SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended March 31, 2007
o
TRANSITION
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from _______________ to _______________
Commission
file number 1-8191
PORTA
SYSTEMS CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
11-2203988
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
6851
Jericho Turnpike, Suite 170, Syosset, New York
(Address
of principal executive offices)
11791
(Zip
Code)
516-364-9300
(Company’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13
of
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days
Yes
x No
o
Indicate
by a check mark whether the registrant is 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 Exchange Act. Check
one:
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer x
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest
practicable date:
Common
stock (par value $0.01) 10,075,560 shares as of April 27,
2007
PART
I.- FINANCIAL INFORMATION
Item
1- Financial
Statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands, except shares and par value)
|
|
Unaudited
|
|
|
|
|
|
March
31
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
564
|
|
$
|
2,102
|
|
Accounts
receivable - trade, less allowance for doubtful accounts of $13 in
2007
and $13 in 2006
|
|
|
7,155
|
|
|
5,417
|
|
Inventories
|
|
|
6,251
|
|
|
4,591
|
|
Prepaid
expenses and other current assets
|
|
|
718
|
|
|
697
|
|
Assets
of discontinued operations
|
|
|
383
|
|
|
383
|
|
Total
current assets
|
|
|
15,071
|
|
|
13,190
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,644
|
|
|
1,571
|
|
Goodwill,
net
|
|
|
2,961
|
|
|
2,961
|
|
Other
assets
|
|
|
61
|
|
|
51
|
|
Long
term assets of discontinued operations
|
|
|
5
|
|
|
11
|
|
Total
assets
|
|
$
|
19,742
|
|
$
|
17,784
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Senior
debt
|
|
$
|
23,554
|
|
$
|
23,513
|
|
Subordinated
notes
|
|
|
6,144
|
|
|
6,144
|
|
6%
convertible subordinated debentures
|
|
|
385
|
|
|
385
|
|
Accounts
payable
|
|
|
7,620
|
|
|
6,106
|
|
Accrued
expenses and other
|
|
|
2,304
|
|
|
2,136
|
|
Other
accrued interest payable
|
|
|
6,365
|
|
|
6,127
|
|
Liabilities
of discontinued operations
|
|
|
254
|
|
|
425
|
|
Total
current liabilities
|
|
|
46,626
|
|
|
44,836
|
|
|
|
|
|
|
|
|
|
Deferred
compensation, net of current portion
|
|
|
755
|
|
|
771
|
|
Total
long-term liabilities
|
|
|
755
|
|
|
771
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
47,381
|
|
|
45,607
|
|
|
|
|
|
|
|
|
|
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 10,106,501
shares in 2007 and 10,106,480 in 2006
|
|
|
101
|
|
|
101
|
|
Additional
paid-in capital
|
|
|
76,124
|
|
|
76,125
|
|
Accumulated
deficit
|
|
|
(97,548
|
)
|
|
(97,713
|
)
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,378
|
)
|
|
(4,398
|
)
|
|
|
|
(25,701
|
)
|
|
(25,885
|
)
|
Treasury
stock, at cost, 30,940 shares
|
|
|
(1,938
|
)
|
|
(
1,938
|
)
|
Total
stockholders’ deficit
|
|
|
(27,639
|
)
|
|
(27,823
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
19,742
|
|
$
|
17,784
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Operations and Comprehensive Income
(In
thousands, except per share amounts)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,202
|
|
$
|
7,938
|
|
Cost
of sales
|
|
|
5,582
|
|
|
5,225
|
|
Gross
profit
|
|
|
2,620
|
|
|
2,713
|
|
Selling,
general and administrative expenses
|
|
|
1,581
|
|
|
1,306
|
|
Research
and development expenses
|
|
|
373
|
|
|
401
|
|
Total
operating expenses
|
|
|
1,954
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
666
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(440
|
)
|
|
(296
|
)
|
Other
expense, net
|
|
|
(1
|
)
|
|
— |
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
225
|
|
|
710
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(26
|
)
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Income
from continuing operations before discontinued operations
|
|
|
199
|
|
|
687
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
Loss
from discontinued operations (net of zero taxes)
|
|
|
(34
|
)
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
165
|
|
$
|
605
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(73
|
)
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
92
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per common share:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.02
|
|
$
|
0.06
|
|
Discontinued
operations
|
|
|
— |
|
|
— |
|
|
|
$
|
0.02
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,076
|
|
|
10,076
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per common share:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.02
|
|
$
|
0.06
|
|
Discontinued
operations
|
|
|
— |
|
|
— |
|
|
|
$
|
0.02
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,111
|
|
|
10,106
|
|
See
accompanying notes to unaudited consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Cash Flows
(In
thousands)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
165
|
|
$
|
605
|
|
Loss
from discontinued operations
|
|
|
34
|
|
|
82
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
71
|
|
|
112
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,738
|
)
|
|
(1,017
|
)
|
Inventories
|
|
|
(1,661
|
)
|
|
395
|
|
Prepaid
expenses and other current assets
|
|
|
(23
|
)
|
|
(67
|
)
|
Other
assets
|
|
|
(9
|
)
|
|
(9
|
)
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
1,769
|
|
|
802
|
|
Net
cash provided by (used in) operating activities
|
|
|
(1,392
|
)
|
|
903
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(144
|
)
|
|
(126
|
)
|
Net
cash used in investing activities
|
|
|
(144
|
)
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Increase
in senior debt
|
|
|
191
|
|
|
— |
|
Repayments
of senior debt
|
|
|
(150
|
)
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
41
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(43
|
)
|
|
(726
|
)
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(1,538
|
)
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of the year
|
|
|
2,102
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of the period
|
|
$
|
564
|
|
$
|
1,033
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$
|
24
|
|
$
|
66
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
0
|
|
$
|
23
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
NOTES
TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note
1: |
Management’s
Responsibility for Interim Financial Statements Including All
Adjustments
Necessary for Fair
Presentation
|
Management
acknowledges its responsibility for the preparation of the accompanying interim
consolidated financial statements which reflect all adjustments, consisting
of
normal recurring adjustments, considered necessary in its opinion for a fair
statement of its consolidated financial position and the results of its
operations for the interim period presented. These consolidated financial
statements should be read in conjunction with the summary of significant
accounting policies and notes to consolidated financial statements included
in
the Company’s Form 10-K annual report for the year ended December 31, 2006.
These financial statements have been prepared assuming that the Company will
continue as a going concern and, accordingly, do not include any adjustments
that might result from the outcome of the uncertainties described within. The
audit opinion included in the December 31, 2006 Form 10-K annual report
contained an explanatory paragraph regarding the Company’s ability to continue
as a going concern. The factors which resulted in the explanatory paragraph
are
continuing. Results for the first three months of 2007 are not necessarily
indicative of results for the year.
Inventories
are stated at the lower of cost (on the average or first-in, first-out methods)
or market.
The
composition of inventories at the end of the respective periods is as follows
(net of reserves of $2,411,000 for 2007 and $2,345,000 for 2006):
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
(in
thousands)
|
|
Parts
and components
|
|
$
|
3,911
|
|
$
|
3,637
|
|
Work-in-process
|
|
|
1,081
|
|
|
543
|
|
Finished
goods
|
|
|
1,259
|
|
|
411
|
|
|
|
$
|
6,251
|
|
$
|
4,591
|
|
Note
3: Senior and Subordinated Debt
On
March
31, 2007, the Company’s liability to the holder of its senior debt was
$23,554,000.
During
the fourth quarter of 2004, SHF IX, LLC an affiliate of Stonehill Financial,
LLC, purchased the Company’s senior debt of approximately $25,000,000 from Wells
Fargo Foothill, Inc. The Company has made payments totaling $2,695,000 as
required by amendments and extensions of the loan agreement, of which $478,000
was applied to interest and $2,217,000 was applied to principal. 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. 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.
As
of
March 31, 2007, the Company’s short-term debt also included $6,144,000 of
subordinated debt that became due on July 3, 2001 and $385,000 of 6% debentures
which became due on July 2, 2002. The interest rate on the 6% debentures
increased to 8.26% as a result of our failure to make interest payments on
the
debentures since July 1, 2000 and our failure to pay principal on July 2, 2002.
Accrued interest on the subordinated notes was approximately $6,207,000, which
represents interest from July 2000 through March 31, 2007. We are precluded
by
the holder of our senior debt from paying any principal or interest on the
subordinated debt.
Note
4: Accounting for Stock Based Compensation
For
the
three months ended March 31, 2007 and 2006, the Company did not issue any stock
options and, therefore, did not recognize non-cash compensation expense
attributable to stock options granted during the quarters. The Company uses
the
Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period when granting stock options. All
options previously granted are fully vested.
Note
5: Segment Data
The
Company has two reportable segments: Line Connection and Protection Equipment
(“Line”) whose products interconnect copper telephone lines to switching
equipment and provide fuse elements that protect telephone equipment and
personnel from electrical surges, and Signal Processing (“Signal”) whose
products are used in data communication devices that employ high frequency
transformer technology.
Due
to
continuing losses in the Operating Support Systems (“OSS”) division, combined
with difficulties in marketing OSS products in view of our financial condition,
in December 2003, the Company decided to limit its operations in this segment
to
the performance of contractual maintenance and warranty services. Our
obligations to perform these services will expire in June 2007 (see Note 7)
and
the Company anticipates that these services will cease by June 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. Accordingly, effective 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 the
Consolidated Financial Statements present in this Form 10-Q. OSS was engaged
in
the business whose products automate the testing, provisioning, maintenance
and
administration of communication networks and the management of support personnel
and equipment. Currently we limit OSS activities to the performance of
contractual maintenance and warranty services.
The
factors used to determine the above segments focused primarily on the types
of
products and services provided, and the type of customer served. Each of these
segments is managed separately from the others, and management evaluates segment
performance based on operating income.
There
has
been no significant change, from December 31, 2006, in the basis of measurement
of segment revenues and profit or loss, and no significant change in the
Company’s assets for the Line and Signal reporting segments.
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Sales:
|
|
|
|
|
|
Line
|
|
$
|
6,801,000
|
|
$
|
6,488,000
|
|
Signal
|
|
|
1,388,000
|
|
|
1,412,000
|
|
|
|
$
|
8,189,000
|
|
$
|
7,900,000
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
Line
|
|
$
|
1,062,000
|
|
$
|
1,204,000
|
|
Signal
|
|
|
418,000
|
|
|
384,000
|
|
|
|
$
|
1,480,000
|
|
$
|
1,588,000
|
|
The
following table reconciles segment totals to consolidated
totals:
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Sales:
|
|
|
|
|
|
Total
revenue for reportable segments
|
|
$
|
8,189,000
|
|
$
|
7,900,000
|
|
Other
revenue
|
|
|
13,000
|
|
|
38,000
|
|
Consolidated
total revenue
|
|
$
|
8,202,000
|
|
$
|
7,938,000
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
Total
segment income for
|
|
|
|
|
|
|
|
reportable
segments
|
|
$
|
1,480,000
|
|
$
|
1,588,000
|
|
Corporate
and unallocated
|
|
|
(814,000
|
)
|
|
(582,000
|
)
|
Consolidated
total operating income
|
|
$
|
666,000
|
|
$
|
1,006,000
|
|
Note
6: 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 did not 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 did not have a material effect on our financial
position or results of operations.
Note
7: Discontinued operations
Operating
Support Systems (“OSS”)
In
December 2003, the Company decided to limit 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 will 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
that the OSS operations will 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:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Assets
of discontinued operations:
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
13,000
|
|
$
|
13,000
|
|
Accounts
receivable
|
|
|
17,000
|
|
|
18,000
|
|
Inventories
|
|
|
353,000
|
|
|
352,000
|
|
Property,
plant and equipment
|
|
|
5,000
|
|
|
11,000
|
|
Total
assets of discontinued operations
|
|
$
|
388,000
|
|
$
|
394,000
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
254,000
|
|
$
|
425,000
|
|
Total
liabilities of discontinued operations
|
|
$
|
254,000
|
|
$
|
425,000
|
|
Results
of
operations for OSS have been segregated from continuing operations and are
reflected as discontinued operations approximately as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
72,000
|
|
$
|
105,000
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(34,000
|
)
|
$
|
(82,000
|
)
|
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
Our
consolidated statements of operations for the periods indicated below, shown
as
a percentage of sales, are as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Sales
|
|
|
100
|
%
|
|
100
|
%
|
Cost
of Sales
|
|
|
68
|
%
|
|
66
|
%
|
Gross
Profit
|
|
|
32
|
%
|
|
34
|
%
|
Selling,
general and administrative expenses
|
|
|
19
|
%
|
|
16
|
%
|
Research
and development expenses
|
|
|
5
|
%
|
|
5
|
%
|
Operating
income
|
|
|
8
|
%
|
|
13
|
%
|
Interest
expense - net
|
|
|
(5
|
%)
|
|
(4
|
%)
|
Income
from continuing operations
|
|
|
3
|
%
|
|
9
|
%
|
Loss
from discontinued operations
|
|
|
—
|
|
|
1
|
%
|
Net
income
|
|
|
2
|
%
|
|
8
|
%
|
Overview
We
operate in the telecommunications industry, and our customer base consists
largely of government-owned and privately-owned telecommunications companies.
Our line connection and protection equipment (“Line”) interconnects copper
telephone lines to switching equipment and provides fuse elements that protect
telephone equipment and personnel from electrical surges. Our signal processing
(“Signal”) equipment is used in data communication devices that employ high
frequency transformer technology.
Our
Line
equipment is designed to connect copper-wired telecommunications networks and
to
protect telecommunications equipment from voltage surges. We market this
equipment to telephone operating companies in the United States and foreign
countries. Our Line division operated at a profit for the three months ended
March 31, 2007 and March 31, 2006. We market Signal equipment principally
for use in defense and aerospace applications. The Signal division generated
operating profit for the three months ended March 31, 2007 and the comparable
period of 2006. We recognize revenue from Line and Signal products when the
product is shipped.
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
7). Effective as of June 30, 2006, the results of our consolidated operations
present the OSS division as a discontinued operation.
Our
sales
by product line for the periods ended March 31, 2007 and 2006 are as follows
(dollars in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Line
connection/protection equipment
|
|
$
|
6,801
|
|
|
83
|
%
|
$
|
6,488
|
|
|
82
|
%
|
Signal
Processing
|
|
|
1,388
|
|
|
17
|
%
|
|
1,412
|
|
|
18
|
%
|
Other
|
|
|
13
|
|
|
0
|
%
|
|
38
|
|
|
0
|
%
|
|
|
$
|
8,202
|
|
|
100
|
%
|
$
|
7,938
|
|
|
100
|
%
|
On
March
31, 2007, our liability to the holder of our senior debt was $23,554,000. On
February 7, 2007 Cheyne Special Situations Fund L.P (“Cheyne”) purchased our
senior debt of approximately $23,400,000 from SHF IX, LLC and subsequently
extended the maturity of our senior debt to October 1, 2007. We cannot give
any
assurance that the holder of our senior debt will extend the maturity date
beyond October 1, 2007. 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.
Results
of Continuing Operations
Our
sales
for the quarter ended March 31, 2007 were $8,202,000, representing an increase
of $264,000 (3%) compared to the quarter ended March 31, 2006 of $7,938,000.
The
increased sales level resulted
from increased sales of Line products, with our increase in Line products being
partially offset by decreased sales by Signal.
Line
equipment sales increased by $313,000 (5%) from $6,488,000 for the March 2006
quarter to $6,801,000 for the March 2007 quarter, primarily as a result of
an
increase in sales in our CPE division from sales generated in North America,
slightly offset by a decrease in revenue from British Telecommunications. A
significant percentage of our revenues are derived from British
Telecommunications and its installers. Any significant reduction in the level
of
business from British Telecommunications and its installers could have material
adverse effect upon both our revenue and net income. Thus, for this year we
have
experienced a significant drop off of orders from BT installers, although direct
sales to British Telecommunications remain vigorous.
Signal
processing revenue for the quarter ended March 31, 2007 compared to 2006
decreased by $24,000 (2%) from $1,412,000 to $1,388,000.
Gross
margin for the March 2007 quarter was 32% compared to 34% for the March 2006
quarter. The decrease is primarily related to a change in product mix sold
to
British Telecommunications from the higher gross profit DSL products to the
lower margin local loop unbundling products and a negotiated price decrease
on
products sold to British Telecommunications.
Selling,
general and administrative expenses increased by $275,000 (21%) from $1,306,000
in the March 2006 quarter to $1,581,000 in the March 2007 quarter. This increase
relates primarily to increased expenses in our Line segment for advertising
and
commissions as our marketing activities for this segment were increased during
the first quarter of 2007. General and administrative costs increased primarily
due to increased expenses related to our debt restructuring effort.
Research
and development expenses decreased by $28,000 (7%) from $401,000 in the March
2006 quarter to $373,000 in the March 2007 quarter. This decrease resulted
from
lower expenses for product design in our Line division which was partially
offset by modest increases in spending for our Signal division.
As
a
result of the foregoing, we had an operating income from continuing operations,
before income taxes, of $225,000 for the March 2007 quarter, compared with
$710,000 for the March 2006 quarter.
Interest
expense, net, for the March 2007 quarter was $440,000, an increase of $144,000
from $296,000 in the March 2006 quarter, primarily because of $132,000 of
interest accrued on our senior debt under the terms of our extension agreement
relating to the senior debt. We do not accrue interest on the entire amount
of
the senior debt of approximately $23,550,000 under the terms of our agreement
with the holder of our senior debt. Interest has accrued from February 7, 2007
on $10,000,000 of the senior debt at 12.5%.
Income
tax expense for the quarter ended March 31, 2007 as well as March 31, 2006
relates to state and foreign taxes. No federal income tax expense has been
provided due to the availability of net operating loss carry
forwards.
As
the
result of the foregoing, we generated net income of $165,000, $.02
per
share (basic and diluted), for the March 2007 quarter versus net income of
$605,000, $0.06 per share (basic and diluted), for the March 2006
quarter.
Liquidity
and Capital Resources
At
March
31, 2007, we had cash and cash equivalents of $564,000 compared with $2,102,000
at December 31, 2006. The reduction in our cash position reflects an increase
of
$1,738,000 in accounts receivable, an increase of $1,660,000 in inventory,
primarily offset by an increase of $1,514,000 in accounts payable.
Our
working capital deficit at March 31, 2007 was $31,555,000, compared to a working
capital deficit of $31,646,000 at December 31, 2006, a reduction of $91,000
in
our working capital deficit.
During
the first quarter, we paid $150,000 to the holder of our senior debt, of which
approximately $10,000 was applied to interest and the remaining $140,000 was
applied to principal.
As
of
March 31, 2007, our debt includes; $23,554,000 of senior debt which matures
on
October 1, 2007, $6,529,000 of principal and $6,365,000 of accrued interest
on
our subordinated debt and 6% debentures that became due on July 3, 2001 and
July
2, 2002, respectively. We are prohibited by the holder of our senior debt from
paying principal or interest on any of the subordinated debt. At March 31,
2007,
we did not have sufficient resources to pay either the senior lender or the
subordinated lenders; it is unlikely that we can generate such cash from our
operations, and our senior lender has precluded us from making any payments
on
the subordinated debt.
We
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 will result in very significant
dilution to the holders of our common stock and will 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.
Forward
Looking Statements
Statements
contained in this Form 10-Q include forward-looking statements that are subject
to risks and uncertainties. In particular, statements in this Form 10-Q that
state our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions are “forward-looking statements.” Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under “Risk Factors,” in our Form 10-K for the year ended
December 31, 2006 and in the Form 10-Q and those described in “Management's
Discussion and Analysis of Financial Conditions and Results of Operations” in
our Form 10-K and this Form 10-Q, and those described in any other filings
by us
with the Securities and Exchange Commission, as well as general economic
conditions and economic conditions affecting the telecommunications industry,
any one or more of which could cause actual results to differ materially from
those stated in such statements. Such
statements could be affected by risks and uncertainties related to our financial
conditions, our relationship with the holder of our senior and subordinated
debt, including the willingness or unwillingness of the holder of the senior
debt to extend the maturity date of the senior debt and the amount and timing
of
any payments which the holder of the senior debt may require, our ability to
sell any or all of our divisions or effect a restructure of our business and
our
debt and equity structure on terms acceptable to the holder of the senior debt,
our relationship with British Telecommunications including its continued
requirements for our products, factors which affect the telecommunications
industry, market and customer acceptance, our access to current technology,
competition, domestic and foreign 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-Q.
Item
3. Quantitative
and Qualitative Disclosure About Market Risk.
We
conduct certain operations outside the United States. A substantial portion
of
our revenue and expenses from our United Kingdom operations are denominated
in
Sterling. Any Sterling-denominated receipts are promptly converted into United
States dollars. We do not engage in any hedging or other currency
transactions.
Item
4. Controls
and Procedures
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. Accordingly,
management believes that the consolidated financial statements included in
this
Quarterly Report on Form 10-Q, fairly present, in all material respects our
financial condition, results of operations and cash flows for the periods
presented.
-
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 at December 31, 2006, 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.
As
of the
end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of our disclosure controls and
procedures. Based on his evaluation, the Chief Executive Officer and Chief
Financial Officer has concluded that our disclosure controls and procedures
are effective in alerting him to material information that is required to be
included in the reports that we file or submit under the Securities Exchange
Act
of 1934 and that the information required to be disclosed in the reports that
we
file or submit under Securities Exchange Act of 1934 is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required
disclosure.
Internal
Control over Financial Reporting
Except
as
otherwise discussed herein, there has been no change in our internal control
over financial reporting that occurred during the fiscal quarter covered by
this
quarterly report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1 A. Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2006, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing our Company.
During
the March 2007 quarter, we sustained modest declines in revenue from our largest
customer, British Telecommunications, from both the comparable quarter of 2006
and the last quarter of 2006, and, based on a change in the product mix, our
gross margin declined on our sales to British Telecommunications. Due to our
reliance on significant business from British Telecommunications, our revenue
and net income could be impaired by any material reduction of sales to British
Telecommunications or any material reduction in the gross margin on sales to
British Telecommunications.
Additional
risks and uncertainties not currently known to us or that we currently deem
to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results.
Item
3. Defaults Upon Senior Securities.
See
Note
3 of Notes to Unaudited Consolidated Financial Statements and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources” for information concerning defaults on our
subordinated debt.
Item
6. Exhibits
|
|
Certificate
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
Certificate
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
PORTA
SYSTEMS CORP.
|
|
|
|
Dated:
May 11, 2007 |
By |
/s/
Edward B. Kornfeld |
|
Edward
B. Kornfeld
|
|
Chief
Executive Officer
and
Chief Financial Officer
|