting of British Telecommunications, Fujitsu and
Marconi, systems integrators for British Telecommunications, Teléfonos
de Mexico S.A. de C.V. (Telmex) and
Graybar, accounted for sales of $23,333,000, or approximately 70% of sales,
for
2006; $17,431,000, or approximately 61% of sales, for
2005;
and $15,443,000,
or approximately 53% of sales, for
2004.
Total sales to British Telecommunications, consisting of direct sales and sales
to systems integrators for British Telecommunications (including Fujitsu) were
$20,313,000 (62% of sales) for 2006, $14,046,000 (50%) for 2005 and $13,662,000
(50%) for 2004. Direct sales to British Telecommunications (exclusive of sales
to systems integrators for British Telecommunications), our largest customer
for
2006 and 2005, were $9,614,000, or approximately 29%
of sales
in 2006, $5,641,000, or approximately 20% of sales in 2005, and $2,259,000,
or
8% of sales, in 2004.
All of
these sales to British Telecommunications were sales of connection/protection
products. Sales to Telmex were $2,435,000, or approximately 7% of sales, for
2006, $3,157,000, or approximately 11% of sales, for 2005 and $3,139,000, or
approximately 11% of sales, for 2004. No other customers account for 10% or
more
of our sales in 2006, 2005 or 2004.
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, 2006, our backlog was approximately $4,050,000 compared with
approximately $4,188,000 at December 31, 2005. Of the December 31, 2006 backlog,
approximately $2,552,000 represented orders from British Telecommunications.
We
expect to ship substantially all of our December 31, 2006 backlog during 2007.
Intellectual
Property Rights
We
own a
number of domestic utility and design patents and have pending patent
applications for certain of our 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, 2006.
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.
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 in 2005 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 we 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 $1,500,000 in 2006, $1,400,000 in 2005, and $1,000,000 in 2004
on
research and development activities from continuing operations. Most of the
research and development expenses in 2006 related to copper
connection/protection products, and were oriented toward development of new
products. All
research and development was Company-sponsored and is expensed as incurred.
During 2006, we increased our research and development efforts in the
connection/protection business.
Employees
As
of
December 31, 2006 we had 355 employees, of which 48 were employed in the United
States, 297 in Mexico, 7 in the United Kingdom, and 3 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 a collective bargaining agreement
that expires on May 20, 2007.
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, 2006 of $31,646,000. As of December
31,
2006, our current liabilities included $23,513,000 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 $12,120,000 which was due at December 31, 2006
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.
As of
December 31, 2006 we had 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.”
We
may enter into an agreement to restructure
our debt which would significantly dilute the interest of the holder’s of our
common stock.
On
February 7, 2007, Cheyne Special Situations Fund L.P. purchased our senior
debt
of approximately $23,400,000 from SHF IX, LLC and subsequently extended the
maturity of the senior debt to October 1, 2007. If the senior debt holder does
not extend the maturity of our senior debt beyond October 1, 2007, or if the
senior debt holder demands payment of all or a significant portion of the senior
debt when due, we will not be able to continue in business, and it is likely
that we will seek protection under the Bankruptcy Code. We are engaged in
negotiations with the senior debt holder with respect to a restructure of our
senior and subordinated debt and we anticipate that any such restructure will
result in a very significant dilution in the interests of the holders of our
common stock and will require the approval of the holders of our common stock
and subordinated debt. If we are unable to obtain the necessary consent, we
may
be unable to effect a restructure of our debt.
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
of our stockholders’ deficit of $27,823,000, our working capital deficit of
$31,646,000 as of December 31, 2006 and our dependence upon the continued
agreement of our senior debt holder 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 $20,313,000 (62% of sales) for 2006,
$14,046,000 (50% of sales) for 2005 and $13,662,000 (50%) for 2004. 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. In the past, we have suffered losses
following the overbuilding by the telecommunications industry and the subsequent
reduced demand for telecommunications products generally and our products in
particular. We cannot assure you that we will not be affected by similar or
other industry-related factors in the future.
We
are heavily dependent on foreign sales.
Approximately
63% of our sales in 2006, 52% of our sales in 2005 and 52% of our sales in
2004,
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.
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
chief executive officer 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.
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 2011. The
aggregate current annual rental is approximately $91,000 and is subject to
customary escalation clauses.
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
|
None
Item
4. |
Submission
of Matters to a Vote of Securities
Holders
|
During
the fourth quarter of 2006, 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 2006, the quarterly high and low bid
prices for our common stock on the OTC Bulletin Board as provided by the Nasdaq
Stock Market, Inc.
These
prices represent inter-dealer quotations without retail markup, markdown, or
commission and may not necessarily represent actual transactions.
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
quarter
|
|
$
|
0.19
|
|
$
|
0.12
|
|
$
|
0.17
|
|
$
|
0.09
|
|
Second
quarter
|
|
|
0.54
|
|
|
0.14
|
|
|
0.15
|
|
|
0.09
|
|
Third
quarter
|
|
|
0.23
|
|
|
0.14
|
|
|
0.15
|
|
|
0.06
|
|
Fourth
quarter
|
|
|
0.26
|
|
|
0.15
|
|
|
0.18
|
|
|
0.11
|
|
The
last
reported bid price of our common stock on March 12, 2007 was $0.18 per
share.
We
did
not declare or pay any cash dividends in 2006 or 2005, 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.
We
did
not issue any unregistered securities during 2006.
Equity
Compensation Plan Information
The
following table summarizes the equity compensation plans under which our
securities may be issued as of December 31, 2006.
Equity
Compensation Plan Information as of December 31, 2006
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
|
|
|
322,280
|
|
$
|
1.33
|
|
|
977,720
|
|
Equity
compensation plan not approved by security holders
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
322,280
|
|
$
|
1.33
|
|
|
977,720
|
|
Item
6. |
Selected
Financial Data
|
The
following selected consolidated financial data has been derived from the
Company’s audited Consolidated Financial Statements for the five years ended
December 31, 2006. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, found in Item 7 of this report, for
information regarding discontinued operations, critical accounting policies
and
items affecting comparability of the amounts below. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements included in Item 8 of this report. All current and prior years
financial data below has been restated to reflect the discontinued operations
of
our OSS business.
|
|
Year
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In
thousands, except per share data)
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
32,818
|
|
$
|
27,819
|
|
$
|
27,165
|
|
$
|
16,341
|
|
$
|
15,003
|
|
Income
(loss) from continuing operations
|
|
|
2,511
|
|
|
1,855
|
|
|
4,336
|
|
|
(284
|
)
|
|
(
4,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from discontinued operations, net of zero tax
|
|
|
(329
|
)
|
|
(1,045
|
)
|
|
(1,661
|
)
|
|
(3,073
|
)
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
2,182
|
|
|
810
|
|
|
2,675
|
|
|
(3,357
|
)
|
|
(4,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share: Basic net income (loss) from continuing operations
|
|
$
|
0.25
|
|
$
|
0.18
|
|
$
|
0.43
|
|
$
|
(0.08
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) from discontinued operations
|
|
|
(0.03
|
)
|
|
(0.10
|
)
|
|
(0.17
|
)
|
|
(0.31
|
)
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) from continuing operations
|
|
|
0.25
|
|
|
0.18
|
|
|
0.43
|
|
|
(0.08
|
)
|
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) from discontinued operations
|
|
|
(0.03
|
)
|
|
(0.10
|
)
|
|
(0.17
|
)
|
|
(0.31
|
)
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares used in calculating net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,076
|
|
|
10,054
|
|
|
9,972
|
|
|
9,972
|
|
|
9,972
|
|
Diluted
|
|
|
10,103
|
|
|
10,093
|
|
|
9,988
|
|
|
9,972
|
|
|
9,972
|
|
|
|
At
December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
17,784
|
|
$
|
14,661
|
|
$
|
14,438
|
|
$
|
12,355
|
|
$
|
14,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (deficit)
|
|
$
|
(31,646
|
)
|
$
|
(33,777
|
)
|
$
|
(34,150
|
)
|
$
|
(36,825
|
)
|
$
|
(34,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
debt maturities, including accrued interest
|
|
$
|
36,169
|
|
$
|
36,384
|
|
$
|
36,736
|
|
$
|
35,479
|
|
$
|
34,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current maturities
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit
|
|
$
|
(27,823
|
)
|
$
|
(30,185
|
)
|
$
|
(30,661
|
)
|
$
|
(33,238
|
)
|
$
|
(29,935
|
)
|
In
December 2003, we decided to scale down our OSS business because of continuing
losses combined
with difficulties in marketing OSS products in view of our financial condition.
The OSS operating segment is reported in our consolidated financial statements
as a discontinued operation. Currently,
our OSS operating activities are limited to the performance
of
contractual maintenance and warranty services. In addition, we continue to
pursue the sale of the OSS technology and remaining inventory. We hope to
complete the sale in 2007, but we give no assurances that we will be successful.
We do not expect OSS operations to be material in 2007.
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, 2006, we had outstanding senior debt of approximately $23,500,000
and subordinated debt of approximately $12,100,000. Although we have received
an
extension to October 1, 2007, 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 Code. 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 of our stockholders’ deficit of $27,823,000 and working
capital
deficit
of $31,646,000 as of December 31, 2006, and because we are dependent upon our
senior debt holder 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.
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.
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.
Inventory
Reserves
Inventories
are stated at the lower of cost (on the average or first-in, first-out methods)
or fair market value. Our stated inventory reflects an inventory obsolescence
reserve that represents the difference between the cost of the inventory and
its
estimated market value. This reserve is calculated based on historical usage
and
forecasted sales. Actual results may differ from our estimates.
Goodwill
Goodwill
represents the difference between the purchase price and the fair market value
of net assets acquired in business combinations treated as purchases. 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, 2006 and 2005, 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. We determined that there was no impairment
of goodwill for 2006.
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 October 1, 2007. On
February 7, 2007, Cheyne Special Situations Fund L.P purchased our senior debt
of approximately $23,400,000 from SHF IX, LLC and subsequently extended the
maturity of the senior debt to October 1, 2007. If
the
senior debt is not extended beyond October 1, 2007, or if the senior debt holder
demands payment of all or a significant portion of the loan when due, we will
not be able to continue in business, and it is likely that we will seek
protection under the Bankruptcy Code
Interest
Under
the
terms of our senior debt agreements, we have not paid or accrued interest on
$22,600,000 of senior debt since March 2002. As a result, our statement of
operations does not reflect any interest charges on the senior debt for 2006,
2005 and 2004. 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. In addition, our current extension of our senior note provides
for interest payments to the senior debt holder of $181,000 on May 1, 2007,
$312,500 on July 1, 2007 and $312,500 on October 1, 2007.
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.
Discontinued
Operations
In
December 2003, we decided to scale down our OSS business
because
of continuing losses combined
with difficulties in marketing OSS products in view of our financial condition.
The OSS operating segment is reported as a discontinued operation in our
consolidated financial statements for all periods presented. Currently,
the OSS operating activities are limited to the performance
of
contractual maintenance and warranty services under contracts that expire by
June 30, 2007. We anticipate that the operations of this division will be
entirely phased out by June 30, 2007. We continue to pursue the sale of the
OSS
technology and remaining inventory. We hope to complete the sale in 2007, but
we
give no assurances that we will be successful. We do not expect OSS operations
to be material in 2007.
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 62% of sales for 2006,
50% of sales for 2005 and 50% of sales for 2004. 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,
2006, 2005 and 2004, as a percentage of sales:
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of sales
|
|
|
67
|
%
|
|
63
|
%
|
|
59
|
%
|
Gross
profit
|
|
|
33
|
%
|
|
37
|
%
|
|
41
|
%
|
Selling,
general and administrative expenses
|
|
|
17
|
%
|
|
18
|
%
|
|
16
|
%
|
Research
and development expenses
|
|
|
5
|
%
|
|
5
|
%
|
|
4
|
%
|
Reorganization
expenses
|
|
|
—
|
|
|
3
|
%
|
|
—
|
|
Operating
income
|
|
|
11
|
%
|
|
11
|
%
|
|
21
|
%
|
Interest
expense (net)
|
|
|
(3
|
)%
|
|
(4
|
%)
|
|
(5
|
%)
|
Income
from continuing operations before income taxes
|
|
|
8
|
%
|
|
7
|
%
|
|
16
|
%
|
Income
tax expense
|
|
|
(1
|
%)
|
|
(1
|
%)
|
|
(1
|
%)
|
Income
from continuing operations before discontinued operations
|
|
|
8
|
%
|
|
7
|
%
|
|
16
|
%
|
Loss
from discontinued operations
|
|
|
(1
|
%)
|
|
(4
|
%)
|
|
(6
|
%)
|
Net
income
|
|
|
7
|
%
|
|
3
|
%
|
|
10
|
%
|
Years
Ended December 31, 2006 and 2005
Our
sales
for 2006 were $32,818,000 compared to $27,819,000 in 2005, which is an increase
of $4,999,000 (18%).
Line
connection/protection equipment sales for 2006 increased $5,206,000 (24%) from
$21,982,000 in 2005 to $27,188,000 in 2006. 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 2006, direct sales to British
Telecommunications increased 70% from $5,641,000 to $9,614,000, while sales
to
systems integrators for British Telecommunications increased from $8,406,000
to
$10,700,000, or 27%, 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 an increase 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.
Signal
processing revenue for 2006 compared to 2005 decreased by $418,000 (7%) from
$5,710,000 to $5,292,000. The decline in Signal revenue for 2006 resulted
primarily from sluggish order rates from the military sector in the first six
months of 2006. In addition, the revenue for 2005 was positively impacted by
product
shipments to customers whose 2004 backlogged orders were not shipped in 2004
due
to our cash constraints at that time. Sales
for
2006 represent shipments of both current orders and backlog.
Gross
profit decreased from 37% in 2005 to 33% in 2006. The
decrease is primarily related to a change in products sold to British
Telecommunications from the higher gross profit DSL products to the lower margin
local loop unbundling products, short-term manufacturing inefficiencies at
our
assembly facility in Mexico during the second quarter, and additional freight
costs associated with on-time deliveries to customers.
Selling,
general and administrative expenses increased by $395,000 (8%) from $5,120,000
in 2005 to $5,515,000 in 2006. These increases resulted primarily from increased
expenses in our Line segment for salaries and advertising as our marketing
activities for Line were increased during 2006. These increases in Line expenses
were partially offset by a decrease in general and administrative expenses
relating to a 2005 lease agreement in the United Kingdom which was settled
in
the fourth quarter of 2005.
Research
and development expenses increased by $146,000 (11%) from $1,359,000 in 2005
to
$1,505,000 in 2006. This increase resulted primarily from increased spending
by
our Line connection/protection division of approximately $120,000 as well as
increased spending by our Signal division of approximately $30,000 to enhance
our existing products and develop new products.
As
a
result of the above, we had an operating income of $3,814,000 in 2006 versus
an
operating income of $3,066,000 in 2005.
Interest
expense, net, for 2006 increased by $131,000 from $1,056,000 in 2005 to
$1,187,000 in 2006 primarily because of imputed interest on the amortization
of
a long term liability in 2006. Such interest excludes interest on our old term
loan, in the principal amount of approximately $23,500,000, as our related
loan
agreement provides that no interest is due commencing March 1, 2002 through
December 31, 2006. At the time interest begins to accrue, the interest is due
at
a rate of 12% or, in the case of default, 14%.
The
tax
provisions for 2006 and 2005 were lower than the statutory tax rate principally
as a result of the utilization of available net operating loss carryforwards
and
reductions in the deferred tax reserves.
As
the
result of the foregoing, the 2006 net income was $2,182,000, $0.22 per share
(basic and diluted), compared with a net income of $810,000, $0.08 per share
(basic and diluted) for 2005.
The
loss
from discontinued operations decreased from $1,045,000 in 2005 to $329,000
in
2006 as a result of the reduction in the scope of these operations reflecting
the scaling down of these operations which commenced in 2004.
Even
though we were profitable in 2006, 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, 2005 and 2004
Our
sales
for 2005 were $27,819,000 compared to $27,165,000 in 2004, an increase of
$654,000 (2%).
Line
connection/protection equipment sales for 2005 increased approximately $437,000
(2%) from $21,545,000 in 2004 to $21,982,000 in 2005. The slight increased
sales
level resulted
primarily from an increased level of sales to British Telecommunications and
systems integrators for British Telecommunications, as a result of British
Telecommunications increasing the availability of DSL lines in the United
Kingdom. Direct sales to British Telecommunications increased 150% from
$2,259,000 to $5,641,000. Sales to systems integrators for British
Telecommunications decreased from $11,403,000 to $8,406,000, or 26%, from 2004
to 2005. Sales increased 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 in 2005 reflects shipments
from the 2004 backlog that we were unable to ship timely in 2004 due to our
weak
cash position.
Gross
profit decreased from 41% in 2004 to 37% in 2005. The
line
protection/connection margin decreased while signal processing margin stayed
the
same. The decrease is directly related to a change in products sold to British
Telecommunications from the higher gross profit DSL products to the lower margin
local loop unbundling products during the second half of 2005.
Selling,
general and administrative expenses increased by $893,000 (21%) from $4,227,000
in 2004 to $5,120,000 in 2005. This increase relates primarily to the recording
of the lease termination in the UK of approximately $715,000.
Research
and development expenses increased by $340,000 (33%) from $1,019,000 in 2004
to
$1,359,000 in 2005. This increase was primarily due to increased spending by
our
line connection/protection division to enhance our existing line products and
develop new products.
In
2005,
reorganization expenses were $877,000. The expenses 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 $3,066,000 in 2005 versus
an
operating income of $5,815,000 in 2004.
Interest
expense, net, for 2005 decreased by $237,000 from $1,317,000 for 2004 to
$1,080,000 in 2005 primarily because of an interest adjustment for interest
expense accrued in prior periods. Such interest excludes interest on our old
term loan, in the principal amount of approximately $24,700,000, as our related
loan agreement provides that no interest is due commencing March 1, 2002 through
December 31, 2006. At the time interest begins to accrue, the interest is due
at
a rate of 12% or, in the case of default 14%.
The
tax
provision for 2005 and 2004 is lower than the statutory tax rate principally
as
a result of the utilization of available net operating loss carryforwards.
The
loss
from discontinued operations decreased from $1,661,000 in 2004 to $1,045,000
in
2005 as a result of the reduction in the scope of these operations reflecting
the scaling down of these operations which commenced in 2004, as well as
increased difficulty in generating OSS business which is reflected in our
decision to scale back these operations.
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, $0.26 per share
(basic and diluted) for 2004.
Liquidity
and Capital Resources
At
December 31, 2006, we had cash and cash equivalents of $2,102,000 compared
with
$1,253,000 at December 31, 2005. Our working capital deficit was $31,646,000
at
December 31, 2006, compared to a working capital deficit of $33,777,000 at
December 31, 2005. During
2006 our operations generated net cash of $2,462,000 as compared with 2005,
in
which we generated cash of $1,097,000 from our operations. Of
this
amount, we made principal payments of $1,163,000 on account of our senior debt.
Our cash flow from operations reflects interest payments of $169,400 on our
senior debt and $25,000 on account of the senior lender’s expenses. Since
late 2003, our present senior lenders did not advance us any funds. Since we
do
not have any borrowing capability as a result of our senior debt position,
our
only source of funds has been from our 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, 2006, our debt includes $23,513,000 of senior debt which, as a
result of an extension effective February 7, 2007, matures on October 1, 2007,
and $6,144,000 principal amount of subordinated notes which became due on July
3, 2001. We were unable to pay the interest payment on the subordinated notes
of
approximately $5,976,000 which represents interest accrued from July 2000
through December 2006. As
of
December 31, 2006, we also
had
$385,000 outstanding of 6% convertible debentures which matured July 2, 2002.
The interest accrued on the 6% debentures at December 31, 2006 was approximately
$151,000. At
December 31, 2006, 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.
We
are
addressing our working capital and liquidity problems by seeking a restructure
of our senior and subordinated debts as well as a significant amount of
unsecured debt. Any restructure of our Company is likely to result in very
significant dilution to the holders of our common stock and require the approval
of the holders of our common stock and subordinated debt If we do not
restructure our debt and the senior lender does not extend the maturity of
our
senior debt beyond October 1, 2007 or if the holder of our senior debt demands
payment of all or a significant portion of the senior debt when due, whether
on
October 1, 2007 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.
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
or
sell one or more of our remaining 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
of
December 31, 2006, 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, 2006 and the effects such obligations are expected to have on our liquidity
and cash flow in future periods.
|
|
Payments
Due by Period(in thousands)
|
|
Contractual
Obligations
|
|
1
Year
|
|
1-3
Years
|
|
3
-5 Years
|
|
More
Than
5
Years
|
|
Total
|
|
Total
debt, including accrued interest
|
|
$
|
36,169
|
|
$
|
—
|
|
$
|
|
|
$
|
|
|
$
|
36,169
|
|
Operating
leases
|
|
|
591
|
|
|
823
|
|
|
792
|
|
|
1,652
|
|
|
3,858
|
|
Deferred
compensation Obligations
|
|
|
109
|
|
|
290
|
|
|
216
|
|
|
703
|
|
|
1,318
|
|
Purchase
obligations
|
|
|
4,694
|
|
|
|
|
|
|
|
|
|
|
|
4,694
|
|
Total
|
|
$
|
41,563
|
|
$
|
1,113
|
|
$
|
1,008
|
|
$
|
2,355
|
|
$
|
46,039
|
|
Recently
Issued Accounting Standards
See
Note
1 to the consolidated financial statements.
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 2006 and 2005, the currency translation adjustment was not significant
in
relation to our total revenue.
Item
8. |
Financial
Statements
|
The
financial statements and supplementary data begin on Page F-1.
Item
9. |
Changes
In and Disagreements With Accountants On Accounting and Financial
Disclosure.
|
Not
Applicable
Item
9A. |
Controls
and Procedures.
|
Evaluation
of disclosure controls and procedures
An
evaluation was performed, under the supervision of, and with the participation
of, our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including
the
chief executive officer and chief financial officer, concluded that our
disclosure controls and procedures were not effective for the reasons discussed
below related to the weaknesses in our internal control over financial
reporting. Disclosure controls and procedures are defined as controls
and other procedures that are designed to ensure
that information required to be disclosed by us in the reports that we file
or
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in these reports is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.
Our
management is responsible for establishing and maintaining effective internal
controls. Because of its inherent limitations, internal controls may not prevent
or detect misstatements. A control system, no matter how well designed and
operated, can only provide reasonable, not absolute, assurance that the control
system’s objectives will be met. Also, projections of any evaluation of
effectiveness as to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with policies and procedures may deteriorate.
A
material weakness is a control deficiency or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As a result of our evaluation of our disclosure controls and
procedures described above, we concluded that there were weaknesses in our
disclosure controls and procedures. To address these weaknesses described below,
we performed additional analysis and performed other procedures to ensure the
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. Accordingly, management believes that the
consolidated financial statements included in this Annual Report on
Form 10-K, fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented in
accordance with generally accepted accounting principles.
Management’s
assessment identified the following weaknesses at December 31, 2006 in our
internal control over financial reporting and, subsequent to December 31, 2006,
we took the following steps to address those weaknesses.
-
Our
United Kingdom subsidiary has identified a weakness in the segregation of
duties, specifically as they relate to cash management. We are implementing
measures to segregate certain functions and otherwise improve cash management
functions including a division of the function of authorizing and issuing
payments. In addition, as a result of a change in personnel in our main office,
we were unable to fully implement our existing internal cash management
functions at our main office during a portion of 2006, which has been remedied
by implementing our preexisting internal control polices.
-
As a
result of the audit performed by our independent registered public accounting
firm, BDO Seidman, LLP, we recorded journal entries which, individually and
in
the aggregate, were material and evidenced a weakness in our internal control
reporting procedures. To address this weakness, we have initiated a review
of
our training and supervision policies and procedures, particularly with respect
to the functions in which adjustment had been made, which includes an evaluation
of the specific knowledge and skills required to perform each function, an
assessment of the personnel training necessary to perform such function
adequately, a plan to ensure that all personnel receive the appropriate level
of
training, and a review and modification of the supervisory procedures over
such
personnel.
We
believe that the measures we have taken have addressed each matter identified
as
a material weakness by management and our independent registered public
accounting firm. We will continue to monitor the effectiveness of our internal
controls and procedures on an ongoing basis and will take further actions,
as
appropriate.
The
certification of our chief executive officer and chief financial officer, which
is included as Exhibit 31.1 to this Annual Report on Form 10-K, include, in
paragraph 4 of such certification, information concerning our disclosure
controls and procedures and internal control over financial reporting. Such
certifications should be read in conjunction with the information contained
in
this Item 9A - Controls and Procedures for a more complete understanding of
the
matters covered by such certification.
Except
as
otherwise discussed herein, there have been no significant changes in our
internal control over financial reporting during the most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. In addition,
we are continuing to implement the enhancements to our internal control over
financing reporting to address the material weaknesses described
above.
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
|
|
63
|
William
V. Carney1
|
|
Chairman
of the board and director
|
|
70
|
Michael
A. Tancredi
|
|
Senior
vice president, secretary, treasurer and director
|
|
77
|
Warren
H. Esanu1,2
|
|
Director
|
|
64
|
Herbert
H. Feldman1,2
|
|
Director
|
|
73
|
Marco
M. Elser2
|
|
Director
|
|
48
|
|
|
|
|
|
1 |
Member
of the executive committee
|
2 |
Member
of the audit and compensation committees.
|
Mr.
Kornfeld has been an executive officer since 1995. Mr. Kornfeld has been our
chief executive officer since April 2006, and president from April 2004 through
April 2006 and chief financial officer since October 1995. He was chief
operating officer from April 2004 until April 2006.
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 our business.
Mr.
Carney has been chairman of the board since October 1996, a director since
1970
and chief executive officer from October 1996 until March 2006, and a consultant
from March 2006 until March 2007. 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.
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 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.
The
Board and Committees of the Board
We
are
governed by a board of directors currently consisting of five members. The
Board
has established three committees: the executive committee, the audit committee,
the compensation committee. The Board has adopted a written charter for the
audit and compensation committee, copies of which are posted on our website
at
www.portasystems.com. Printed
copies of these charters may be obtained, without charge, by contacting the
corporate secretary, Mr. Michael A. Tancredi, at 6851 Jericho Turnpike, Syosset,
New York 11791. Set forth below is a summary of each of the
committees.
Executive
Committee
The
executive committee has all power to act between board meeting. As a result,
any
action that can be taken or approved by the board of directors can be taken
or
approved by the executive committee, except that the executive committee has
no
power or authority with respect to amending our certificate of incorporation
(except with respect to a certificate of designation to the extent authorized
by
the board of directors, adopting an agreement of merger or consolidation,
recommending to the stockholders a sale or lease of all or substantially all
of
its property, recommending a dissolution or amending our bylaws. In addition,
unless our certificate of incorporation
or by-laws or a board resolution expressly provides for it, the executive
committee has no power to declare a dividend, or authorize the issuance of
stock
or merger a wholly-owned subsidiary into us.
The
executive committee is presently comprised of Messrs. Carney, Esanu and Feldman.
Audit
Committee
Our
audit
committee reviews our financial statements and accounting principles, the scope
and results of the annual audit by the independent registered public accounting
firm (the “independent auditors”), our internal audit process, and the
effectiveness of our internal control over financial reporting. Prior to the
filing of each quarterly report on Form 10-Q and annual report on Form 10-K,
our
audit committee holds a conference call meeting with representatives of our
independent auditors and our chief financial officer.
Our
audit
committee also reviews the qualifications, independence and performance of
our
independent auditors. In this connection, the audit committee is directly
responsible for the appointment, compensation, retention and oversight of the
work of our registered public accounting firm engaged (including the resolution
of disagreements between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit report or performing
other audit, review or attest services for us, and our registered public
accounting firm reports directly to the audit committee.
Our
audit
committee is presently comprised of Messrs. Elser, Esanu and Feldman.
Our
board
of directors has determined that each member of the audit committee is an
independent director, using the Nasdaq’s standard of independence. The board
also has determined that Mr. Elser qualifies as an “audit committee financial
expert” under the rules of the SEC.
No
members of our audit committee serve on the audit committee of any other public
companies.
Compensation
Committee
Our
compensation committee oversees the compensation of our chief executive officer
and our other executive officers. The committee also serves as the granting
and
administrative committee under our equity compensation plans.
Our
compensation committee is presently comprised of Messrs. Elser, Esanu and
Feldman.
Board
and Committee Attendance
The
Board
and its committees held the following number of meetings during the
2006:
Board
of directors
|
|
|
10
|
|
Audit
committee
|
|
|
4
|
|
Compensation
committee
|
|
|
3
|
|
The
meetings include meetings that were held by means of a conference telephone
call, but do not include actions taken by unanimous written
consent.
Each
director attended at least 75% of the total number of meetings of the board
and
those committees on which he served during the year. Our non-management
directors did not meet in executive session during 2006.
Item
11. |
Executive
Compensation
|
SUMMARY
COMPENSATION TABLES
The
following tables set
forth
below a summary of the dollar values of the total annual compensation provided
to each person who served as our chief executive officer and our chief financial
officer during (i) 2006 and (ii) 2005 and 2004. During 2006, Mr. Kornfeld served
as chief financial officer for the entire year and chief executive officer
for a
portion of the year, and Mr. Carney served as chief executive officer for part
of 2006. No other officer who received compensation of $100,000 or more during
2006.
Information
for 2006
Name
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-Equity
Incentive Plan Compensation
|
|
All
Other Compensation
|
|
Total
|
|
Edward
B. Kornfeld
chief
executive officer
and chief financial officer
|
|
|
2006
|
|
$
|
256,250
|
|
$
|
60,000
|
|
|
-0-
|
|
|
-0-
|
|
|
-0-
|
|
$
|
6,865
|
|
$
|
323,115
|
|
William
V. Carney,
chief
executive officer
|
|
|
2006
|
|
|
25,500
|
|
|
-0-
|
|
|
-0-
|
|
$
|
219
|
|
|
-0-
|
|
|
98,544
|
|
|
124,263
|
|
Compensation
to Mr. Kornfeld does not include fees of $48,000 paid in 2006 to Tatum CFO
Partners, of which Mr. Kornfeld is a partner, for services rendered to us by
Mr.
Kornfeld. In addition, Mr. Kornfeld received, included on All Other
Compensation, 401K match ($3,300) and supplemental insurance ($3,565).
All
Other
Compensation to Mr. Carney, our Chief Executive Officer through March 13, 2006,
includes consulting fees ($37,500) and fees paid to Mr. Carney as a non-employee
member of our board of directors ($59,855) for March through December. In
addition, he received 401K match ($383) and Supplemental Insurance ($806).
Information
for 2005 and 2004
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Long-Term
Compensatio
(Awards)
|
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Restricted
Stock Awards (Dollars)
|
|
Options,
SARs
(Number)
|
|
All
other
Compensation
|
|
William
V. Carney, chief executive officer
|
|
|
2005
|
|
$
|
128,000
|
|
$
|
10,000
|
|
|
—
|
|
|
|
|
$
|
6,256
|
|
|
|
|
2004
|
|
|
122,000
|
|
|
5,000
|
|
|
|
|
|
|
|
|
6,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
B. Kornfeld, President, chief operating officer and chief financial
officer
|
|
|
2005
|
|
|
237,000
|
|
|
50,000
|
|
|
|
|
|
|
|
|
6,714
|
|
|
|
|
2004
|
|
|
206,000
|
|
|
15,000
|
|
|
|
|
|
|
|
|
6,639
|
|
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.
“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.
Set
forth
below is a chart that shows, for 2005 and 2004, the components of “All Other
Compensation” listed in the Summary Compensation Table.
|
|
2005
|
|
2004
|
|
|
|
Mr.
Carney
|
|
M.
Kornfeld
|
|
Mr.
Carney
|
|
Mr.
Kornfeld
|
|
401(k)
Match
|
|
$
|
2,065
|
|
$
|
3,150
|
|
$
|
1,910
|
|
$
|
3,075
|
|
Supplemental
Insurance
|
|
|
4,191
|
|
|
3,564
|
|
|
4,191
|
|
|
3,564
|
|
Internal
Revenue Code Section 162(m)
Section
162(m) of the Internal Revenue Code precludes a public corporation from taking
a
deduction for compensation in excess of $1 million for its chief executive
officer or any of its four other highest paid executive officers, unless certain
specific and detailed criteria are satisfied. We do not believe that this
provision will effect the deductibility of our compensation to our chief
executive officer under his employment agreement.
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
Our
philosophy
is to provide a compensation package that attracts and retains executive talent
and delivers higher rewards for superior performance and consequences for
underperformance. We seek to offer a
balanced
mix of cash and equity-based compensation designed to align the short- and
long-term interests of our executives with that of our stockholders and to
encourage executives to act as and on behalf of our stockholders. We
seek
to
attract executive talent by offering competitive base salaries, annual
performance incentive opportunities, and the potential for long-term rewards
under our long-term incentive program. Achievement of short-term objectives
is
rewarded through base salary and annual performance incentives, while long-term
equity-based incentive grants encourage executives to focus on our long-term
goals as well. These incentives are based on financial objectives of importance
to us, including revenue and earnings growth, return on invested capital, and
creation of shareholder value. Our compensation program also accounts for
individual performance, which enables the committee to differentiate among
executives and emphasize the link between personal performance and compensation.
Our compensation practices reflect our pay-for-performance
philosophy.
The
key
elements of executive compensation are base salary, annual performance incentive
awards, and long-term equity-based incentive grants. A table showing the value
of total annual compensation provided to the named executive officers is set
forth below under “Value of Total Compensation.”
During
the past years, our business was in a state of flux. Prior to 2004, our
financial condition, inability to raise funds for our operations, uncertainty
about our future and the problems facing the telecommunications industry as
a
result of overbuilding in the 1990s made it difficult to develop incentive
programs for our executive officers. Further, prior to February 2007, we were
under pressure from the holder of our senior debt to restructure the senior
debt
and/or sell one or more divisions to provide funds to pay the senior lender.
As
a result, during this period we reduced our senior management and, at present,
we have two executive officers, with the positions of chief executive and
financial officer being held by one person since March 2006.
During
the past three years, we have generated both net income and cash flow from
operations on increased revenue. However, because of the uncertainties described
in the preceding paragraph, we were limited in the incentives that we could
make
available to our executive officers and we did not grant options to any of
our
officers. We expect, however, that in 2007, equity incentives will represent
an
important aspect of our executive compensation program.
Elements
of Executive Compensation
Base
Salary
Our
compensation committee annually
reviews and determines the base salaries of the chief executive officer and
other members of senior management, with its determination with respect to
the
chief executive officer being subject to approval by the entire board. In each
case, the committee takes into account the results achieved by the executive,
his or her future potential, scope of responsibilities and experience, and
competitive salary practices.
Performance-Based
Annual Incentive Awards
Annual
performance incentives are tied to our overall performance, as well as the
performance of each executive and of his or her area of responsibility or
business unit. An annual bonus is awarded the chief executive officer by the
committee based on its evaluation of the effectiveness of the executive for
each
year. In addition, management sets certain financial and operational objectives
for each business unit manager that are designed to promote key company
initiatives.
Incentive
award payments are made to the heads of business units based on the business
units’ performance, ranging from $0 for meeting the business units’ operating
income goal to a maximum of $30,000 of the performance operating income target,
pre-established by the committee, with the committee having discretion to grant
additional awards based on other factors.
Performance
Level
|
|
Funding
Level
|
|
Meet
of target
|
|
No
funding
|
|
At
least 1%, but less than 10% above target
|
|
$
|
5,000
|
|
At
least 10%, but less than 15% above target
|
|
|
7,500
|
|
At
least 15%, but less than 20% above target
|
|
|
12,500
|
|
20%
or more above target
|
|
|
30,000
|
|
Long-Term
Incentive Awards
We
provide a stock award plan and two stock option plans to award officers and
key
managers, which are described under “Long-Term Incentive Plans.
REVIEW
OF ALL COMPONENTS OF CEO COMPENSATION
The
compensation committee has reviewed all components of the CEO's compensation,
including salary, bonus, equity and long-term incentive compensation,
accumulated realized and unrealized stock options, the dollar value to the
executive and cost to us of all perquisites and other personal benefits, and
under several potential severance and change-in-control scenarios.
The
Committee’s Conclusion
Based
on
its review, the committee concluded that the CEO’s total compensation (and, in
the case of the severance and change-in-control scenarios, the potential
payouts) in the aggregate to be reasonable and not excessive. It should be
noted
that when the committee considers any component of the CEO’s total compensation,
the aggregate amounts and mix of all the components, including accumulated
(realized and unrealized) options are taken into consideration in the
committee’s decisions. At the committee meeting during the year, the CEO’s
proposed compensation is presented, reviewed and analyzed in the context of
all
the components of his total compensation. Members then have additional time
between meetings to ask for additional information and to raise and discuss
further questions, after which a vote is taken.
REPORT
OF
THE COMPENSATION COMMITTEE
ON
EXECUTIVE COMPENSATION
The
compensation committee is composed exclusively of non-employee, independent
directors. The committee reviews the compensation program for the chief
executive officer and other members of senior management, including the
executive officers listed on the Summary Compensation Table (the “named
executives”), and determines their compensation. In the case of the chief
executive officer, the compensation determination made by the committee is
also
subject to approval by the entire board. The committee also oversees the
administration of our employee benefits and benefit plans.
Compensation
of the Chief Executive Officer
The
committee meets each year in executive session to evaluate the performance
of
the chief executive officer, the results of which are used to determine his
compensation.
In
March
2006, the committee approved a 6.0% salary increase for Mr. Kornfeld from
$245,000 to $260,000, effective April 1, 2006. This increase also recognized
Mr.
Kornfeld’s additional responsibilities as our chief executive officer while
continuing to serve as our chief financial officer.
The
committee also awarded Mr. Kornfeld a $60,000 annual incentive payment in
November 2006 based on our overall financial performance, as well as his
leadership in advancing our strategies of increasing profitable revenue growth
through innovation, improving operating effectiveness and strengthening our
organizational capabilities. The
committee also reviewed perquisites and other compensation paid to
Mr. Kornfeld for fiscal 2005, during which he served as president, chief
operating officer and chief financial officer, and found these amounts to be
reasonable.
Stock
Incentive Plans
We
have
two stock option plans pursuant to which we may grant options to key employees,
including officers. Pursuant to these plans, at December 31, 2006, there were
outstanding options to purchase 207,280 shares of common stock from the 1996
plan and 115,000 shares of common stock from the 1999 plan, together with any
outstanding options which expire or are terminated prior to the expiration
of
the applicable plan. Pursuant to these plans, each non-management director
received the automatic grant of an five-year option to purchase 5,000 shares
(or, if there are not sufficient shares available, the number of available
shares divided by the number of non-management directors) of common stock a
price per share equal to the average closing price of the common stock for
the
last ten trading days in April. During 2006, we did not grant either of the
named executive officer any options, and neither of the named executive officer
exercised any options to purchase shares of our common stock.
We
did
not make any stock grants to our officers during 2006. The following table
sets
forth information as to outstanding options held by the officers named in the
summary compensation table. No stock appreciation rights were
granted.
OPTION
AWARDS
|
Name
|
Number
of Securities Underlying Unexercised Options (#)
Exercisable
|
Number
of Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Mr.
Kornfeld
|
23,000
|
-0-
|
-0-
|
$1.50
|
5/7/07
|
Mr.
Carney
|
86,250
|
-0-
|
-0-
|
$1.50
|
5/7/07
|
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.
Directors’
Compensation
At
January 1, 2006, we paid directors’ fees to our non-management directors a fee
of $6,250 per quarter and a meeting fee of $1,500 per meeting. On March 23,
2006, the directors’ fee was increased to $6,875 per quarter and the meeting fee
was increased to $1,650 per meeting.
The
table
below summarized the compensation we paid to our non-employee directors for
the
year ended December 31, 2006:
Directors’
Summary Compensation Table
Name
|
|
Fees
Paid in Cash
|
|
Option
Award(1)
|
|
Total
|
|
Herbert
H. Feldman
|
|
$
|
55,424
|
|
$
|
218
|
|
$
|
55,642
|
|
Marco
M. Elser
|
|
$
|
55,424
|
|
$
|
218
|
|
$
|
55,642
|
|
William
V. Carney
|
|
$
|
97,405(2
|
)
|
$
|
218
|
|
$
|
97,623
|
|
Warren
H. Esanu
|
|
$
|
55,424
|
|
$
|
218
|
|
$
|
55,642
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects
the dollar amount recognized for financial statement reporting purposes
for 2006 in accordance with FAS 123R and thus includes amounts from
awards
granted prior to 2006.
|
(2) |
Represents
directors fees of $ 59,855 and consulting fees of $37,550 paid to
Mr.
Carney during 2006, and does not include compensation to Mr. Carney
of
$25,500 for services as our chief executive officer through April,
2006.
|
The
option awards represent the options to purchase 5,000 shares of common stock
which are automatically granted to each non-employee director on May 1 of each
year. Prior to 2006, we issued to our non-employee directors shares of common
stock in lieu of a portion of the cash compensation due to them for services
as
a director. All of such shares vested six months after the grant and therefore
no awards were outstanding at December 31, 2006.
As
of
December 31, 2006, each director has the following outstanding options: Messrs.
Esanu and Feldman, 40,000 each; Mr. Elser, 30,000; and Mr. Carney,
5,000.
Consulting
Agreements
On
March
14, 2006, Mr. Carney resigned as an officer but was engaged as a consultant
to
us in the area of product development through March 13, 2007, at which time
his
agreement terminated. His compensation was $50,000 during this period of which
$37,550 was paid in 2006 and the balance in 2007.
Employment
Agreements
We
have
an employment agreement and a salary continuation agreement with Mr. Kornfeld.
The employment agreement has a term which expires August 31, 2008 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 $1,000 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 August 31, 2008
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
We
have
an employment agreement with Mr.Tancredi, Senior Vice President, Treasurer
and
Secretary. The employment agreement has a term which expires July 31, 2008
and
continues on a year-to-year basis thereafter unless terminated by either party
on not less than 90 days’ prior written notice. Salary is determined
by
the
board, except that the salary may not be reduced except as a part of a salary
reduction program applicable to all executive officers. Upon death or
termination of employment as a result of a disability, Mr. Tancredi or his
estate is to receive a payment equal to three months salary. Upon a termination
without cause, Mr. Tancredi 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. Mr. Tancredi’s current annual salary is
$92,500.
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, 2007, 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
|
|
|
59,000
|
|
|
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)
|
|
|
856,364
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
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, 2007 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
2006, Warren H. Esanu, a director, served as a member of our audit and
compensation committees. During 2006, 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 $310,000. Katsky Korins LLP is continuing to render legal
services to us during 2007.
Item
14. |
Principal
Accountant Fees and Services.
|
The
following is a summary of the fees for professional services rendered by our
independent registered public accountants, BDO Seidman, LLP, for the years
ended
December 31, 2006 and December 31, 2005:
|
|
Fees
|
|
Fee
Category
|
|
2006
|
|
2005
|
|
Audit
fees
|
|
$
|
239,400
|
|
$
|
177,623
|
|
Audit-related
fees
|
|
|
12,500
|
|
|
15,031
|
|
Tax
fees
|
|
|
30,000
|
|
|
55,899
|
|
Total
Fees
|
|
$
|
281,900
|
|
$
|
248,553
|
|
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.
|
See
Schedule II.
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.
ExhibitNo. |
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 |
Amendment
Number Twenty Seven to the Amended and Restated Loan and Security
Agreement between the Company and Cheyne Special Situations Fund
L.P.,
dated as of February 7, 2007.
|
10.1 |
Form
of Executive Salary Continuation Agreement, incorporated by reference
to
Exhibit 19 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 August
1,
2006.
|
10.5 |
Employment
Agreement between the Company and Michael A.Tancredi dated August
1, 2006.
|
14.1 |
Code
of Ethics of the Company, dated March 23, 2004, incorporated by reference
to Exhibit 14.1 of the Company’s Annual Report on Form 10K for the year
ended December 31, 2003.
|
14.2 |
Standard
of Conduct of the Company.
|
22
|
Subsidiaries
of the Company, incorporated by reference to Exhibit 22.1 of the
Company’s
Annual Report on Form 10K for the year ended December 31,
1995.
|
23
|
Consent
of Independent Registered Public Accounting
Firm.
|
31.1
|
Certification
of chief executive officer and chief financial officer pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of chief executive officer and chief financial officer pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(b) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned thereunto duly authorized.
PORTA
SYSTEMS CORP.
Dated:
March 29, 2007
By:
/s/
Edward B. Kornfeld
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
29, 2007
|
Edward
B. Kornfeld
|
|
(Principal
Executive, Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/William
V. Carney
|
|
Director
|
|
March
29, 2007
|
William
V. Carney
|
|
|
|
|
|
|
|
|
|
/s/Warren
H. Esanu
|
|
Director
|
|
March
29, 2007
|
Warren
H. Esanu
|
|
|
|
|
|
|
|
|
|
/s/Michael
A. Tancredi
|
|
Director
|
|
March
29, 2007
|
Michael
A. Tancredi
|
|
|
|
|
|
|
|
|
|
/s/Herbert
H. Feldman
|
|
Director
|
|
March
29, 2007
|
Herbert
H. Feldman
|
|
|
|
|
|
|
|
|
|
/s/Marco
Elser
|
|
Director
|
|
March
29, 2007
|
Marco
Elser
|
|
|
|
|
Exhibit
I
Item
8. Financial Statements and Supplementary Data
Index
|
Page
|
|
|
Consolidated
Financial Statements and Notes:
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets, December 31, 2006 and 2005
|
F-3
|
Consolidated
Statements of Income and Comprehensive Income, Years Ended December
31,
2006, 2005 and 2004
|
F-4
|
Consolidated
Statements of Stockholders’ Deficit, Years Ended December 31, 2006, 2005
and 2004
|
F-5
|
Consolidated
Statements of Cash Flows
for
the Years Ended December 31, 2006, 2005 and 2004
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
|
Financial
Statement Schedule:
|
|
Report
of Independent Registered Public Accounting Firm
|
F-25
|
Financial
Statement Schedule II - Valuation and Qualifying Accounts
|
F-26
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Porta
Systems Corp.
Syosset,
New York
We
have
audited the accompanying consolidated balance sheets of Porta Systems Corp.
and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income and comprehensive income, stockholders’ deficit, and cash
flows for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States.
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 and, as of
December 31, 2006, has a stockholders’ deficit of $27,823,000 and a working
capital deficit of $31,646,000 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.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123R, “Share-Based Payments” using the modified-prospective transition
method.
/s/
BDO
SEIDMAN, LLP
BDO
SEIDMAN, LLP
Melville,
New York
March
23,
2007
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2006 and 2005
(in
thousands, except shares and par value)
Assets
|
|
2006
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,102
|
|
|
1,253
|
|
Accounts
receivable - trade, less allowance for doubtful accounts of
$13 in 2006 and 2005
|
|
|
5,417
|
|
|
3,471
|
|
Inventories
|
|
|
4,591
|
|
|
4,541
|
|
Prepaid
expenses and other current assets
|
|
|
697
|
|
|
447
|
|
Current
assets of discontinued operations
|
|
|
383
|
|
|
530
|
|
Total
current assets
|
|
|
13,190
|
|
|
10,242
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,571
|
|
|
1,352
|
|
Goodwill
|
|
|
2,961
|
|
|
2,961
|
|
Other
assets
|
|
|
51
|
|
|
48
|
|
Long
term assets of discontinued operations
|
|
|
11
|
|
|
58
|
|
Total
assets
|
|
$
|
17,784
|
|
|
14,661
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Senior
debt, including accrued interest
|
|
$
|
23,513
|
|
|
24,675
|
|
Subordinated
notes
|
|
|
6,144
|
|
|
6,144
|
|
6%
Convertible subordinated debentures
|
|
|
385
|
|
|
385
|
|
Accounts
payable
|
|
|
6,106
|
|
|
4,011
|
|
Accrued
expenses and other
|
|
|
2,136
|
|
|
1,591
|
|
Other
accrued interest payable
|
|
|
6,127
|
|
|
5,180
|
|
Liabilities
of discontinued operations
|
|
|
425
|
|
|
2,033
|
|
Total
current liabilities
|
|
|
44,836
|
|
|
44,019
|
|
|
|
|
|
|
|
|
|
Deferred
compensation
|
|
|
771
|
|
|
827
|
|
Total
liabilities
|
|
|
45,607
|
|
|
44,846
|
|
|
|
|
|
|
|
|
|
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 2006 and 2005
|
|
|
101
|
|
|
101
|
|
Additional
paid-in capital
|
|
|
76,125
|
|
|
76,124
|
|
Accumulated
deficit
|
|
|
(97,713
|
)
|
|
(99,895
|
)
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,398
|
)
|
|
(4,577
|
)
|
|
|
|
(25,885
|
)
|
|
(28,247
|
)
|
Treasury
stock, at cost, 30,940 shares
|
|
|
(1,938
|
)
|
|
(1,938
|
)
|
Total
stockholders’ deficit
|
|
|
(27,823
|
)
|
|
(30,185
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
17,784
|
|
|
14,661
|
|
See
accompanying notes to consolidated financial statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Income and Comprehensive Income
Years
ended December 31, 2006, 2005 and 2004
(in
thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
32,818
|
|
|
27,819
|
|
|
27,165
|
|
Cost
of sales
|
|
|
21,984
|
|
|
17,397
|
|
|
16,104
|
|
Gross
profit
|
|
|
10,834
|
|
|
10,422
|
|
|
11,061
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,515
|
|
|
5,120
|
|
|
4,227
|
|
Research
and development expenses
|
|
|
1,505
|
|
|
1,359
|
|
|
1,019
|
|
Reorganization
expense
|
|
|
—
|
|
|
877
|
|
|
—
|
|
Total
expenses
|
|
|
7,020
|
|
|
7,356
|
|
|
5,246
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,814
|
|
|
3,066
|
|
|
5,815
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,217
|
)
|
|
(1,080
|
)
|
|
(1,317
|
)
|
Interest
income
|
|
|
30
|
|
|
24
|
|
|
—
|
|
Other
income, net
|
|
|
2
|
|
|
5
|
|
|
7
|
|
Income
from continuing operations before income taxes
|
|
|
2,629
|
|
|
2,015
|
|
|
4,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(118
|
)
|
|
(160
|
)
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
2,511
|
|
|
1,855
|
|
|
4,336
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations (net of zero tax)
|
|
|
(329
|
)
|
|
(1,045
|
)
|
|
(1,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,182
|
|
|
810
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
179
|
|
|
(400
|
)
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
comprehensive income
|
|
$
|
2,361
|
|
|
410
|
|
|
2,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.25
|
|
|
0.18
|
|
|
0.43
|
|
Discontinuing
operations
|
|
|
(0.03
|
)
|
|
(0.10
|
)
|
|
(0.17
|
)
|
|
|
$
|
0.22
|
|
|
0.08
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average of shares outstanding
|
|
|
10,076
|
|
|
10,054
|
|
|
9,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.25
|
|
|
0.18
|
|
|
0.43
|
|
Discontinuing
operations
|
|
|
(0.03
|
)
|
|
(0.10
|
)
|
|
(0.17
|
)
|
|
|
$
|
0.22
|
|
|
0.08
|
|
|
0.26
|
|
Weighted
average shares of common stock outstanding
|
|
|
10,103
|
|
|
10,093
|
|
|
9,988
|
|
See
accompanying notes to consolidated financial statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Deficit
Years
ended December 31, 2006, 2005 and 2004
(In
thousands)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Additional
|
|
Other
|
|
|
|
|
|
|
|
Stock-
|
|
|
|
No.
of
|
|
Par
Value
|
|
Paid-in
|
|
Comprehensive
|
|
Accumulated
|
|
Treasury
|
|
No.
of
|
|
holders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Loss)
|
|
Deficit
|
|
Stock
|
|
Shares
|
|
Deficit
|
|
Balance
at December 31, 2003
|
|
|
10,003
|
|
$
|
100
|
|
$
|
76,059
|
|
$
|
(4,079
|
)
|
$
|
(103,380
|
)
|
$
|
(1,938
|
)
|
|
30,940
|
|
$
|
(33,238
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
30,940
|
|
|
(30,661
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
30,940
|
|
|
(30,185
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,182
|
|
|
|
|
|
|
|
|
2,182
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
Balance
at December 31, 2006
|
|
|
10,084
|
|
$
|
101
|
|
$
|
76,125
|
|
$
|
(4,398
|
)
|
$
|
(97,713
|
)
|
$
|
(1,938
|
)
|
|
30,940
|
|
$
|
(27,823
|
)
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Note 18)
Years
ended December 31, 2006, 2005 and 2004
(In
thousands)
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,182
|
|
|
810
|
|
|
2,675
|
|
Loss
from discontinued operations
|
|
|
329
|
|
|
1,045
|
|
|
1,662
|
|
Stock
compensation expense
|
|
|
1
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
414
|
|
|
410
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,945
|
)
|
|
(611
|
)
|
|
(1,336
|
) |
Inventories
|
|
|
(50
|
)
|
|
(320
|
)
|
|
(1,811
|
)
|
Prepaid
expenses
|
|
|
(250
|
)
|
|
(118
|
)
|
|
462
|
|
Other
assets
|
|
|
(3
|
)
|
|
20
|
|
|
(24
|
)
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
3,532
|
|
|
1,164
|
|
|
3,158
|
|
Net
cash provided by continuing operations
|
|
|
4,210
|
|
|
2,400
|
|
|
5,064
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operations of discontinued operations
|
|
|
(1,748
|
)
|
|
(1,303
|
)
|
|
(3,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operations
|
|
|
2,462
|
|
|
1,097
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(585
|
)
|
|
(415
|
)
|
|
(228
|
)
|
Net
cash provided by (used in) investing of discontinued
operations
|
|
|
5
|
|
|
(172
|
)
|
|
|
|
Net
cash used in investing activities
|
|
|
(580
|
)
|
|
(587
|
)
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Increase
in senior debt
|
|
|
|
|
|
337
|
|
|
287
|
|
Repayments
of senior debt
|
|
|
(1,163
|
)
|
|
(1,336
|
)
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,163
|
)
|
|
(999
|
)
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
130
|
|
|
(298
|
)
|
|
(97
|
)
|
Increase
(decrease) in cash and cash equivalents
|
|
|
849
|
|
|
(787
|
)
|
|
1,571
|
|
Cash
and equivalents - beginning of year
|
|
|
1,253
|
|
|
2,040
|
|
|
469
|
|
Cash
and cash equivalents - end of year
|
|
$
|
2,102
|
|
|
1,253
|
|
|
2,040
|
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements
December
31, 2006 and 2005
(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,
is recognized when a product is shipped.
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
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.
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.
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. 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, 2006 and 2005, related only
to
the Company’s signal processing division. The Company determined that there was
no goodwill impairment for 2006 or 2005.
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 (See Note 13.)
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.
Research
and Development
Costs
for
research and development activities are expensed as incurred.
Shipping
and Handling Costs
Shipping
and
handling costs are included as a component of cost of sales.
Net
Income Per Share
Basic
net
income per share is based on the weighted average number of shares outstanding.
Diluted net income 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.
Accounting
for Stock Based Compensation
The
Company had previously accounted for its stock-based employee compensation
plans
under the recognition and measurement principles of Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost was reflected in
net
income, as all options granted under those plans had an exercise price equal
to
the market value of the Common Stock on the date of grant.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
123R, “Share-Based Payment,” a revision of SFAS 123 which supercedes APB 25
“Accounting for Stock Issued to Employees”. As of January 1, 2006, the Company
adopted SFAS 123R using the modified prospective transition method. Under that
transition method, compensation cost recognized in fiscal 2006 includes (a)
compensation cost for all share-based payments granted prior to, but not yet
vested as of December 31, 2005, based on the grant-date fair value estimated,
and (b) compensation cost for all share-based payments granted subsequent to
December 31, 2005, based on the grant-date fair value estimate. Accordingly,
the
Company’s unaudited consolidated financial statements for the prior periods have
not been restated to reflect the adoption of SFAS 123R. Because the Company
previously adopted only the pro forma disclosure provisions of SFAS 123, it
will
recognize compensation cost relating to the unvested portion of awards granted
prior to the date of adoption, using the same estimate of the grant-date fair
value and the same attribution method used to determine the pro forma
disclosures under SFAS 123, except that forfeiture rates will be estimated
for
all options, as required by SFAS 123R. The cumulative effect of applying the
forfeiture rates is not material.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
For
the
fiscal year ended December 31, 2006, the Company recognized approximately $1,000
of non-cash compensation expense included in Selling, General and Administrative
expense in the Consolidated Statement of Income attributable to stock options
granted or vested subsequent to December 31, 2005. The Company used the
Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period of the grant.
The
following is a summary of the assumptions used in fiscal year ended December
31,
2006:
Risk-free
interest rate
|
|
|
4.35
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
term
|
|
|
5
years
|
Expected
volatility
|
|
|
50
|
%
|
The
risk-free interest rate is based on the US Treasury yield curve at the time
of
the grant. The expected term of stock options granted is derived from historical
data and represents the period of time that stock options are expected to be
outstanding. The Company also uses historical data to estimate expected dividend
yield and forfeiture rates. The expected volatility is based on historical
volatility, implied volatility and other factors impacting the
Company.
A
summary
of stock option transactions is as follows for the fiscal year ended December
31, 2006:
|
|
Shares
|
|
Weighted
Average Exercise Price
(per
share)
|
|
Weighted-Average
Remaining Contractual Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding at beginning of period
|
|
$
|
337,780
|
|
$
|
1.39
|
|
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
0.11
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
|
|
|
35,500
|
|
|
3.30
|
|
|
|
|
|
|
|
Options
outstanding at end of period
|
|
|
322,280
|
|
|
1.33
|
|
|
2.71
|
|
$
|
4,290
|
|
Options
exercisable at end of period
|
|
|
322,280
|
|
|
1.33
|
|
|
2.71
|
|
$
|
4,290
|
|
Options
available for future grants
|
|
|
977,720
|
|
|
|
|
|
|
|
|
|
|
The
weighted average grant-date fair value of stock options granted during the
period ended December 31, 2006 was $0.11 per share. As of December 31, 2006,
there were no unrecognized stock-based compensation costs related to options
granted under our plans as all options vested during the year.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
Awards
granted prior to the adoption of FASB 123R were accounted for under the
provisions of Accounting Principles Board Opinion No 25, “Accounting for Stock
Issued to Employees” (APB 25”), and its related interpretations. Under this
intrinsic value method there was no compensation expense recognized for the
year
ended December 31, 2005 because all the options had exercise prices equal to
the
market value of the underlying stock on the date of grant. The following table
details the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Statement (“SFAS”) No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, to stock-based employee compensation.
|
|
Year
Ended
|
|
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
Net
Income (loss) reported
|
|
$
|
810
|
|
$
|
2,675
|
|
Deduct:
Total stock-based employee Compensation expense determined under
Far value
based method
|
|
|
(2
|
)
|
|
(1
|
)
|
Pro-forma
net income
|
|
$
|
808
|
|
$
|
2,674
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.08
|
|
$
|
0.27
|
|
Basic
pro-forma
|
|
|
0.08
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.08
|
|
$
|
0.27
|
|
Diluted
- pro-forma
|
|
|
0.08
|
|
|
0.27
|
|
The
following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants during fiscal year ended December 31, 2005:
term
of 5 years, dividend yield of 0.00%, volatility of 50% and risk-free interest
rate of 4.35%. For the fiscal year ended December 31, 2004: term of 5 years,
dividend yield of 0.00%, volatility of 50% and risk-free interest rate of
4.22%.
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.
Reorganization
Expenses
Reorganization
expenses in 2005 were $877,000. The expenses were for investment banking, legal
and accounting, including payment of legal fees and other expenses of our senior
debt holder, resulting from the requirement of our senior debt holder that
we
restructure our Company to provide payments on account of the senior
debt.
Use
of
Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
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, accrued expenses, goodwill
valuation, stock based compensation and the deferred tax asset valuation
allowance. Actual results could differ from the estimates.
New
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109. The
objective of this interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for the fiscal years beginning after December 15, 2006. The adoption
of this statement is not expected to have a material effect on our financial
position or results of operations.
In
September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,”
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes a
common
definition of fair value, provides a framework for measuring fair value under
U.S. GAAP and expands disclosures requirements about fair value measurements.
SFAS No. 157 is effective for financial statements issued in fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. . The adoption of this statement is not expected to have a material
effect on our financial position or results of operations.
As
of
December 31, 2006, the Company’s
debt
included (a) $23,513,000 of senior debt, as a result of a February 7, 2007
extension, which matures on October 1, 2007; (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 ($5,976,000) on the subordinated
notes or the principal ($385,000) or interest ($151,000) on the 6% Debentures.
Accordingly, the senior debt and subordinated debt are classified as current
liabilities (Notes 7, 8 and 9).
Although
the Company has realized profits from operations in each of the last three
years, after incurring losses in several previous years, its liquidity is
impaired by both its working capital deficit, which was $31,646,000 at December
31, 2006, 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.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
At
December 31, 2006, 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
(Notes 7, 8 and 9).
On
February 7, 2007 Cheyne Special Situations Fund L.P (“Cheyne”) purchased the
Company’s senior debt of approximately $23,400,000 from SHF IX, LLC and
subsequently extended the maturity of the senior debt to October 1, 2007. The
Company can not give any assurance that the holder of its senior debt will
extend the loan beyond October 1, 2007. The
Company cannot determine whether the holder of the senior debt will continue
to
extend the loans. Any adverse event, including declines in business, could
have
an effect on the decision of the holder of the senior debt to extend or demand
payment on the notes. If
the
holder of the senior debt does not extend the maturity of our senior debt beyond
October 1, 2007 or if the holder of the senior debt demands payment of all
or a
significant portion of the senior debt when due, we will not be able to continue
in business, and it is likely that we will 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. 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.
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, 2006 is adequate. However, actual write-offs may differ from the
recorded allowance.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
The
allowance for doubtful accounts receivable was $13,000
as of
December 31, 2006 and 2005. The accounts receivable relating to the discontinued
operations are included in assets of discontinued operations. (See Note 10.)
In
2006,
the Company wrote off approximately $243,000 of fully reserved OSS accounts
receivable.
Inventories
from continuing operations consist of the following (net of $2,345,000 in
reserve for 2006 and $2,583,000 for 2005):
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Parts
and component
|
|
$
|
3,637,000
|
|
|
3,022,000
|
|
Work-in-process
|
|
|
543,000
|
|
|
460,000
|
|
Finished
goods
|
|
|
411,000
|
|
|
1,059,000
|
|
|
|
$
|
4,591,000
|
|
|
4,541,000
|
|
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.
(5) |
Property,
Plant and Equipment
|
Property,
plant and equipment from continuing operations consist of the
following:
|
|
December
31
|
|
Estimated
|
|
|
|
2006
|
|
2005
|
|
useful
lives
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
132,000
|
|
|
132,000
|
|
|
—
|
|
Buildings
|
|
|
850,000
|
|
|
850,000
|
|
|
20
years
|
|
Machinery
and equipment
|
|
|
1,584,000
|
|
|
1,209,000
|
|
|
3-8
years
|
|
Furniture
and fixtures
|
|
|
307,000
|
|
|
276,000
|
|
|
5-10
years
|
|
Transportation
equipment
|
|
|
63,000
|
|
|
33,000
|
|
|
4
years
|
|
Tools
and molds
|
|
|
1,353,000
|
|
|
1,099,000
|
|
|
8
years
|
|
Leasehold
improvements
|
|
|
251,000
|
|
|
200,000
|
|
|
Lesser
of term of lease or estimated useful life of asset
|
|
|
|
|
4,540,000
|
|
|
3,799,000
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
2,969,000
|
|
|
2,447,000
|
|
|
|
|
|
|
$
|
1,571,000
|
|
|
1,352,000
|
|
|
|
|
Total
depreciation and amortization expense for 2006, 2005 and 2004 amounted to
approximately $414,000,
$410,000 and $359,000 respectively.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
During
2006, the Company wrote off previously fully depreciated assets of approximately
$69,000, 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, 2006 and 2005, 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, 2006 and 2005, the Company’s senior debt consisted of debt in the
amount of $23,513,000 and $24,675,000, 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 October 1, 2007
and,
accordingly, the senior debt has been classified as a current liability. (See
Note 2.)
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. 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, 2006 and 2005, 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, 2006 and 2005, accrued interest on the
debentures was $151,000 and $127,000, 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.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
As
of
December 31, 2006 and 2005, subordinated notes in the principal amount of
$6,144,000 were outstanding. As of December 31, 2006, $5,976,000 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 $5,976,000 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 (see Note
7).
(10) |
Discontinued
operations
|
Operating
Support Systems (“OSS”)
In
December 2003, the Company decided to wind down its OSS business because of
continuing losses combined
with difficulties in marketing OSS products in view of the Company’s financial
condition. The OSS operating segment is reported in the consolidated financial
statements as a discontinued operation for all periods presented. Currently,
its operating activities are limited to the performance
of
contractual maintenance and warranty services which expire by June 30, 2007.
The
Company anticipates that all OSS operations will cease by June 30, 2007. The
Company continues to pursue the sale of the OSS business technology and the
remaining inventory. The Company hopes to complete the sale in 2007, but the
Company gives no assurances that it will be successful. We do not expect OSS
operations to be material in 2007.
The
following amounts related to OSS have been segregated from the Company’s
continuing operations and are reported as assets and liabilities of discontinued
operations in the consolidated balance sheet:
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
13,000
|
|
$
|
35,000
|
|
Accounts
receivable
|
|
|
18,000
|
|
|
184,000
|
|
Inventories
|
|
|
352,000
|
|
|
311,000
|
|
Property,
plant and equipment
|
|
|
11,000
|
|
|
57,000
|
|
Other
assets
|
|
|
—
|
|
|
1,000
|
|
Total
assets of discontinued operations
|
|
$
|
394,000
|
|
$
|
588,000
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
425,000
|
|
$
|
2,033,000
|
|
Total
liabilities of discontinued operations
|
|
$
|
425,000
|
|
$
|
2,033,000
|
|
Results
of operations for OSS have been segregated from continuing operations and are
reflected as
discontinued
operations approximately as follows:
|
|
December
31, 2006
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
333,000
|
|
$
|
785,000
|
|
$
|
2,003,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(329,000
|
)
|
$
|
(1,045,000
|
)
|
$
|
(1,661,000
|
)
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
(11) |
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. Total deferred compensation obligations
as of December 31, 2006 and 2005, before discounting at a rate of 6.5%, were
$1,317,000.
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, 2006, 2005 and 2004, the Company’s contribution amounted to
$44,000, $41,000 and $38,000, respectively.
Incentive
awards are provided to employees under the terms of our 1998 Non-Qualified
Stock
Option Plan and our 1999 Incentive and Non-Qualified Stock Option Plan (the
"1998 Plan" and “1999 Plan”, respectively). 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 under the 1998
Plan are equal to the fair market value at the date of grant and vest as
determined by the board of directors. 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 are equal to the fair market value at the date of grant
and vest as determined by the board of directors, which is historically
determined as six months. 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. Options under
both the 1998 and 1999 Plans have expiration terms between 5 and 10
years.
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 2006, 2005 and 2004.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
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. Currently
there are 450,000 options outstanding under this plan for future
grants.
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. Currently there are 285,000 options
outstanding for future grants.
The
weighted-average fair values of options granted were $0.07 per share for options
granted in 2004, $0.14 per share for options granted in 2005 and $0.11 per
share
for options granted in 2006. 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 2006, 2005 and 2004:
|
|
2006
|
|
2005
|
|
2004
|
|
Dividends:
|
|
$
|
0.00
per share
|
|
$
|
0.00
per share
|
|
$
|
0.00
per share
|
|
Volatility:
|
|
|
50
|
%
|
|
50
|
%
|
|
50
|
%
|
Risk-free
interest:
|
|
|
4.35
|
%
|
|
4.35
|
%
|
|
4.22
|
%
|
Expected
term:
|
|
|
5
years
|
|
|
5
years
|
|
|
5
years
|
|
A
summary
of the status of the Company’s stock option plans as of December 31, 2006, 2005,
and 2004, and changes during the years ending on those dates is presented below:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
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
|
|
|
337,780
|
|
$
|
1.39
|
|
|
322,780
|
|
$
|
1.45
|
|
|
552,530
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
0.11
|
|
|
15,000
|
|
|
0.14
|
|
|
15,000
|
|
|
0.07
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
35,500
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(244,000
|
)
|
|
3.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
end of year
|
|
|
322,280
|
|
$
|
1.33
|
|
|
337,780
|
|
$
|
1.39
|
|
|
322,780
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
|
322,280
|
|
|
|
|
|
337,780
|
|
|
|
|
|
318,780
|
|
|
|
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
The
provision for income taxes consists of the following:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Federal
|
|
$
|
—
|
|
|
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
|
State
and foreign
|
|
|
118,000
|
|
|
— |
|
|
|
|
|
|
|
|
169,000
|
|
|
|
|
Total
|
|
$
|
118,000
|
|
|
|
|
|
160,000
|
|
|
|
|
|
169,000
|
|
|
|
|
The
domestic and foreign components of income (loss) from continuing operation
before provision (benefit) for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
United
States
|
|
$
|
1,146,000
|
|
|
782,795
|
|
|
2,513,000
|
|
Foreign
|
|
|
1,483,000
|
|
|
1,231,205
|
|
|
1,992,000
|
|
Income
from continuing operations before discontinued operations
|
|
$
|
2,629,000
|
|
|
2,015,000
|
|
|
4,505,000
|
|
The
Company’s tax provision consisted of current federal minimum taxes and state and
foreign taxes.
Porta
has
unused United States tax net operating loss (NOL) carryforwards of approximately
$48,350,000 expiring at various dates between 2008 and 2026. Due to the 1997
change in ownership which resulted from the conversion of the Company’s
Debentures to common stock, the Company’s usage of its NOL will be limited in
accordance with Internal Revenue Code section 382. The Company’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 $6,511,000 with indefinite expiration
dates.
The
components of the deferred tax assets, the net balance of which total zero
after
the valuation allowance, as of December 31, 2006 and 2005 are as
follows:
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Inventory
|
|
$
|
933,000
|
|
|
1,254,000
|
|
Allowance
for doubtful accounts receivable
|
|
|
5,000
|
|
|
99,000
|
|
Benefits
of tax loss carryforwards
|
|
|
20,568,000
|
|
|
20,361,000
|
|
Benefit
plans
|
|
|
412,000
|
|
|
421,000
|
|
Accrued
commissions
|
|
|
88,000
|
|
|
77,000
|
|
Other
|
|
|
2,957,000
|
|
|
2,762,000
|
|
Depreciation
|
|
|
253,000
|
|
|
364,000
|
|
|
|
|
25,216,000
|
|
|
25,338,000
|
|
Valuation
allowance
|
|
$
|
(25,216,000
|
)
|
|
(25,338,000
|
)
|
|
|
$
|
|
|
|
|
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
Because
of the Company’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.
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, 2006, undistributed earnings of the foreign subsidiaries amounted
to approximately $2,692,000.
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, 2006, 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 2006, 2005,
and
2004 amounted to approximately $614,000, $594,000 and $581,000, respectively.
Minimum rental commitments, exclusive of future escalation
charges,
for each of the next five years are as follows:
2007
|
|
$
|
591,000
|
|
2008
|
|
|
294,000
|
|
2009
|
|
|
264,000
|
|
2010
|
|
|
264,000
|
|
2011
|
|
|
264,000
|
|
Thereafter
|
|
|
2,181,000
|
|
|
|
$
|
3,858,000
|
|
Porta’s
five largest
customers accounted for sales of $23,333,000, or approximately 70% of sales,
for
2006,
$17,431,000
or approximately 61% of sales, for
2005
and
$15,443,000 or approximately 53% of sales, for
2004.
British
Telecommunications PLC
was
Porta’s largest customer for 2006, accounting for sales of $9,614,000 or
approximately 29%. For 2005, British Telecommunications was also Porta’s largest
customer accounting for sales of $5,641,000 or approximately 20% of sales.
Fujitsu Telecommunications Europe LTD was the largest customer for 2004,
accounting for sales of $4,772,000,
or approximately 16%
of
sales. A
significant amount of sales of the Company’s products for use by British
Telecommunications was 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 $2,259,000, or 8% of sales, for
2004
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
(16) |
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.
(17) |
Net
Income Per Share
|
In
both
2006 and 2005, the weighted average shares of common stock outstanding for
purposes of computing diluted net income per share include 65,000 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 257,280, 292,780 and 277,780,
shares of common stock for 2006, 2005 and 2004, respectively, with exercise
prices ranging from $0.32 to $3.85, $0.30 to $3.85 and $0.02 to $3.85 for 2006,
2005 and 2004, respectively, were outstanding but not included in the
computation of diluted net income per share, because the effect of doing so
would be anti-dilutive.
(18) |
Cash
Flow Information
|
Supplemental
cash flow information for the years ended December 31, 2006 is as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
paid for interest
|
|
$
|
169
|
|
$
|
1,130
|
|
$
|
116
|
|
Cash
paid for income taxes
|
|
$
|
0
|
|
$
|
115
|
|
$ |
69 |
|
During
2005, the Company issued common stock amounting to $66,000 in lieu of payment
of
professional fees.
(19) |
Segment
and Geographic Data
|
Porta
has
two 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; and Signal Processing (“Signal”) whose products are used in data
communication devices that employ high frequency transformer
technology.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
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.
|
|
2006
|
|
2005
|
|
2004
|
|
Revenue:
|
|
|
|
|
|
|
|
Line
|
|
$
|
27,188,000
|
|
$
|
21,982,000
|
|
$
|
21,545,000
|
|
Signal
|
|
|
5,292,000
|
|
|
5,710,000
|
|
|
5,551,000
|
|
|
|
$
|
32,480,000
|
|
$
|
27,692,000
|
|
$
|
27,096,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
4,688,000
|
|
|
4,345,000
|
|
|
5,784,000
|
|
Signal
|
|
|
1,640,000
|
|
|
2,134,000
|
|
|
2,124,000
|
|
|
|
$
|
6,328,000
|
|
$
|
6,479,000
|
|
$
|
7,908,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
315,000
|
|
|
310,000
|
|
|
263,000
|
|
Signal
|
|
|
34,000
|
|
|
31,000
|
|
|
27,000
|
|
|
|
$
|
349,000
|
|
|
341,000
|
|
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
9,667,000
|
|
|
7,626,000
|
|
|
6,525,000
|
|
Signal
|
|
|
5,159,000
|
|
|
4,775,000
|
|
|
4,562,000
|
|
|
|
$
|
14,826,000
|
|
|
12,401,000
|
|
|
11,087,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
517,000
|
|
|
357,000
|
|
|
132,000
|
|
Signal
|
|
|
60,000
|
|
|
37,000
|
|
|
72,000
|
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
$
|
577,000
|
|
|
394,000
|
|
|
204,000
|
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes
to
Consolidated Financial Statements, continued
The
following table reconciles segment totals to consolidated totals:
|
|
2006
|
|
2005
|
|
2004
|
|
Revenue:
|
|
|
|
|
|
|
|
Total
revenue for reportable segments
|
|
$
|
32,480,000
|
|
|
27,692,000
|
|
|
27,096,000
|
|
Other
revenue
|
|
|
338,000
|
|
|
127,000
|
|
|
69,000
|
|
Consolidated
total revenue
|
|
$
|
32,818,000
|
|
|
27,819,000
|
|
|
27,165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income :
|
|
|
|
|
|
|
|
|
|
|
Total
segment income for reportable segments
|
|
$
|
6,328,000
|
|
|
6,479,000
|
|
|
7,908,000
|
|
Corporate
and unallocated
|
|
|
(2,514,000
|
)
|
|
(3,413,000
|
)
|
|
(2,093,000
|
)
|
Consolidated
total operating income
|
|
$
|
3,814,000
|
|
|
3,066,000
|
|
|
5,815,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
349,000
|
|
|
341,000
|
|
|
290,000
|
|
Corporate
and unallocated
|
|
|
65,000
|
|
|
69,000
|
|
|
69,000
|
|
Consolidated
total deprecation and amortization
|
|
$
|
414,000
|
|
|
410,000
|
|
|
359,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
14,826,000
|
|
|
12,401,000
|
|
|
11,087,000
|
|
Corporate
and unallocated
|
|
|
2,564,000
|
|
|
1,672,000
|
|
|
2,564,000
|
|
Assets
of discontinued operations
|
|
|
394,000
|
|
|
588,000
|
|
|
787,000
|
|
Consolidated
total assets
|
|
$
|
17,784,000
|
|
|
14,661,000
|
|
|
14,438,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$
|
577,000
|
|
|
394,000
|
|
|
204,000
|
|
Corporate
and unallocated
|
|
|
8,000
|
|
|
21,000
|
|
|
24,000
|
|
Consolidated
total capital expenditures
|
|
$
|
585,000
|
|
|
415,000
|
|
|
228,000
|
|
The
following table presents information about the Company by geographic
area:
|
|
2006
|
|
2005
|
|
2004
|
|
Revenue:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
9,625,000
|
|
|
10,120,000
|
|
|
9,809,000
|
|
United
Kingdom
|
|
|
20,725,000
|
|
|
14,542,000
|
|
|
14,217,000
|
|
Other
Europe
|
|
|
0
|
|
|
0
|
|
|
29,000
|
|
Latin
America
|
|
|
0
|
|
|
0
|
|
|
158,000
|
|
Other
North America
|
|
|
2,468,000
|
|
|
3,157,000
|
|
|
2,952,000
|
|
Consolidated
total revenue
|
|
$
|
32,818,000
|
|
|
27,819,000
|
|
|
27,165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
4,241,000
|
|
|
4,055,000
|
|
|
3,843,000
|
|
United
Kingdom
|
|
|
44,000
|
|
|
77,000
|
|
|
169,000
|
|
Other
North America
|
|
|
298,000
|
|
|
288,000
|
|
|
352,000
|
|
|
|
|
4,583,000
|
|
|
4,420,000
|
|
|
4,364,000
|
|
Current
and other assets
|
|
|
13,201,000
|
|
|
10,241,000
|
|
|
10,074,000
|
|
Consolidated
total assets
|
|
$
|
17,784,000
|
|
|
14,661,000
|
|
|
14,438,000
|
|
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, 2006
|
|
June
30, 2006
|
|
September
30, 2006
|
|
December
31, 2006
|
|
Net
sales
|
|
$
|
7,937,000
|
|
$
|
8,084,000
|
|
$
|
9,018,000
|
|
$
|
7,779,000
|
|
Gross
profit
|
|
|
2,713,000
|
|
|
2,752,000
|
|
|
2,984,000
|
|
|
2,385,000
|
|
Loss
from discontinued operations
|
|
|
(82,000
|
)
|
|
(76,000
|
)
|
|
(87,000
|
)
|
|
(83,000
|
)
|
Net
income
|
|
|
605,000
|
|
|
587,000
|
|
|
818,000
|
|
|
172,000
|
|
Income
per share from continuing operations
|
|
|
0.07
|
|
|
0.07
|
|
|
0.09
|
|
|
0.03
|
|
(Loss)
per share from discontinued Operations
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
|
Quarter
Ended
|
|
|
|
March
31, 2005
|
|
June
30, 2005
|
|
September
30, 2005
|
|
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
7,407,000
|
|
$
|
8,223,000
|
|
$
|
6,875,000
|
|
$
|
5,314,000
|
|
Gross
profit
|
|
|
3,158,000
|
|
|
3,275,000
|
|
|
2,446,000
|
|
|
1,543,000
|
|
Loss
from discontinued operations
|
|
|
(273,000
|
)
|
|
(263,000
|
)
|
|
(166,000
|
)
|
|
(343,000
|
)
|
Net
income (loss)
|
|
|
1,203,000
|
|
|
887,000
|
|
|
107,000
|
|
|
(1,387,000
|
)
|
Income
per share from continuing operations
|
|
|
0.14
|
|
|
0.11
|
|
|
0.03
|
|
|
(0.10
|
)
|
(Loss)
per share from discontinued operations
|
|
|
(0.03
|
)
|
|
(0.02
|
)
|
|
(0.02
|
)
|
|
(0.03
|
)
|
During
the first three quarters of 2005, the Company had incurred approximately
$450,000 in reorganization expenses 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.
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM:
The
Board
of Directors and Stockholders
Porta
Systems Corp.
Syosset,
New York
The
audits referred to in our report, dated March 23, 2007, 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, 2006. 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.
BDO
Seidman, LLP
Melville,
New York
March
23,
2007
Schedule
II
|
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, 2006
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
13
|
|
$ |
—
|
|
$
|
|
|
$
|
13
|
|
Inventory
reserve
|
|
|
2,583
|
|
|
—
|
|
|
238
|
|
|
2,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
802
|
|
$
|
19
|
|
$
|
808
|
|
$
|
13
|
|
Inventory
reserve
|
|
|
2,626
|
|
|
626
|
|
|
669
|
|
|
2,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR
ENDED DECEMBER 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
848
|
|
$
|
34
|
|
$
|
80
|
|
$
|
802
|
|
Inventory
reserve
|
|
|
2,936
|
|
|
515
|
|
|
825
|
|
|
2,626
|
|