-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U7pe0EMMCcIrrvkFZWJPd3JMj/uSm0vL1LS8NNw9Uq4ue6ByzHLCK6YDJABeiwaN zdT668DNGexpzrFd3lOuBg== /in/edgar/work/20000814/0000891092-00-000698/0000891092-00-000698.txt : 20000921 0000891092-00-000698.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891092-00-000698 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: [3661 ] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08191 FILM NUMBER: 696582 BUSINESS ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5163649300 MAIL ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.......to....... Commission file number 1-8191 PORTA SYSTEMS CORP. ------------------- (Exact name of registrant as specified in its charter) Delaware 11-2203988 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 575 Underhill Boulevard, Syosset, New York ------------------------------------------ (Address of principal executive offices) 11791 ----- (Zip Code) 516-364-9300 ------------ (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ 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) 9,797,648 shares as of August 7, 2000 PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 2000 1999 ----------- ------------ Assets (Unaudited) ------ Current assets: Cash and cash equivalents $ 2,959 $ 3,245 Accounts receivable, net 12,354 12,137 Inventories 8,645 8,893 Prepaid expenses 1,450 1,373 -------- -------- Total current assets 25,408 25,648 -------- -------- Property, plant and equipment, net 5,088 4,193 Goodwill, net 10,728 11,076 Other assets 2,510 2,531 -------- -------- Total assets $ 43,734 $ 43,448 ======== ======== Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Current portion of senior debt $ 3,500 $ 2,000 Subordinated notes 900 -- Accounts payable 7,121 8,831 Accrued expenses 7,306 5,723 Accrued interest payable 740 588 Accrued commissions 1,621 1,864 Income taxes payable 240 267 Accrued deferred compensation 196 196 Short-term loans 5 44 -------- -------- Total current liabilities 21,629 19,513 -------- -------- Senior debt net of current maturities 17,526 15,518 Subordinated notes 5,139 6,013 6% convertible subordinated debentures 373 371 Deferred Compensation 925 1,004 Income taxes payable 254 352 Other long-term liabilities 876 971 Minority interest 937 1,093 -------- -------- Total long-term liabilities 26,030 25,322 -------- -------- Total liabilities 47,659 44,835 -------- -------- 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 9,786,349 shares at June 30, 2000 and 9,638,861 shares at December 31, 1999 98 96 Additional paid-in capital 75,448 75,310 Accumulated other comprehensive loss: Foreign currency translation adjustment (3,994) (3,896) Accumulated deficit (73,539) (70,959) -------- -------- (1,987) 551 Treasury stock, at cost (1,938) (1,938) -------- -------- Total stockholders' deficit (3,925) (1,387) -------- -------- Total liabilities and stockholders' deficit $ 43,734 $ 43,448 ======== ========
See accompanying notes to consolidated financial statements. Page 2 of 14 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share data) Six Months Ended June 30, June 30, 2000 1999 -------- -------- Sales $29,756 $18,635 Cost of sales 20,470 13,185 ------- ------- Gross profit 9,286 5,450 Selling, general and administrative expenses 6,998 6,023 Research and development expenses 3,067 2,747 ------- ------- Total expenses 10,065 8,770 ------- ------- Operating loss (779) (3,320) Interest expense (1,965) (1,720) Interest income 56 104 Other income 12 158 ------- ------- Loss before income taxes and minority interest (2,676) (4,778) Income tax expense (61) (15) Minority interest 156 110 ------- ------- Net loss $(2,581) $(4,683) ======= ======= Other comprehensive loss, net of tax: Foreign currency translation adjustments (98) (68) ------- ------- Comprehensive loss $(2,679) $(4,751) ======= ======= Per share data: Basic per share amounts: Net loss per share of common stock $ (0.27) $ (0.49) ======= ======= Weighted average shares outstanding 9,722 9,485 ======= ======= Diluted per share amounts: Net loss per share of common stock $ (0.27) $ (0.49) ======= ======= Weighted average shares outstanding 9,722 9,485 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 3 of 14 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share data) Three Months Ended June 30, June 30, 2000 1999 ------- -------- Sales $13,828 $ 9,109 Cost of sales 10,258 6,470 ------- ------- Gross profit 3,570 2,639 Selling, general and administrative expenses 3,863 3,269 Research and development expenses 1,659 1,477 ------- ------- Total expenses 5,522 4,746 ------- ------- Operating loss (1,952) (2,107) Interest expense (1,031) (927) Interest income 29 36 Other income 7 21 ------- ------- Loss before income taxes and minority interest (2,947) (2,977) Income tax expense (31) (7) Minority interest 91 44 ------- ------- Net loss $(2,887) $(2,940) ======= ======= Other comprehensive loss, net of tax: Foreign currency translation adjustments (135) (27) ------- ------- Comprehensive loss $(3,022) $(2,967) ======= ======= Per share data: Basic per share amounts: Net loss per share of common stock $ (0.30) $ (0.31) ======= ======= Weighted average shares outstanding 9,782 9,485 ======= ======= Diluted per share amounts: Net loss per share of common stock $ (0.30) $ (0.31) ======= ======= Weighted average shares outstanding 9,782 9,485 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 4 of 14 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands)
Six Months Ended June 30, June 30, 2000 1999 -------- --------- Cash flows from operating activities: Net loss $(2,581) $(4,683) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash financing expenses 15 14 Depreciation and amortization 776 723 Amortization of discount on convertible subordinated debentures 13 161 Minority interest (156) (110) Changes in assets and liabilities: Accounts receivable (217) 8,018 Inventories 248 420 Prepaid expenses (77) (216) Other assets 3 71 Accounts payable, accrued expenses and other liabilities (517) (4,900) ------- ------- Net cash used in operating activities (2,493) (502) ------- ------- Cash flows from investing activities: Proceeds from disposal of assets -- 243 Capital expenditures, net (1,285) (226) Proceeds from exercised options and warrants 140 -- Repayment of employee loans -- 182 ------- ------- Net cash provided by (used in) investing activities (1,145) 199 ------- ------- Cash flows from financing activities: Proceeds from senior debt 4,490 1,800 Repayments of senior debt (982) (1,020) Repayments of short term loans (39) (62) ------- ------- Net cash provided by financing activities 3,469 718 ------- ------- Effect of exchange rate changes on cash (117) (60) ------- ------- Increase (decrease) in cash and cash equivalents (286) 355 Cash and equivalents - beginning of the year 3,245 3,044 ------- ------- Cash and equivalents - end of the period $ 2,959 $ 3,399 ======= ======= Supplemental cash flow disclosures: Cash paid for interest expense $ 1,853 $ 1,381 ======= ======= Cash paid for income taxes $ 109 $ 306 ======= =======
See accompanying notes to unaudited consolidated financial statements. Page 5 of 14 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim periods 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 annual report to stockholders for the year ended December 31, 1999. Results for the first six months of 2000 are not necessarily indicative of results for the year. Note 2: Inventories Inventories are stated at the lower of cost (on the average or first-in, first-out methods) or market. The composition of inventories at the end of the respective periods is as follows: June 30, 2000 December 31,1999 -------------- ----------------- (in thousands) Parts and components $5,901 $5,558 Work-in-process 734 584 Finished goods 2,010 2,751 ------ ------ $8,645 $8,893 ====== ====== Note 3: Senior Debt During the quarter ended June 30, 2000, the Company and its senior lender agreed to extend the loan and security agreement to July 3, 2001. As consideration, Porta agreed to reduce the exercise price of 470,000 outstanding warrants held by its senior lender to $2.00 per share. In addition during the quarter ended June 30, 2000, the Company and its senior lender agreed to increase the revolving line maximum by $2,000,000 from $9,000,000 to $11,000,000 through January 1, 2001. As of June 30, 2000, the Company had borrowed $1,500,000 under the increased revolving line. As of January 1, 2001 the revolving line maximum will return to $9,000,000. As consideration, the Company issued to its senior lender a warrant to purchase 100,000 shares of the Company's common stock at $2.00 per share exercisable for a period of five years. On June 30, 2000, the Company's debt to its senior lender was $21,026,000. During the six and three months ended June 30, 2000, the Company repaid principal of $982,000 and $582,000, respectively. The Company borrowed $4,490,000 and $1,940,000 during the six and three-month periods ended June 30, 2000, respectively. Based on anticipated principal payments, $3,500,000 has been classified as a current liability at June 30, 2000. Financial debt covenants include an interest coverage ratio measured quarterly, limitations on the incurrence of indebtedness, limitations on capital expenditures, and prohibitions on declarations of any cash or stock dividends or the repurchase of the Company's stock. As of June 30, 2000, the Company was not in compliance with the interest coverage covenant and obtained a waiver from its senior lender. Page 6 of 14 Note 4: Subordinated Notes As of June 30, 2000, the Company has outstanding $6,064,000 of subordinated notes. During the quarter ended June 30, 2000, the Company and the holders of 85% of the subordinated notes agreed to eliminate the requirement that Porta meet specific financial goals for Porta to extend the maturity date of their subordinated notes to July 3, 2001. As a result, notes in the principal amount of $900,000 are due January 3, 2001 and notes in the principal amount of $5,164,000 are due July 3, 2001. The carrying value of such combined subordinated notes as of June 30, 2000 is $6,039,000, which is net of a related issuance discount of $25,000. In connection with the extension agreement, the Company agreed to issue to the noteholders warrants to purchase 127,500 shares of common stock at $3.00 per share. The Company may issue warrants to purchase up to 22,500 shares of common stock at $3.00 per share to any noteholders who agree to this amendment. Warrants to purchase 150,000 shares of common stock, which were previously authorized, will be issued if the notes are extended. Note 5: Segment Data The Company has three 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; Operating Support Systems ("OSS") whose products automate the testing, provisioning, maintenance and administration of communication networks and the management of support personnel and equipment; 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. There has been no significant change from December 31, 1999 in the basis of measurement of segment revenues and profit or loss, and no significant change in the Company's assets.
Six Months Ended Three Months Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ------------- ------------- ------------- ------------- Sales: Line $10,512,000 $ 9,161,000 $ 4,418,000 $ 4,533,000 OSS 15,305,000 6,268,000 7,191,000 3,065,000 Signal 3,588,000 3,109,000 2,010,000 1,486,000 ----------- ----------- ----------- ----------- $29,405,000 $18,538,000 $13,619,000 $ 9,084,000 =========== =========== =========== =========== Segment profit (loss): Line $ 1,905,000 $ 2,207,000 $ 636,000 $ 839,000 OSS (727,000) (3,990,000) (1,278,000) (2,090,000) Signal 642,000 809,000 340,000 349,000 ----------- ----------- ------------ ----------- $ 1,820,000 $ (974,000) $ (302,000) $ (902,000) =========== =========== ============ ===========
Page 7 of 14 The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ------------- ------------- ------------- ------------- Sales: Total revenue for reportable segments $29,405,000 $18,538,000 $13,619,000 $ 9,084,000 Other revenue 351,000 97,000 209,000 25,000 ----------- ----------- ----------- ----------- Consolidated total revenue $29,756,000 $18,635,000 $13,828,000 $ 9,109,000 =========== =========== =========== =========== Operating income (loss): Total segment Profit (loss) for reportable segments $ 1,820,000 $ (974,000) $ (302,000) $ (902,000) Corporate and unallocated (2,599,000) (2,346,000) (1,650,000) (1,205,000) ----------- ----------- ----------- ----------- Consolidated total operating loss $ (779,000) $(3,320,000) $(1,952,000) $(2,107,000) =========== =========== =========== ===========
Note 6: Legal Proceedings On or about December 31, 1999, the Porta entered into four related agreements with a vendor concerning updating and maintaining certain of Porta's software. As a result of disputes with the vendor, in March 2000, Porta terminated these agreements and a related agreement. The vendor commenced litigation and arbitration proceedings against Porta, which were settled in July 2000. Among other things, the settlement provided for the reinstatement of the terminated agreements with revisions and clarifications, which reflected increased payments by Porta, and a new agreement between Porta and the vendor pursuant to which the vendor is to update and maintain certain other software of Porta. Porta also agreed to pay $150,000, plus interest, in twelve monthly installments to reimburse the vendor for certain legal expenses. In March 2000, Porta suspended, with pay, two of its executives from their positions pending completion of Porta's investigation of a vendor dispute, as noted above, and certain other matters. Prior to the completion of this investigation by Porta, the two suspended executives accepted positions with another company and thereby voluntarily resigned from their positions with Porta. These two executives, however, have expressed the position, through their counsel, that they were fired without cause in March and not suspended, and, therefore, they claim to be entitled to certain severance payments under their respective employment agreements. Their counsel has threatened to bring an action against Porta seeking such severance payments. Porta strongly disputes the positions taken by the two former executives. Page 8 of 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's consolidated statements of operations for the periods indicated below, shown as a percentage of sales, are as follows:
Six Months Ended Three Months Ended ---------------- ------------------ June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of Sales 69% 71% 74% 71% Gross Profit 31% 29% 26% 29% Selling, general and administrative expenses 24% 32% 28% 36% Research and development expenses 10% 15% 12% 16% Operating loss (3%) (18%) (14%) (23%) Interest expense - net (6%) (9%) (7%) (10%) Other income 0% 1% 0% 0% Minority interest 0% 1% 0% 1% Income taxes 0% 0% 0% 0% Net loss (9%) (25%) (21%) (32%)
The Company's sales by product line for the periods ended June 30, 2000 and 1999 are as follows: Six Months Ended ---------------- June 30, -------- 2000 1999 ---- ---- (Dollars in thousands) Line $10,512 35% $ 9,161 49% OSS 15,305 52% 6,268 33% Signal 3,588 12% 3,109 17% Other 351 1% 97 1% ------------ ------------- $29,756 100% $18,635 100% ============ ============= Three Months Ended ------------------ June 30, -------- 2000 1999 ---- ---- (Dollars in thousands) Line $ 4,418 32% $ 4,533 50% OSS 7,191 52% 3,065 34% Signal 2,010 15% 1,486 16% Other 209 1% 25 0% ------------ ------------- $13,828 100% $ 9,109 100% ============ ============= Page 9 of 14 Results of Operations The Company's sales for the six months ended June 30, 2000 compared to the six months ended June 30, 1999 increased by $11,121,000 (60%) from $18,635,000 in 1999 to $29,756,000 in 2000. Sales for the quarter ended June 30, 2000 of $13,828,000 increased by $4,719,000 (52%) compared to $9,109,000 for the quarter ended June 30, 1999. The increases in sales for the six and three month periods are due primarily to additional sales from the OSS division for these periods, although sales from Line Connection and Signal also increased for both the six and three month periods. Line sales for the six months ended June 30 increased from $9,161,000 to $10,512,000, or $1,351,000 (15%) from 1999 to 2000. Sales for the three months ended June 30 decreased by $115,000 (3%) from $4,533,000 in 1999 to $4,418,000 in 2000. The increase in sales for the six month period is primarily attributable to sales of approximately $3,100,000 pursuant to a purchase order from Telefonos de Mexico S.A. de C.V. (Telmex), which was partially offset by reduced sales to other customers, primarily to customers in the United Kingdom. The decrease for the three months ended June 30, 2000 reflects reduced sales primarily to customers in the United Kingdom. OSS sales for the six months ended June 30, 2000 were $15,305,000 compared to the six months ended June 30, 1999 of $6,268,000, an increase of $9,037,000 (144%). OSS revenue for the three months ended June 30, 2000 was $7,191,000 compared to the three months ended June 30, 1999 of $3,065,000, an increase of $4,126,000 (135%). The increase in sales during the six and three months ended June 30, 2000 resulted from sales of approximately $11,000,000 and $5,100,000 to Fujitsu Telecommunications Europe Limited under a $12,000,000 supply contract. Signal sales for the six months ended June 30, 2000 were $3,588,000 compared to the six months ended June 30, 1999 of $3,109,000, an increase of $479,000 (15%). Sales for the three months ended June 30, 2000 were $2,010,000 compared to the three months ended June 30, 1999 of $1,486,000, an increase of $524,000 (35%). The increase in sales for the six and three-month periods primarily reflects an improvement in timely deliveries to meet customers orders in the second quarter. Gross margin for the six months ended June 30, 2000 was 31% compared to 29% for the six months ended June 30, 1999. This improvement in gross margin is attributable to the increased level of sales, which enabled the Company to absorb more efficiently certain fixed expenses associated with the OSS contracts. Gross margin for the quarter ended June 30, 2000 was 26% compared to 29% for the quarter ended June 30, 1999. This decline in gross margin is attributable to changes in the copper product mix, increased costs to support OSS customer maintenance contracts which was slightly offset by the Company's ability to absorb more efficiently certain fixed expenses associated with the OSS contracts. The reduced gross margin was also affected by the terms of the Company's revised agreements with a vendor who has been providing maintenance services since January 2000. Selling, general and administrative expenses increased by $975,000 (16%) from $6,023,000 to $6,998,000 for the six months ended June 30, 2000 compared to 1999. For the quarter ended June 30, 2000 selling, general and administrative expenses increased by $594,000 (18%) from 1999. The increase from 1999 to 2000 for the six and three months primarily reflects higher than anticipated professional legal expenses due primarily to litigation involving the Company, particularly litigation and settlement of a dispute involving a vendor. Page 10 of 14 Results of Operations (continued) Research and development expenses increased by $320,000 (12%) and by $182,000 (12%) for the six and three months ended June 30, 2000 from the comparable periods in 1999, respectively. The increased expenses related to the Company's efforts to develop new products, primarily for the OSS business. As a result of the above, for the six months ended June 30, 2000 compared to 1999, the Company had an operating loss of $779,000 in 2000 versus an operating loss of $3,320,000 in 1999. The Company had an operating loss of $1,952,000 for the quarter ended June 30, 2000 as compared to an operating loss of $2,107,000 for the quarter ended June 30, 1999. Interest expense for the six months ended June 30, 2000 compared to June 30, 1999 increased by $245,000 (14%) from $1,720,000 in 1999 to $1,965,000 in 2000. Interest expense for the three-month period ending June 30, 2000 compared to the same three months of 1999, increased by $104,000 (11%) from $927,000 in 1999 to $1,031,000 in 2000. This change is attributable primarily to increased levels of borrowing from the Company's senior lender. As the result of the foregoing, the Company incurred a net loss of $2,581,000, $0.27 per share (basic and diluted) for the six months ended June 30, 2000 compared with a net loss of $4,683,000, $0.49 per share (basic and diluted), for the six months ended June 30, 1999. The net loss for the three months ended June 30, 2000 was $2,887,000, $0.30 per share (basic and diluted), compared with a net loss for the three months ended June 30, 1999 of $2,940,000, $0.31 per share (basic and diluted). Liquidity and Capital Resources At June 30, 2000 the Company had cash and cash equivalents of $2,959,000 compared with $3,245,000 at December 31, 1999. The Company's working capital at June 30, 2000 was $3,779,000, compared to working capital of $6,135,000 at December 31, 1999. The decline in working capital was a result of (i) increase in the current portion of senior debt and (ii) the movement of the $900,000 of Subordinated Notes from long-term to current liabilities. During the first six months of 2000, the net cash used by the Company in operations was $2,493,000. The principal source of cash during the quarter was a net increase of $3,508,000 in loans from the senior lender. As of June 30, 2000, the Company's loan and security agreement with its senior secured lender provides the Company, under its revolving line of credit and its letter of credit facility, with combined availability totaling $11,000,000 (See Note 3), of which $500,000 was available as of June 30, 2000. Of the $11,000,000, $2,000,000 is payable on January 1, 2001 and the remainder expires July 3, 2001. The combined availability is subject to the Company's borrowing base and amounts outstanding under the revolver and committed letters of credit. In addition, the Company has $21,026,000 outstanding as of June 30, 2000 of which $710,000 was a non-interest bearing note, $9,640,000 was outstanding against the revolving line of credit, and $10,676,000 was a term loan agreement. The Company was not in compliance with the interest coverage covenant and obtained a waiver from its senior lender for the period ended June 30, 2000. Page 11 of 14 Liquidity and Capital Resources (continued) As of June 30, 2000, the Company had outstanding $6,064,000 of subordinated notes. As a result of an agreement with the holders of 85% of these notes, the maturity date of the notes was extended to July 3, 2001. As a result, notes in the principal amount of $900,000 are due January 3, 2001 and note in the principal amount of $5,164,000 is due July 3, 2001. The carrying value of such combined subordinated notes as of June30, 2000 is $6,039,000, which is net of a related issuance discount. The Company's cash availability during the second half of 2000 and thereafter may be affected by a number of factors. At August 11, 2000, the Company had no cash available under its credit facility. To the extent that credit is not available, the Company may have difficulty performing its obligations under its contracts, which could result in the cancellation of contracts or the loss of future business. In addition, at June 30, 2000, $24,690,000 of senior and subordinated debt will become due in July 2001, in addition to $1,500,000 of senior debt and $900,000 of subordinated debt which is due in January 2001. The Company does not presently have the ability to pay these debts and, if the Company cannot obtain either an extension on the maturity of the debts or an alternative financing source or raise funds from the sale of one of its divisions, the Company may be unable to meet its financial obligations. Although the Company has been exploring alternatives, including the possible sale of one of its divisions and other financing sources, the Company has no formal or informal agreement or understanding as to an extension of its existing loans or any alternative financing source or any purchaser of one of its divisions, and it cannot give any assurance that it will be able to obtain either an extension of its existing debt or funds to enable it to pay its loans. Year 2000 Issue Many existing computer programs use only two digits to identify a year in a date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. This is referred to as the "Year 2000 Issue." Management initiated a company-wide program to prepare our computer systems and applications for year 2000 compliance. To date, the Company has not experienced any significant Year 2000 issues. Porta incurred internal staff costs as well as other expenses necessary to prepare its systems for the year 2000, replacing some systems and upgrading others. The total cost of this program, which was incurred during 1999, was approximately $500,000, with approximately $200,000 representing internal costs and $300,000 representing external equipment and services. The Company has not incurred any expenses related to the Year 2000 Issue in 2000. Statements contained in this Year 2000 disclosure are subject to certain protection under the Year 2000 Information and Readiness Disclosure Act. Forward Looking Statements Statements contained in this Form 10-Q include forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified in this Form 10-Q, the Company's Annual Report on From 10-K for the year ended December 31, 1999 and in other documents filed by the Company with the Securities and Exchange Commission. Page 12 of 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings On or about December 31, 1999, the Company entered into four related agreements (the "ANP Agreements") with a vendor concerning updating and maintaining the Company's ANP software. As a result of disputes with the vendor, in March 2000, the Company terminated the ANP Agreements. The Company also terminated a related agreement with the vendor (the "Teaming Agreement") concerning a proposed joint bid by the Company, the vendor and another company in connection with a request for certain sales proposals. The vendor commenced litigation against the Company in April 2000 in the United States District Court for the Eastern District of New York and in June 2000 in the United States District Court for the District of Colorado and also commenced arbitration and mediation proceedings in New York with respect to these disputes. Following discovery and motion practice in the New York federal court action and a mediation session, the parties settled their disputes. Among other things, the settlement provided for the reinstatement of the ANP agreements with revisions and clarifications, which reflected increased payments by the Company, a new agreement between the Company and the vendor pursuant to which the vendor is to update and maintain certain other software of the Company and which, among other things, superseded the Teaming Agreement, and the payment by the Company of $150,000, plus interest, in twelve monthly installments to reimburse the vendor for certain legal expenses. In March 2000, the Company suspended, with pay, two of its executives from their positions pending completion of the Company's investigation of a vendor dispute, as noted above, and certain other matters. Prior to the Company completing its investigation of these matters, the two suspended executives accepted positions with another company and thereby voluntarily resigned from their positions with the Company. These two executives, however, have expressed the position through their counsel that they were fired without cause in March and not suspended, and, therefore, are supposedly entitled to certain severance payments under their respective employment agreements with the Company. Their counsel has threatened to bring an action against the Company seeking such severance payments. The Company strongly disputes the positions taken by the two former executives. Item 4. Submission of Matters to a Vote of Security Holders. The Company's 2000 Annual Meeting of Stockholders was held on June 9, 2000. At the annual meeting, the stockholders (i) reelected its present board, consisting of Messrs. William V. Carney, Seymour Joffe, Michael A. Tancredi, Warren H. Esanu, Herbert H. Feldman, Stanley Kreitman, and Robert Schreiber and (ii) ratified the appointment of BDO Seidman, LLP as independent auditors for the year ended December 31, 2000. Each director received at least 7,392,219 votes for his election. Set forth below is the vote on the other matters approved at the meeting.
Matter Votes For Votes Against Abstentions Broker Non-Votes ------ ---------- ------------- ----------- ---------------- Appointment of Auditors 7,700,819 25,225 3,377 None
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None Page 13 of 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTA SYSTEMS CORP. Dated August 11, 2000 By /s/ William V. Carney ----------------------------- William V. Carney Chairman of the Board Dated August 11, 2000 By /s/ Edward B. Kornfeld ----------------------------- Edward B. Kornfeld Senior Vice President and Chief Financial Officer Page 14 of 14 EX-27 2 0002.txt FDS --
5 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 2,959 0 12,354 0 8,645 25,408 5,088 0 43,734 21,629 0 0 0 98 (4,023) 43,734 29,756 29,756 20,470 10,065 0 0 1,965 (2,676) 61 (2,581) 0 0 0 (2,581) (0.27) (0.27)
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