-----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, NbZZZlrTf1nUeNQUdb8KZIF8tgSXl4FRbXYRPkjNldpMyFpruJQ+tIED+umtvaAE DbJv5ToR50RyrE63dd/5Vw== 0000891092-03-002122.txt : 20030813 0000891092-03-002122.hdr.sgml : 20030813 20030813134426 ACCESSION NUMBER: 0000891092-03-002122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08460 FILM NUMBER: 03840282 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 e15471_10q.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, 2003 [ ] 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.) 6851 Jericho Turnpike, Suite 170, Syosset, New York --------------------------------------------------- (Address of principal executive offices) 11791 ---------- (Zip Code) 516-364-9300 ------------------------------------------------- (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark whether the registrant is an accelerated filer (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) 9,980,423 shares as of July 25, 2003 PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 2003 2002 ----------- ------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 337 $ 779 Accounts receivable - trade, less allowance for doubtful accounts 3,611 4,654 Inventories 2,934 3,363 Prepaid expenses and other current assets 389 329 --------- --------- Total current assets 7,271 9,125 Property, plant and equipment, net 1,626 1,802 Goodwill, net 2,961 2,961 Other assets 117 340 --------- --------- Total assets $ 11,975 $ 14,228 ========= ========= Liabilities and Stockholders' Deficit Current liabilities: Senior debt $ 25,222 $ 25,070 Subordinated notes 6,144 6,144 6% convertible subordinated debentures 385 385 Accounts payable 5,713 5,241 Accrued expenses 2,354 2,640 Accrued interest payable 3,101 2,639 Accrued commissions 287 566 Accrued deferred compensation 72 329 Income taxes payable 20 302 Short-term loan 6 8 --------- --------- Total current liabilities 43,304 43,324 --------- --------- Deferred compensation 1,123 839 --------- --------- Total long-term liabilities 1,123 839 --------- --------- Total liabilities 44,427 44,163 --------- --------- Stockholders' deficit: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 20,000,000 shares, issued 10,003,224 and 10,003,224 shares at June 30, 2003 and December 31, 2002 100 100 Additional paid-in capital 76,059 76,059 Accumulated deficit (102,490) (100,023) Accumulated other comprehensive loss: Foreign currency translation adjustment (4,183) (4,133) --------- --------- (30,514) (27,997) Treasury stock, at cost (1,938) (1,938) --------- --------- Total stockholders' deficit (32,452) (29,935) --------- --------- Total liabilities and stockholders' deficit $ 11,975 $ 14,228 ========= =========
See accompanying notes to consolidated financial statements. Page 2 of 15 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, 2003 2002 ------- -------- Sales $ 8,338 $ 11,236 Cost of sales 6,278 8,241 ------- -------- Gross profit 2,060 2,995 ------- -------- Selling, general and administrative expenses 3,141 3,628 Research and development expenses 1,016 1,387 Impairment loss -- 800 ------- -------- Total expenses 4,157 5,815 ------- -------- Operating loss (2,097) (2,820) Interest expense (627) (1,178) Interest income 1 3 Gain on sale of investment in joint venture -- 450 Other income (expense), net (26) 30 ------- -------- Loss before income taxes (2,749) (3,515) Income tax (expense) benefit 282 (9) ------- -------- Net loss $(2,467) $ (3,524) ======= ======== Other comprehensive loss: Foreign currency translation adjustments (50) (5) ------- -------- Comprehensive loss $ 2,517) $ (3,529) ======= ======== Per share data: Basic per share amounts: Net loss per share of common stock $ (0.25) $ (0.35) ======= ======== Weighted average shares outstanding 9,972 9,986 ======= ======== Diluted per share amounts: Net loss per share of common stock $ (0.25) $ (0.35) ======= ======== Weighted average shares outstanding 9,972 9,986 ======= ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 15 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, 2003 2002 ------- ------- Sales $ 3,964 $ 6,492 Cost of sales 2,897 4,375 ------- ------- Gross profit 1,067 2,117 ------- ------- Selling, general and administrative expenses 1,586 1,761 Research and development expenses 444 627 Impairment loss -- 800 ------- ------- Total expenses 2,030 3,188 ------- ------- Operating loss (963) (1,071) Interest expense (320) (304) Interest income -- 1 Gain on sale of investment in joint venture -- 450 Other income (expense), net (26) 33 ------- ------- Loss before income taxes (1,309) (891) Income tax benefit 268 4 ------- ------- Net loss $(1,041) $ (887) ======= ======= Other comprehensive loss: Foreign currency translation adjustments 30 (26) ------- ------- Comprehensive loss $(1,011) $ (913) ======= ======= Per share data: Basic per share amounts: Net loss per share of common stock $ (0.10) $ (0.09) ======= ======= Weighted average shares outstanding 9,972 9,999 ======= ======= Diluted per share amounts: Net loss per share of common stock $ (0.10) $ (0.09) ======= ======= Weighted average shares outstanding 9,972 9,999 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 4 of 15 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands) Six Months Ended June 30, June 30, 2003 2002 ------- ------- Cash flows from operating activities: Net loss $(2,467) $(3,524) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 259 342 Amortization of debt discounts -- 3 Impairment loss -- 800 Gain on sale of investment in joint venture -- (450) Changes in operating assets and liabilities: Accounts receivable 1,043 (2,959) Inventories 429 1,914 Prepaid expenses (60) 343 Other assets 223 133 Accounts payable, accrued expenses and other liabilities 114 (193) ------- ------- Net cash used in operating activities (459) (3,591) ------- ------- Cash flows from investing activities: Capital expenditures, net (74) (19) ------- ------- Net cash used in investing activities (74) (19) ------- ------- Cash flows from financing activities: Proceeds from senior debt 152 2,826 Proceeds from exercised options and warrants -- 4 Repayments of short term loans (2) (2) ------- ------- Net cash provided by financing activities 150 2,828 ------- ------- Effect of exchange rate changes on cash (59) (34) ------- ------- Decrease in cash and cash equivalents (442) (816) Cash and equivalents - beginning of the year 779 1,204 ------- ------- Cash and equivalents - end of the period $ 337 $ 388 ======= ======= Supplemental cash flow disclosure: Cash paid for interest expense $ 3 $ 6 ======= ======= Cash paid for income taxes $ 6 $ 27 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 5 of 15 PORTA SYSTEMS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's Form 10-K annual report for the year ended December 31, 2002. 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 these financial statements. The audit opinion included in the December 31, 2002 Form 10-K annual report contained an explanatory paragraph regarding the Company's ability to continue as a going concern. Results for the second quarter or the first six months of 2003 are not necessarily indicative of results for the year. See Note 3. 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: June 30, 2003 December 31, 2002 ------------- ----------------- (in thousands) Parts and components $1,483 $1,767 Work-in-process 343 208 Finished goods 1,108 1,388 ------ ------ $2,934 $3,363 ====== ====== Note 3: Senior and Subordinated Debt On June 30, 2003, the Company's debt to its senior lender was $25,222,000. Under a prior amendment, the loan became due and payable on December 31, 2002. In May 2003, the senior lender granted an extension to August 29, 2003. As a result, the entire balance of the Company's obligations to its senior lender becomes due and payable on that date. The Company does not have the ability to pay the senior debt or the subordinated debt described in the following paragraph. If the maturity of the senior debt is not extended beyond August 29, 2003, and if the senior lender demands payment of all or a significant portion of the loan when due, the Company will not be able to continue in business and may seek protection under the Bankruptcy Code. As of June 30, 2003, the Company's short-term debt also included $6,144,000 of subordinated debt that became due on July 3, 2001 and $385,000 of 6% debentures which became due on July 2, 2002. Accrued interest on the subordinated notes was approximately $2,743,000, which represents interest from July 2000 through June 30, 2003, and accrued interest on the 6% debentures was $58,000. The Company's senior lender has precluded it from paying any principal or interest on the subordinated debt. Page 6 of 15 Note 4: Accounting for Stock Based Compensation The Company applies the intrinsic value method as outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-based Compensation," requires the Company to provide pro forma information regarding net loss and net loss per share of common stock as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. Since there was no stock-based compensation in the six months ended June 30, 2003 and 2002, pro forma loss is the same as the reported net loss. 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 provide 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, 2002 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, 2003 June 30, 2002 June 30, 2003 June 30, 2002 -------------- ------------- ------------- ------------- Sales: Line $ 4,232,000 $ 4,232,000 $2,071,000 $2,762,000 OSS 1,590,000 4,236,000 677,000 2,191,000 Signal 2,071,000 2,412,000 1,006,000 1,336,000 ----------- ----------- ---------- ---------- $ 7,893,000 $10,880,000 $3,754,000 $6,289,000 =========== =========== ========== ========== Segment profit (loss): Line $ (15,000) $ (706,000) $ (18,000) $ (46,000) OSS (1,333,000) (48,000) (480,000) 231,000 Signal 559,000 444,000 210,000 337,000 ----------- ----------- ---------- ---------- $ (789,000) $ (310,000) $ (288,000) $ 522,000 =========== =========== ========== ==========
Page 7 of 15 The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 ------------- ------------- ------------- ------------- Sales: Total revenue for reportable segments $ 7,893,000 $ 10,880,000 $ 3,754,000 $ 6,289,000 Other revenue 445,000 356,000 210,000 203,000 ----------- ------------ ----------- ----------- Consolidated total revenue $ 8,338,000 $ 11,236,000 $ 3,964,000 $ 6,492,000 =========== ============ =========== =========== Operating loss: Total segment profit (loss) for reportable segments $ (789,000) $ (310,000) $ (288,000) $ 522,000 Impairment loss -- (800,000) -- (800,000) Corporate and unallocated (1,308,000) (1,710,000) (675,000) (793,000) ----------- ----------- ----------- ----------- Consolidated total operating loss $(2,097,000) $(2,820,000) $ (963,000) $(1,071,000) =========== =========== ========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Reference is made to the information provided under "Critical Accounting Policies and Estimates" in our Form 10-K for the year ended December 31, 2002. Our business has continued to be impaired by our financial position. We are not able to ship a portion of backlog in a timely manner, as several of our key suppliers are reluctant to provide us with credit. In addition, there have been periods during the three and six months ended June 30, 2003 that we did not have the funds either to prepay suppliers or to make purchases on a COD basis, and if we are unable to increase our sales, it may become increasingly difficult for us to make purchases necessary for filling orders. Our senior lender is not providing us with any additional funds, and our obligations to the senior lender, which are described below and in Note 3, become due on August 29, 2003. Our senior lender has not required us to pay interest on approximately $23,000,000 of senior debt since March 1, 2002. Accordingly, the financial statements do not reflect any interest charges on that amount which would have been payable but for the senior lender's waiver of interest. We have been seeking to raise funds from the sale of one or more of our divisions, and we are currently engaged in negotiations with respect to the potential sale of certain overseas assets of one of our divisions. We expect that, if such a sale is completed, only a nominal portion of the net proceeds from such a sale will be available to us for our operations, and that a significant portion will be paid to our senior lender. However, we anticipate that, if we are successful in both consummating the sale of these assets and eliminating the ongoing expenses associated with the operations being sold, we will be able to reduce the losses which have been generated by the division. In the past, we have engaged in negotiations with respect to sales of our divisions, and none of such negotiations resulted in an agreement, and we cannot give any assurance that the current negotiations will result in an agreement. Page 8 of 15 Even if we are successful in selling the assets we are negotiating to sell and eliminating the ongoing expenses associated with those assets, we may still be unable to operate profitably, and it may be necessary for us to seek protection under the Bankruptcy Code. 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, ---------------- ------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of sales 75% 73% 73% 67% Gross profit 25% 27% 27% 33% Selling, general and administrative expenses 38% 32% 40% 27% Research and development expenses 12% 12% 11% 10% Impairment loss 0% 7% 0% 12% Operating loss (25%) (25%) (24%) (16%) Interest expense - net (8%) (10%) (8%) (5%) Gain on sale of joint venture 0% 4% 0% 7% Other 3% 0% 6% 0% Net loss (30%) (31%) (26%) (14%) The Company's sales by product line for the periods ended June 30, 2003 and 2002 are as follows: Six Months Ended June 30, ------------------------- $(000) 2003 2002 ---- ---- Line connection/protection equipment $ 4,232 51% $ 4,232 38% OSS equipment 1,590 19% 4,236 38% Signal Processing 2,071 25% 2,412 21% Other 445 5% 356 3% -------------- -------------- $ 8,338 100% $ 11,236 100% ============== ============== Three Months Ended June 30, $(000) 2003 2002 ---- ---- Line connection/protection equipment $ 2,071 52% $ 2,762 42% OSS equipment 677 17% 2,191 34% Signal Processing 1,006 26% 1,336 21% Other 210 5% 203 3% -------------- -------------- $ 3,964 100% $ 6,492 100% ============== ============== Page 9 of 15 Results of Operations Our sales for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 decreased by $2,898,000 (26%) from $11,236,000 in 2002 to $8,338,000 in 2003. Sales for the quarter ended June 30, 2003 of $3,964,000 decreased by $2,528,000 (39%) compared to $6,492,000 for the quarter ended June 30, 2002. The decrease in sales for the six months is primarily attributed to a 62% decline in sales from our OSS business. The decrease in sales for the three month period reflects a 69% decline in sales from our OSS business unit as well as lower percentage declines from our Line and Signal business units. Line equipment sales for the six months ended June 30, were unchanged at $4,232,000 for each period. Sales for the three months ended June 30 decreased by $691,000 (25%) from $2,762,000 in 2002 to $2,071,000 in 2003. The decrease for the three months ended June 30, 2003 primarily reflects reduced sales volume to customers in the United States and the United Kingdom and shortages of materials resulting from the refusal of several of our suppliers to ship us on credit due to our financial condition. OSS sales for the six months ended June 30, 2003 were $1,590,000 compared to $4,236,000 in the same period of 2002, a decrease of $2,646,000 (62%). OSS sales for the three months ended June 30, 2003 were $677,000 compared to $2,191,000 in the same period of 2002, a decrease of $1,514,000 (69%). The decrease in sales for the six and three months resulted from the inability to secure new orders attributable to the slowdown in the telecommunications market and the effects of our financial condition, and from lower levels of contract completion compared to the similar period of the prior year reflecting a lower backlog at December 31, 2002 from the prior year. Signal sales for the six months ended June 30, 2003 were $2,071,000 compared to $2,412,000 in the same period of 2002, a decrease of $341,000 (14%). Sales for the three months ended June 30, 2003 compared to 2002, decreased $330,000 (25%) from $1,336,000 to $1,006,000. The decrease in sales for the six and three months was primarily due to a sluggish new order rate and shortages of materials resulting from the refusal of several of our suppliers to ship us on credit due to our financial condition. Gross margin for the six months ended June 30, 2003 was 25% compared to 27% for the six months ended June 30, 2002. Gross margin for the quarter ended June 30, 2003 was 27% compared to 33% for the quarter ended June 30, 2002. The decline in the gross margin reflects our inability to absorb fixed overhead expenses on our reduced sales base for both the six and three months periods. Although we have implemented cost reductions, we are unable to effect further reductions in our fixed overhead without compromising our ability to fill orders. Selling, general and administrative expenses decreased by $487,000 (13%) from $3,628,000 to $3,141,000 for the six months ended June 30, 2003 compared to 2002. For the quarter ended June 30, 2003 selling general and administrative expenses decreased by $175,000 (10%) from 2002. This decrease relates primarily to our ongoing efforts to reduce salaries, benefits and consulting services, and reduced commissions levels reflecting our current level of business. Research and development expenses decreased by $371,000 (27%) and by $183,000 (29%) for the six and three months ended June 30, 2003 from the comparable periods in 2002. These decreases resulted from our efforts to reduce expenses primarily related to the OSS business. Our failure to fund research and development could adversely affect our capability to offer products based on developing Page 10 of 15 technologies, which could affect both our efforts to sell product in future years and our attractiveness to potential buyers. At June 30, 2002, we determined that goodwill related to our Signal division was impaired based upon attaining a fair market value estimate during discussions with respect to the proposed sale of the Signal division. Based on those discussions, we estimated that the impairment loss was approximately $800,000. This amount was charged to operations in the quarter ended June 30, 2002 reducing the carrying value of the goodwill to $2,961,000. Furthermore, we cannot give assurance that further write-downs will not be necessary. The goodwill for our Line and OSS divisions had previously been written off. As a result of the above, for the six months ended June 30, 2003, we had an operating loss of $2,097,000 versus an operating loss of $2,820,000 for the comparable period of 2002. We had an operating loss of $963,000 for the quarter ended June 30, 2003 as compared to an operating loss of $1,071,000 for the quarter ended June 30, 2002. Interest expense for the six months ended June 30, 2003 compared to June 30, 2002 decreased by $552,000 (47%) from $1,178,000 in 2002 to $627,000 in 2003. Interest expense for the three-month period ending June 30, 2003 compared to the same three months of 2002, increased by $16,000 (5%) from $304,000 in 2002 to $320,000 in 2003. This decrease is attributable to our amended agreement with our senior lender, which provides that the old term loan, in the principal amount of approximately $23,000,000, bears no interest commencing March 1, 2002 until such time as the lender, in its sole discretion, resumes interest charges. The senior lender has not resumed interest charges. The tax benefit for the three and six months ended June 30, 2003 resulted from the settlement of an outstanding tax obligation of $274,000 of one of our subsidiaries for $30,000. As a result of the foregoing, we incurred a net loss of $2,467,000, $0.25 per share (basic and diluted), for the six months ended June 30, 2003, compared with a net loss of $3,524,000, $0.35 per share (basic and diluted), for the six months ended June 30, 2002. The net loss for the three months ended June 30, 2003 was $1,041,000, $0.10 per share (basic and diluted), compared with a net loss for the three months ended June 30, 2002 of $887,000, $0.09 per share (basic and diluted). Liquidity and Capital Resources At June 30, 2003, we had cash and cash equivalents of $337,000 compared with $779,000 at December 31, 2002. Our working capital deficit at June 30, 2003 was $36,033,000 compared to a working capital deficit of $34,199,000 at December 31, 2002. Our outstanding senior and subordinated debt with the reduced level of cash on hand and inventory, and the increased level of accounts payable, resulted in the increase in the working capital deficiency. During the six months of 2003, the net cash used by us in operations was $459,000 and we are continuing to operate with a negative cash flow from operations. As of June 30, 2003, our debt includes $25,222,000 of senior debt which matures on August 29, 2003, $6,144,000 of subordinated debt that became due on July 3, 2001, and $385,000 of 6% debentures which became due on July 2, 2002. The maturity date of the senior debt reflects an extension of the maturity of our senior debt to August 29, 2003. Interest on the subordinated notes was approximately $2,743,000, which represents interest from July 2000 through June 30, 2003, and interest on the 6% Page 11 of 15 debentures was $58,000. We do not have sufficient resources to pay either the senior lender or the subordinated lenders, we are unable to generate such cash from our operations, and our senior lender is not making any further advances to us and has precluded us from making any payments on the subordinated debt. We also do not have any prospects of obtaining an alternate senior lender to replace our present lender. Our financial condition and stock price effectively preclude us from raising funds through the issuance of debt or equity securities, we have no other source of funds other than operations, and our operations are generating a negative cash flow. We have in the past sought to raise funds through the sale of one or more of our divisions, but our efforts to date have been unsuccessful. Even if we were able to sell all of our divisions, it is unlikely that we would generate sufficient cash to pay our senior lender in full. If the senior lender does not extend the maturity date of our obligations, which mature on August 29, 2003, and demands payment of all or a significant portion of our obligations to the senior lender, we will not be able to continue in business and we may seek protection under the Bankruptcy Code. We cannot assure you that our senior lender will not demand payment of all or a significant portion of our obligations. Furthermore, even if our senior lender grants us additional extensions, it may nonetheless be necessary for us to seek protection under the Bankruptcy Code. As a result of our continuing financial difficulties: o we are having and we may continue to have difficulty performing our obligations under our contracts, which could result in the cancellation of contracts or the loss of future business and penalties for non-performance; o we are having and we may continue to have difficulty in obtaining new business from either existing customers or new customers; and o a number of our suppliers have refused to ship to us until we pay all or a portion of the outstanding balance due to them, and other suppliers ship to us only on a prepaid or COD basis: and o a number of creditors have engaged attorneys or collection agencies, or commenced legal actions against us. We are seeking to address our need for liquidity by exploring alternatives, including the possible sale of one or more of our divisions. We are currently engaged in negotiations with respect to the sale of overseas assets of one of our divisions. If we complete the sale, we anticipate that a substantial portion of the net proceeds will be paid to our senior lender and we will not receive any significant amount of working capital from such sale. Even if the sale is completed, we may still be unable to operate profitably and it may be necessary for us to seek protection under the Bankruptcy Code. Page 12 of 15 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 the Company's 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, 2002 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. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Although we conduct operations outside of the United States, most of our contracts and sales are dollar denominated. A portion of the revenue from our United Kingdom operations and the majority of our United Kingdom expenses are denominated in Sterling. Any Sterling-denominated receipts are promptly converted into United States dollars. We do not engage in any hedging or other currency transactions. For the six months ended June 30, 2003 and 2002, the currency translation adjustment was not significant in relation to our total revenue. Item 4. Controls and Procedures Our chief executive officer and chief financial officer have supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures as of a date within 90 days of the date of this report, and based on their evaluations, they believe that our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. As a result of the evaluation, there were no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities. See Note 3 of Notes to Unaudited Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for information concerning defaults on our subordinated debt. Page 13 of 15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On May 15, 2003, the Company reported its results of operations for the quarter ended March 31, 2003 under Item 9. Page 14 of 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTA SYSTEMS CORP. Dated August 13, 2003 By /s/William V. Carney ---------------------------- William V. Carney Chairman of the Board and Chief Executive Officer Dated August 13, 2003 By /s/Edward B. Kornfeld ---------------------------- Edward B. Kornfeld Senior Vice President and Chief Financial Officer Page 15 of 15 EX-31.1 3 e15471ex31_1.txt CERTIFICATION OF CHIEF EXECUTIVE CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS Exhibit 31.1 William V. Carney does hereby certify that he is the duly elected and incumbent chief executive officer of Porta Systems Corp (the "issuer") and he does hereby certify, with respect to the issuer's Form 10-Q for the quarter ended June 30, 2003 (the "report") as follows: 1. He has reviewed the report; 2. Based on his knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on his knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report; 4. He and the other certifying officer are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, for the issuer and have: i. Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic reports are being prepared; ii. Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report (the "Evaluation Date"); and iii. Presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date 5. He and the other certifying officer have disclosed to the issuer's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): i. All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and ii. Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and 6. He and the other certifying officer have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/ William V. Carney ---------------------- William V. Carney Chief Executive Officer EX-31.2 4 e15471ex31_2.txt CERTIFICATION OF CHIEF EXECUTIVE Exhibit 31.2 Edward B. Kornfeld does hereby certify that he is the duly elected and incumbent chief financial officer of Porta Systems Corp. (the "issuer") and he does hereby certify, with respect to the issuer's Form 10-Q for the quarter ended June 30, 2003 (the "report") as follows: 1. He has reviewed the report; 2. Based on his knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on his knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report; 4. He and the other certifying officer are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended, for the issuer and have: i. Designed such disclosure controls and procedures to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the periodic reports are being prepared; ii. Evaluated the effectiveness of the issuer's disclosure controls and procedures as of a date within 90 days prior to the filing date of the report (the "Evaluation Date"); and iii. Presented in the report their conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation Date 5. He and the other certifying officer have disclosed to the issuer's auditors and to the audit committee of the board of directors (or persons fulfilling the equivalent function): i. All significant deficiencies in the design or operation of internal controls which could adversely affect the issuer's ability to record, process, summarize and report financial data and have identified for the issuer's auditors any material weaknesses in internal controls; and ii. Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal controls; and 6. He and the other certifying officer have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By /s/Edward B. Kornfeld ---------------------------- Edward B. Kornfeld Chief Financial Officer EX-32.1 5 e15471ex32_1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER The undersigned chief executive officer of the Registrant does hereby certify that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, as amended, and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Registrant at the dates and for the periods shown in such report. Dated August 13, 2003 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board and Chief Executive Officer EX-32.2 6 e15471ex32_2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER The undersigned chief financial officer of the Registrant does hereby certify that this Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, as amended, and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the Registrant at the dates and for the periods shown in such report. Dated August 13, 2003 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----