United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31,
2008
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
file number 0-8460
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
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ 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 ¨
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 ¨
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 ¨ Accelerated filer
¨ Non-accelerated
filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
State
aggregate market value of the voting stock held by non-affiliates of the
registrant: $127,485 as of June 30, 2008.
Indicate
the number of shares outstanding of each of the registrant's class of common
stock, as of the latest practicable date: 9,954,569 shares of Common Stock, par
value $.01 per share, as of March 15, 2009.
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:
Voice and
Data Connection and Protection Equipment. These products,
which we refer to as our connection /protection equipment, are used to connect
copper wire lines, automated digital subscriber lines (“ADSL”), wireless
networks, fiber connection/protection lines (“FTTX”), and security networks, and
to protect equipment from voltage surges. We market our connection and
protection products to telephone operating companies, customer premise providers
and installers and security providers and installers throughout the
world.
Signal
Processing Equipment.
Signal processing products are sold principally for use in defense and
aerospace applications and support copper wire-based communications systems. Our
signal processing products provide network infrastructure in data-transmission
applications. Customers for signal processing equipment are major
aircraft, naval ship and ground-based vehicle manufacturers, as well as their
systems integrators.
Through
2004, we offered a third category of products – operations support systems,
which we called OSS. We initially scaled back our OSS operations in 2003 and we
scaled back these operations further through 2006, limiting our activity to the
performance of contractual maintenance and warranty services. In June
2007, the contractual maintenance and warranty services agreements expired and
we discontinued all operations for OSS. See Note 11 of Notes to
Consolidated Financial Statements. The assets and liabilities and results of
operations of the OSS division through June 30, 2007 are segregated and reported
separately as discontinued operations on our consolidated financial
statements.
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.
Reverse
Split
On July 31, 2008, we amended our
certificate of incorporation to effect a one-for-11.11 reverse split pursuant to
which each share of common stock was converted into .0900090009 shares of common
stock. Neither the par value nor the number of authorized shares was
changed as a result of the reverse split. The information in this
annual report gives retroactive effect to the reverse split.
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 condition, our
relationship with the holder of our senior debt, factors which affect the
telecommunications industry, market and customer acceptance, including our
relationship with our principal customer, 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 and Protection Equipment.
Our
connection and protection equipment includes a variety of connector blocks,
protector modules, building entrance terminals, category 5E and 6 cable connectors
and protectors, frames used in telephone central switching offices, voice and
data installations, multiple dwelling units and customer premises
applications. The connector products are used by telephone
companies and installers of voice and data transmission equipment to
interconnect copper and fiber subscriber lines. The protector modules are used
to protect from electrical surges equipment and personnel of telephone
companies, voice and data transmission providers and customer premises equipment
providers. The need for protection products has increased as a result
of the worldwide move to digital technology, wireless and broadband, which is
extremely sensitive to damage by electrical overloads. Moreover,
private owners of telecommunications equipment now have the responsibility to
protect their equipment, personnel and buildings from damage caused by
electrical surges.
We also
have developed a range of security products for use in the closed circuit
television (CCTV) market. Our CCTV video balun products allow full
motion color or monochrome video transmission via cost-effective UTP CAT 3 or
better cable eliminating expensive and bulky coax cable. Our CCTV surge
protectors provide protection against voltage spikes and current surges that can
disable and permanently damage expensive video equipment, including cameras and
recorders, resulting in loss of important information and reduced
security.
Our
connection and protection products are used by international telephone service
providers as well as many of the regional telecommunications service providers
and independent telecommunications service providers in the United States, as
well as by 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 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 may
custom-design modifications to accommodate the specific needs of a
customer.
Signal Processing
Products
The signal processing
products include data bus components, cable assemblies and wideband
transformers. Our data bus components provide network infrastructure that
connects remote terminals used in military data transmission applications, where
an extremely high level of reliability and performance is required. Our wideband
video isolation transformers are used by the television and broadcast, medical
imaging, in-flight entertainment and industrial process control industries to
reduce ground noise, interference and improve picture quality. Our
wideband instrumentation baluns, longitudinal balance bridges and return loss
bridges are used by test and measurement engineers to measure balance,
longitudinal conversion loss and impedance in the characterization of data
transmission networks.
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. 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 expired by June 30, 2007 at
which time we discontinued our OSS operations completely. Effective as of June
30, 2006, the assets and liabilities and results of operations of the OSS
division were segregated and reported separately as discontinued operations on
our consolidated financial statements through June 30, 2007. Sales of OSS
products and related services in 2007 were $100,000, all of which were generated
prior to June 30, 2007.
Markets
Our
connection/protection equipment is used by domestic and international service
providers, by owners of private telecommunications equipment, and by
manufacturers and suppliers of telephone central office and customer premises
equipment. Products of this type comprising our telecommunications connection
equipment are included as an integral part of all domestic and foreign voice and
data networks, ADSL services, FTTX and other telecommunications
systems.
As a
telephone company expands the number of its subscriber lines and additional
services such as ADSL, it may require additional connection equipment to
interconnect and protect those lines in its central offices and in street
cabinets. 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, when 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.
Connection/protection
equipment sales accounted for approximately 83% of our sales in 2008, 82% of our
sales in 2007 and 83% of our sales in 2006.
Our
signal processing products are sold to customers in the military and aerospace
industry as well as manufacturers of medical equipment and video systems. The
primary communication standard in 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, in flight entertainment, 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. Wideband transformers provide a cost-effective and
quick solution to the problem of redesigning of the rest of the system. Products
are designed to satisfy the specific requirements of each military or aerospace
customer.
Signal
processing equipment accounted for approximately 17% of our sales in 2008, 18%
of our sales in 2007 and 16% of our sales in 2006.
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.
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 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 existing direct marketing relationships with telephone operating
companies.
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,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
$ |
10,777 |
|
|
|
40 |
% |
|
$ |
13,321 |
|
|
|
48 |
% |
|
$ |
20,725 |
|
|
|
63 |
% |
United
States
|
|
|
9,476 |
|
|
|
36 |
% |
|
|
9,316 |
|
|
|
33 |
% |
|
|
8.936 |
|
|
|
27 |
% |
Mexico
|
|
|
6,484 |
|
|
|
24 |
% |
|
|
5,183 |
|
|
|
19 |
% |
|
|
3,157 |
|
|
|
10 |
% |
Consolidated
total revenue
|
|
$ |
26,737 |
|
|
|
100 |
% |
|
$ |
27,820 |
|
|
|
100 |
% |
|
$ |
32,818 |
|
|
|
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 and fluctuation, 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 during 2007 we
commenced sourcing certain manufacturing to China in order to reduce
manufacturing costs.
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
Sales to
British Telecommunications and its systems integrators and Teléfonos de Mexico
S.A. de C.V. (Telmex) accounted for approximately 59% of sales in 2008, 61% of
sales in 2007 and 69% of sales in 2006. The following table sets
forth information as to sales to each customer or customer group that accounted
for 10% or more of the company’s sales in 2008, 2007 and 2006 (dollars in
thousands).
|
|
Year Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Customer
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
British
Telecommunications
|
|
$ |
8,965 |
|
|
|
34 |
% |
|
$ |
10,860 |
|
|
|
39 |
% |
|
$ |
9,614 |
|
|
|
29 |
% |
British
Telecommunications and its Systems Integrators*
|
|
|
10,296 |
|
|
|
39 |
% |
|
|
12,504 |
|
|
|
45 |
% |
|
|
20,313 |
|
|
|
62 |
% |
Teléfonos
de Mexico S.A. de C.V. (Telmex)
|
|
|
5,239 |
|
|
|
20 |
% |
|
|
4,585 |
|
|
|
16 |
% |
|
|
2,435 |
|
|
|
7 |
% |
* Sales
to British Telecommunications are included in the sales and percentages figures
on the line “British Telecommunications and its systems
integrators”. In 2006, systems integrators for British
Telecommunications included Fujitsu Telecommunications Europe LTD, which
accounted for more than 13% of net sales. In 2007 and 2008, no single
integrator accounted for more than 10% of net sales.
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, 2008, our backlog was approximately $5,114,000, compared with a
backlog of approximately $2,368,000 as of December 31, 2007. We
expect to ship a significant amount of our December 31, 2008 backlog during
2009.
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, 2008.
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 or invalidation of any of our patents,
or the cancellation of any of our existing license agreements would have a
material adverse effect on our business.
Competition
The
voice, data and security market in which we do business is characterized by
intense competition, rapid technological change and the offering of triple play
(television, data and telephones). In competing for signal processing 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 premise 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 Emerson being our principal United
States competitor. Emerson’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,
Emerson and a number of companies with greater financial resources than ours
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 competitive worldwide. However, our ability to compete is
hampered by our historical financial condition.
In
connection with overseas sales of our connection/ protection equipment, there is
significant competition from United States and foreign manufacturers of
comparable equipment and we expect this competition to continue. Tyco and a
number of our other overseas competitors have significantly greater resources
than we do.
Research
and Development Activities
We spent
approximately $1,477,000 in 2008 and, $1,955,000 in 2007 on research and
development activities related to continuing operations. Most of the research
and development expenses in 2008 related to copper connection/protection
products, and were oriented toward development of new products and the support
of our current products. All research and development was Company-sponsored
and is expensed as incurred.
Employees
As of
December 31, 2008 we had 381 employees, of which 59 were employed in the United
States, 319 in Mexico and 3 in the United Kingdom. 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, 2010.
We
require substantial financing to meet our working capital requirements and we
have no access to such financing.
Although
we completed a debt restructuring during 2008, which reduced our debt, the
restructuring did not affect the factors that impacted our business prior to the
debt restructuring. Our senior lender has no obligation to provide us
with financing and, because the senior lender has a lien on all of our assets as
well as our continuing losses and negative cash flow from operations, we are
unable to obtain financing from other sources. We incurred
losses from operations and negative cash flow from operations prior to the
worldwide economic downturn, and the downturn can accentuate our business and
financial problems. As a result, our only source for funding is cash
flow from operations and we cannot be certain that we will generate the
necessary cash from our operations to enable us to pay our obligations,
including our obligations under existing debt agreements. To the extent that
either our operations do not generate sufficient funds to cover our expenses or
make the required payments on our debt, 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 not be able to replace the significant decline in sales to British
Telecommunications which resulted in our losses for 2008 and 2007.
Our sales
to British Telecommunications and its systems integrators have declined
significantly, from $20,313,000 in 2006 to $12,504,000 in 2007 to $10,296,000 in
2008, a decline of approximately 38.4% from 2006 to 2007 and a further 17.7%
from 2007 to 2008. We were not able to generate sufficient other
business to offset this decline in sales, with the result that we sustained net
losses from continuing operations before extraordinary gain and discontinued
operations of approximately $2,352,000 in 2008 and $2,223,000 in
2007. We are still selling products to British Telecommunications at
the reduced level, and we cannot assure you that sales to British
Telecommunications will not continue to decline. Because of both the
product mix and the currency fluctuations described below, our gross margin on
sales to British Telecommunications and its systems integrators declined in both
2008 and 2007. Our overall gross margin declined from 33% in 2006 to
29% in 2007 to 21% in 2008. Unless we are able to increase our sales
and gross margin to British Telecommunications or sell products to new
customers, we will not be able to operate at a profit. We cannot
assure you that we will be able to improve either our sales to British
Telecommunications or our margins on those sales or find other customers for our
products. If
British Telecommunications and its systems integrators do not increase their
purchases from us or if we are not able to increase our margins on sales to
these customers, it may be necessary for us to seek protection under the
Bankruptcy Code.
Because
a significant percentage of our sales are made in currencies other than the
United States dollars, our sales and the results of our operations are affected
by currency fluctuations.
Because
our financial statements are denominated in United States dollars and our sales
in the international market, particularly the United Kingdom and Mexico, are
paid in the local currency, our sales are affected by fluctuations in the
currency rates between the United States dollar and foreign currencies,
particularly the British pound and the Mexican peso. The recent
strengthening of the United States dollar verses the pound and the peso has
translated into a lower sales prices where the purchase price of goods is paid
in a foreign currency. This decline in revenue also results in a
lower gross margin and an increase in our net loss.
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 $16,044,000, our net loss from continuing
operations before extraordinary gain and discontinued operations
of $2,352,000 for 2008, our limited working capital and the absence
of any source of financing, our accounting firm included in its report an
explanatory paragraph about our ability to continue as a going
concern.
Our
copper connection/protection equipment is designed to meet specific market
factors and the requirements of British Telecommunications, which may not
continue.
All
products sold to British Telecommunications and to its systems integrators are
connection/protection products. These sales to British
Telecommunications and its system integrators were $10,296,000, representing 47%
of our connection/protection products and 39% of total sales for 2008,
$12,504,000, representing 55% of connection/protection sales and 45% of total
sales for 2007, and $20,313,000, representing 75% of connection/protection sales
and 62% of total sales, for 2006. To the extent that British Telecommunications
no longer requires products from us or reduces the level of products it and its
systems integrators purchase 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 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 or
the worldwide economic downturn. 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. Our business may be affected
by the general economic slowdown and decreased availability of credit, which may
result in our inability to develop new business and decisions of our customers
to cancel or defer purchases of our equipment.
We
are heavily dependent on foreign sales.
Approximately
64%, 67%, and 64% of our sales in 2008, 2007, and 2006, respectively, were made
to foreign telephone operating companies, particularly British
Telecommunications and its systems integrators and Telmex. 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 the
fluctuation in the value of the dollar against local currencies and risks
relating to political and economic changes.
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 Emerson, which acquired the business in 2004 from
Marconi Corporation, 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 current and historical losses,
combined with the absence of additional 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 not actively traded, you may have difficulty in selling our
stock.
Our stock
is traded on the OTC Bulletin Board, our stock price is very low and there is no
active market for our common stock. On many days there is no reported trading,
and on those days where there is reported trading, the reported trading volume
is often less than 1,000 shares. As a result, you may have difficulty
in selling your stock.
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, and approximately 5,000 square feet of warehousing space
in Brownsville, Texas. These facilities represent substantially all of our
office, plant and warehouse space in the United States. The Syosset, New York
leases expire February 2011. The annual rental payable under these leases is
approximately $353,000 and is subject to customary escalation clauses. The space
in Texas is currently leased on a month to month basis.
Our
wholly-owned United Kingdom subsidiary leases an approximately 7,000 square foot
facility in Northants, England, which facility comprises all of our office and
warehouse space. The lease expires in 2017. The aggregate current annual rental
is approximately $66,000 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 2008, 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
PORT. The following table sets forth, for 2007 and 2008, 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.
|
|
2007
|
|
|
2008
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First
quarter
|
|
$ |
2.00 |
|
|
$ |
1.22 |
|
|
$ |
1.33 |
|
|
$ |
0.56 |
|
Second
quarter
|
|
|
2.00 |
|
|
|
1.22 |
|
|
|
0.56 |
|
|
|
0.17 |
|
Third
quarter
|
|
|
1.78 |
|
|
|
1.22 |
|
|
|
0.33 |
|
|
|
0.01 |
|
Fourth
quarter
|
|
|
1.44 |
|
|
|
0.66 |
|
|
|
0.12 |
|
|
|
0.08 |
|
The last
reported bid price of our common stock on March 13, 2009 was $0.02 per
share.
We
effectuated our debt restructuring with the issuance of 8,445,903 shares of
common stock to the holders of our senior and subordinated debt as partial
consideration for their agreement to reduce our debt by approximately
$25,000,000. In addition, key members of our management team received
an aggregate of 603,277 shares of common stock and we issued warrants to
purchase 201,093 of common stock at an exercise price of $ 0.10 per share for
services related to the restructuring of our debt. We did not issue
any unregistered securities during 2007.
We did
not declare or pay any cash dividends in 2008 or 2007, 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
or from acquiring our common stock.
Equity
Compensation Plan Information
The
following table summarizes the equity compensation plans under which our
securities may be issued as of December 31, 2008.
Equity Compensation Plan
Information as of December 31, 2008
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
|
|
|
155,000 |
|
|
$ |
.34 |
|
|
|
245,000 |
|
Equity
compensation plan not approved by security holders
|
|
|
201,093 |
|
|
|
.10 |
|
|
|
-0- |
|
|
|
|
356,093 |
|
|
$ |
.20 |
|
|
|
245,000 |
|
As of the
date of this report, the equity compensation plan approved by security holders
had expired and no further options are available for grant there
under. No options had been granted under the plan subsequent to
December 31, 2008.
The
equity compensation plan not approved by security holders represents the
warrants issued to Advicorp in connection with our debt restructuring
plan.
Item 7.
|
Management’s Discussion and Analysis of Financial
Condition and Results of
Operations
|
Overview
We
design, manufacture and market systems for the connection, protection, testing
and administration of public and private telecommunications lines and networks
and products that provide network infrastructure. Our principal customers are
foreign and domestic telephone companies. As a result, our business
is dependent upon meeting the needs of the foreign and domestic
telecommunications industry.
Dependence on British
Telecommunications
From 2003
through 2006, we experienced an increase in our copper connection business
primarily as a result of the requirements of British Telecommunications to
provide increased service in the United Kingdom and, in 2005, as a result of
British Telecommunications’ implementation of the local loop unbundling (“LLU”)
program, demanded by regulators to enable third party providers of telephone
service to gain access to British Telecommunications’ systems. During 2007 and
2008 we continued to supply LLU at a significant rate, but experienced a
significant drop off of demand for ADSL product from British
Telecommunications. During the past three years, sales to British
Telecommunications, consisting of both direct sales and sales to systems
integrators for British Telecommunications represented a substantial percentage
of our total sales, accounting for 39% of sales for 2008, 45% of sales for 2007
and 62% for 2006. Such sales were of copper connection and protection products.
Our sales to British Telecommunications, including sales to its systems
integrators, have declined significantly, from $20,313,000 in 2006 to
$12,504,000 in 2007 to $10,296,000 in 2008, a decline of approximately 38.4%
from 2006 to 2007 and a further decline of approximately 17.7% from 2007 to
2008. We were not able to offset completely this decline in
sales. In addition, the dollar has recently strengthened
against the British
pound.
Sales to
customers in Great Britain are made in the local currency. As a result, while
our costs are incurred in dollars, the dollar value of our collections from
these customers, primarily British Telecommunications, has decreased. The
exchange rate change along with reduced sales volume and change in product mix
sold to British Telecommunications, had an impact on overall gross margin, which
declined from 29% for 2007 to 21% for 2008. Furthermore, we sustained a net loss
from continuing operations before extraordinary gain and discontinued operations
of approximately $2,352,000 in 2008, as compared with net loss from continuing
operations before discontinued operations of approximately $2,223,000 in 2007
and income from continuing operations of $2,182,000 in 2006.
Unless
we are able to increase our sales to British Telecommunications or sell products
to new customers and improve our gross margin, we will not be able to operate at
a profit. We cannot assure you that we will be able to improve either
our sales to British Telecommunications or our margins on those sales or find
other customers for our products. If British Telecommunications and its systems
integrators do not increase their purchases from us or if we are not able to
increase our margins on sales to these customers, it may be necessary for us to
seek protection under the Bankruptcy Code.
Reverse Split and Debt
Restructuring:
On July 31, 2008, we amended our
certificate of incorporation to effect a one-for-11.11 reverse split pursuant to
which each share of common stock became converted into 0.0900090009 shares of
common stock.
On July 31, 2008, we implemented a
trouble debt restructuring plan (as defined under SFAS 15). Pursuant
to the restructuring plan:
|
·
|
The
holder of our senior debt converted notes in the principal amount of
$23,373,000 and accrued interest of $1,354,000 into a note for $11,601,156
plus 7,038,236 shares of common stock, valued at $83,600 as of the
modification date and representing 70% of the common stock outstanding
after giving effect to all of the issuances contemplated by the
restructuring plan (the “Total Issuances”). The note bears interest at
12.5% per annum amortized on a payment schedule over its 6¾-year
term. As required under the Statement of Financial Accounting
Standard No. 15-Accounting by Debtors and Creditors for Troubled Debt
Restructuring (“SFAS 15”), the amount of this note as shown on the balance
sheet includes interest at the stated rate through the stated maturity
date of the note. The interest accreted to the balance sheet was offset
against the extraordinary gain recognized on the troubled debt restructure
and was not treated as an interest charge during 2008. Subsequent to the
restructuring, there was a modification of the payment terms which
deferred the first payment to July 2010. As a result of this
modification, as of December 31, 2008, the senior debt has been classified
as long term debt. See Note 20 of Notes to Consolidated
Financial Statements. As of December 31, 2008 the long term
portion reflects principal and interest of
$17,766,000.
|
|
·
|
A
working capital note in the principal amount of $1,600,000 due to our
senior debt holder was extended to December 31, 2008 and subsequently to
April 30, 2010. See Notes 8 and 15 of Notes to Consolidated Financial
Statements. The interest on the $1,600,000 through the repayment term of
the loan of $207,000 has been added to the face value of the note on the
balance sheet and is included with the current portion of our senior
debt. The interest was calculated at 14% which represents LIBOR
plus 10% as of the date of the restructuring. Subsequent to the
restructure, there was a modification of the payment terms. See
Note 20 of Notes to Consolidated Financial
Statements.
|
|
·
|
The
holders of all of our subordinated notes converted the entire principal
and interest on the notes, of approximately $13,583,000, into notes in the
principal amount of $1,750,000 and 1,407,667 shares of common stock,
representing 14% of the common stock outstanding after giving effect to
the Total Issuances. The $1,750,000 notes will be repaid based upon a
25-year amortization schedule and will mature January 31, 2016 with final
payment of the remaining principal and interest due at such time. Such
debt bears interest at 10% annually payable quarterly in arrears. As
required by SFAS 15, the interest on these notes, through the stated term
of the loan in the amount of $1,256,000 had been added to the amount of
the note on the balance sheet. See Note 10 of Notes to Consolidated
Financial Statements.
|
|
·
|
The
holders of our convertible debentures due July 1, 2002, in the principal
amount of $385,000 plus accrued interest of $318,000, have been offered
the right to convert their debentures into a subordinated note in the
principal amount equal to their proportionate share (based on the
principal amount of debentures) of $100,000 and their proportionate shares
of 100,546 shares of common stock, representing 1% of the common stock
outstanding after giving effect to the Total Issuances. These
notes will have a 25-year amortization schedule and a 7½-year maturity
date. The $100,000 notes will bear interest at 10% annually payable
quarterly in arrears. As of December 31, 2008, no subordinated
note holder has converted their debentures. As a result, the
original debt of $385,000 and accrued interest continues to be classified
as a current liability. We are restricted from making any
payments on these debentures unless and to the extent that the notes are
converted. Any notes which may be issued with respect to
debentures which are converted will be reflected on our balance sheet in
accordance with SFAS 15.
|
|
·
|
Certain
other creditors agreed to accept substantial discounts on their
outstanding claims. The gain on restructuring of these payables
and accrued expenses (net of zero tax) was $714,000, which is included in
the extraordinary gain on the consolidated statement of
operations.
|
|
·
|
We
issued 603,277 shares of common stock, representing 6% of the common stock
outstanding after giving effect to the Total Issuances, to key
employees. The value of these shares is included in selling,
general and administrative expenses as a non-cash expense of $7,000,
reflecting the market value of the shares at the date of the
restructuring.
|
|
·
|
For
services relating to the debt restructuring, we will pay Advicorp, PLC, a
fee of $200,000, payable in 25 monthly installments commencing
January 2009 and grant to Advicorp warrants to purchase 201,093 shares of
common stock at an exercise price equal of $0.10. A member of
our board of directors is chief executive officer and a part owner of
Advicorp, PLC.
|
|
·
|
As
part of the debt restructuring, the outstanding options to purchase an
aggregate of 155,000 shares of common stock at exercise prices ranging
from $0.03 to $2.03, which were held by the Company’s directors, were not
adjusted as a result of the reverse
split.
|
The restructuring eliminated
principal and interest on approximately $25,076,000 of debt and resulted in an
extraordinary gain of $17,502,000 (net of related costs). The gain
did not result in any tax expense as a result of our ability to use our income
tax loss carryforward.
As a
result of the issuance of more than 50% of our common stock to new stockholders,
our ability to use our remaining net operating loss carryforwards will be
severely curtailed in accordance with Section 382 of the Internal Revenue
Code.
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. Because of
our stockholders’ deficit of $16,044,000, a net loss from continuing operations
before extraordinary gain and discontinued operations of $2,352,000 for 2008,
and our working capital constraints, our 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,
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, 2008 and 2007,
all of our goodwill related to our signal processing division. We cannot give
assurances that write-downs in the future will not be necessary, although
management believes that no additional goodwill impairment charges are necessary
at this time and that there was no impairment of goodwill for 2008.
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. An effect of our debt restructuring, was the issuance of
more than fifty (50%) percent of our common stock to new stockholders, as a
result our ability to use our remaining net operating loss carryforwards will be
severely curtailed in accordance with Section 382 of the Internal Revenue Code.
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.
Other
Matters
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 expect to 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.
The OSS operating activities were limited to the performance of contractual
maintenance and warranty services under contracts which expired by June 30, 2007
and at which time this business was discontinued.
Results
of Operations
Years
Ended December 31, 2008 and 2007
The following table sets forth our
consolidated statements of operations for the two years ended December 31, 2008
and 2007 and as a percentage of sales:
|
|
Years Ended December 31,
|
|
|
|
(Dollars in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
Sales
|
|
$ |
26,737 |
|
|
|
100 |
% |
|
$ |
27,820 |
|
|
|
100 |
% |
Cost
of sales
|
|
|
21,002 |
|
|
|
79 |
% |
|
|
19,760 |
|
|
|
71 |
% |
Gross
profit
|
|
|
5,735 |
|
|
|
21 |
% |
|
|
8,060 |
|
|
|
29 |
% |
Selling,
general and administrative expenses
|
|
|
5,163 |
|
|
|
19 |
% |
|
|
6,186 |
|
|
|
22 |
% |
Research
and development expenses
|
|
|
1,477 |
|
|
|
5 |
% |
|
|
1,955 |
|
|
|
7 |
% |
Operating
loss
|
|
|
(905 |
) |
|
|
(3 |
)% |
|
|
(81 |
) |
|
|
- |
|
Interest
expense (net)
|
|
|
(1,387 |
) |
|
|
(5 |
)% |
|
|
(2,066 |
) |
|
|
(8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(2,292 |
) |
|
|
(8 |
)% |
|
|
(2,147 |
) |
|
|
(8 |
)% |
Income
tax expense
|
|
|
(60 |
) |
|
|
- |
|
|
|
(76 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before extraordinary gain and discontinued
operations
|
|
|
(2,352 |
) |
|
|
(8 |
)% |
|
|
(2,223 |
) |
|
|
(8 |
)% |
Loss
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
(521 |
) |
|
|
(2 |
)% |
Extraordinary
gain on debt restructuring
|
|
|
17,502 |
|
|
|
65 |
% |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
15,150 |
|
|
|
57 |
% |
|
$ |
(2,744 |
) |
|
|
(10 |
)% |
Our sales
for 2008 were $26,737,000 compared to $27,820,000 in 2007, which is a decrease
of $1,083,000 (4%). Line connection/protection
equipment sales for 2008 decreased $797,000 (3.5%) from $22,929,000 in 2007 to
$22,132,000 in 2008. The decrease in sales is due to a decline in orders from
British Telecommunications’ systems integrators for ADSL products that was
partially offset by higher demand for connection/protection product, from
western hemisphere customers principally Telmex. During 2008, direct
sales to British Telecommunications (excluding sales to system integrators)
decreased 17.4% from $10,860,000 to $8,965,000 primarily as a result in the drop
in demand for LLU products. A significant decrease in sales of connector
products to British Telecommunications of approximately $5,545,000 was partially
offset by increased sales of protection modules of approximately $3,649,000 to
British Telecommunications. Sales to systems integrators for British
Telecommunications decreased from $1,644,000 to $1,331,000, or 19%, for the same
period. Sales of connection/protection product to North America customers
increased approximately $1,747,000 from $9,608,000 in 2007 to $11,355,000 in
2008.
Signal
sales for 2008 were $4,605,000 compared to $4,891,000 in 2007, a decrease of
5.8%. The decline in signal revenue was primarily due to the timing
of orders from the military sector.
Gross
profit decreased from 29% in 2007 to 21% in 2008. The decrease is primarily
related to excess capacity in our Mexico facility due to lower production levels
as compared to 2007, principally resulting from the decrease in sales to British
Telecommunications and shifting of certain manufacturing to China. We
were unable to obtain and produce orders from other customers to make up for
this decrease due to working capital constraints. Gross margins were
also reduced by changes in product mix and the effects of the stronger dollar,
primarily against the British pound. We do not engage in
hedging as a method of seeking to reduce the impact of currency
fluctuations.
Selling,
general and administrative expenses decreased by $1,023,000 (16.5%) from
$6,186,000 in 2007 to $5,163,000 in 2008. The Company reduced advertising and
participation in trade shows, which resulted in a decrease in selling expenses
of approximately $350,000. General and administrative costs decreased
primarily due to a reduction of costs relating to our debt restructuring, and
the effects of overall cost cutting initiatives. Costs associated
with the debt restructuring, consisting primarily of professional fees for 2008
were offset against the extraordinary gain on restructuring. Costs associated
with the debt restructuring were approximately $600,000.
Research and development expenses
decreased by $478,000 (24.5%) from $1,955,000 in 2007 to $1,477,000 in 2008. The
decrease is a direct result of targeted cost reductions significantly in the use
of outside consultants and development of prototypes.
As a result of the above, we had an
operating loss of $905,000 in 2008 as compared with an operating loss of $81,000
in 2007.
Interest
expense, net of interest income, for 2008 decreased by $704,000 from $2,120,000
in 2007 to $1,416,000 in 2008. Interest on our debt prior to the
restructuring on July 31, 2008 was not accrued on the entire amount of the
senior debt of $24,973,000 under the terms of our agreement with the holder of
our senior debt. Due to the restructuring, interest on the senior and
subordinated debt through the maturity dates of the notes has been added to the
amount of the debt on our balance sheet and did not affect our interest expense
in 2008 and will not be treated as an interest expense in future period. The
decrease is primarily related to the restructuring of our senior and
subordinated debt. We accrue interest on $425,000 of funds lent to us
by our senior lender in November 2008, subsequent to the debt
restructure. Interest, accrued at a rate of LIBOR plus 10%, was
approximately 11.7% in the period ending December, 31, 2008. As a
result, our loss from continuing operations before income tax increased from
$2,147,000 to $2,292,000.
The tax provisions for 2008 were lower
than the statutory tax rate primarily as a result of the utilization of
available net operating loss carryforwards, and reductions in the deferred tax
reserves. As a result of the issuance of more than 50% of our common
stock to new stockholders, our ability to use our remaining net operating loss
carryforward will be severely reduced in accordance with IRS code
382.
The
troubled debt restructuring eliminated principal and interest on approximately
$25,076,000 of debt and resulted in an extraordinary gain of $17,502,000 (net of
related costs, including the interest that was added to principal under troubled
debt restructuring accounting rules) which was recognized in 2008. As a result
of the foregoing, we incurred as net loss before extraordinary income of
$2,352,000, or $0.50 per share (basic and diluted) for 2008 compared with a net
loss of $2,744,000, or $3.04 per share (basic and diluted) in
2007. The effect of the extraordinary gain for 2008 is $3.73 per
share, basic and diluted. During 2007 there was a loss from
discontinued operations of $521,000, or $0.58 per share (basic and
diluted). There was no loss from discontinued operations in
2008. If we are unable to operate profitably in the future it may be
necessary for us to seek protection under the Bankruptcy Code.
Liquidity
and Capital Resources
At December 31, 2008, we had cash and
cash equivalents of $292,000 compared with $494,000 at December 31, 2007. During
2008 our operations utilized net cash of $693,000 as compared with $1,941,000 in
2007. Our cash flow from operations includes interest payments
of $153,000 and $568,000 in 2008 and 2007, respectively. During 2008, we
borrowed an additional $1,025,000 from our senior debt holder to meet our
current working capital needs. Principal payments on our senior and
subordinated notes were repaid in the amount of $491,000 in 2008 and $140,000 in
2007. The improvement in working capital, from a working capital
deficit of $34,513,000 at December 31, 2007 to a positive working capital of
$827,000 at December 31, 2008 was due to the restructuring of the debt during
the third quarter of 2008 and the fourth quarter modification of the payment
terms of the senior debt which deferred the payment schedule of the senior debt
in the amount of $11,601,156 to begin in July 2010, which enabled us to classify
all of this senior debt as long-term debt. However, our working capital at
December 31, 2008 is not significant and may not be sufficient to enable us to
continue to operate. We have no source of funds other than from our
operation, and our senior debt holder has no obligation to provide us with
additional funding. 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 a
result of the debt restructuring in 2008, we eliminated principal and interest
on approximately $25,076,000 of debt. We believe that we will be able
to meet the amortization schedule of the remaining debt. However, we
have already required, and obtained, a deferral of the amortization schedule on
the senior debt, and we cannot assure you that the holder of our senior debt
will agree to any other deferrals or modifications of our debt. See
Note 20 of Notes to Consolidated Financial Statements. Our ability to
make these debt payments, as well as to pay our other obligations in the normal
course of business, is dependent upon our ability to operate profitably and to
generate positive cash flow from operations, and we cannot assure you that we
will be able to do so. If we continue to incur losses from our
operations, we may be unable to continue in business which may necessitate our
seeking protection under the Bankruptcy Code.
During
the year ended December 31, 2008, our only investing activities were capital
expenditures of $232,000 compared with $533,000 for the same period in
2007.
Although
the debt restructuring reduced our working capital deficiency, it did not
provide us with any additional cash for our operations. Our only
source of funds other than normal operations is Cheyne Special Situations Fund,
L.P., which advanced us $1,000,000 in October 2007, $600,000 in June 2008, and
$425,000 in November 2008. However, our continuing losses and the
uncertainty of any significant increase in business from British
Telecommunications, together with the worldwide economic downturn and the
general lack of credit even for companies with strong balance sheets and
positive operation results, will increase the difficulties in obtaining
financings from other sources and may continue to affect our ability to generate
business from new customers as well as our ability to make the payments that are
due to Cheyne. We cannot give any assurance that Cheyne will provide
us with any additional funding if the need arises. If we are not able to
generate sufficient revenue to enable us to meet our obligations or obtain
financing from Cheyne, we would not be able to continue in business, and it
would be likely that we would seek protection under the Bankruptcy
Code.
We have
in the past, and may in the future, consider the sale of one or more of our
divisions. However, all of our past discussions terminated without
any agreement and we cannot give any assurance that we would be able to effect
any sale of our business or that such a sale would not be part of bankruptcy
reorganization. Further, our senior debt is secured by a lien on
substantially all of our and our subsidiaries’ assets, and substantially all, if
not all, of the proceeds from any sale may be required to be paid to our debt
holders, principally the holder of our senior debt.
The following table summarizes our
principal contractual obligations as of December 31, 2008 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
|
|
$ |
1,691 |
|
|
$ |
3,428 |
|
|
$ |
3,757 |
|
|
$ |
19,194 |
|
|
$ |
28,070 |
|
Operating
leases
|
|
|
448 |
|
|
|
577 |
|
|
|
132 |
|
|
|
247 |
|
|
|
1,404 |
|
Deferred
compensation obligations
|
|
|
109 |
|
|
|
144 |
|
|
|
144 |
|
|
|
713 |
|
|
|
1,110 |
|
Purchase
obligations
|
|
|
3,730 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,730 |
|
Total
|
|
$ |
5,978 |
|
|
$ |
4,149 |
|
|
$ |
4,033 |
|
|
$ |
20,154 |
|
|
$ |
34,314 |
|
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
pounds. Any pound-denominated receipts are promptly converted into United States
dollars. We do not engage in any hedging or other currency transactions. During
the fourth quarter of 2008, the loss from exchange rates accounted for
approximately 2% of sales. For 2007, 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.
|
(a) Evaluation of disclosure controls and
procedures
Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and timely reported as
provided in SEC rules and forms. We periodically review the design and
effectiveness of our disclosure controls and procedures, including compliance
with various laws and regulations that apply to our operations. We make
modifications to improve the design and effectiveness of our disclosure controls
and procedures, and may take other corrective action, if our reviews identify a
need for such modifications or actions. In designing and evaluating the
disclosure controls and procedures, we recognize that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control
objectives.
We have
carried out an evaluation, under the supervision and 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 (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act),
as of the year ended December 31, 2008. In light of the discussion of a material
weakness set forth below in respect to information technology, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures were not effective as of December 31,
2008. To address the material weakness, described below, we performed
additional analysis and other post closing procedures to ensure our consolidated
financial statements were prepared in accordance with generally accepted
accounting principles. Based on the additional procedures performed,
management has determined that the consolidated financial statements fairly
present, in all material respects, our financial condition, results of
operations, and cash flows for the periods presented.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process designed
by, or under the supervision of the Company’s chief executive and chief
financial officers, and effected by the board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with US GAAP including those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company, (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with US GAAP and that receipts and expenditures are being made only
in accordance with authorizations of management and directors of the Company,
and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness 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.
Under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we have assessed the
effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, our management used the
criteria described in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Due to
the inherent issue of segregation of duties in a small company, we have relied
heavily on entity or management review controls to lessen the issue of
segregation of duties. Based on this assessment and those criteria, our
management concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2008, as a result
of a material weakness relating to information technology, as described below.
Notwithstanding the material weaknesses, management believes the consolidated
financial statements included in this report fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.
Management’s
report was not subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits us to provide only management’s report in this annual
report.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. Management identified the
following material weaknesses as of December 31, 2007 which continued
through 2008:
Management identified the following
significant deficiencies that when aggregated give rise to a material
weakness. Management identified certain control procedures that were not
sufficiently documented relating to a) program change management in the
Company’s PROCOMM system, b) lack of integrated modules with the general ledger
and c) excessive manual adjustments to the inventory module are
required.
Management’s
Plan of Remediation
Management is continuing to
investigate new integrated ERP systems that will include complete general ledger
and reporting which will eliminate the need for manual updates and significantly
reduce the need for journal entries in the financial reporting
process. Our inability to finance this major capital expenditure has
significantly limited the ERP systems available for us to
evaluate. Specific remediation actions used in 2008 to address our
material weakness in internal control over financial reporting in respect to
information technology include the following:
In-depth review of all perpetual
inventory reports
Analyzing of production reporting in
respect to ending inventory
Re-computation of reports on a test
basis
Changes in Internal
Control over Financial Reporting
There have been no changes in our
internal control over financial reporting during the year ended December 31, 2008
that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B.
|
Other
Information.
|
None
PART
III
Item 10.
|
Directors and Executive
Officers
|
Set forth
below is information concerning our directors and executive
officers:
Name
|
|
Positions
|
|
Age
|
Edward
B. Kornfeld
|
|
Chief
executive officer and director
|
|
65
|
Leslie
K. Brand
|
|
Chief
financial officer
|
|
51
|
Michael
A. Tancredi
|
|
Senior
vice president, secretary, treasurer and director
|
|
79
|
William
V. Carney1
|
|
Chairman
of the board and director
|
|
72
|
Warren
H. Esanu1,2
|
|
Director
|
|
66
|
Herbert
H. Feldman1,2
|
|
Director
|
|
75
|
Marco
M. Elser2
|
|
Director
|
|
50
|
1
|
Member
of the executive committee
|
2
|
Member
of the audit and compensation
committees.
|
Mr.
Kornfeld has been an executive officer since 1995 and a director since July
2008. Mr. Kornfeld has been our chief executive officer since April 2006,
president from April 2004 through April 2006 and chief financial officer from
October 1995 until February 9, 2009. 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, including us; however, he continues to
devote full-time effort to our business.
Ms. Brand
joined us as corporate controller in August 2007 and became our chief financial
officer in February 2009. Prior to joining us, Ms. Brand was employed by
Recourses Global Professionals from November 2004 until July 2007 through which
she was a consultant to CA, Inc. in their Sarbanes Oxley initiative. Ms.
Brand has spent more than 15 years in managerial positions within manufacturing
companies in the food and drug industries. Ms. Brand is a CPA.
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. Elser
has been a director since 2000 and partner 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 until 2001and was
responsible for its 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.
Code
of Ethics
We maintain a code of ethics that
applies to all of our executive officers, including our principal executive,
financial and accounting officers, our directors, our financial managers and all
employees. Any waiver of the code must be approved by the Audit Committee and
must be disclosed in accordance with SEC rules. We also have a standard of
conduct which is applicable to all employees. Our code of ethics is
on our website at http://www.portasystems.com/legal/CodeOfEthics.htm.
The
Board and Committees of the Board
We are
governed by a board of directors currently consisting of six 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
http://www.portasystems.com/legal/AuditComChart.htm and
http://www.portasystems.com/legal/CompComChart.htm.
Printed
copies of these charters and our code of ethics 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 meetings. 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:
|
·
|
Has
reviewed and discussed the audited financial statements for the year ended
December 31, 2008 with management;
|
|
·
|
Has
discussed with the independent auditors the matters required to be
discussed by the Statement on Auditing Standards No. 61, as
amended;
|
|
·
|
Has
received the written disclosures and the letter from the independent
accountants required by the Public Company Accounting Oversight Board Rule
3526, and has discussed with the independent accountants the independence
of the independent accountants; and
|
|
·
|
Recommended,
based on the review and discussion set forth above, to the board of
directors that audited financial statements be included in our annual
report on Form 10-K for the year ended December 31,
2008.
|
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 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,
our other executive officers and the general compensation policies of other of
the Company’s employees. The committee also serves as the granting and
administrative committee under our equity compensation plans. The compensation committee
does not delegate its authority to fix compensation; however, as to officers who
report to the chief executive officer, the compensation committee consults with
the chief executive officer, who may make recommendations to the compensation
committee. Any recommendations by the chief executive officer are
accompanied by an analysis of the basis for the recommendations. The
committee also discussed compensation policies for employees who are not
officers with the chief executive officer and other responsible officers. The
compensation committee did not engage any compensation consultants of other
persons performing similar functions. 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
2008:
Board
of directors
|
|
|
6 |
|
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. The executive committee did not meet during
2008.
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 2008.
Item 11.
|
Executive
Compensation
|
SUMMARY
COMPENSATION TABLES
The
following tables set forth below a summary of the dollar values of the
compensation provided in 2008 and 2007 to our principal executive and financial
officer and the only other officer who received compensation of $100,000 or more
during 2008.
Name
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Stock
Awards
|
|
|
Option
Awards
|
|
|
Non-Equity
Incentive
Plan
Compensation
|
|
|
Nonqualified
deferred
compensation
earnings
|
|
|
All
Other
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
B.
Kornfeld, chief
executive officer
|
|
2008
|
|
$ |
275,000 |
|
|
$ |
- |
|
|
$ |
3,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,014 |
|
|
$ |
285,014 |
|
and
chief
financial
officer
|
|
2007
|
|
|
271,250 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,939 |
|
|
|
278,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Tancredi, senior
|
|
2008
|
|
|
100,000 |
|
|
|
- |
|
|
|
264 |
|
|
|
- |
|
|
|
- |
|
|
|
36,750 |
|
|
|
5,329 |
|
|
|
142,343 |
|
vice
president,
treasurer
and
secretary
|
|
2007
|
|
|
98,125 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
36,750 |
|
|
|
6,171 |
|
|
|
141,046 |
|
Compensation
to Mr. Kornfeld does not include fees of $12,000 paid in each of 2008 and 2007
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. All Other Compensation includes for Mr. Kornfeld 401(k)
match ($3,450) and supplemental insurance ($3,564) for 2008, 401(k) match
($3,375) and supplemental insurance ($3,564) for 2007. As part of our debt
restructuring, Mr. Kornfeld was granted 250,000 shares of common stock, the
value of which is reflected under “Stock Awards.”
Mr.
Tancredi’s “All Other Compensation” includes 401(k) match ($385) and
supplemental insurance ($4,944) for 2008, and 401(k) match ($1,227) and
supplemental insurance ($4,944) for 2007. As part of our debt
restructuring, Mr. Tancredi was granted 22,000 shares of common stock, the value
of which is reflected under “Stock Awards.”
Neither Mr. Kornfeld or Mr. Tancredi
have any unexercised options or stock rights as of December 31, 2008, nor did
either exercise any options or stock rights in 2007 or 2008.
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 above under “Value of Total Compensation.”
We have
been limited in the past on the incentives that we could make available to our
executive officers and we did not grant options to any of our officers in 2007
or 2008 nor are there any outstanding equity awards to any named officer as of
December 31, 2008. During 2008, in connection with our debt restructuring, we
issued 603,217 shares of common stock to our officers and key employees, of
which 250,000 shares were issued to Mr. Kornfeld, our chief executive and
financial officer, and 22,000 shares were issued to Mr. Tancredi, our senior
vice president, treasurer and secretary. We expect that in 2009,
equity incentives may 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. These payments range from $0 for meeting the business units’
operating income goal to a maximum of $30,000 based on meeting 120% 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 a
stock option plan to award officers and key managers, which are described under
“Stock Incentive Plans.” As of March 23, 2009, no further options can be granted
under the stock option plan.
REVIEW OF ALL COMPONENTS OF
CHIEF EXECUTIVE OFFICER’S COMPENSATION
The
compensation committee has reviewed all components of the chief executive
officer’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 chief executive officer’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.
Since we sustained a loss from continuing operations before extraordinary gain
in 2008, we did not award bonus compensation to our chief executive officer or
to any senior executive officer. As part of our debt restructuring, Mr. Kornfeld
was granted 250,000 shares of the company’s stock in recognition of his services
in the negotiations required to consummate the restructure. It should
be noted that when the committee considers any component of the chief executive
officer’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 chief executive officer’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. Due to the company’s continued operating losses, the
committee did not increase Mr. Kornfeld’s compensation in 2008. The
committee approved a 4% salary increase for Mr. Kornfeld in April
2007.
As part
of our debt restructuring, Mr. Kornfeld was granted 250,000 shares of common
stock in recognition of his services in the negotiations required to consummate
the restructure. The committee did not award bonus compensation in
2008 or 2007 because we sustained a net loss from continuing operations before
extraordinary gain and discontinued operations for both years.
Stock
Incentive Plans
We have a
stock option plan pursuant to which we may grant options to key employees,
including officers. Pursuant to this plan, at December 31, 2008, there were
outstanding options of 155,000 shares of common stock. Pursuant to
this plan, each non-management director received the automatic grant of a
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 at a price per share equal to the
average closing price of the common stock for the last ten trading days in
April. During 2008 and 2007, we did not grant either of the named executive
officers any options, and they did not exercise any options to purchase shares
of our common stock. As of December 31, 2008, neither of the named
executive officers had any outstanding options and no stock appreciation rights
were granted.
Directors’
Compensation
We paid
directors’ fees to our non-management directors a directors fee of $6,875 per
quarter and a meeting fee of $1,650 per meeting in both 2008 and
2007. Each non-management director received the automatic grant
of a five-year option to purchase 5,000 shares of common stock at a price per
share, equal to the average closing price of the common stock for the last ten
trading days in April.
The table
below summarizes the compensation we paid to our non-employee directors for the
year ended December 31, 2008:
Directors’ Summary
Compensation Table
Name
|
|
Fees Paid in Cash
|
|
|
Option Award1
|
|
|
Total
|
|
William
V. Carney
|
|
$ |
50,600 |
|
|
|
— |
|
|
$ |
50,600 |
|
Marco
M. Elser
|
|
|
48,950 |
|
|
|
— |
|
|
|
48,950 |
|
Warren
H. Esanu
|
|
|
50,600 |
|
|
|
— |
|
|
|
50,600 |
|
Herbert
H. Feldman
|
|
|
50,600 |
|
|
|
— |
|
|
|
50,600 |
|
|
1
|
Reflects the dollar amount
recognized for financial statement reporting purposes for 2008 in
accordance with SFAS 123R. The fair value of the automatic
grants is
inconsequential.
|
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. All of such options vested six months after the grant and therefore there
were no unvested awards at December 31, 2008. The number of shares
subject to the automatic option grant was not adjusted for the reverse
split.
As of
December 31, 2008, each director has the following outstanding options: Messrs.
Esanu and Feldman, 50,000 each; Mr. Elser, 40,000; and Mr. Carney,
15,000.
Employment
Agreements
We have an employment agreement and an
income continuation agreement with Mr. Kornfeld. The employment agreement has a
term which expires March 31, 2010 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 and was increased to $275,000 on April 1, 2007. 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 24 months. In the event that Mr. Kornfeld is covered by an
executive severance agreement, including the income 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
income 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 24. For purposes of the
income 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 income continuation agreement, which is
currently through July 31, 2010 and is renewed automatically unless we give 60
days notice prior to August 1 of any year of our election not to renew the
agreement. If such a change of control occurs during the effectiveness of the
income 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, 2009 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
the remainder of the term of the agreement or six months salary, whichever is
greater. Mr. Tancredi’s current annual salary is
$100,000.
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, 2009, by:
|
•
|
each
director;
|
|
•
|
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.
|
|
|
Shares of Common
Stock Beneficially
Owned
|
|
|
Percentage of
Outstanding
Common Stock
|
|
Cheyne
Capital
Management
(UK) LLP
Stornoway
House,
13
Cleveland Row,
London
SW1A 1DH,
Unitited
Kingdom
|
|
|
7,038,236 |
|
|
|
70.69 |
% |
William
V. Carney
|
|
|
138,022 |
|
|
|
1.39 |
% |
Michael
A. Tancredi
|
|
|
25,532 |
|
|
|
|
* |
Warren
H. Esanu
|
|
|
76,977 |
|
|
|
|
* |
Herbert
H. Feldman
|
|
|
109,631 |
|
|
|
1.10 |
% |
Marco
M. Elser
|
|
|
671,872 |
|
|
|
6.75 |
% |
Edward
B. Kornfeld
|
|
|
252,369 |
|
|
|
2.53 |
% |
All
directors and executive officers as a group (7
individuals)
|
|
|
8,323,916 |
|
|
|
83.60 |
% |
Except as
otherwise noted, each person has the sole power to vote and dispose of the
shares of common stock listed opposite his name.
The
shares beneficially owned by Mr. Elser represent (a) 114,403 shares held by
Watersfield Ltd., of which Mr. Elser has joint voting and dispositive power, and
(b) 201,093 shares issued upon exercise of warrants held by Advicorp PLC, of
which Mr. Elser is chief executive officer and a part owner and has joint voting
and dispositive power.
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, 2009 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
|
|
|
15,000 |
|
Michael
A. Tancredi
|
|
|
- |
|
Warren
H. Esanu
|
|
|
50,000 |
|
Herbert
H. Feldman
|
|
|
50,000 |
|
Marco
M. Elser
|
|
|
241,093 |
|
Edward
B. Kornfeld
|
|
|
- |
|
All
officers and directors as a group
|
|
|
356,093 |
|
The shares issuable upon options and
warrants held by Mr. Elser include 201,093 shares issuable upon exercise of
warrants held by Advicorp PLC, of which Mr. Elser is chief executive officer and
a part owner and has joint voting and dispositive power.
Item 13.
|
Certain Relationships and Related
Transactions
|
We have
outstanding obligations to current directors for unpaid fees in the amount of
$203,100 for unpaid directors’ fees from periods prior to 2004. Pursuant to the
debt restructuring, we were scheduled to pay these obligations, without
interest, on February 15, 2009. We will make these payments, without
interest, in 8 monthly installments.
During
2008 and 2007, the law firm of Katsky Korins LLP to which Warren H, Esanu, a
director, is senior counsel, provided legal services to us, for which it
received fees of $367,000 and $390,000 for 2008 and 2007, respectively. Katsky
Korins LLP is continuing to render legal services to us during
2009. As part of the debt restructuring. Katsky Korins agreed to
accept payments of $285,000 in full satisfaction of accrued past legal fees in
the amount of $607,836. Such fees were payable at the rate of $1,000
per month for 85 months, effective January 1, 2007, provided that any monthly
installments that were not made prior to August 22, 2008 were to be paid on that
date. No fees were paid to Katsky Korins pursuant to this agreement
in 2007. During 2008, we paid Katsky Korins $105,000, and $180,000
remained outstanding at December 31, 2008.
As part
of the debt restructuring in 2008:
|
·
|
Mr.
Esanu received a note in the amount of $33,538 and 26,977 shares of common
stock in respect of subordinated notes in principal amount of $116,969, on
which there was accrued interest of
$146,343.
|
|
·
|
Watersfield,
Ltd., of which Marco M. Elser, a director, has joint voting and
disposition power, received a note in the amount of $142,226 and 114,403
shares of common stock in respect of subordinated notes in principal
amount of $500,000, on which there was accrued interest of
$603,941.
|
Mr. Esanu
and Watersfield received stock and notes in respect of their subordinated notes
on the same terms and conditions as the other holders of subordinated
notes. The notes will be repaid based upon a 25-year amortization
schedule and will mature January 31, 2016. The notes bear interest at
10% annually payable quarterly in arrears.
Mr. Elser
also holds our convertible debentures in the principal amount of
$105,000. Pursuant to the debt restructuring, Mr. Elser has the right
to exchange the debentures for a subordinated note in the amount of $27,273 and
27,422 shares of common stock.
Mr. Elser
is chief executive officer and a part owner of Advicorp. For services
relating to our debt restructuring, we will pay Advicorp a fee of $200,000,
payable, without interest, in 25 monthly installments commencing January
2009, and we granted to Advicorp warrants to purchase 201,093 shares of common
stock at an exercise price of $0.10 per share, which was the average closing
price of the common stock on the five trading days commencing August 31,
2008. As of the date of this report, we have not commenced the
monthly payments.
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, 2008 and 2007:
|
|
Fees
|
|
Fee Category
|
|
2008
|
|
|
2007
|
|
Audit
fees
|
|
$ |
291,884 |
|
|
$ |
288,000 |
|
Audit-related
fees
|
|
|
2,000 |
|
|
|
14,100 |
|
Tax
fees
|
|
|
35,393 |
|
|
|
32,000 |
|
Other
fees
|
|
|
58,558 |
|
|
|
42,000 |
|
Total
Fees
|
|
$ |
387,835 |
|
|
$ |
376,100 |
|
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 performed services related
to the restructuring of the Company’s senior and subordinated debt described
above and our proxy statement.
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)
|
Documents
filed as part of this Annual Report on Form
10-K:
|
|
(i)
|
Financial
Statements.
|
See Index
to Consolidated Financial Statements on Page F-1.
|
(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.
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
3.1
|
|
Certificate
of Incorporation of the Company, as amended to date.
|
3.2
|
|
By-laws
of the Company, 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 January 1, 2009, issued to
Cheyne Special Situations Fund, L.P. in the principal amount of
$11,601,156
|
4.3
|
|
Negotiable
promissory note dated January 1, 2009, issued to Cheyne Special Situations
Fund, L.P. in the principal amount of
$1,747,012
|
4.4
|
|
Form
of subordinated note issued to the holders of the Company’s subordinated
notes., incorporated by reference to Exhibit 4.2 of the Company’s Current
Report on Form 8-K filed on August 6, 2008
|
4.5
|
|
Amendment
Number 31 to the Amended and Restated Loan and Security Agreement between
the Company and Cheyne Special Situations Fund L.P., dated as of August
1,2008, incorporated by reference to Exhibit 99.1 of the Company’s Current
Report on Form 8-K filed on August 6, 2008.
|
10.1
|
|
Agreement
dated June 20, 2008 between the Company and Cheyne Special Situations Fund
L.P., incorporated by reference to Exhibit 99.2 of the Company’s Current
Report on Form 8-K filed on August 6, 2008.
|
10.2
|
|
Form
of agreement and accord and satisfaction between the Company and the
holders of the Company’s 12% subordinated notes
|
10.3
|
|
Employment
agreement dated as of April 1, 2007 between the Company and Edward B.
Kornfeld
|
10.4
|
|
Amendment
dated as of April 1, 2008 to the employment agreement between the Company
and Edward B. Kornfeld
|
10.5
|
|
Income
continuation agreement dated June 27, 2008 between the Company and Edward
B. Kornfeld
|
10.6
|
|
Employment
agreement dated as of August 1, 2008 between the Company and Michael
Tancredi
|
10.7
|
|
Warrant
to purchase common stock issued to Advicorp, PLC
|
10.8
|
|
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.
|
10.9
|
|
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.
|
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, 2007.
|
14.2
|
|
Standard
of Conduct of the Company incorporated by reference to Exhibit 14.2 of the
Company’s Annual Report on Form 10K for the year ended December 31,
2007.
|
22.1
|
|
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.
|
31.1
|
|
Certification
of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
|
Certification
of 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.
Dated:
March 31, 2009
|
PORTA
SYSTEMS CORP. |
|
|
|
|
By:
|
/s/ Edward B.
Kornfeld
|
|
|
Edward
B. Kornfeld
|
|
|
Chief
Executive
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 director
|
|
March
31, 2009
|
Edward
B. Kornfeld
|
|
(Principal
executive officer)
|
|
|
|
|
|
|
|
/s/Leslie K. Brand
|
|
Chief
financial officer
|
|
March
31, 2009
|
Leslie
K. Brand
|
|
(Principal financial
and accounting officer)
|
|
|
|
|
|
|
|
/s/William V. Carney
|
|
Director
|
|
March
31, 2009
|
William
V. Carney
|
|
|
|
|
|
|
|
|
|
/s/Warren H. Esanu
|
|
Director
|
|
March
31, 2009
|
Warren
H. Esanu
|
|
|
|
|
|
|
|
|
|
/s/Michael A. Tancredi
|
|
Director
|
|
March
31, 2009
|
Michael
A. Tancredi
|
|
|
|
|
|
|
|
|
|
/s/Herbert H. Feldman
|
|
Director
|
|
March
31, 2009
|
Herbert
H. Feldman
|
|
|
|
|
|
|
|
|
|
/s/Marco Elser
|
|
Director
|
|
March
31, 2009
|
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, 2008 and 2007
|
|
F-3
|
Consolidated
Statements of Operations and Comprehensive Income(Loss), Years Ended
December 31, 2008 and 2007
|
|
F-4
|
Consolidated
Statements of Stockholders’ Deficit, Years Ended December 31, 2008, and
2007
|
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008
and 2007
|
|
F-6
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
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, 2008 and 2007, and the related consolidated
statements of operations and comprehensive income (loss), stockholders’ deficit,
and cash flows for each of the two years in the period ended December 31,
2008. These consolidated 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, 2008 and 2007, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States.
The
accompanying consolidated 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, 2008, and has a
stockholders’ deficit of $16,044,000. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
actions 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.
/s/ BDO SEIDMAN, LLP
|
BDO
SEIDMAN, LLP
|
Melville,
New York
March 24,
2009
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2008 and 2007
(In thousands, except shares and par
value)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
292 |
|
|
$ |
494 |
|
Accounts
receivable - trade, less allowance for doubtful accounts of $30 in 2008
and $50 in 2007
|
|
|
4,554 |
|
|
|
5,098 |
|
Inventories
|
|
|
6,110 |
|
|
|
6,411 |
|
Prepaid
expenses and other current assets
|
|
|
202 |
|
|
|
203 |
|
Total
current assets
|
|
|
11,158 |
|
|
|
12,206 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,564 |
|
|
|
1,678 |
|
Goodwill
|
|
|
2,961 |
|
|
|
2,961 |
|
Other
assets
|
|
|
78 |
|
|
|
54 |
|
Total
assets
|
|
$ |
15,761 |
|
|
$ |
16,899 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Senior
debt including interest
|
|
$ |
1,500 |
|
|
$ |
25,026 |
|
Subordinated
notes including interest
|
|
|
191 |
|
|
|
13,044 |
|
6%
Convertible subordinated debentures, principal
|
|
|
385 |
|
|
|
385 |
|
Accounts
payable
|
|
|
5,529 |
|
|
|
5,523 |
|
Accrued
expenses and other
|
|
|
2,390 |
|
|
|
2,555 |
|
Other
accrued interest payable
|
|
|
336 |
|
|
|
186 |
|
Total
current liabilities
|
|
|
10,331 |
|
|
|
46,719 |
|
|
|
|
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
|
|
|
|
|
Senior
debt including interest
|
|
|
18,056 |
|
|
|
— |
|
Subordinated
notes including interest
|
|
|
2,767 |
|
|
|
— |
|
Deferred
compensation and other long term liabilities
|
|
|
651 |
|
|
|
707 |
|
Total
long term liabilities
|
|
|
21,474 |
|
|
|
707 |
|
Total liabilities
|
|
|
31,805 |
|
|
|
47,426 |
|
|
|
|
|
|
|
|
|
|
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 9,957,354 in
2008 and 907,701 shares in 2007
|
|
|
100 |
|
|
|
9 |
|
Additional
paid-in capital
|
|
|
76,244 |
|
|
|
76,217 |
|
Accumulated
deficit
|
|
|
(85,307 |
) |
|
|
(100,457 |
) |
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(5,143 |
) |
|
|
(4,358 |
) |
|
|
|
(14,106 |
) |
|
|
(28,589 |
) |
Treasury
stock, at cost, 2,785 shares
|
|
|
(1,938 |
) |
|
|
(1,938 |
) |
Total
stockholders’ deficit
|
|
|
(16,044 |
) |
|
|
(30,527 |
) |
Total
liabilities and stockholders’ deficit
|
|
$ |
15,761 |
|
|
$ |
16,899 |
|
See
accompanying notes to consolidated financial statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Operations and Comprehensive Income (Loss)
Years
ended December 31, 2008 and 2007
(in
thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
Sales
|
|
$ |
26,737 |
|
|
$ |
27,820 |
|
Cost
of sales
|
|
|
21,002 |
|
|
|
19,760 |
|
Gross
profit
|
|
|
5,735 |
|
|
|
8,060 |
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,163 |
|
|
|
6,186 |
|
Research
and development expenses
|
|
|
1,477 |
|
|
|
1,955 |
|
Total
expenses
|
|
|
6,640 |
|
|
|
8,141 |
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(905 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
Interest
expense (net)
|
|
|
(1,416 |
) |
|
|
(2,120 |
) |
Other
income, net
|
|
|
29 |
|
|
|
54 |
|
Loss
from continuing operations before income taxes
|
|
|
(2,292 |
) |
|
|
(2,147 |
) |
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(60 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before extraordinary gain and discontinued
operations
|
|
|
(2,352 |
) |
|
|
(2,223 |
) |
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations (net of zero tax)
|
|
|
- |
|
|
|
(87 |
) |
Write
off of net assets of discontinued operations
|
|
|
- |
|
|
|
(434 |
) |
Total
loss for discontinued operations
|
|
|
- |
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
Extraordinary
gain on troubled debt restructure (net of zero tax) (Note 14
)
|
|
|
17,502 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
15,150 |
|
|
$ |
(2,744 |
) |
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(785 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
Net
comprehensive income (loss)
|
|
$ |
14,365 |
|
|
$ |
(2,704 |
) |
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.50 |
) |
|
$ |
(2.46 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
(0.58 |
) |
Extraordinary
item
|
|
|
3.73 |
|
|
|
- |
|
|
|
$ |
3.23 |
|
|
$ |
(3.04 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average of shares of common stock outstanding
|
|
|
4,688 |
|
|
|
905 |
|
See
accompanying notes to consolidated financial statement
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Deficit
Years
ended December 31, 2008 and 2007
(In
thousands)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of
|
|
|
Par
Value
|
|
|
Additional
Paid-in
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
No.
of
|
|
|
Total
Stock-
holders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
Stock
|
|
|
Shares
|
|
|
Deficit
|
|
Balance
at December 31, 2006
|
|
|
908 |
|
|
$ |
9 |
|
|
$ |
76,217 |
|
|
$ |
(4,398 |
) |
|
$ |
(97,713 |
) |
|
$ |
(1,938 |
) |
|
|
3 |
|
|
$ |
(27,823 |
) |
Net
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,744 |
) |
|
|
|
|
|
|
|
|
|
|
(2,744 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Balance
at December 31, 2007
|
|
|
908 |
|
|
|
9 |
|
|
|
76,217 |
|
|
|
(4,358 |
) |
|
|
(100,457 |
) |
|
|
(1,938 |
) |
|
|
3 |
|
|
|
(30,527 |
) |
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,150 |
|
|
|
|
|
|
|
|
|
|
|
15,150 |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(785 |
) |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
(785 |
) |
Common
Stock issued
|
|
|
9,049 |
|
|
|
91 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118 |
|
Balance
at December 31, 2008
|
|
|
9,957 |
|
|
$ |
100 |
|
|
$ |
76,244 |
|
|
$ |
(5,143 |
) |
|
$ |
(85,307 |
) |
|
$ |
(1,938 |
) |
|
|
3 |
|
|
$ |
(16,044 |
) |
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
ended December 31, 2008 and 2007
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities of continuing operations:
|
|
|
|
Net
income (loss)
|
|
$ |
15,150 |
|
|
$ |
(2,744 |
) |
Adjustments
to reconcile net income/ (loss) to net cash used in operation activities
of continuing operations:
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
- |
|
|
|
521 |
|
Extraordinary
gain on debt restructuring
|
|
|
(16,144 |
)
|
|
|
- |
|
Stock
compensation expense
|
|
|
7
|
|
|
|
- |
|
Depreciation
and amortization
|
|
|
322 |
|
|
|
407 |
|
Inventory
reserves
|
|
|
(49 |
)
|
|
|
(404 |
) |
Allowance
for bad debt
|
|
|
(20 |
)
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(542 |
) |
|
|
644 |
|
Inventories
|
|
|
131 |
|
|
|
(1,407 |
) |
Prepaid
expenses
|
|
|
7 |
|
|
|
151 |
|
Other
assets
|
|
|
(26 |
)
|
|
|
(8 |
) |
Accounts
payable, accrued expenses and other liabilities
|
|
|
471 |
|
|
|
949 |
|
Net
cash used in continuing operations
|
|
|
(693 |
)
|
|
|
(1,854 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operations of discontinued operations
|
|
|
-
|
|
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(693 |
)
|
|
|
(1,941 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(232 |
)
|
|
|
(533 |
) |
Net
cash used in investing activities
|
|
|
(232 |
)
|
|
|
(533 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
of senior debt
|
|
|
1,025 |
|
|
|
1,000 |
|
Repayments
of senior debt and subordinated notes
|
|
|
(491 |
)
|
|
|
(140 |
) |
Net
cash provided by financing activities
|
|
|
534 |
|
|
|
860 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
189 |
|
|
|
6 |
|
Decrease
in cash and cash equivalents
|
|
|
(202 |
)
|
|
|
(1,608 |
) |
Cash
and cash equivalents - beginning of year
|
|
|
494 |
|
|
|
2,102 |
|
Cash
and cash equivalents - end of year
|
|
$ |
292 |
|
|
$ |
494 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
|
Cash
paid for interest expense
|
|
$ |
153 |
|
|
$ |
568 |
|
Cash
paid for income taxes
|
|
$ |
4 |
|
|
$ |
- |
|
Non-Cash
Financing and Investing:
|
|
|
|
|
|
|
|
|
Non-cash
exchange of common stock issued in debt restructure
|
|
$ |
100 |
|
|
$ |
- |
|
Interest
accrued and forgiven in accordance with SFAS 15 Troubled Debt Restructure
during the period
|
|
$ |
(1,358 |
) |
|
$ |
- |
|
See
accompanying notes to consolidated financial statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December
31, 2008 and 2007
(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 and products that provide network
infrastructure that connects remote terminals used in military data transmission
applications. 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 foreign and domestic 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.
Reverse
Split
On July
31, 2008, the Company amended its certificate of incorporation to effect a
one-for-11.11 reverse split pursuant to which each share of common stock was
converted into .0900090009 shares of common stock. Neither the par
value nor the number of authorized shares was changed as a result of the reverse
split. The financial statements give retroactive effect to the
reverse split.
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.
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.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
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. With respect to the testing of
our goodwill for impairment, we do not believe that it is reasonable to consider
the market capitalization as an indicator of fair value, as our stock is thinly
traded. Accordingly, the Company determines the estimated fair value of
the reporting unit by considering the projected cash flows generated and a
market approach analysis to which the goodwill relates. The market
approach is based on the comparable transaction method, which considers the sale
and acquisition activities in the Company’s industry. The Company tests
the goodwill for impairment on an annual basis, or more frequently if certain
events or changes in circumstances indicate that the carrying value may not be
recoverable. Goodwill at December 31, 2008 and 2007, related
only to the Company's signal processing division. Some factors that could
trigger an interim impairment review include:
|
·
|
Significant
underperformance relative to the expected historical or projected future
operation results of the related
division.
|
|
·
|
Significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business.
|
If we
determine through the impairment review process that goodwill has been impaired,
an impairment charge would be recorded in our consolidated statement of
operations. The Company determined that there was no goodwill impairment
for 2008 or 2007.
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 carry forwards. 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 14- Income taxes.)
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.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
Shipping and Handling
Costs
Shipping
and handling costs are included as a component of cost of sales.
Net Income (Loss) Per
Share
Basic net
income (loss) per share is based on the weighted average number of shares
outstanding. Diluted net income 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 accounts for its stock based compensation under Financial Accounting
Standards Board (“FASB”) SFAS 123R, “Share-Based Payment.” The Company used the
Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period of the grant. Based on the
Black-Scholes valuation model there is no non-cash compensation attributable to
stock options granted during 2008 and 2007, stock compensation expense for all
vested options to date is diminutive.
The
following is a summary of the assumptions used in fiscal year ended December
31:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.25 |
% |
|
|
4.35 |
% |
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
Expected
term
|
|
|
5
years |
|
|
|
5
years |
|
Expected
volatility
|
|
|
50 |
% |
|
|
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, 2008:
|
Shares
|
|
Weighted
Average
Exercise
Price
(per
share)
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding at beginning of period
|
139,000
|
|
$
|
0.49
|
|
|
|
|
|
|
Granted
|
20,000
|
|
|
0.03
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
4,000
|
|
|
3.85
|
|
|
|
|
|
|
Options
outstanding at end of period
|
155,000
|
|
|
.34
|
|
5.43
|
|
$
|
1,990
|
|
Options
exercisable at end of period
|
155,000
|
|
|
.34
|
|
5.43
|
|
$
|
1,990
|
|
Options
available for future grants
|
245,000
|
|
|
|
|
|
|
|
|
|
In
connection with the debt restructure and the reverse split, the number of shares
subject to outstanding options and the exercise price of the options and the
number of shares available for grant or issued pursuant to the automatic grant
to non-employee directors were not changed as a result of the reverse
split.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
The
weighted average grant-date fair value of stock options granted during the
period ended December 31, 2008 was $0.03 per share. Warrants to purchase 201,093
shares of common stock were granted under our debt restructuring (See Note 7-
Debt Restructure). The warrants were issued at an exercise price
equal to the average closing price of the common stock on the five trading days
commencing August 31, 2008 which was $0.10. The
warrants have an exercise period of five years and have not been
exercised.
As of
December 31, 2008, there were no unrecognized stock-based compensation costs
related to options granted under our plans as all options vested during the
year. There were no
options granted to employees during 2008 or 2007. The only options
granted in 2008 and 2007 were as required under our automatic grant
of options to non-employee directors.
Accounting for the
Impairment of Long-Lived Assets
Prior to
2008, 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.
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, accrued expenses, goodwill valuation,
and the deferred tax asset valuation allowance. Actual results could differ from
the estimates.
Reclassification and
retroactive effects
Certain
reclassifications have been made to the prior consolidated financial statements
to conform to the current year presentation.
Adoption of New Accounting
Standards
The terms
“SFAS” and “FASB” used in these notes refer to Statements of Financial
Accounting Standards issued by the United States Financial Accounting Standards
Board.
SFAS
157
In
September 2006, FASB issued Statement SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a
framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. The statement applies whenever other
statements require or permit assets or liabilities to be measured at fair value.
SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. This statement does not require any new fair value
measurements, but rather applies to all other accounting pronouncements that
require or permit fair value measurements. The FASB issued FSP 157-1 to exclude
FASB Statement No. 13 and its related interpretive accounting
pronouncements that address leasing transactions. In February 2008, the FASB
issued FSP 157-2 to allow a one-year deferral of adoption of SFAS No. 157 for
non-financial assets and non-financial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. In
October 2008, the FASB issued FSP 157-3 which clarifies the application of SFAS
No. 157 in an inactive market and illustrates how an entity would determine fair
value when the market for a financial asset is not active. This FSP
is effective immediately. We elected to defer adoption of SFAS No.
157 for non-financial assets and non-financial liabilities and we do not
currently anticipate that full adoption in 2009 will materially impact our
consolidated financial statements. We evaluated SFAS No. 157 and
determined that the adoption of the provisions effective January 1, 2008 did not
have a material effect on our consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
SFAS
159
We
adopted SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“SFAS 159”), effective January 1, 2008. SFAS 159 allows
entities the option of measuring eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. The adoption of this
statement did not have a material effect on the Company’s financial position or
results of operations.
The
Company is impaired by its continued losses from continuing operations before
extraordinary gain and discontinued operations which was $2,352,000 for the year
ended December 31, 2008, as well as its continued liquidity
issues. At December 31, 2008, the Company did not have sufficient
resources to pay the holder of the senior debt. Although the senior
debt holder has extended the terms of the debt, at current production levels the
Company is uncertain that it can generate the cash needed to repay this debt.
Should the Company not meet the revised terms for the loan, we cannot be assured
that the holder of the senior debt will continue to modify the terms of the
repayment of the debt. If this should occur the Company will not be
able to continue in business, and it is likely that the Company 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, the hiring of lower wage personnel in its
Mexico facility and the outsourcing of manufacturing to China. During 2008, the
Company restructured its debt (See Note 7- Debt Restructuring). The
Company will continue to look to reduce costs while it seeks additional business
from new and existing customers. The Company believes that its current and
historic financial position is having an adverse effect upon its ability to
develop new business, as competitors and potential customers question our
ability to both 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, 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, 2008 is adequate. However, actual write-offs may differ from the
recorded allowance.
The
allowance for doubtful accounts receivable was $30,000 and $50,000, as of
December 31, 2008 and 2007, respectively.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
Inventories
consist of the following (net of $1,876,000 in reserve for 2008 and $1,952,000
for 2007):
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Parts
and component
|
|
$ |
3,735,000 |
|
|
$ |
3,669,000 |
|
Work-in-process
|
|
|
1,176,000 |
|
|
|
858,000 |
|
Finished
goods
|
|
|
1,199,000 |
|
|
|
1,884,000 |
|
|
|
$ |
6,110,000 |
|
|
$ |
6,411,000 |
|
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. Due to changes in the market and the current global economic
environment, we determined that our estimate for our inventory reserve needed to
be increased by $200,000. This change in estimate was recorded in our
statement of operations during the fourth quarter of 2008. 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
|
|
|
|
2008
|
|
|
2007
|
|
|
useful
lives
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
132,000 |
|
|
$ |
132,000 |
|
|
|
— |
|
Buildings
|
|
|
876,000 |
|
|
|
876,000 |
|
|
20
years
|
|
Machinery
and equipment
|
|
|
1,742,000 |
|
|
|
1,695,000 |
|
|
3-8
years
|
|
Furniture
and fixtures
|
|
|
340,000 |
|
|
|
353,000 |
|
|
5-10
years
|
|
Transportation
equipment
|
|
|
48,000 |
|
|
|
48,000 |
|
|
4
years
|
|
Tools
and molds
|
|
|
1,825,000 |
|
|
|
1,688,000 |
|
|
8
years
|
|
Leasehold
improvements
|
|
|
73,000 |
|
|
|
75,000 |
|
|
Lesser
of term of lease or
estimated
useful life of
asset
|
|
|
|
|
5,036,000 |
|
|
|
4,867,000 |
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
3,472,000 |
|
|
|
3,189,000 |
|
|
|
|
|
|
|
$ |
1,564,000 |
|
|
$ |
1,678,000 |
|
|
|
|
|
Total
depreciation and amortization expense for 2008 and 2007 amounted to
approximately $322,000 and $407,000 respectively.
During
2007 the Company wrote off assets net of depreciation of $24,000 relating to
leasehold improvements on property no longer leased in the UK.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
Goodwill
represents the difference between the purchase price and the fair market value
of net assets acquired in business combinations. With respect to the testing of
our goodwill for impairment, we do not believe that it is reasonable to consider
the market capitalization as an indicator of fair value, as our stock is thinly
traded. Accordingly, the Company determines the estimated fair value of
the reporting unit by considering the projected cash flows generated and a
market approach analysis to which the goodwill relates. The market
approach is based on the comparable transaction method, which considers the sale
and acquisition activities in the Company’s industry. The Company tests
the goodwill for impairment on an annual basis, or more frequently if certain
events or changes in circumstances indicate that the carrying value may not be
recoverable. Goodwill at December 31, 2008 and 2007, related
only to the Company's signal processing division. Some factors that could
trigger an interim impairment review include:
|
·
|
significant
underperformance relative to the expected historical or projected future
operation results of the related
division.
|
|
·
|
significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business.
|
If we
determine through the impairment review process that goodwill has been impaired,
an impairment charge would be recorded in our consolidated statement of
operations. As of December 31, 2008 and 2007, goodwill was
$2,961,000. The Company determined that there was no goodwill
impairment for 2008 or 2007.
On July
31, 2008, the Company implemented a trouble debt restructuring plan (as defined
under Statement of Financial Accounting Standard No. 15-Accounting by Debtors
and Creditors for Troubled Debt Restructuring). Under this standard,
the gain on the restructuring was measured by the excess of (i) the carrying
amount of the liability settled over (ii) the fair value of the assets
transferred to the creditor (the face amount increased by interest accreted to
maturity and issue costs). The Company recognized a gain on the
restructuring of debt of $17,502,000 net of costs associated with the
restructuring.
Terms of
restructuring:
|
|
The
holder of our senior debt converted notes in the principal amount of
$23,373,000 and accrued interest of $1,354,000 into a note for $11,601,156
plus 7,038,236 shares of common stock, valued at $83,000 based as of the
modification date and representing 70% of the common stock outstanding
after giving effect to all of the issuances contemplated by the
restructuring plan (the “Total Issuances”). The note bears interest at
12.5% per annum amortized on a payment schedule over its 6¾-year
term. As required under the Statement of Financial Accounting
Standard No. 15-Accounting by Debtors and Creditors for Troubled Debt
Restructuring (“SFAS 15”), the amount of this note as shown on the balance
sheet includes interest at the stated rate through the stated maturity
date of the note. As of January 1, 2009, the payments of this
debt were deferred until July 2010. As a result, all of the
senior debt is classified as long term. (See Note 20- Subsequent
Event)
|
|
|
A
note in the principal amount of $1,600,000 (the “Working Capital Note”)
due to our senior debt holder was due on December 31, 2008. The interest
through the repayment term of the loan of $207,000 has been added to the
face value of the note on the balance sheet and is included with the
current portion of our senior debt. The interest was calculated
at 14% based on the six month LIBOR plus 10% as of July 31, 2008. Payment
of the Working Capital Note has been extended. (See Note 20-
Subsequent Event)
|
|
|
The
holders of all of the Company’s subordinated notes converted the entire
principal and interest on the notes, which amounted to approximately
$13,583,000, into notes in the principal amount of $1,750,000 and
1,407,667 shares of common stock, representing 14% of the common stock
outstanding after giving effect to the Total Issuances. The $1,750,000
notes will be repaid based upon a 25-year amortization schedule and will
mature January 31, 2016. Such debt bears interest at 10% annually payable
quarterly in arrears. As required by SFAS 15, the interest on these notes,
through the stated term of the loan in the amount of $1,256,000 has been
added to the amount of the note on the balance
sheet.
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
|
·
|
The
holders of the Company’s convertible debentures due July 1, 2002 (the
“Debentures”), in the principal amount of $385,000 plus accrued interest
of $318,000, have been offered the right to convert their debentures into
a subordinated note in the principal amount equal to their proportionate
share (based on the principal amount of debentures) of $100,000 and their
proportionate shares of 100,546 shares of common stock, representing 1% of
the common stock outstanding after giving effect to the Total
Issuances. These notes will have a 25-year amortization
schedule and a 7½-year maturity date. The $100,000 notes bears interest at
10% annually payable quarterly in arrears. As of December 31,
2008, no subordinated note holder has converted their debentures; as such,
the original debt of $385,000 and accrued interest of $326,000 continues
to be classified as current liabilities. The Company is
restricted from making any payments on these debentures unless and to the
extent that the notes are converted. The notes issued with
respect to any debentures which are converted will be reflected on the
Company’s balance sheet in accordance with SFAS
15.
|
|
·
|
Certain
other creditors have agreed to accept substantial discounts on their
outstanding claims. The gain on restructuring of these payables
and accrued expenses (net of zero tax) was
$714,000.
|
|
·
|
The
Company issued 603,277 shares of common stock, representing 6% of the
common stock outstanding after giving effect to the Total Issuances, to
key employees, including officers. The value of these shares is
included in selling, general and administrative expenses as a non-cash
expense of $7,000, reflecting the value of the shares at the date of the
restructuring, July 31, 2008.
|
|
·
|
As
part of the debt restructuring, the outstanding options to purchase an
aggregate of 155,000 shares of common stock at exercise prices ranging
from $0.03 to $2.03, which were held by the Company’s directors, were not
adjusted as a result of the reverse
split.
|
|
·
|
In
addition, for services relating to the debt restructure, the Company will
pay Advicorp, PLC, a fee of $200,000, payable in 25 monthly
installments commencing January 2009 and granted to Advicorp warrants to
purchase 201,093 shares of common stock at an exercise price of $0.10,
which was the average closing price of the common stock on the five
trading days commencing August 31, 2008, and $12,100 was offset against
the extraordinary gain . Advicorp, PLC is partially owned by
one of the members of our board of directors. (See Note 13- Incentive
Plans)
|
As a
result of the issuance of more than fifty (50%) percent of the Company’s common
stock to new stockholders, the Company’s ability to use its remaining net
operating loss carry forwards was severely reduced in accordance with Section
382 of the Internal Revenue Code.
At
December 31, 2007, the Company’s senior debt was $24,973,000, consisting of
notes in the aggregate principal amount of $23,373,000 and a note in the
principal amount of $1,000,000, which increased to $1,600,000 by July 31,
2008. Effective August 1, 2008, the Company entered into an amendment
to the loan and security agreement with its senior lender which amended an
amended and restated loan and security agreement dated as of November 28, 1994,
between the Company and a prior holder of the senior debt.
On August
1, 2008, pursuant to this amendment as well as an agreement dated May 8, 2008
between the Company and the holder of the senior debt, as amended and restated
on June 20, 2008, and agreements with the holders of all of the Company’s
subordinated notes in the principal amount of $6,144,000, the Company completed
a debt restructuring (See Note 7- Debt Restructuring):
|
·
|
Notes
in the aggregate principal amount of $23,373,000 were exchanged for a note
for $11,601,156 plus 7,038,236 shares of common stock, representing 70% of
the common stock outstanding after giving effect to the Total Issuances.
The principal amount of the note represents the $10,000,000 principal
amount of the note as contemplated by the June 20, 2008 agreement, plus
accrued interest of $1,601,156, through September 30, 2008, and
constitutes senior secured debt and is secured by a lien on substantially
all of the assets of the Company and its subsidiaries. As
required by SFAS 15, the interest of $6,164,966 on these notes, through
the stated term of the note has been added to the principal amount of the
note on the balance sheet. The note bears interest at 12.5% per annum and
will be amortized on a payment schedule over its 6¾-year term with a final
payment of $2,101,156 due on March 31, 2015. The new note
continues to constitute senior debt. (See Note 20- Subsequent
Events)
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
|
·
|
A
note in the principal amount of $1,600,000 held by the senior debt holder,
was extended to December 31, 2008. The interest through the repayment term
of the loan of $207,000 has been added to the face value of the note on
the balance sheet and is included with the senior debt. The
interest was calculated at 14% based on the six month LIBOR plus 10% as of
July 31, 2008. In November 2008, the Company borrowed additional senior
debt of $425,000. The old working capital note was replaced for a
new working capital note in the amount of $1,747,012 (including accreted
interest on the $1,600,000 principal balance as of the date of the
troubled debt restructure). Interest on the additional
$425,000 advance will be expensed as incurred at a rate equal to the six
month LIBOR rate plus 10% which was to 11.7% at December 31, 2008. Due to
the Company’s inability to meet the repayment terms of the debt, the
holder of the note modified the terms notes effective as of January 1,
2009 (See Note 20- Subsequent Event). The new working capital
note is collateralized by substantially all of the assets of the
Company. Total payments of principal and interest of $442,000
were made on this note during 2008.
|
(9)
|
6% Convertible Subordinated
Debentures
|
As of
December 31, 2008 and 2007, the Company had outstanding $385,000 principal
amount of its debentures. The interest rate on these debentures increased from
the stated interest rate of 6% to 8.26% as a result of the Company’s failure
both to make interest payments on the debentures since July 1, 2000 and to pay
principal on July 2, 2002, the stated maturity date. At December 31,
2008 and 2007, accrued interest, including additional interest
resulting from the Company’s failure to pay the debentures of $326,000 and
$183,000, respectively, and is included in other accrued interest
payable. 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 stated maturity date, which
was July 1, 2002. The holder of the senior debt had precluded the
Company from making payments on the debentures. See Note 7 -Debt Restructuring
with respect to the right which the Company granted to the holders of the
debentures to convert the Debentures into subordinated notes and
equity.
On
August 1, 2008, the Company restructured $6,144,000 of subordinated notes (See
Note 7- Debt Restructuring). The holders of all of the Company’s subordinated
notes converted the entire principal and interest on the notes, which amounted
to approximately $13,583,000, into notes in the principal amount of $1,750,000
and 1,407,667 shares of common stock, representing 14% of the common stock
outstanding after giving effect to the Total Issuances. The $1,750,000 notes
will be repaid based upon a 25-year amortization schedule and will mature
January 31, 2016. Such debt bears interest at 10% annually payable quarterly in
arrears. As required by SFAS 15, the interest on these notes, through the stated
term of the loan in the amount of $1,256,000 has been added to the amount of the
note on the balance sheet.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
Maturities of long term debt
(including Senior Debt, 6% Convertible Subordinated Debentures and Subordinated
Notes)
Debt
obligations are summarized as follows:
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Debt
obligations
|
|
$ |
22,899,000 |
|
|
$ |
38,455,000 |
|
Less
current portion
|
|
|
2,076,000 |
|
|
|
38,455,000 |
|
Long-term
debt
|
|
$ |
20,823,000 |
|
|
$ |
- |
|
The
aggregate annual maturities of debt obligations are as follows (amounts in
thousands):
2009
|
|
$
|
1,691
|
|
2010
|
|
1,737
|
|
2011
|
|
1,691
|
1691
|
2012
|
|
1,691
|
|
2013
|
|
2,066
|
|
Thereafter
|
|
14,398
|
|
Totals
|
|
$
|
23,274
|
|
(11)
|
Discontinued
operations
|
Operating Support Systems
(“OSS”)
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 are reported in
the Consolidated Financial Statements as a discontinued operation.
Results
of operations for OSS have been segregated from continuing operations and are
reflected as discontinued operations approximately as follows:
|
|
December
31,
2007
|
|
|
|
|
|
Revenues
|
|
$
|
100,000
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
(521,000)
|
|
(12)
|
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, 2008 and 2007, before discounting at a rate of 6.5%, were
$1,111,000 and $1,219,000, respectively.
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, 2008, and 2007, the Company’s contribution amounted to
$43,000 and $46,000, respectively.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
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 of 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 total of 95,750 shares of common stock is reserved for issuance
pursuant to the Bonus Plan at December 31, 2008 and 2007. No shares of common
stock were issued pursuant to the Bonus Plan during 2008 or 2007, which
terminated in 2009.
The
Company’s 1998 Non-Qualified Stock Option Plan covers 450,000 shares of common
stock. This plan expired in 2008; and there are no options are outstanding under
the plan or available for grant.
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, however
previously granted options are not affected. 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. The number of shares subject to the 1999
plan and the number of shares subject to the automatic option grant to
non-management directors was not adjusted for the reverse split. The
1999 plan terminated in 2009, after which no further options can be issued under
the plan. There are 155,000 options outstanding under this
plan.
The
weighted-average fair values of options granted were $0.14 per share for options
granted in 2007 and $0.03 for options granted in 2008. The only options granted
under this plan during 2007 and 2008 are the options granted to the independent
directors pursuant to the automatic grant provisions. 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 2007, and
2008:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Dividends:
|
|
$ |
0.00
per share
|
|
|
$ |
0.00
per share
|
|
Volatility:
|
|
|
|
50
|
% |
|
|
|
50
|
% |
Risk-free
interest:
|
|
|
|
2.25
|
% |
|
|
|
4.35
|
% |
Expected
term:
|
|
|
5
years
|
|
|
|
5
years
|
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
A summary
of the status of the Company’s stock option plans as of December 31, 2008 and
2007, and changes during the years ending on those dates is presented
below:
|
2008
|
|
2007
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
Price
|
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding
beginning of year
|
139,000
|
|
$
|
0.49
|
|
322,280
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
20,000
|
|
|
0.03
|
|
20,000
|
|
|
0.14
|
|
Exercised
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Forfeited
|
4,000
|
|
|
3.85
|
|
203,280
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
end of year
|
155,000
|
|
$
|
0.34
|
|
139,000
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
155,000
|
|
|
|
|
139,000
|
|
|
|
|
Warrants
to purchase 201,093 shares of common stock were granted to Advicorp, PLC, which
is partially owned by one of the members of our board of directors, under our
debt restructure (See Note 7- Debt Restructure). The warrants were
issued at an exercise price of $0.10 which was the average closing
price of the common stock on the five trading days commencing August 31,
2008. The
warrants have an exercisable period of five years and no warrants have been
exercised as of December 31, 2008.
The
provision for income taxes consists of the following:
|
2008
|
|
2007
|
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Federal
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
State
and foreign
|
|
|
60,000 |
|
|
|
— |
|
|
|
76,000 |
|
|
|
— |
|
Total
|
|
$ |
60,000 |
|
|
$ |
— |
|
|
$ |
76,000 |
|
|
$ |
— |
|
The
domestic and foreign components of loss from continuing operations before
provision for income taxes were as follows:
|
|
|
|
|
|
2008
|
|
2007
|
|
United
States
|
|
$ |
(3,881,000 |
) |
|
$ |
(3,799,000 |
) |
Foreign
|
|
|
1,589,000 |
|
|
|
1,652,000 |
|
Loss
from continuing operations before income taxes
|
|
$ |
(2,292,000 |
) |
|
$ |
(2,147,000 |
) |
The
Company’s tax provision consisted of state and foreign taxes.
Porta has
unused United States tax net operating loss (NOL) carryforwards of approximately
$11,814,000 expiring in 2028.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
Due to
the 2008 change in ownership which resulted from the restructuring of the
Company’s debt, the ability of the Company to use its NOL will be limited in
accordance with Internal Revenue Code section 382. The Company’s carryforward
utilization of the NOL is limited to $546,000 per year with respect to
approximately $10.9 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, the Company has foreign NOL
carryforwards of approximately $2,860,000 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, 2008 and 2007 are as
follows:
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Inventory
|
|
$ |
933,000 |
|
|
$ |
943,000 |
|
Allowance
for doubtful accounts receivable
|
|
|
12,000 |
|
|
|
19,000 |
|
Benefits
of tax loss carryforwards
|
|
|
5,406,000 |
|
|
|
21,538,000 |
|
Benefit
plans
|
|
|
376,000 |
|
|
|
410,000 |
|
Accrued
commissions
|
|
|
60,000 |
|
|
|
111,000 |
|
Other
|
|
|
3,300,000 |
|
|
|
3,255,000 |
|
Depreciation
|
|
|
14,000 |
|
|
|
69,000 |
|
|
|
|
10,101,000 |
|
|
|
26,345,000 |
|
Valuation
allowance
|
|
$ |
(10,101,000 |
) |
|
$ |
(26,345,000 |
) |
|
|
$ |
— |
|
|
$ |
— |
|
The
provision for income taxes reported for the year ended December 31, 2008 differs
from that computed using the United States statutory tax rate of 34% due to the
following:
|
|
Years
Ended
December
31,
|
|
|
|
2008
|
|
Provision
(benefit) for taxes using statutory rate
|
|
$ |
5,171,000 |
|
State
taxes, net of federal tax benefit
|
|
|
(20,000 |
) |
Foreign
income at rates other than statutory rates
|
|
|
(460,000 |
) |
Loss
of US NOL’s due to Section 382 limitation
|
|
|
14,836,000 |
|
Change
in prior year deferred tax valuation allowance- Federal
|
|
|
(14,593,000 |
) |
Reduction
of foreign NOL’s due to translation
|
|
|
925,000 |
|
Other
|
|
|
199,000 |
|
Permanent
differences:
|
|
|
|
|
Debt
forgiveness
|
|
|
(6,008,000 |
) |
Other
|
|
|
10,000 |
|
Provision
(benefit) for income taxes
|
|
$ |
60,000 |
|
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.
Effective
January 1, 2007, we adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting for uncertainty in Income Taxes (“FIN 48”). FIN 48
prescribes a more-likely-than-not threshold for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax
return. As of such date, we did not have any unrecognized tax
benefits, and there was no effect on our financial condition or results of
operation as a result of implementing FIN 48.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
At
December 31, 2008 the Company did not have any accrued interest or penalties
associated with any unrecognized tax benefits, nor was any interest expense
recognized thereafter.
We file
U.S. federal income tax returns as well as income tax returns in various states
and foreign jurisdictions. We may be subject to examination by the
Internal Revenue Service (‘IRS”) for calendar years 2004 through 2007 under the
normal statute of limitations. Additionally, any net operating losses that were
generated in prior years and utilized in these years may also be subject to
examination by the IRS. Generally, for state tax purpose, the
Company’s 2003 though 2007 tax years remain open for examination by the tax
authorities under a four year statute of limitations, however certain states may
keep their stature open for six to ten years.
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, 2008,
undistributed earnings of the foreign subsidiaries amounted to approximately
$5,255,000. 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, 2008, the Company and its subsidiaries leased manufacturing and
administrative facilities, equipment 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 2008 and 2007 amounted to
approximately $ 447,000 and $491,000, respectively. Minimum rental commitments,
exclusive of future escalation charges, for each of the next five years are as
follows:
2009
|
|
$
|
448,000
|
|
2010
|
|
|
448,000
|
|
2011
|
|
|
128,000
|
|
2012
|
|
|
66,000
|
|
2013
|
|
|
66,000
|
|
Thereafter
|
|
|
248,000
|
|
|
|
$
|
1,404,000
|
|
The
following table sets forth information as to sales to each customer or customer
group that accounted for 10% or more of company’s sales in 2008 and 2007
(dollars in thousands).
|
|
Year Ended December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Customer
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
British
Telecommunications
|
|
$ |
8,965 |
|
|
|
34 |
% |
|
$ |
10,860 |
|
|
|
39 |
% |
British
Telecommunications and its systems integrators*
|
|
|
10,296 |
|
|
|
39 |
% |
|
|
12,504 |
|
|
|
45 |
% |
Teléfonos
de Mexico S.A. de C.V. (Telmex)
|
|
|
5,239 |
|
|
|
20 |
% |
|
|
4,585 |
|
|
|
16 |
% |
* Sales
to British Telecommunications are included in the sales and percentages figures
on the line “British Telecommunications and its systems
integrators”.
(17)
|
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.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
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, the restructuring of the senior
and subordinated debt on July 31, 2008, that the fair value of these instruments
is stated at their fair values.
(18)
|
Net Income (Loss) Per
Share
|
In 2008
and 2007 the weighted average shares of common stock did not take into effect
the potential dilutive stock options as they would be anti-dilutive in the
calculation of fully dilutive earnings per share for continuing operations
before extraordinary gain and discontinued operations. Options and
warrants to purchase 356,093 share of common stock were outstanding, with
exercise prices ranging from $0.03 to $2.03 for 2008. Options to purchase
139,000 shares of common stock with exercise
prices
ranging from $0.07 to $3.85 for 2007, were outstanding but not included in the
computation of diluted net income per share, because the effect of doing so
would be anti-dilutive.
(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.
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.
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
Line
|
|
$ |
22,132,000 |
|
|
$ |
22,929,000 |
|
Signal
|
|
|
4,605,000 |
|
|
|
4,891,000 |
|
|
|
$ |
26,737,000 |
|
|
$ |
27,820,000 |
|
Segment
profit (loss):
|
|
|
|
|
|
|
|
|
Line
|
|
$ |
277,000 |
|
|
$ |
1,724,000 |
|
Signal
|
|
|
928,000 |
|
|
|
1,178,000 |
|
|
|
$ |
1,205,000 |
|
|
$ |
2,902,000 |
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Line
|
|
$ |
263,000 |
|
|
$ |
331,000 |
|
Signal
|
|
|
26,000 |
|
|
|
33,000 |
|
|
|
$ |
289,000 |
|
|
$ |
364,000 |
|
Total
identifiable assets:
|
|
|
|
|
|
|
|
|
Line
|
|
$ |
10,252,000 |
|
|
$ |
11,032,000 |
|
Signal
|
|
|
4,808,000 |
|
|
|
5,022,000 |
|
|
|
$ |
15,060,000 |
|
|
$ |
16,054,000 |
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
Line
|
|
$ |
180,000 |
|
|
$ |
492,000 |
|
Signal
|
|
|
7,000 |
|
|
|
12,000 |
|
|
|
$ |
187,000 |
|
|
$ |
504,000 |
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
The following table reconciles segment
totals to consolidated totals:
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
Total
revenue for reportable segments
|
|
$ |
26,737,000 |
|
|
$ |
27,820,000 |
|
Consolidated
total revenue
|
|
$ |
26,737,000 |
|
|
$ |
27,820,000 |
|
|
|
|
|
|
|
|
|
|
Operating
income (loss) :
|
|
|
|
|
|
|
|
|
Total
segment income for reportable segments
|
|
$ |
1,205,000 |
|
|
$ |
2,902,000 |
|
Corporate
and unallocated
|
|
|
(2,110,000
|
) |
|
|
(2,983,000
|
) |
Consolidated
total operating income (loss)
|
|
$ |
(905,000 |
) |
|
$ |
(81,000 |
) |
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$ |
289,000 |
|
|
$ |
364,000 |
|
Corporate
and unallocated
|
|
|
33,000 |
|
|
|
43,000 |
|
Consolidated
total deprecation and amortization
|
|
$ |
322,000 |
|
|
$ |
407,000 |
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$ |
15,060,000 |
|
|
$ |
16,054,000 |
|
Corporate
and unallocated
|
|
|
701,000 |
|
|
|
845,000 |
|
Consolidated
total assets
|
|
$ |
15,761,000 |
|
|
$ |
16,899,000 |
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
Total
for reportable segments
|
|
$ |
187,000 |
|
|
$ |
504,000 |
|
Corporate
and unallocated
|
|
|
45,000 |
|
|
|
29,000 |
|
Consolidated
total capital expenditures
|
|
$ |
232,000 |
|
|
$ |
533,000 |
|
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements, continued
The
following table presents information about the Company by geographic
area:
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
United
States
|
|
$ |
9,476,000 |
|
|
$ |
9,316,000 |
|
United
Kingdom
|
|
|
10,777,000 |
|
|
|
13,321,000 |
|
Mexico
|
|
|
6,484,000 |
|
|
|
5,183,000 |
|
Consolidated
total revenue
|
|
$ |
26,737,000 |
|
|
$ |
27,820,000 |
|
|
|
|
|
|
|
|
|
|
Consolidated long-lived
assets:
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
4,290,000 |
|
|
$ |
4,328,000 |
|
United
Kingdom
|
|
|
18,000 |
|
|
|
37,000 |
|
Mexico
|
|
|
295,000 |
|
|
|
328,000 |
|
|
|
|
4,603,000 |
|
|
|
4,693,000 |
|
Current
and other assets
|
|
|
11,158,000 |
|
|
|
12,206,000 |
|
Consolidated
total assets
|
|
$ |
15,761,000 |
|
|
$ |
16,899,000 |
|
Effective
January 1, 2009, the holder of the Company’s senior debt holder modified the
terms on the Company’s notes. As defined under SFAS No. 15-
Accounting by Debtors and Creditors for Troubled Debt Restructuring, this
modification is accounted for as a trouble debt restructure. As the
troubled debt restructuring involved only modifications of the terms of the
debt, and did not involve a transfer of assets or a grant of an equity interest,
the Company accounts for the effects of the restructuring prospectively from the
time of the restructuring, and does not change the carrying amount of the
liability on the balance sheet. The additional interest due to the
terms of the modifications will be accrued prospectively. Under the
revised payment schedule:
|
·
|
The
promissory note in the principal amount of $1,747,012 is to be paid at a
rate of $125,000 per month, with a final payment of the remaining
principal and interest on April 30, 2010. Payments will be
allocated first to accrued interest, then to principal. No
other modifications to the note were
made.
|
|
·
|
The
secured promissory note in the principal amount of $11,601,156 is to be
paid in twelve quarterly installments each in the amount of $375,000, with
the first payment of principal and interest being due on June 30, 2010,
followed by thirteen quarterly installments of principal and interest each
in the amount of $500,000, with a final payment of all remaining principal
and accrued interest on September 30, 2016. All payments shall
be applied first to accrued interest and any remainder to principal. No
other modifications to the note were
made.
|