SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 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
(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 __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 August 3, 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
|
|
|
|
| |
|
June
30,
|
|
December
31,
|
|
|
Assets
|
|
2007
|
|
2006
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
669
|
|
$
|
2,102
|
|
|
Accounts
receivable - trade, less allowance for doubtful accounts of $23 in
2007
and $13 in 2006
|
|
|
6,068
|
|
|
5,417
|
|
|
Inventories
|
|
|
5,550
|
|
|
4,591
|
|
|
Prepaid
expenses and other current assets
|
|
|
610
|
|
|
697
|
|
|
Assets
of discontinued operations
|
|
|
—
|
|
|
383
|
|
|
Total
current assets
|
|
|
12,897
|
|
|
13,190
|
|
| |
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,557
|
|
|
1,571
|
|
|
Goodwill,
net
|
|
|
2,961
|
|
|
2,961
|
|
|
Other
assets
|
|
|
54
|
|
|
51
|
|
|
Long
term assets of discontinued operations
|
|
|
—
|
|
|
11
|
|
|
Total
assets
|
|
$
|
17,469
|
|
$
|
17,784
|
|
| |
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Senior
debt, principal amount
|
|
$
|
23,373
|
|
$
|
23,513
|
|
|
Subordinated
notes, principal amount
|
|
|
6,144
|
|
|
6,144
|
|
|
6%
convertible subordinated debentures, principal amount
|
|
|
385
|
|
|
385
|
|
|
Accounts
payable
|
|
|
5,453
|
|
|
6,106
|
|
|
Accrued
expenses and other
|
|
|
2,760
|
|
|
2,136
|
|
|
Accrued
interest payable
|
|
|
6,917
|
|
|
6,127
|
|
|
Liabilities
of discontinued operations
|
|
|
—
|
|
|
425
|
|
|
Total
current liabilities
|
|
|
45,032
|
|
|
44,836
|
|
| |
|
|
|
|
|
|
|
|
Deferred
compensation, net of current portion
|
|
|
739
|
|
|
771
|
|
|
Total
long-term liabilities
|
|
|
739
|
|
|
771
|
|
|
Total
liabilities
|
|
|
45,771
|
|
|
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
|
|
|
76,125
|
|
|
76,125
|
|
|
Accumulated
deficit
|
|
|
(98,339
|
)
|
|
(97,713
|
)
|
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(4,251
|
)
|
|
(4,398
|
)
|
| |
|
|
(26,364
|
)
|
|
(25,885
|
)
|
|
Treasury
stock, at cost, 30,940 shares
|
|
|
(1,938
|
)
|
|
(
1,938
|
)
|
|
Total
stockholders’ deficit
|
|
|
(28,302
|
)
|
|
(27,823
|
)
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
17,469
|
|
$
|
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)
| |
|
|
|
|
|
| |
|
Six
Months Ended
|
|
| |
|
June
30,
|
|
June
30,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Sales
|
|
$
|
15,271
|
|
$
|
16,021
|
|
|
Cost
of sales
|
|
|
10,576
|
|
|
10,556
|
|
|
Gross
profit
|
|
|
4,695
|
|
|
5,465
|
|
| |
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
2,993
|
|
|
2,704
|
|
|
Research
and development expenses
|
|
|
778
|
|
|
756
|
|
|
Total
expenses
|
|
|
3,771
|
|
|
3,460
|
|
| |
|
|
|
|
|
|
|
|
Operating
income
|
|
|
924
|
|
|
2,005
|
|
| |
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(990
|
)
|
|
(587
|
)
|
|
Other
income (expense), net
|
|
|
—
|
|
|
2
|
|
| |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
(66
|
)
|
|
1,420
|
|
| |
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(39
|
)
|
|
(70
|
)
|
| |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before discontinued
operations
|
|
|
(105
|
)
|
|
1,350
|
|
| |
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations (net of taxes of zero)
|
|
|
(87
|
)
|
|
(159
|
)
|
|
Write
off of net assets of discontinued operations
|
|
|
(434
|
)
|
|
—
|
|
|
Total
loss from discontinued operations
|
|
|
(521
|
)
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(626
|
)
|
$
|
1,191
|
|
| |
|
|
|
|
|
|
|
|
Other
comprehensive (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(61
|
)
|
|
(126
|
)
|
| |
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(687
|
)
|
$
|
1,065
|
|
| |
|
|
|
|
|
|
|
|
Basic
income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.01
|
)
|
$
|
0.13
|
|
|
Discontinued
operations
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
| |
|
$
|
(0.06
|
)
|
$
|
0.12
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,076
|
|
|
10,076
|
|
| |
|
|
|
|
|
|
|
|
Diluted
income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.01
|
)
|
$
|
0.13
|
|
|
Discontinued
operations
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
| |
|
$
|
(
0.06
|
)
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,076
|
|
|
10,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Operations and Comprehensive Income
(In
thousands, except per share amounts)
| |
|
Three
Months Ended
|
|
| |
|
June
30,
|
|
June
30,
|
|
| |
|
2007
|
|
2006
|
|
|
Sales
|
|
$
|
7,069
|
|
$
|
8,084
|
|
|
Cost
of sales
|
|
|
4,994
|
|
|
5,332
|
|
|
Gross
profit
|
|
|
2,075
|
|
|
2,752
|
|
| |
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
1,412
|
|
|
1,406
|
|
|
Research
and development expenses
|
|
|
405
|
|
|
347
|
|
|
Total
expenses
|
|
|
1,817
|
|
|
1,753
|
|
| |
|
|
|
|
|
|
|
|
Operating
income
|
|
|
258
|
|
|
999
|
|
| |
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(550
|
)
|
|
(289
|
)
|
|
Other
income, net
|
|
|
—
|
|
|
—
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
(292
|
)
|
|
710
|
|
| |
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(12
|
)
|
|
(47
|
)
|
| |
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before discontinued
operations
|
|
|
(304
|
)
|
|
663
|
|
| |
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations (net of taxes of zero)
|
|
|
(53
|
)
|
|
(76 |
)
|
|
Write
off of net assets of discontinued operations
|
|
|
(434
|
)
|
|
—
|
|
|
Total
loss from discontinued operations
|
|
|
(487
|
)
|
|
(76
|
)
|
| |
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(791
|
)
|
$
|
587
|
|
| |
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(134
|
)
|
|
167
|
|
| |
|
|
|
|
|
|
|
|
Comprehensive
(loss) income
|
|
$
|
(925
|
)
|
$
|
754
|
|
| |
|
|
|
|
|
|
|
|
Basic
income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.03
|
)
|
$
|
0.07
|
|
|
Discontinued
operations
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
| |
|
$
|
(0.08
|
)
|
$
|
0.06
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,076
|
|
|
10,076
|
|
| |
|
|
|
|
|
|
|
|
Diluted
income (loss) per share of common stock
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.03
|
)
|
$
|
0.07
|
|
|
Discontinued
operations
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
|
|
$
|
(
0.08
|
)
|
$
|
0.06
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
10,076
|
|
|
10,098
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
See
accompanying notes to unaudited consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Cash Flows
(In
thousands)
| |
|
Six
Months Ended
|
|
| |
|
June
30,
|
|
June
30,
|
|
| |
|
2007
|
|
2006
|
|
|
Cash
flows from operating activities of continuing operations:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(626
|
)
|
$
|
1,191
|
|
|
Loss
from discontinued operations
|
|
|
521
|
|
|
159
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities of continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
249
|
|
|
175
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(651
|
)
|
|
(1,459
|
)
|
|
Inventories
|
|
|
(959
|
)
|
|
679
|
|
|
Prepaid
expenses and other current assets
|
|
|
87
|
|
|
(312
|
)
|
|
Other
assets
|
|
|
(3
|
)
|
|
—
|
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
696
|
|
|
2,161
|
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(686
|
)
|
|
2,594
|
|
| |
|
|
|
|
|
|
|
|
Net
cash used in operations of discontinued operations
|
|
|
—
|
|
|
(1,480
|
)
|
| |
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(686
|
)
|
|
1,114
|
|
| |
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(236
|
)
|
|
(292
|
)
|
|
Net
cash used in investing activities
|
|
|
(236
|
)
|
|
(292
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments
of senior debt
|
|
|
(140
|
)
|
|
(675
|
)
|
|
Net
cash used in financing activities
|
|
|
(140
|
)
|
|
(675
|
)
|
| |
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(371
|
)
|
|
138
|
|
| |
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(1,433
|
)
|
|
285
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of the year
|
|
|
2,102
|
|
|
1,254
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of the period
|
|
$
|
669
|
|
$
|
1,539
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$
|
181
|
|
$
|
678
|
|
| |
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
—
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 second quarter or the first six months of 2007
are
not necessarily indicative of results for the year.
Note
2: Inventories
Inventories,
from continuing operations, are stated at the lower of cost (on the average
or
first-in, first-out method) or market. The composition of inventories at the
end
of the respective periods is as follows (net of reserve of $2,010,000 for 2007
and $2,345,000 for 2006):
| |
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
|
(In
thousands)
|
|
|
Parts
and components
|
|
$
|
3,512
|
|
$
|
3,637
|
|
|
Work-in-process
|
|
|
1,307
|
|
|
543
|
|
|
Finished
goods
|
|
|
731
|
|
|
411
|
|
| |
|
$
|
5,550
|
|
$
|
4,591
|
|
Note
3: Senior and Subordinated Debt
On
June
30, 2007, the Company’s liability to its senior debt holder was $23,373,000 plus
accrued interest of $312,000. 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 through June 30, 2007 totaling $2,876,000 as required by amendments
and
extensions of the loan agreement, of which $659,000 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. At June 30, 2007, the Company
had made one interest payment of approximately $180,600 to Cheyne. 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 senior debt holder to extend or
demand payment on the notes. If the senior debt holder does not extend the
maturity of the Company’s 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, the Company will not be able to continue in business, and it is likely
that it will seek protection under the Bankruptcy Code.
As
of
June 30, 2007, the Company’s short-term debt also included $6,144,000 principal
amount of subordinated debt that became due on July 3, 2001 and $385,000
principal amount 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 and the 6% debentures was approximately $6,604,000,
which represents interest through June 30, 2007. We are precluded by our senior
debt holder from paying any principal or interest on the subordinated debt.
Note
4: Accounting for Stock Based Compensation
For
the
six months ended June 30, 2007, the Company issued 20,000 stock options under
its 1999 Plan that provides for the automatic grant to non-management directors.
This 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 this Plan have a term
of
10 years. 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. Based
on the Black-Scholes valuation model there is no non-cash compensation expense
attributable to stock options granted during the quarters. Stock compensation
expense for all vested options to date is diminutive.
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 the Company’s financial
condition, the
Company decided in December 2003 that it would discontinue this operating
segment. As a result, the Company limited
the OSS activities to the performance of contractual maintenance and warranty
services through June 2007 (see Note 7). Accordingly, as of June 30, 2007
the
net
assets of $434,000 of this operation were written off and the results of
operations of the OSS division have been segregated and reported separately
as
discontinued operations on the consolidated financial statements
in this
Form 10-Q.
OSS was
engaged in the business of marketing, manufacturing and selling products that
automate the testing, provisioning, maintenance and administration of
communication networks and the management of support personnel and equipment.
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.
| |
|
Six
Months Ended
|
|
Three
Months Ended
|
|
| |
|
June
30, 2007
|
|
June
30, 2006
|
|
June
30, 2007
|
|
June
30, 2006
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
12,615,000
|
|
$
|
13,468,000
|
|
$
|
5,815,000
|
|
$
|
6,981,000
|
|
|
Signal
|
|
|
2,637,000
|
|
|
2,407,000
|
|
|
1,249,000
|
|
|
994,000
|
|
|
Total
of Continuing Operations
|
|
$
|
15,252,000
|
|
$
|
15,875,000
|
|
$
|
7,064,000
|
|
$
|
7,975,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
|
|
$
|
1,746,000
|
|
$
|
2,615,000
|
|
$
|
684,000
|
|
$
|
1,410,000
|
|
|
Signal
|
|
|
698,000
|
|
|
606,000
|
|
|
279,000
|
|
|
222,000
|
|
|
Total
of Continuing Operations
|
|
$
|
2,444,000
|
|
$
|
3,221,000
|
|
$
|
963,000
|
|
$
|
1,632,000
|
|
The
following table reconciles segment totals to consolidated totals:
| |
|
Six
Months Ended
|
|
Three
Months Ended
|
|
| |
|
June
30, 2007
|
|
June
30, 2006
|
|
June
30, 2007
|
|
June
30, 2006
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
Total
revenue for reportable segments
|
|
$
|
15,252,000
|
|
$
|
15,875,000
|
|
$
|
7,064,000
|
|
$
|
7,975,000
|
|
|
Other
revenue
|
|
|
19,000
|
|
|
146,000
|
|
|
5,000
|
|
|
109,000
|
|
|
Consolidated
total revenue
|
|
$
|
15,271,000
|
|
$
|
16,021,000
|
|
$
|
7,069,000
|
|
$
|
8,084,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment income for reportable segments
|
|
$
|
2,444,000
|
|
$
|
3,221,000
|
|
$
|
963,000
|
|
$
|
1,632,000
|
|
|
Corporate
and unallocated
|
|
|
(1,520,000
|
)
|
|
(1,216,000
|
)
|
|
(705,000
|
)
|
|
(633,000
|
)
|
|
Consolidated
total operating income
|
|
$
|
924,000
|
|
$
|
2,005,000
|
|
$
|
258,000
|
|
$
|
999,000
|
|
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.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" or SFAS 159. SFAS 159 provides
companies with an option to report selected financial assets and liabilities
at
fair value. SFAS 159 is effective for fiscal years beginning after November
15,
2007. We are currently evaluating the impact of implementation of SFAS No.
159
on our consolidated financial statements.
Note
7: Discontinued
operations
In
December, 2003, the Company decided to wind down its OSS business. This decision
was made because of continuing losses combined
with difficulties in marketing OSS products in view of the Company’s financial
condition. As of June 30, 2007, the Company discontinued operating this
business. Accordingly, as of June 30, 2007, the OSS net assets of $434,000
were
written off and the operations of the segment were reported in the Consolidated
Financial Statements as a discontinued operation through June 30,
2007.
Results
of operations for OSS have been segregated from continuing operations and are
reflected as discontinued operations approximately as follows:
| |
|
Six
Months Ended June 30,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Revenues
|
|
$
|
100,000
|
|
$
|
196,000
|
|
| |
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(87,000
|
)
|
|
(159,000
|
)
|
|
Write
off of net assets of discontinued operations
|
|
|
(434,000
|
)
|
|
—
|
|
|
Total
loss from discontinued operations
|
|
$
|
(521,000
|
)
|
$
|
(159,000
|
)
|
| |
|
Three
Months Ended June 30,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Revenues
|
|
$
|
28,000
|
|
$
|
91,000
|
|
| |
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(53,000
|
)
|
|
(76,000
|
)
|
|
Write
off of net assets of discontinued operations
|
|
|
(434,000
|
)
|
|
—
|
|
|
Total
loss from discontinued operations
|
|
$
|
(487,000
|
)
|
$
|
(76,000
|
)
|
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
The
Company’s consolidated statements of operations for the periods indicated below,
shown as a percentage of sales, are as follows:
| |
|
Six
Months Ended
|
|
Three
Months Ended
|
|
| |
|
June
30,
|
|
June
30,
|
|
| |
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
Cost
of sales
|
|
|
69
|
%
|
|
66
|
%
|
|
70
|
%
|
|
66
|
%
|
|
Gross
profit
|
|
|
31
|
%
|
|
34
|
%
|
|
30
|
%
|
|
34
|
%
|
|
Selling,
general and administrative expenses
|
|
|
20
|
%
|
|
17
|
%
|
|
20
|
%
|
|
17
|
%
|
|
Research
and development expenses
|
|
|
5
|
%
|
|
5
|
%
|
|
6
|
%
|
|
5
|
%
|
|
Operating
income
|
|
|
6
|
%
|
|
12
|
%
|
|
4
|
%
|
|
12
|
%
|
|
Interest
expense - net
|
|
|
(7
|
%)
|
|
(4
|
%)
|
|
(8
|
%)
|
|
(4
|
%)
|
|
Income
(loss) from continuing operations
|
|
|
(1
|
%)
|
|
8
|
%
|
|
(4
|
%)
|
|
8
|
%
|
|
Loss
from discontinued operations
|
|
|
(3
|
%)
|
|
(1
|
%)
|
|
(7
|
%)
|
|
(1
|
%)
|
|
Net
(loss) income
|
|
|
(4
|
%)
|
|
7
|
%
|
|
(11
|
%)
|
|
7
|
%
|
The
Company’s sales, from continuing operations, by product line for the periods
ended June 30, 2007 and 2006 are as follows:
| |
|
Six
Months Ended June 30,
|
|
| |
|
$(000)
|
|
|
|
|
2007
|
|
2006
|
|
|
Line
connection/protection equipment
|
|
$
|
12,615
|
|
|
82
|
%
|
$
|
13,468
|
|
|
84
|
%
|
|
Signal
Processing
|
|
|
2,637
|
|
|
17
|
%
|
|
2,407
|
|
|
15
|
%
|
|
Other
|
|
|
19
|
|
|
1
|
%
|
|
146
|
|
|
1
|
%
|
| |
|
$
|
15,271
|
|
|
100
|
%
|
$
|
16,021
|
|
|
100
|
%
|
| |
|
Three
Months Ended June 30,
|
|
| |
|
$(000)
|
|
|
|
|
2007
|
|
2006
|
|
|
Line
connection/protection equipment
|
|
$
|
5,815
|
|
|
82
|
%
|
$
|
6,981
|
|
|
87
|
%
|
|
Signal
Processing
|
|
|
1,249
|
|
|
18
|
%
|
|
994
|
|
|
12
|
%
|
|
Other
|
|
|
5
|
|
|
—
|
%
|
|
109
|
|
|
1
|
%
|
| |
|
$
|
7,069
|
|
|
100
|
%
|
$
|
8,084
|
|
|
100
|
%
|
Overview
We
operate in the telecommunications industry, and our customer base consists
largely of government-owned and privately-owned telecommunications companies.
Our line connection and protection equipment (“Line”)
interconnects copper telephone lines to switching equipment and provides fuse
elements that protect telephone equipment and personnel from electrical surges.
Our signal processing (“Signal”) equipment is used in data communication devices
that employ high frequency transformer technology.
Our
Line
equipment is designed to connect copper-wired telecommunications networks and
to
protect telecommunications equipment from voltage surges. We market this
equipment primarily to telephone operating companies outside the United States
and through distribution to designers, engineers and installers in the United
States. Our Line division generated net income from operations for the three
and
six months ended June 30, 2007 and the comparable periods of 2006. We market
Signal equipment principally
for use in defense and aerospace applications. The Signal division generated
net
income from operations for the three and six months ended June 30, 2007 and
2006. We recognize revenue from Line and Signal products when the product is
shipped.
On
June
30, 2007, our liability to our senior debt holder was $23,373,000 plus accrued
interest of $312,000. 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 our senior debt holder will extend the maturity date beyond
October 1, 2007. Any adverse event, including declines in business, could have
an effect on the decision of our senior debt holder to extend or demand payment
on the notes. If our senior debt holder does not extend the maturity of our
senior debt beyond October 1, 2007 or if our 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.
Results
of Continuing Operations
The
below
narratives discuss the activities of our continuing operations.
Line
equipment sales for the six months ended June 30, 2007, compared to the six
months ended June 30, 2006, decreased by $853,000 (7%) from $13,468,000 to
$12,615,000. Sales for the three months ended June 30, 2007 decreased by
$1,166,000 (17%) from $6,981,000 in 2006 to $5,815,000 in 2007. The decrease
in
sales for the six and the three months is the result of a decline in orders
from
British Telecommunications that was partially offset by higher sales of
connection and protection product to a North America customer. 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 far this year we
have
experienced a significant drop off of orders from British Telecommunications’
installers, although direct sales to British Telecommunications remain
significant.
Signal
sales for the six months ended June 30, 2007 were $2,637,000, compared to
$2,407,000 in the same period of 2006, an increase of $230,000 (10%). Sales
for
the three months ended June 30, 2007 compared to 2006, increased by $255,000
(26%) from $994,000 to $1,249,000. The growth in Signal revenue for the first
half of 2007 resulted primarily from increased sales to the military sector
as
reflected in our first quarter sales.
Gross
margin for the six months ended June 30, 2007 was 31% compared to 34% for the
six months ended June 30, 2006. Gross margin for the quarter ended June 30,
2007
was 30% compared to 34% for the
quarter
ended June 30, 2006. The
decrease for the quarter and six months 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.
Our
Signal segment gross margin slightly increased during the quarter and six months
due to sales mix.
Selling,
general and administrative expenses increased by $289,000 (11%) from $2,704,000
to $2,993,000 for the six months ended June 30, 2007 compared to 2006. For
the
quarter ended June 30, 2007 selling, general and administrative expenses
increased by $6,000 from $1,406,000 in 2006 to $1,412,000 in 2007.
The
selling expense increase for the six months ended June 30, 2007 relates
primarily to increased expenses in our Line segment for advertising and
commissions as our marketing activities for this segment were increased during
this period. The selling expense increase in the second quarter in our Signal
segment for salaries, benefits and commissions was partially offset by decreased
spending in our Line segment for commissions and advertising. General and
administrative costs increased, for the six months and the quarter, primarily
due to increased expenses related to our debt restructuring efforts.
For
the
six months ended June 30, 2007 compared to 2006, research and development
expenses increased by $22,000 (3%) to $778,000 from $756,000. For the quarter
ended June 30, 2007 compared to 2006, research and development expenses
increased by $58,000 (17%) to $405,000 from $347,000. The increase for the
six
months and the quarter resulted primarily from increased spending in the second
quarter by our line connection/protection division to enhance our existing
line
products and develop new products. Our research and development expenses
declined during the first quarter of 2007 from the comparable period of
2006.
As
a
result of the foregoing, for the six months ended June 30, 2007, we had an
operating income from continuing operations of $924,000 compared with $2,005,000
in the same period of 2006. We had an operating income from continuing
operations of $258,000 for the quarter ended June 30, 2007 as compared with
$999,000 in the same period of 2006.
Interest
expense, net, for the six months ended June 30, 2007 was $990,000, an increase
of $403,000 from $587,000 for the six months ended June 30, 2006. For the three
months ended June 30, 2007 the interest expense was $550,000 compared to
$289,000 for the comparable period last year. These increases of $403,000 and
$261,000 for the six months and three months, respectively, are primarily
related to interest on our senior debt under the terms of our extension
agreement with the debt holder. We do not accrue interest on the entire amount
of the senior debt of approximately $23,400,000 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% as a result of the terms of the
February 7, 2007 extension of the maturity of our senior debt.
Income
tax expense for the quarter and six months ended June 30, 2007 relates to state
and foreign taxes. No federal income tax expense has been provided due to losses
incurred during the six-months period.
As
a
result of the foregoing, we generated a net loss from continuing operations
of
$105,000, or $0.01 per share (basic and diluted), for the six months ended
June
30, 2007, compared with net income from continuing operations of $1,350,000,
or
$0.13 per share (basic and diluted), in 2006. The net loss for the three months
ended June 30, 2007, from continuing operations, was $304,000, or $0.03 per
share (basic and diluted), compared with net income of from continuing
operations $663,000, $0.07 per share (basic and diluted) in 2006.
Liquidity
and Capital Resources
At
June
30, 2007, we had cash and cash equivalents of $669,000 compared with $2,102,000
at December 31, 2006. The reduction in our cash position primarily reflects
increases of $651,000 in accounts receivable and $959,000 in inventory, a
decrease of $653,000 in accounts payable and payments of $331,000 with respect
to our
senior
debt, of which $140,000 was principal and $191,000 was interest. These factors
were also reflected in our working capital deficit at June 30, 2007 of
$32,135,000, as compared with a working capital deficit of $31,646,000 at
December 31, 2006, an increase of $489,000 in our working capital deficit.
During
the first six months of 2007, we paid $331,000 to our senior debt holder of
which approximately $191,000 was applied to interest and $140,000 was applied
to
principal.
As
of
June 30, 2007, our senior debt includes $23,373,000 of principal and $312,000
of
accrued interest, which matures on October 1, 2007; and $6,529,000 of principal
and $6,604,000 of accrued interest on our subordinated notes and 6% debentures
that became due on July 3, 2001 and July 2, 2002, respectively. We are
prohibited by our senior debt holder from paying principal or interest on any
of
the subordinated debt. At June 30, 2007, we did not have sufficient resources
to
repay either the senior lender or the subordinated lenders and it is unlikely
that we can generate such cash from our operations.
In
December, 2003, the Company decided to wind down its OSS business. This decision
was made because of continuing losses combined
with difficulties in marketing OSS products in view of our financial condition.
As of June 30, 2007, the Company discontinued operating this business.
Accordingly, as of June 30, 2007, the OSS net assets of $434,000 were written
off and the operations of the segment were reported in the Consolidated
Financial Statements as a discontinued operation through June 30,
2007.
We
are
addressing our working capital and liquidity problems by seeking a restructuring
of our senior and subordinated debts as well as significant amounts of unsecured
debt due to third parties. Any restructuring 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 our senior debt holder 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 had identified a weakness in the segregation of
duties, specifically as they relate to cash management. We implemented 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
1A. 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 and in this Form 10-Q are not the only risks
facing our Company.
During
the quarter and six months ended June 30, 2007, we sustained declines in revenue
from our largest customer, British Telecommunications, from the comparable
three
and six month periods 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
|
|
31.1 |
Certificate
of Chief Executive Officer and Chief Financial Officer pursuant
to Section
302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1 |
Certificate
of Chief Executive Officer and Chief Financial Officer pursuant
to
Section
906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PORTA
SYSTEMS CORP.
Dated:
August 13, 2007
By:
/s/
Edward B. Kornfeld
Edward
B.
Kornfeld
Chief
Executive Officer and
Chief
Financial Officer