-----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, MxZWKDtC++3HvgT8H8Q7NfoJ7D9LfoRcdWOsbz7kTL67xF1hyZGdw50fnQirXM04 yzg49KH6YiiHT9cyB6YiFg== /in/edgar/work/0000891092-00-001060/0000891092-00-001060.txt : 20001114 0000891092-00-001060.hdr.sgml : 20001114 ACCESSION NUMBER: 0000891092-00-001060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 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: 761099 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 September 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) 9,817,165 shares as of November 3, 2000 Page 1 of 14 pages PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
September 30, December 31, 2000 1999 ------------- ------------ Assets (Unaudited) Current assets: Cash and cash equivalents $ 2,163 $ 3,245 Accounts receivable, net 9,508 12,137 Inventories 8,066 8,893 Prepaid expenses 1,960 1,373 -------- -------- Total current assets 21,697 25,648 -------- -------- Property, plant and equipment, net 4,612 4,193 Goodwill, net 10,581 11,076 Other assets 2,133 2,531 -------- -------- Total assets $ 39,023 $ 43,448 ======== ======== Liabilities and Stockholders' Deficit Current liabilities: Current portion of senior debt $ 21,146 $ 2,000 Subordinated notes 6,131 -- Accounts payable 6,913 8,831 Accrued expenses 6,265 5,723 Accrued interest payable 537 588 Accrued commissions 1,456 1,864 Income taxes payable 240 267 Accrued deferred compensation 196 196 Short-term loans 2 44 -------- -------- Total current liabilities 42,886 19,513 -------- -------- Senior debt net of current maturities -- 15,518 Subordinated notes -- 6,013 6% convertible subordinated debentures 375 371 Deferred compensation 970 1,004 Income taxes payable 205 352 Other long-term liabilities 896 971 Minority interest 905 1,093 -------- -------- Total long-term liabilities 3,351 25,322 -------- -------- Total liabilities 46,237 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 9,797,648 shares at September 30, 2000 and 9,638,861 shares at December 31, 1999 98 96 Additional paid-in capital 75,466 75,310 Accumulated other comprehensive loss: Foreign currency translation adjustment (4,145) (3,896) Accumulated deficit (76,695) (70,959) -------- -------- (5,276) 551 Treasury stock, at cost (1,938) (1,938) -------- -------- Total stockholders' deficit (7,214) (1,387) -------- -------- Total liabilities and stockholders' deficit $ 39,023 $ 43,448 ======== ========
See accompanying notes to consolidated financial statements. Page 2 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share data) Nine Months Ended September 30, September 30, 2000 1999 ------------- ------------- Sales $ 40,951 $ 27,032 Cost of sales 28,813 19,704 -------- -------- Gross profit 12,138 7,328 -------- -------- Selling, general and administrative expenses 10,277 9,226 Research and development expenses 4,530 4,575 -------- -------- Total expenses 14,807 13,801 -------- -------- Operating loss (2,669) (6,473) Interest expense (3,087) (2,608) Interest income 88 138 Other income (expense) (163) 158 -------- -------- Loss before income taxes and minority interest (5,831) (8,785) Income tax expense (94) (53) Minority interest 188 155 -------- -------- Net loss $ (5,737) $ (8,683) ======== ======== Other comprehensive loss, net of tax: Foreign currency translation adjustments (249) (178) -------- -------- Comprehensive loss $ (5,986) $ (8,861) ======== ======== Per share data: Basic per share amounts: Net loss per share of common stock $ (0.59) $ (0.92) ======== ======== Weighted average shares outstanding 9,747 9,487 ======== ======== Diluted per share amounts: Net loss per share of common stock $ (0.59) $ (0.92) ======== ======== Weighted average shares outstanding 9,747 9,487 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Loss (In thousands, except per share data) Three Months Ended September 30, September 30, 2000 1999 ------------- ------------- Sales $ 11,195 $ 8,397 Cost of sales 8,343 6,519 -------- -------- Gross profit 2,852 1,878 -------- -------- Selling, general and administrative expenses 3,279 3,203 Research and development expenses 1,463 1,828 -------- -------- Total expenses 4,742 5,031 -------- -------- Operating loss (1,890) (3,153) Interest expense (1,122) (888) Interest income 32 34 Other income (expense) (175) 1 -------- -------- Loss before income taxes and minority interest (3,155) (4,006) Income tax expense (33) (38) Minority interest 32 45 -------- -------- Net loss $ (3,156) $ (3,999) ======== ======== Other comprehensive loss, net of tax: Foreign currency translation adjustments (151) (110) -------- -------- Comprehensive loss $ (3,307) $ (4,109) ======== ======== Per share data: Basic per share amounts: Net loss per share of common stock $ (0.32) $ (0.42) ======== ======== Weighted average shares outstanding 9,796 9,489 ======== ======== Diluted per share amounts: Net loss per share of common stock $ (0.32) $ (0.42) ======== ======== Weighted average shares outstanding 9,796 9,489 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 4 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, September 30, 2000 1999 ------------- ------------- Cash flows from operating activities: Net loss $(5,737) $(8,683) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash financing expenses -- 18 Non-cash employee stock bonuses -- 8 Depreciation and amortization 1,156 1,144 Amortization of debt discounts 42 240 Minority interest (188) (155) Changes in assets and liabilities: Accounts receivable 2,629 7,530 Inventories 827 1,796 Prepaid expenses (587) (266) Other assets 371 99 Accounts payable, accrued expenses and other liabilities (2,118) (3,588) ------- ------- Net cash used in operating activities (3,605) (1,857) ------- ------- Cash flows from investing activities: Proceeds from disposal of assets -- 243 Capital expenditures (1,091) (588) Proceeds from exercised options and warrants 158 -- Repayments of employee loans -- 245 ------- ------- Net cash used in investing activities (933) (100) ------- ------- Cash flows from financing activities: Proceeds from senior debt 5,010 3,350 Repayments of senior debt (1,382) (1,420) Proceeds from subordinated notes 80 -- Repayments of short term loans (42) (99) ------- ------- Net cash provided by financing activities 3,666 1,831 ------- ------- Effect of exchange rates on cash (210) (175) ------- ------- Decrease in cash and cash equivalents (1,082) (301) Cash and equivalents - beginning of the year 3,245 3,044 ------- ------- Cash and equivalents - end of the period $ 2,163 $ 2,743 ======= ======= Supplemental cash flow disclosures: Cash paid for interest expense $ 3,096 $ 2,007 ======= ======= Cash paid for income taxes $ 147 $ 364 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 5 of 14 pages 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 nine months of 2000 are not necessarily indicative of results for the year. Note 2: Inventories Inventories are valued 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: September 30, 2000 December 31,1999 ------------------ ---------------- (in thousands) Parts and components $ 5,415 $ 5,558 Work-in-process 1,329 584 Finished goods 1,322 2,751 -------- -------- $ 8,066 $ 8,893 ======== ======== Note 3: Senior Debt On September 30, 2000, the Company's debt to its senior lender was $21,146,000. During the nine and three months ended September 30, 2000, the Company repaid principal of $1,382,000 and $400,000, respectively. The Company borrowed $5,010,000 and $520,000 during the nine and three-month periods ended September 30, 2000, respectively. Subsequent to September 30, 2000, the Company repaid $400,000, resulting in a balance owed of approximately $20,746,000. As of September 30, 2000, the total outstanding principal balance, of which $2,000,000 is due on January 1, 2001 and $19,146,000 is due on July 3, 2001, has been classified as a current liability. See Item II Liquidity and Capital Resources 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 September 30, 2000, the Company was not in compliance with the interest coverage covenant. In addition, as of September 30, 2000, the outstanding advances from the senior lender exceeded the maximum allowable under the borrowing base formula since the Company's eligible assets were not sufficient to support the outstanding balance under the combined revolving advance and standby letters of credit guarantee. As a result, the outstanding advances from the senior lender exceeded the maximum allowable under the borrowing base formula by $1,400,000 as of November 3, 2000. The Company has obtained a waiver of such non-compliance from its senior lender related to the interest coverage ratio and the over advance under the line. In connection with the waiver given with respect to the overadvance, (i) the lender agreed that the Company may have an overadvance of not more than $1,800,000 or such higher amount that the lender may allow in its sole and absolute discretion through December 31, 2000 and (ii) the Company reduced from $2.00 per share to $1.00 per share, the exercise price of warrants to purchase 571,000 shares of common stock which are held by the lender. Page 6 of 14 pages Note 4: 12% Subordinated Notes As of September 30, 2000, the Company has outstanding $6,144,000 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 $5,244,000 are due July 3, 2001. The carrying value of such combined subordinated notes as of September 30, 2000 is $6,131,000, which is net of a related issuance discount of $13,000. 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.
Nine Months Ended Three Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------ ------------------ Revenue: Line $ 14,801,000 $ 14,633,000 $ 4,289,000 $ 5,472,000 OSS 19,977,000 7,690,000 4,672,000 1,424,000 Signal 5,668,000 4,544,000 2,080,000 1,435,000 ------------ ------------ ------------ ------------ $ 40,446,000 $ 26,867,000 $ 11,041,000 $ 8,331,000 ============ ============ ============ ============ Segment profit (loss): Line $ 2,382,000 $ 3,218,000 $ 477,000 $ 1,011,000 OSS (2,697,000) (7,176,000) (1,970,000) (3,186,000) Signal 1,146,000 1,071,000 504,000 262,000 ------------ ------------ ------------ ------------ $ 831,000 $ (2,887,000) $ (989,000) $ (1.913,000) ============ ============ ============ ============
Page 7 of 14 pages The following table reconciles segment totals to consolidated totals:
Nine Months Ended Three Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------ ------------------ Revenue: Total revenue for reportable segments $ 40,446,000 $ 26,867,000 $ 11,041,000 $ 8,331,000 Other Revenue 505,000 165,000 154,000 66,000 ------------ ------------ ------------ ------------ Consolidated total revenue $ 40,951,000 $ 27,032,000 $ 11,195,000 $ 8,397,000 ============ ============ ============ ============ Operating loss: Total segment profit (loss) for reportable segments $ 831,000 $ (2,887,000) $ (989,000) $ (1,913,000) Corporate and unallocated (3,500,000) (3,586,000) (901,000) (1,240,000) ------------ ------------ ------------ ------------ Consolidated total operating loss $ (2,669,000) $ (6,473,000) $ (1,890,000) $ (3,153,000) ============ ============ ============ ============
Note 6: Equity On August 8, 2000, the board of directors approved, with the consent of the directors, the issuance to the non-management directors an aggregate of 125,335 shares of common stock in lieu of payment of director's fees from January 1, 2000 through January 1, 2001. The common stock was valued at $1.31 per share, which was the market price of the common stock on such approval date. At September 30, 2000, no shares had been issued. Note 7: Legal Proceedings On or about July 7, 2000, Porta entered into two related agreements with a vendor concerning updating and maintaining certain Porta software and resolving certain prior disputes with that vendor. Thereafter, new disputes arose between Porta and that vendor concerning that vendor's and Porta's performance under those agreements. In August 2000, Porta suspended making payments to that vendor pending resolution of those disputes. The vendor then commenced mediation and arbitration proceedings against Porta seeking damages alleged to be in excess of $6,750,000. Porta strongly disputes the allegations of the vendor and if the matter cannot be resolved through mediation, Porta intends to defend vigorously the claims asserted by the vendor and to assert its own counterclaims against the vendor concerning the vendor's failure to perform under the parties' agreements. In September 2000, the Company settled the previously reported action for commissions allegedly owed to a former sales representative. The settlement did not have a material effect on the Company's financial statements. Page 8 of 14 pages 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:
Nine Months Ended Three Months Ended September 30, September 30, 2000 1999 2000 1999 ---------- ---------- ---------- --------- Sales 100% 100% 100% 100% Cost of sales 70% 73% 75% 78% Gross profit 30% 27% 25% 22% Selling, general and administrative expenses 25% 34% 29% 38% Research and development expenses 11% 17% 13% 22% Operating loss (6%) (24%) (17%) (38%) Interest expense - net (7%) (9%) (10%) (10%) Other income (1%) 1% (1%) 0% Minority interest 0% 0% 0% 0% Income taxes 0% 0% 0% 0% Net loss (14%) (32%) (28%) (48%)
The Company's sales by product line for the periods ended September 30, 2000 and 1999 are as follows: Nine Months Ended September 30, 2000 1999 ---- ---- (Dollars in thousands) Line connection/protection equipment ("Line") $14,801 36% $14,633 54% Operations Support Systems ("OSS") 19,977 49% 7,690 28% Signal Processing ("Signal") 5,668 14% 4,544 17% Other 505 1% 165 1% --------------- ---------------- $40,951 100% $27,032 100% =============== ================ Three Months Ended September 30, 2000 1999 ---- ---- (Dollars in thousands) Line $ 4,289 38% $ 5,472 65% OSS 4,672 42% 1,424 17% Signal 2,080 19% 1,435 17% Other 154 1% 66 1% --------------- ---------------- $11,195 100% $ 8,397 100% =============== ================ Page 9 of 14 pages Results of Operations The Company's sales for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 increased $13,919,000 (51%) from $27,032,000 in 1999 to $40,951,000 in 2000. Sales for the quarter ended September 30, 2000 of $11,195,000 increased by $2,798,000 (33%) compared to $8,397,000 for the quarter ended September 30, 1999. The increased sales for the three and nine months are due primarily from higher sales by the OSS and Signal divisions. The line sales for the nine months ended September 30, 2000 compared to September 30, 1999 increased from $14,633,000 to $14,801,000 or $168,000 (1%). Line sales for the three months ended September 30, decreased by $1,183,000 (22%) from $5,472,000 in 1999 to $4,289,000 in 2000. The increase in sales for the nine 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 completed during the first quarter of 2000, which was partially offset by reduced sales to other customers, primarily to customers in the United Kingdom. The decrease for the three months ended September 30, 2000 reflects reduced sales primarily to customers in the United Kingdom. OSS sales for the nine months ended September 30, 2000 were $19,977,000 compared to the nine months ended September 30, 1999 of $7,690,000, an increase of $12,287,000 (160%). Sales for the three months ended September 30, 2000 were $4,672,000 compared to sales for the three months ended September 30, 1999 of $1,424,000, an increase of $3,248,000 (228%). The increase in sales during the nine months ended September 30, 2000 resulted from sales of approximately $11,000,000 to Fujitsu Telecommunications Europe Limited under a $12,000,000 supply contract which was completed during the first half of 2000, and approximately $2,800,000 to Philippines Long Distance Telephone Co. The approximate $2,800,000 to Philippines Long Distance Telephone Co. also positively impacted the three months ended September 30, 2000. Signal sales for the nine months ended September 30, 2000 were $5,668,000 compared to the nine months ended September 30, 1999 of $4,544,000, an increase of $1,124,000 (25%). Signal processing sales for the three months ended September 30, 2000 were $2,080,000, compared to the three months ended September 30, 1999 of $1,435,000, an increase of $645,000 (45%). The increase in sales for the nine and three-month periods primarily reflects an improvement in timely deliveries to meet customers' orders. Gross margin for the nine months ended September 30, 2000 was 30% compared to 27% for the nine months ended September 30, 1999. This improvement in gross margin is attributable to the increased level of sales by the OSS division, which enabled the Company to absorb more efficiently certain fixed expenses associated with the OSS contracts. Gross margin for the quarter ended September 30, 2000 was 25% compared to 22% for the quarter ended September 30, 1999. This improvement in gross margin is attributable to the Company's ability to absorb more efficiently certain fixed expenses associated with the OSS contracts which was slightly offset by both changes in the line product mix and increased costs to support OSS customer maintenance contracts. Page 10 of 14 pages Results of Operations (continued) Selling, general and administrative expenses increased by $1,051,000 (11%) from $9,226,000 to $10,277,000 for the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999. Selling, general and administrative expenses increased by $76,000 (2%) from $3,203,000 in the quarter ended September 30, 1999 to $3,279,000 in the comparable quarter of 2000. The increase from 1999 to 2000 for the nine 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. Research and development expenses decreased by $45,000 (1%) for the nine months ended September 30, 2000 and by $365,000 (20%) for the three months ended September 30, 2000 from the comparable periods in 1999, respectively. The decrease for the three months reflects the completion of certain efforts to develop new products primarily related to the OSS business. As a result of the above, the Company had an operating loss of $2,669,000 for the nine months ended September 30, in 2000 compared to an operating loss of $6,473,000 in the comparable period of 1999. The Company had an operating loss of $1,890,000 for the quarter ended September 30, 2000 as compared to an operating loss of $3,153,000 for the quarter ended September 30, 1999. Interest expense for the nine months ended September 30, 2000 compared to September 30, 1999 increased by $479,000 (18%) from $2,608,000 in 1999 to $3,087,000 in 2000. Interest expense for the three-month period ending September 30, 2000 compared to the same three months of 1999, increased by $234,000 (26%) from $888,000 in 1999 to $1,122,000 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 $5,737,000, $0.59 per share (basic and diluted) for the nine months ended September 30, 2000, compared with a net loss of $8,683,000, $0.92 per share (basic and diluted), for the nine months ended September 30, 1999. The net loss for the three months ended September 30, 2000 was $3,156,000, $0.32 per share (basic and diluted), compared with a net loss for the three months ended September 30, 1999 of $3,999,000, $0.42 per share (basic and diluted). Liquidity and Capital Resources At September 30, 2000 the Company had cash and cash equivalents of $2,163,000 compared with $3,245,000 at December 31, 1999. The Company had a working capital deficit at September 30, 2000 of $21,189,000, compared to working capital of $6,135,000 at December 31, 1999. The decline in working capital was primarily a result of (i) the classification of senior debt to a current liability and (ii) the classification of Subordinated Notes from long-term to current liabilities. During the first nine months of 2000, the net cash used by the Company in operations was $3,605,000. The principal source of cash during the nine months was a net increase of $3,628,000 in loans from the senior lender. Page 11 of 14 pages Liquidity and Capital Resources (continued) As of September 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 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. The Company's outstanding borrowings from the senior lender at September 30, 2000, were $21,146,000 of which $310,000 was a non-interest bearing note, $10,160,000 was outstanding against the revolving line of credit, and $10,676,000 was a term loan. As of September 30, 2000, the Company's eligible assets were not sufficient to support the combined revolving advance and standby letters of credit guarantee. As a result, the outstanding advances from the senior lender exceeded the maximum allowable under the borrowing base formula by $1,400,000 as of November 3, 2000. The Company has obtained a waiver of such non-compliance from its senior lender pursuant to the interest coverage ratio and the overadvance under the line. In connection with the waiver given with respect to the overadvance, the lender agreed that the Company may have an overadvance of not more than $1,800,000 or such higher amount that the lender may allow in its sole and absolute discretion through December 31, 2000. The Company cannot give any assurance that it will not require an overadvance in excess of $1,800,000 or that the overadvance will not be required subsequent to December 31, 2000. The Company does not have any commitments for alternative financing sources, and its inability to have the required financing could severely impair its business and operations. As of September 30, 2000, the Company had outstanding $6,144,000 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 notes in the principal amount of $5,244,000 are due July 3, 2001. The carrying value of such combined subordinated notes as of June30, 2000 is $6,131,000, which is net of a related issuance discount. The Company's cash availability during the remainder of 2000 and thereafter may be affected by a number of factors. At September 30, 2000, the Company had no cash available under its credit facility and had borrowed more than the amount available to the Company under its borrowing base. 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, $2,000,000 of senior debt and $900,000 of subordinated debt will become due in January 2001 and $24,390,000 of senior and subordinated debt will become due in July 2001. Under the default provisions of the loan agreement with the senior lender, a default on the subordinated notes can trigger a default in the Company's obligations to the senior lender. 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 these financial obligations. Although the Company has been exploring alternatives, including the possible sale of one of its divisions, the Company has no formal or informal agreement or understanding as to an extension of its existing loans or any alternative financing source, 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. The Company has been engaged in negotiations with respect to the possible sale of one of its divisions. However, the Company has not signed any agreement with respect to such a sale, and it cannot give any assurance that its negotiations will result in the sale of such division. Page 12 of 14 pages 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. PART II- OTHER INFORMATION Item 1. Legal Proceedings The Company is the respondent in mediation and arbitration proceedings commenced by a vendor, BMS Corporation, in New York City with the American Arbitration Association. The claims asserted in those proceedings arose from two related agreements which the Company entered into with BMS on or about July 7, 2000, requiring BMS to update and maintain certain of the Company's software and resolving certain prior disputes with BMS. After entering into those agreements, new disputes arose between the Company and BMS concerning BMS' and the Company's performance under those agreements. In August 2000, the Company suspended making payments to BMS pending resolution of those disputes. BMS then commenced mediation and arbitration proceedings against the Company seeking damages alleged to be in excess of $6,750,000. The Company strongly disputes the allegations of BMS and if the matter cannot be resolved through mediation, the Company intends to defend vigorously the claims asserted by BMS and to assert its own counterclaims against BMS concerning BMS' failure to perform under the parties' agreements. In September 2000, the Company settled the previously reported action for commissions allegedly owed to a former sales representative. The settlement did not have a material effect on the Company's financial statements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None Page 13 of 14 pages 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 November 9, 2000 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board Dated November 9, 2000 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Vice President and Chief Financial Officer Page 14 of 14 pages EX-27 2 0002.txt FDS --
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 2,163 0 9,508 0 8,066 21,697 4,612 0 39,023 42,886 0 0 0 98 (7,312) 39,023 40,951 40,951 28,813 14,807 0 0 3,087 (5,831) 94 (5,737) 0 0 0 (5,737) (0.59) (0.59)
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