SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2009
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from.................to...................
Commission
file number 0-8460
PORTA
SYSTEMS CORP.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
11-2203988
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
6851 Jericho Turnpike, Suite
170, Syosset, New York 11791
(Address
of principal executive offices, including ZIP Code)
516-364-9300
(Company’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes
¨
No.
Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, see definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of Exchange Act. Check
one:
|
Large
accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
|
Smaller
reporting company
x
|
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
¨
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date:
Common
stock (par value $0.01) 9,954,569 shares as of May 8, 2009.
PART
I.- FINANCIAL INFORMATION
Item
1-
Financial
Statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands, except shares and par value)
|
|
|
Unaudited March 31,
2009
|
|
|
December 31,
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
542
|
|
|
$
|
292
|
|
|
Accounts
receivable - trade, less allowance for doubtful accounts of $25 in 2009
and $30 in 2008
|
|
|
3,698
|
|
|
|
4,554
|
|
|
Inventories
|
|
|
6,271
|
|
|
|
6,110
|
|
|
Prepaid
expenses and other current assets
|
|
|
369
|
|
|
|
202
|
|
|
Total
current assets
|
|
|
10,880
|
|
|
|
11,158
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,555
|
|
|
|
1,564
|
|
|
Goodwill
|
|
|
2,961
|
|
|
|
2,961
|
|
|
Other
assets
|
|
|
78
|
|
|
|
78
|
|
|
Total
assets
|
|
$
|
15,474
|
|
|
$
|
15,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Deficit
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Senior
debt including interest
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
Subordinated
notes including interest
|
|
|
191
|
|
|
|
191
|
|
|
Subordinated
debentures, principal
|
|
|
385
|
|
|
|
385
|
|
|
Accounts
payable
|
|
|
5,400
|
|
|
|
5,529
|
|
|
Accrued
expenses and other
|
|
|
2,488
|
|
|
|
2,390
|
|
|
Other
accrued interest payable
|
|
|
349
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
10,313
|
|
|
|
10,331
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
|
|
|
|
|
|
Senior
Debt including interest
|
|
|
17,820
|
|
|
|
18,056
|
|
|
Subordinated
notes including interest
|
|
|
2,720
|
|
|
|
2,767
|
|
|
Deferred
compensation and other long term liabilities
|
|
|
640
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long term liabilities
|
|
|
21,180
|
|
|
|
21,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,493
|
|
|
|
31,805
|
|
|
|
|
|
|
|
|
|
|
|
|
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
shares in 2009 and 2008
|
|
|
100
|
|
|
|
100
|
|
|
Additional
paid-in capital
|
|
|
76,244
|
|
|
|
76,244
|
|
|
Accumulated
deficit
|
|
|
(85,131
|
)
|
|
|
(85,307
|
)
|
|
Accumulated
other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(5,294
|
)
|
|
|
(5,143
|
)
|
|
|
|
|
(14,081
|
)
|
|
|
(14,106
|
)
|
|
Treasury
stock, at cost, 2,785 shares
|
|
|
(1,938
|
)
|
|
|
(1,938
|
)
|
|
Total
stockholders’ deficit
|
|
|
(16,019
|
)
|
|
|
(16,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
15,474
|
|
|
$
|
15,761
|
|
See
accompanying notes to consolidated financial statements
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Operations and Comprehensive Income
(Loss)
(In
thousands, except per share amounts)
|
|
|
Three Months Ended
|
|
|
|
|
March
31
,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
7,653
|
|
|
$
|
6,545
|
|
|
Cost
of sales
|
|
|
5,718
|
|
|
|
4,708
|
|
|
Gross
profit
|
|
|
1,935
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
1,305
|
|
|
|
1,342
|
|
|
Research
and development expenses
|
|
|
336
|
|
|
|
424
|
|
|
Total
operating expenses
|
|
|
1,641
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
294
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(33
|
)
|
|
|
(591
|
)
|
|
Other
income , net
|
|
|
9
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
270
|
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(94
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
176
|
|
|
$
|
(537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(151
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
25
|
|
|
$
|
(621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share of common stock
|
|
$
|
0.02
|
|
|
$
|
( 0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
9,955
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share of common stock
|
|
$
|
0.02
|
|
|
$
|
( 0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
9,963
|
|
|
|
905
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
Unaudited
Consolidated Statements of Cash Flows
(In
thousands)
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income (loss)
|
|
$
|
176
|
|
|
$
|
(537
|
)
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used
in) operation activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
75
|
|
|
|
79
|
|
|
Inventory
reserves
|
|
|
(27
|
)
|
|
|
(177
|
)
|
|
Allowance
for bad debt
|
|
|
(5
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
806
|
|
|
|
(333
|
)
|
|
Inventories
|
|
|
(135
|
)
|
|
|
(514
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(163
|
)
|
|
|
(265
|
)
|
|
Other
assets
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
15
|
|
|
|
1,657
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
735
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital
expenditures, net
|
|
|
(71
|
)
|
|
|
(22
|
)
|
|
Net
cash used in investing activities
|
|
|
(71
|
)
|
|
|
(22
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
(286
|
)
|
|
|
-
|
|
|
Net
cash used in financing activities
|
|
|
(286
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(128
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
250
|
|
|
|
(179
|
)
|
|
Cash
and equivalents - beginning of period
|
|
|
292
|
|
|
|
494
|
|
|
Cash
and cash equivalents – end of period
|
|
$
|
542
|
|
|
$
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
55
|
|
|
$
|
-
|
|
|
Cash
paid for income taxes
|
|
$
|
61
|
|
|
$
|
2
|
|
See
accompanying notes to unaudited consolidated financial
statements.
PORTA
SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
Note 1:
|
Management’s
Responsibility for Interim Financial Statements Including All
Adjustments
Necessary for Fair Presentation
|
Management
acknowledges its responsibility for the preparation of the accompanying interim
consolidated financial statements which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair
presentation of its consolidated financial position and the results of its
operations for the interim period presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company’s Form 10-K annual report for the year ended December
31, 2008. 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 in
the financial statements. The audit opinion included in the December
31, 2008 Form 10-K annual report contained an explanatory paragraph regarding
the Company’s ability to continue as a going concern. The factors
which resulted in the explanatory paragraph are continuing. Results for the
first quarter of 2009 are not necessarily indicative of results for the
year. Certain reclassifications have been made to the prior
consolidated financial statements to conform to the current year
presentation.
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 0.0900090009 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.
Note 2:
Inventories
Inventories
are stated at the lower of cost (on the average or first-in, first-out method)
or market. The composition of inventories at the end of the
respective periods is as follows (net of reserve of $1,849,000 for March 31,
2009 and $1,876,000 for December 31, 2008):
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Parts
and components
|
|
$
|
4,227,000
|
|
|
$
|
3,735,000
|
|
|
Work-in-process
|
|
|
947,000
|
|
|
|
1,176,000
|
|
|
Finished
goods
|
|
|
1,097,000
|
|
|
|
1,199,000
|
|
|
|
|
$
|
6,271,000
|
|
|
$
|
6,110,000
|
|
Note
3: Senior and Subordinated Debt
The
following table sets forth information as to the Company’s senior and
subordinated debt as of March 31, 2009 and December 31, 2008. The
senior debt and the subordinated notes were issued as part of a troubled debt
restructuring during the third quarter of 2008, and, accordingly, the amounts
shown for that debt includes interest accrued through the stated maturity dates
of the respective notes. The convertible debentures were not changed as a result
of the troubled debt restructuring. On January 1, 2009, the
payment schedules for the senior notes were revised and
extended. This revision is treated as a troubled debt
restructuring. As the modification of terms did not reduce the
future cash payments below the carrying amount of the liability, only the
additional interest resulting from the revised payment schedule is treated as a
current period cost.
|
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
|
12.5%
senior note in installments through September 30, 2016, including interest
of $6,165,000 at March 31, 2009 and December 31, 2008
(1)(2)
|
|
$
|
17,766,000
|
|
|
$
|
17,766,000
|
|
|
Floating
rate working capital senior note, including interest of $9,000 at March
31, 2009 and $54,000 at December 31, 2008 (1)(3)
|
|
|
1,554,000
|
|
|
|
1,790,000
|
|
|
10%
Subordinated notes due in installments through January 31, 2016, including
interest of $1,169,000 at March 31, 2009 and $1,256,000 at December 31,
2008 (4)
|
|
|
2,911,000
|
|
|
|
2,958,000
|
|
|
Subordinated
debentures (5)
|
|
|
385,000
|
|
|
|
385,000
|
|
|
(1)
|
The
senior debt is secured by a security interest in substantially all of the
Company’s and its subsidiaries’
assets.
|
|
(2)
|
This
note initially provided for a maturity of March 31, 2015 with scheduled
amortization payments over the term of the note. As a result of
a January 1, 2009 modification, the maturity date and the payment schedule
was revised. At March 31, 2009, the note provides for 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
13 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. Payments are applied first to
accrued interest and any remainder to
principal.
|
|
(3)
|
These
notes bear interest at the six-month LIBOR rate plus 10% per annum, which
was 11.7% per annum at March 31, 2009 and December 31, 2008. On
January 1, 2009, the terms of this note were modified to provide for
monthly payments of $125,000, with a final payment of the remaining
principal and interest on April 30, 2010. Payments are applied
first to accrued interest and any remainder to
principal. During the first quarter of 2009, the Company made
payments of $250,000, of which $60,000 was interest and $190,000 was
principal. (See Note 8-Subsequent
Event)
|
|
(4)
|
These
notes will be repaid based upon a 25-year amortization schedule and mature
January 31, 2016.
|
|
(5)
|
At
March 31, 2009 and December 31, 2008, accrued interest, was $335,000 and
$326,000, 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 precluded the Company from making payments on the debentures,
except that, pursuant to the debt restructuring, the Company offered the
holders of the debentures the right to exchange their debentures for their
proportionate shares of (a) subordinated notes in the principal amount of
$100,000 and (b) 100,546 shares of common stock, and the Company may make
the payments provided in the new notes. As of March 31, 2009,
no holders of the debentures had accepted the Company’s
offer.
|
The
holder of the senior debt has no obligation to make any further loans or
modification of the loans to the Company. Any adverse events,
including declines in business, could cause a default on the debt and could
affect the decision of the senior debt holder to extend or demand
payment. If the senior debt holder demands payment of all or a
significant portion of the senior debt when due, the Company will not be able to
continue in business, and it is likely that it would seek protection under the
Bankruptcy Code.
Note
4: Accounting for Stock Based Compensation
For the
three months ended March 31, 2009 and 2008, the Company did not grant any stock
options and, therefore did not recognize non-cash compensation expense
attributable to stock options granted during the quarter. The Company uses the
Black-Scholes valuation model and straight-line amortization of compensation
expense over the requisite service period when granting stock
options. All options previously granted are fully
vested.
Note 5: Segment
Data
The
Company
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.
The
factors used to determine the segments focused primarily on the types of
products and services provided, and the type of customer served. Each
of these segments is managed separately from the others, and management
evaluates segment performance based on operating income.
There has
been no significant change, from December 31, 2008, in the basis of measurement
of segment revenues and profit or loss, and no significant change in the
Company’s assets for the connection /protection and Signal reporting
segments.
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Sales:
|
|
|
|
|
|
|
|
Connection
/protection
|
|
$
|
6,220,000
|
|
|
$
|
5,392,000
|
|
|
Signal
|
|
|
1,433,000
|
|
|
|
1,153,000
|
|
|
Total
|
|
$
|
7,653,000
|
|
|
$
|
6,545,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit from operations:
|
|
|
|
|
|
|
|
|
|
Connection/protection
|
|
$
|
471,000
|
|
|
$
|
447,000
|
|
|
Signal
|
|
|
471,000
|
|
|
|
241,000
|
|
|
Total
|
|
$
|
942,000
|
|
|
$
|
688,000
|
|
The
following table reconciles segment totals to consolidated totals:
|
Operating
income:
|
|
|
|
|
|
|
|
Total
segment income for reportable segments
|
|
$
|
942,000
|
|
|
$
|
688,000
|
|
|
Corporate
and unallocated
|
|
|
(648,000
|
)
|
|
|
(617,000
|
)
|
|
Consolidated
total operating income
|
|
$
|
294,000
|
|
|
$
|
71,000
|
|
Note 6:
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 No. 157
—
In September 2006, the Financial Accounting Standards Board issued
SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. In February 2008, the FASB issued Staff Position
FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the
effective date of SFAS No. 157 for all non-financial assets and
non-financial liabilities, except those that are measured at fair value on a
recurring basis. Effective January 1, 2009, we adopted
SFAS No. 157 with respect to non-financial assets and liabilities
measured on a non-recurring basis. The application of the fair value framework
established by SFAS No. 157 to these fair value measurements did not
have a material impact on our consolidated financial position, results of
operations or cash flow.
SFAS No. 141(R)
—
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations, which establishes principles for how the acquirer
recognizes and measures in the financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree. This statement also provides guidance for recognizing and measuring
the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. Effective
January 1, 2009, we adopted SFAS No. 141(R) which did not have a
material impact on our consolidated financial statements.
SFAS No. 160
—
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51, which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The standard also establishes that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. We adopted
SFAS No. 160 on January 1, 2009. The adoption of SFAS No.
160 did not have a material impact on our consolidated financial
statements.
In June
2008, the EITF reached a consensus in Issue No. 07-5, “Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-5”). This Issue addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which is the first part
of the scope exception in paragraph 11(a) of SFAS 133. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of EITF 07-5 as of January 1,
2009 did not have a material impact on our consolidated financial position,
results of operations and cash flows.
On April
9, 2009, the FASB simultaneously issued the following three FSPs:
|
·
|
FSP
FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional
guidance to companies for determining fair values of financial instruments
for which there is no active market or quoted prices may represent
distressed transactions. The guidance includes a reaffirmation
of the need to use judgment in certain
circumstances.
|
|
·
|
FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, requires companies to provide additional fair value
information for certain financial instruments in interim financial
statements, similar to what is currently required to be disclosed on an
annual basis.
|
|
·
|
FSP
FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments, amends the existing guidance regarding
impairments for investments in debt securities. Specifically,
it changes how companies determine if an impairment is considered to be
other-than-temporary and the related accounting. This standard
also provides for increased
disclosures.
|
These
FSPs apply to both interim and annual periods and will be effective for us
beginning April 1, 2009. We have evaluated these standards and
believe they will have no impact on our financial condition and results of
operations.
Note
7:
Significant
Customers
Sales to
British Telecommunications and its systems integrators and Teléfonos de Mexico
S.A. de C.V. (Telmex) accounted for approximately 66% of sales in the first
quarter of 2009, and 49% of sales for the same period in 2008. 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 for the three months
ended March 31, 2009 and 2008 (dollars in thousands).
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Customer
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
British
Telecommunications
|
|
$
|
2,957
|
|
|
|
39
|
%
|
|
$
|
2,338
|
|
|
|
36
|
%
|
|
British
Telecommunications and its Systems Integrators*
|
|
|
3,351
|
|
|
|
44
|
%
|
|
|
2,926
|
|
|
|
45
|
%
|
|
Teléfonos
de México S.A. de C.V. (Telmex)
|
|
|
1,684
|
|
|
|
22
|
%
|
|
|
258
|
|
|
|
4
|
%
|
|
Ericsson
|
|
|
-
|
|
|
|
-
|
%
|
|
|
794
|
|
|
|
12
|
%
|
* Sales
to British Telecommunications are included in the sales and percentages figures
on the line “British Telecommunications and its systems
integrators”.
Note
8:
Subsequent
Event
Effective
May 1, 2009, the working capital senior note was replaced with a new working
capital note in the amount of $1,461,316 (including accrued
interest). The new note provides for monthly payments of $125,000
commencing May 31, 2009, with a final payment of the remaining principal and
interest on May 31, 2010. Payments are applied first to accrued
interest and any remainder to principal. The new working capital note
is collateralized by all of the assets of the Company which also secure the
existing senior debt.
On May
11, 2009, the Company’s board of directors approved the 2009 Long-Term Incentive
Plan, which covers 1,000,000 shares of common stock. The plan
provides for the grant of incentive and non-qualified options, stock grants,
stock appreciation rights and other equity-based incentives to employees,
including officers, and consultants. The plan provides for the automatic grant
of options to independent directors as follows: On the date that the
plan was adopted, each independent director received the grant of an option to
purchase 5,000 shares of common stock at an exercise price of $0.022 per share,
which was the average of the last reported price for the common stock for the
ten trading days immediately preceding the date of grant. On May 1 of
each year, commencing May 1, 2010, each independent director will receive an
option to purchase 5,000 shares at an exercise price equal to the average of the
last reported price for the common stock for the ten trading days immediately
preceding the date of grant. Each newly elected independent director
will receive an option to purchase 10,000 shares at an exercise price equal to
the average of the last ten trading days immediately preceding the date of
becoming a director. Independent directors are not eligible for
options or other rights under the plan except for the options granted pursuant
to the automatic grant provision. The plan was approved subject to
stockholder approval. The Company’s principal stockholder, which
holds 70% of the outstanding stock, has advised the Company that it will approve
the plan.
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward Looking
Statements
Statements
contained in this Form 10-Q include forward-looking statements that are subject
to risks and uncertainties. In particular, statements in this Form
10-Q that state our intentions, beliefs, expectations, strategies, predictions
or any other statements relating to our future activities or other future events
or conditions are “forward-looking statements.” Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under “Risk Factors,” in our Form 10-K for the year ended
December 31, 2008 and those described in “Management's Discussion and Analysis
of Financial Conditions and Results of Operations” in our Form 10-K and this
Form 10-Q, and those described in any other filings by us with the Securities
and Exchange Commission, as well as general economic conditions and economic
conditions affecting the telecommunications industry, any one or more of which
could cause actual results to differ materially from those stated in such
statements. Such statements could be affected by risks and
uncertainties related to our financial conditions, our relationship with the
holder of our senior and subordinated debt, including the willingness or
unwillingness of the holder of the senior debt to extend the maturity date of
the senior debt and the amount and timing of any payments which the holder of
the senior debt may require, our ability to sell any or all of our divisions or
effect a restructure of our business and our debt and equity structure on terms
acceptable to the holder of the senior debt, our relationship with British
Telecommunications including its continued requirements for our products,
factors which affect the telecommunications industry, market and customer
acceptance, our access to current technology, competition, domestic and foreign
government regulations and requirements and pricing, as well as general industry
and market conditions and growth rates, and general economic
conditions. Any forward-looking statements speak only as of the date
on which they are made, and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Form 10-Q.
Overview
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 the 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 Closed Circuit TV (CCTV)
installations. 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. The Company’s 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 telecommunication service providers as
well as independent telecommunication service providers in the United States,
and 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 various foreign countries. This equipment is compatible
with existing telephone systems both within and outside the United States and
can generally be used without modification, although we do custom-design
modifications to accommodate the specific needs of our customers.
Our
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 products are also used by test and measurement
engineers in the characterization of data transmission networks.
Our
Connection/protection segment generated income from operations, prior to
allocations of corporate expenses, of $471,000 for the three months ended March
31, 2009 (the “March 2009 Quarter”) and $447,000 for the three months ended
March 31, 2008 (the “March 2008 Quarter”). We had a net loss from operations
after allocations of corporate expenses on our Connection/protection segment of
$56,000 for the March 2009 Quarter compared to a net loss of $62,000 for the
March 2008 Quarter. Although our sales from this segment increased
$828,000 from the March 2008 Quarter to the March 2009 Quarter, our
gross margin decreased, primarily due to the strength of the US dollar verses
the British pound on our sales to British Telecommunications and its system
integrators. Our Signal segment generated net income from operations,
prior to allocation of corporate expenses, of $471,000 in the first quarter of
2009 compared to $241,000 in the comparable period in 2008, on both increased
sales and margins due to product mix. We recognize revenue from
Connection/protection and Signal products when the product is
shipped.
In
February 2009, we entered into a supplier finance agreement with Lloyds TSB
Commercial Finance Limited to factor British Telecommunications accounts
receivables on a non-recourse basis. We pay fees to Lloyds TSB
Commercial Financing at a rate equal to LIBOR plus 0.7%, based on the number of
days to maturity of each invoice that is factored. These fees, which
are treated as a general and administrative expense, were immaterial in the
March 2009 Quarter.
Dependence on 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. References to British
Telecommunications include British Telecommunications and its systems
integrators, unless the context indicates otherwise. These sales were
of copper connection and protection products. Our sales to British
Telecommunications have declined significantly, from $20,313,000 in 2006 to
$12,504,000 in 2007 to $10,296,000 in 2008. We were not able to
offset completely this decline in sales. 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
33% for 2006 to 29% for 2007 to 21% for 2008 and was 14% for the three months
ended March 31, 2009.
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 the three months
ended March 31, 2009 and 2008 (dollars in thousands).
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Customer
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
British
Telecommunications
|
|
$
|
2,957
|
|
|
|
39
|
%
|
|
$
|
2,338
|
|
|
|
36
|
%
|
|
British
Telecommunications and its Systems Integrators*
|
|
|
3,351
|
|
|
|
44
|
%
|
|
|
2,926
|
|
|
|
45
|
%
|
|
Teléfonos
de México S.A. de C.V. (Telmex)
|
|
|
1,684
|
|
|
|
22
|
%
|
|
|
258
|
|
|
|
4
|
%
|
|
Ericsson
|
|
|
-
|
|
|
|
-
|
%
|
|
|
794
|
|
|
|
12
|
%
|
* Sales
to British Telecommunications are included in the sales and percentages figures
on the line “British Telecommunications and its systems
integrators.”
To the
extent that British Telecommunications reduces its purchases from, or purchases
products at a price which results in a reduced gross margin, our ability to
operate profitably will be impaired. We may not be able to replace
this business from other customers and we cannot give any assurance that British
Telecommunications will increase or continue its purchases from us in the future
or that we will be able to improve our margins on these sales.
Reverse Split and Debt
Restructuring
On July
31, 2008, we effected 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). As a result of the debt restructuring, our senior and
subordinated debt was restructured and reduced. However, all of the
interest due on the restructured senior debt and subordinated notes has been
added to principal for accounting purposes. As a result, we do not
accrue interest on our restructured senior debt and subordinated notes, which
would have been accrued during the March 2008 Quarter.
As part
of the debt restructuring, we issued to Cheyne Special Situations Fund, L.P., as
the holder of the senior debt, 7,038,236 shares of common stock, which
represents 70% of the outstanding common stock. As a result,
pursuant to Section 482 of the Internal Revenue Code, our ability to use net
operating loss carryforwards which were generated prior to the debt
restructuring was significantly reduced.
Critical
Accounting Policies
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 at December 31, 2008, a net loss from
continuing operations before extraordinary gain and discontinued operations of
$2,352,000 for the year ended December 31, 2008, and our working capital
constraints, our accounting firm included in its report on our financial
statements for the year ended December 31, 2008, an explanatory paragraph about
our ability to continue as a going concern. Although we generated net
income of $176,000 for the March 2009 Quarter, our stockholders’ deficit at
March 31, 2009 was $16,019,000, and we continue to be subject to working capital
constraints.
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. With respect to the testing of
our goodwill for impairment, we determine 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 our industry. We test 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. As of March 31, 2009 and December 31, 2008, 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 the March 2009
Quarter.
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 50% 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.
Results of
Operations
The
following table sets forth our consolidated statements of operations for the
three months ended March 31, 2009, in dollars and as a percentage of
sales.
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
Sales
|
|
$
|
7,653
|
|
|
|
100
|
%
|
|
$
|
6,545
|
|
|
|
100
|
%
|
|
Cost
of sales
|
|
|
5,718
|
|
|
|
75
|
%
|
|
|
4,708
|
|
|
|
72
|
%
|
|
Gross
profit
|
|
|
1,935
|
|
|
|
25
|
%
|
|
|
1,837
|
|
|
|
28
|
%
|
|
Selling,
general and administrative expenses
|
|
|
1,305
|
|
|
|
17
|
%
|
|
|
1,342
|
|
|
|
21
|
%
|
|
Research
and development expenses
|
|
|
336
|
|
|
|
5
|
%
|
|
|
424
|
|
|
|
6
|
%
|
|
Operating
income
|
|
|
294
|
|
|
|
3
|
%
|
|
|
71
|
|
|
|
1
|
%
|
|
Interest
expense, net
|
|
|
(33
|
)
|
|
|
-
|
%
|
|
|
(591
|
)
|
|
|
(9
|
)%
|
|
Other
income, net
|
|
|
9
|
|
|
|
-
|
%
|
|
|
8
|
|
|
|
-
|
%
|
|
Income
(loss) before income taxes
|
|
|
270
|
|
|
|
3
|
%
|
|
|
(512
|
)
|
|
|
(8
|
)%
|
|
Income
tax expense
|
|
|
(94
|
)
|
|
|
(1
|
|
|
|
(25
|
)
|
|
|
-
|
%
|
|
Net
income (loss)
|
|
|
176
|
|
|
|
2
|
%
|
|
|
(537
|
)
|
|
|
(8
|
)%
|
|
Foreign
currency translation adjustment
|
|
|
(151
|
)
|
|
|
(2
|
)%
|
|
|
(84
|
)
|
|
|
(1
|
)%
|
|
Comprehensive
income (loss)
|
|
$
|
25
|
|
|
|
-
|
%
|
|
$
|
(621
|
)
|
|
|
(9
|
)%
|
The
following table sets forth the Company’s sales by product line for the three
months ended March 31, 2009 and 2008:
|
|
|
Three Months Ended March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Dollars
|
|
|
%
|
|
|
Dollars
|
|
|
%
|
|
|
Connection/protection:
|
|
$
|
6,220
|
|
|
|
81
|
%
|
|
$
|
5,392
|
|
|
|
82
|
%
|
|
Signal
|
|
|
1,433
|
|
|
|
19
|
%
|
|
|
1,153
|
|
|
|
18
|
%
|
Connection/protection
equipment sales for the March 2009 Quarter were $6,220,000, an increase of
$828,000 (15.4%) from $5,392,000 for the March 2008 Quarter. The increase was
primarily due to increased sales of connector products to British
Telecommunications and its systems integrators of approximately $425,000, and
increase sales to Telmex of $1,426,000 partially offset by decreased sales to
Ericsson of $794,000. A significant percentage of our revenues are
derived from British Telecommunications and its installers. Any continuation of
the significant reduction in the level of business from British
Telecommunications and its installers could continue to have a material adverse
effect upon both our revenue and net income. Sales to Telmex of
$1,684,000 represented 22% of our sales during the March 2009
Quarter. During the second quarter of 2009, business in Mexico
generally was affected by the swine flu. We cannot determine at the
present time the effect, if any, that the swine flu will have on the business
from Telmex.
Signal
sales for the March 2009 Quarter were $1,433,000, an increase of $280,000
(24.3%) from $1,153,000 in the March 2008 Quarter. The increase in signal sales
was primarily due to an increase in orders placed by the military
sector.
Gross
profit was $1,935,000 for the March 2009 Quarter, an increase of $98,000 (5%)
from $1,837,000 for the March 2008 Quarter. Gross margin for the
March 2009 Quarter was 25% compared to 28% for the March 2008
Quarter. Gross margin for connection/protection was 19% for the March
2009 Quarter, as compared with 24% for the March 2008 Quarter. The
decrease is related to changes in product mix in the connection/protection
division and the effects of the stronger dollar, against the British
pound. We do not engage in hedging as a method of seeking to
reduce the impact of currency fluctuations. Gross margin for signal
was 52% for the March 2009 Quarter, as compared with 47 % for the March 2008
Quarter. The increase in gross margin for signal was primarily
related to product mix.
Selling,
general and administrative expenses decreased by $37,000 (2.8%) from $1,342,000
in the March 2008 Quarter to $1,305,000 for the March 2009
Quarter. Selling expenses decreased primarily due to a reduction in
advertising. General and administrative expenses decreased slightly as part of
our overall cost cutting initiatives.
Research
and development decreased by $88,000 (20.8%) to $336,000 for the March 2009
Quarter from $424,000 for the March 2008 Quarter. The decrease in the
quarter resulted primarily from a reduction of personnel and a decrease in
prototypes which were not required in the current phase of the development of
our new products.
As a
result of the foregoing, we had operating income of $294,000 for the March 2009
Quarter, compared with operating income of $71,000 in the March 2008
Quarter.
Net
interest expense, for the March 2009 Quarter was $33,000 compared to $591,000
for March 2008 Quarter. The decrease of $558,000 resulted from the
restructuring of our senior and subordinated debt during the third quarter of
2008. The debt restructuring was treated as a troubled debt
restructuring, and all of the interest through the stated maturity dates of the
notes was accrued on the date of issuance, on July 31, 2008, and added to the
principal of the notes. As a result, the interest on the restructured
senior and subordinated debt is not treated as a current period
cost. Interest at the stated interest rates on the restructured debt
would have been $440,000 for the March 2009 Quarter if the debt had not been
treated as a troubled debt restructuring. The interest which we
accrued during the March 2009 Quarter represents interest on the $425,000
advance made to us by our senior lender in November 2008 at a rate of LIBOR plus
10%, which was approximately 11.7% for the March 2009 Quarter, and interest on
our subordinated debentures at 8.26%.
Income
tax expense for the quarter ended March 31, 2009 relates to Mexico
taxes. No federal or state income tax expense has been provided due
to the availability of net operating loss carry forwards primarily generated
after the July 31, 2008 debt restructuring.
For the
March 2009 Quarter, we generated net income of $176,000, or $0.02 per share
(basic and diluted), as compared with a net loss of $537,000, or $0.59 per share
(basic and diluted) for the March 2008 Quarter.
Liquidity and Capital
Resources
At March
31, 2009, we had cash and cash equivalents of $542,000 compared with $292,000 at
December 31, 2008, and we had working capital of $567,000, as compared with
$827,000 at December 31, 2008. The following table sets forth
information as to the principal changes in the components of our working capital
(dollars in thousands).
|
Category
|
|
March
31,
|
|
|
December
31,
|
|
|
December 31, 2008 to March 31, 2009
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Dollar
Change
|
|
|
Percent Change
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
542
|
|
|
$
|
292
|
|
|
$
|
250
|
|
|
|
86
|
%
|
|
Accounts
receivable – trade, net
|
|
|
3,698
|
|
|
|
4,554
|
|
|
|
(856
|
)
|
|
|
(19
|
)%
|
|
Inventories
|
|
|
6,271
|
|
|
|
6,110
|
|
|
|
161
|
|
|
|
3
|
%
|
|
Prepaid
expenses and other current assets
|
|
|
369
|
|
|
|
202
|
|
|
|
167
|
|
|
|
83
|
%
|
|
Total
current assets
|
|
$
|
10,880
|
|
|
$
|
11,158
|
|
|
$
|
(278
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
debt, including interest
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Subordinated
notes, including interest
|
|
|
191
|
|
|
|
191
|
|
|
|
-
|
|
|
|
-
|
|
|
Subordinated
debentures, principal
|
|
|
385
|
|
|
|
385
|
|
|
|
-
|
|
|
|
-
|
|
|
Accounts
payable
|
|
|
5,400
|
|
|
|
5,529
|
|
|
|
(129
|
)
|
|
|
(2
|
)%
|
|
Accrued
expenses and other
|
|
|
2,488
|
|
|
|
2,390
|
|
|
|
98
|
|
|
|
4
|
%
|
|
Other
accrued interest payable
|
|
|
349
|
|
|
|
336
|
|
|
|
13
|
|
|
|
4
|
%
|
|
Total
current liabilities
|
|
$
|
10,313
|
|
|
$
|
10,331
|
|
|
$
|
(18
|
)
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital
|
|
$
|
567
|
|
|
$
|
827
|
|
|
$
|
(260
|
)
|
|
|
(31
|
)%
|
Cash flow
from operations was $735,000 for the March 2009 Quarter, as compared with
$117,000 of cash used in operations for the March 2008 Quarter. The
Company has entered into a supplier finance agreement with Lloyds TSB Commercial
Finance to factor British Telecommunications receivables without
recourse. The use of this agreement has the effect of accelerating
the cash flow on British Telecommunications
’
receivables
and represents a significant portion of the $856,000 reduction in accounts
receivable from the March 2008 Quarter to the March 2009
Quarter. Fees are at LIBOR plus 0.7% on the days to maturity of each
invoice that is factored.
During
both the March 2009 Quarter and the March 2008 Quarter, our only investing
activities were capital expenditures of $71,000 and $22,000,
respectively.
During
the March 2009 Quarter, we paid senior and subordinated debt of $
286,000. We had no other cash flow or expenditure from financing
activities during the March 2009 Quarter. During the March 2008
Quarter, there was no cash flow or expenditure from financing
activities.
Because a
significant portion of our sales are foreign and denominated in currencies other
than the United States dollar, changes in exchange rates have an effect on our
cash. During the March 2009 Quarter and the March 2008 Quarter, we
sustained losses as a result of exchange rates of $128,000, and $40,000,
respectively.
As a
result of the debt restructuring, we had positive working capital at both March
31, 2009 and December 31, 2008. However, the debt restructuring
itself did not provide us with any additional cash for our
operations. Our only source of funds other than normal operations is
our senior lender, Cheyne Special Situations Fund, L.P. During
the fourth Quarter of 2008, we required additional funds from Cheyne, and Cheyne
provided such funds. Cheyne also agreed to reschedule the payments on
the senior debt as of January 1, 2009. However, despite our modest
profit in the March 2009 Quarter, our significant historical losses and the
uncertainty of any significant increase in business from British
Telecommunications or Telmex, 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. These factors 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.
Item
3.
Quantitative
and Qualitative Disclosure About Market Risk.
We
conduct certain operations outside the United States. A substantial portion of
our revenue and expenses from our United Kingdom operations are denominated in
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 March 2009 Quarter, the loss from exchange rates represented approximately
1% of sales. For the same period in 2008, the currency translation
adjustment was not significant in relation to our total revenue.
Item
4.
Controls and
Procedures
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
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to management, including our chief executive officer and our chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure. Our management, with participation of our chief executive and
financial officers, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this quarterly report on Form 10-Q.
As
previously disclosed in our annual report on Form 10-K for the year ended
December 31, 2008, we determined that, as of the end of the fiscal year 2008,
there was a material weakness affecting our internal control over financial
reporting with respect to information technology (as described below) and, as a
result of the material weaknesses, our disclosure controls and procedures were
not effective. We are continuing to evaluate a change in the information system
platform for our financial and operational systems which will remediate the
material weaknesses. The selection and implementation of a new system
is expected to be completed over the next few years as a result of our current
cash constraints. Consequently, based on the evaluation described above, our
management, including our chief executive officer and our chief financial
officer, have concluded that, as of the March 31, 2009, our disclosure controls
and procedures were not effective.
Internal
Control over Financial Reporting
As
previously reported in form 10-K for the year ended December 31, 2008,
management identified significant deficiencies that when aggregated may give
rise to a material weakness specifically 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
plans to evaluate, select and install a new integrated enterprise resource
planning (ERP) system that will include a complete general ledger and reporting
package to eliminate the need for manual updates and significantly reduce the
need for journal entries in the financial reporting process. Specific
remediation actions used in 2009 to address our material weakness in internal
control over financial reporting with respect to information technology include
the following:
|
|
·
|
In-depth
review of all perpetual inventory
reports;
|
|
|
·
|
Analyzing
of production reporting with respect to ending inventory,
and
|
|
|
·
|
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
most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
Item
5. Other Information
Supplier Finance
Agreement
In
February 2009, we entered into a supplier finance agreement with Lloyds TSB
Commercial Finance Limited to factor British Telecommunications accounts
receivables on a non-recourse basis. We pay fees to Lloyds TSB
Commercial Financing at a rate equal to LIBOR plus 0.7%, based on the number of
days to maturity of each invoice that is factored.
Modification of Working
Capital Senior Note
Effective
May 1, 2009, the working capital senior note was replaced with a new working
capital note in the amount of $1,461,316 (including accrued
interest). The new note provides for monthly payments of $125,000
commencing May 31, 2009, with a final payment of the remaining principal and
interest on May 31, 2010. Payments are applied first to accrued
interest and any remainder to principal. The new working capital note
is collateralized by all of the assets of the Company which also secure the
existing senior debt.
Adoption of the 2009
Long-Term Incentive Plan.
On May
11, 2009, our board of directors approved the 2009 Long-Term Incentive Plan,
which covers 1,000,000 shares of common stock. The plan provides for
the grant of incentive and non-qualified options, stock grants, stock
appreciation rights and other equity-based incentives to employees, including
officers, and consultants. The plan provides for the automatic grant of options
to independent directors as follows: On the date that the plan was
adopted, each independent director received the grant of an option to purchase
5,000 shares of common stock at an exercise price of $0.022 per share, which was
the average of the last reported price for the common stock for the ten trading
days immediately preceding the date of grant. On May 1 of each year,
commencing May 1, 2010, each independent director will receive an option to
purchase 5,000 shares at an exercise price equal to the average of the last
reported price for the common stock for the ten trading days immediately
preceding the date of grant. Each newly elected independent director
will receive an option to purchase 10,000 shares at an exercise price equal to
the average of the last ten trading days immediately preceding the date of
becoming a director. Independent directors are not eligible for
options or other rights under the plan except for the options granted pursuant
to the automatic grant provision. The plan was approved subject to
stockholder approval. The Company’s principal stockholder, which
holds 70% of the outstanding stock, has advised the Company that it will approve
the plan.
Item 6.
Exhibits
|
4.1
|
|
Working
capital senior note dated May 1, 2009.
|
|
10.1
|
|
2009
Long-Term Incentive Plan.
|
|
10.2
|
|
Lloyds
TSB Commercial Finance Limited supplier finance
agreement
|
|
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 the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
PORTA
SYSTEMS CORP.
|
|
|
|
|
|
Dated: May
14, 2009
|
By:
|
/s/Edward B. Kornfeld
|
|
|
|
Edward
B. Kornfeld
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
By:
|
/s/ Leslie K. Brand
|
|
|
|
Leslie
K. Brand
|
|
|
|
Chief
Financial
Officer
|
Southport Acquisition (PK) (USOTC:PORT)
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