-----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, AB5JqwTKXxup5d6I0BkxFlm+czpWzGucDz5qPf71BCJZIrIgjJKsVDfQxuX4CFDr rgE9NZlgww2TRHXgfwXpKg== 0000891092-98-000171.txt : 19980514 0000891092-98-000171.hdr.sgml : 19980514 ACCESSION NUMBER: 0000891092-98-000171 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: AMEX 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: SEC FILE NUMBER: 001-08191 FILM NUMBER: 98618433 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 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 March 31, 1998 [ ] 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) 9,298,713 shares as of May 4, 1998 Page 1 of 12 pages PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) March 31, December 31, 1998 1997 -------- -------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 4,812 $ 5,091 Accounts receivable - trade, less allowance for doubtful accounts 17,068 14,891 Inventories 7,930 8,159 Prepaid expenses and other current assets 1,777 1,266 -------- -------- Total current assets 31,587 29,407 -------- -------- Property, plant and equipment, net 4,542 4,667 Deferred computer software, net 428 543 Goodwill, net 11,943 12,059 Other assets 3,585 4,324 -------- -------- Total assets $ 52,085 $ 51,000 ======== ======== Liabilities and Stockholders' Deficit Current liabilities: Convertible subordinated debentures $ 359 $ 1,758 Current portion of long-term debt 1,906 1,900 Accounts payable 4,414 5,796 Accrued expenses 8,279 8,656 Accrued interest payable 404 398 Accrued commissions 2,241 2,444 Accrued deferred compensation 1,106 1,228 Income taxes payable 838 853 Short-term loans 91 120 -------- -------- Total current liabilities 19,638 23,153 -------- -------- Senior debt 10,028 12,978 12% subordinated debentures 5,370 -- Zero coupon senior subordinated convertible notes -- 2,796 Notes payable net of current maturities 3,084 3,084 Income taxes payable 682 649 Other long-term liabilities 503 487 Minority interest 995 1,040 -------- -------- Total long-term liabilities 20,662 21,034 Stockholders' equity: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 20,000,000 shares, issued 9,298,742 and 8,644,304 shares at March 31, 1998 and December 31, 1997, respectively 93 86 Additional paid-in capital 74,970 70,926 Accumulated other comprehensive loss: Foreign currency translation adjustment (3,885) (4,027) Accumulated deficit (57,020) (57,799) -------- -------- 14,158 9,186 Treasury stock, at cost (2,066) (2,066) Receivable for employee stock purchases (307) (307) -------- -------- Total stockholders' equity 11,785 6,813 -------- -------- Total liabilities and stockholders' equity $ 52,085 $ 51,000 ======== ======== See accompanying notes to consolidated financial statements. Page 2 of 12 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended March 31, March 31, 1998 1997 -------- -------- Sales $ 16,292 $ 12,480 Cost of sales 9,605 8,466 -------- -------- Gross profit 6,687 4,014 Selling, general and administrative expenses 3,467 2,587 Research and development expenses 1,330 1,151 -------- -------- Total expenses 4,797 3,738 -------- -------- Operating income 1,890 276 Interest expense (857) (916) Interest income 78 42 Other income (expense), net 509 135 Debt conversion expense (945) -- -------- -------- Income (loss) before income taxes, minority interest and extraordinary gain 675 (463) Income tax expense (16) (14) Minority interest 45 75 Income (loss) before extraordinary gain 704 (402) Extraordinary gain on early extinguishment of debt 76 8 -------- -------- Net income (loss) $ 780 $ (394) ======== ======== Per share data: Basic per share amounts: Income (loss) before extraordinary gain $ 0.08 $ (0.17) Extraordinary gain 0.01 0.00 -------- -------- Net income (loss) per share of common stock $ 0.09 $ (0.17) ======== ======== Weighted average shares outstanding 9,141 2.337 ======== ======== Diluted per share amounts: Income (loss) before extraordinary gain $ 0.07 $ (0.17) Extraordinary gain 0.01 0.00 -------- -------- Net income (loss) per share of common stock $ 0.08 $ (0.17) ======== ======== Weighted average shares outstanding 9,774 2,337 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 12 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, March 31, 1998 1997 -------- -------- Net income (loss) $ 780 $ (394) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 142 (342) -------- -------- Comprehensive income (loss) $ 922 $ (736) ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 4 of 12 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands)
Three Months Ended March 31, March 31, 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) $ 780 $ (394) Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary gain (76) (8) Non-cash debt conversion expense 945 -- Non-cash financing expenses 144 241 Depreciation and amortization 538 802 Amortization of discount on convertible subordinated debentures 2 10 Minority interest 45 (75) Changes in operating assets and liabilities: Accounts receivable (2,177) 4,525 Inventories 229 802 Prepaid expenses (511) 28 Other receivables -- (223) Deferred computer software -- (13) Other assets 559 406 Accounts payable, accrued expenses and other liabilities (1,385) (3,393) -------- -------- Net cash provided by (used in) operating activities (907) 2,708 Cash flows from investing activities: Proceeds from disposal of assets held for sale, net -- 500 Capital expenditures, net (112) (27) -------- -------- Net cash provided by (used in ) investing activities (112) 473 -------- -------- Cash flows from financing activities: Proceeds from senior debt 6 254 Repayments of senior debt (2,950) (369) Proceeds from 12% subordinated debentures 6,000 -- Repayment of Zero coupon senior subordinated convertible notes (2,796) -- Proceeds from (repayments of) short term loans (29) 16 -------- -------- Net cash provided by (used in) financing activities 231 (99) -------- -------- Effect of exchange rate changes on cash 509 (698) -------- -------- Increase (decrease) in cash and cash equivalents (279) 2,384 Cash and equivalents - beginning of the year 5,091 2,584 -------- -------- Cash and equivalents - end of the period $ 4,812 $ 4,968 ======== ======== Supplemental cash flow disclosure: Cash paid for interest expense $ 630 $ 782 ======== ======== Cash paid for income taxes $ 44 $ 34 ======== ========
See accompanying notes to unaudited consolidated financial statements. Page 5 of 12 pages 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 annual report to stockholders for the year ended December 31, 1997. Results for the interim period are not necessarily indicative of results for the year. Note 2: Inventories Inventories are valued at the lower of cost or market. Inventory costs at March 31, 1998 and December 31, 1997 have been computed using a standard cost system. The composition of inventories at the end of the respective periods is as follows: March 31, 1998 December 31,1997 -------------- ---------------- (in thousands) Parts and components $ 5,078 $ 5,349 Work-in-process 1,261 1,079 Finished goods 1,590 1,731 -------------- -------------- $ 7,930 $ 8,159 ============== ============== Note 3: 6% Convertible Subordinated Debentures and Zero Coupon Senior Subordinated Convertible Notes During the quarter ended March 31, 1998, the Company (i) repaid the remaining balance, $2,796,000, of the Zero Coupon Senior Subordinated Notes (the "Notes") from the proceeds of the 12% Subordinated Notes (note 5) (ii) exchanged $250,000 additional principal amount of the 6% Convertible Subordinated Debentures (the "Debentures") for approximately 58,000 shares of common stock and (iii) issued approximately 330,000 shares of common stock in exchange for $1,260,000 principal amount of its Debentures and accrued interest. As a result of these transactions, the Company recorded an extraordinary gain of $76,000 and debt conversion expense of $945,000, net of interest forgiven, in the first quarter of 1998. After giving affect to these transactions, the Company has no Notes outstanding and $385,000 principal amount of Debentures outstanding as described below. As of March 31, 1998, the Company had outstanding $359,000 of the Debentures due July 1, 2002, net of original issue discount amortized to principal over the term of the debt using the effective interest rate method, of $26,000. The face amount of the outstanding Debentures was $385,000 at March 31, 1998. Interest on the Debentures is payable on July 1 of each year. The interest accrued as of March 31, 1998 amounted to $87,000. As of March 31, 1998 the Company is in default under the interest payment provisions of the Debentures. The Company intends to remedy the default during the second quarter of 1998. Page 6 of 12 pages Note 4: Senior Debt On March 31, 1998, the Company's long-term debt consisted of senior debt under its credit facility in the amount of $11,934,000. The credit facility is secured by substantially all of the Company's assets. All obligations except undrawn letters of credit, letter of credit guarantees and the deferred fee notes bear interest at 12%. The Company incurs a fee of 2% on the average balance of undrawn letters of credit and letter of credit guarantees outstanding. In addition, the Company is obligated to pay a monthly facility fee of $50,000 and the loan agreement requires a minimum quarterly amortized payment of $325,000. During the quarter the Company repaid principal of $2,950,000. 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 March 31, 1998, the Company is in compliance with the above covenants. Note 5: 12% Subordinated Notes In January 1998, the Company raised $6,000,000 from the private placement of 60 units at $100,000 per unit. Each unit consisted of (a) the Company's 12 % Subordinated Note due January 3, 2000 (a "12% Note"), in the principal amount of $100,000, and (b) a Series B Common Stock Purchase Warrant (a "Series B Warrant") to purchase 10,000 shares of Common Stock at $3.00 per share through December 31, 2002. In the event that any 12% Note is outstanding one year from the date on which such 12% Note is issued (the "Anniversary Date of the Note"), the Company shall issue to the holder of such 12% Note on the Anniversary Date of the Note a Series C Warrant to purchase 25 shares of Common Stock for each $1,000 principal amount of 12% Notes outstanding on the Anniversary Date of the Note. The Series C Warrant will have an exercise price equal to the average closing prices of the Common Stock on each of the five trading days preceding the Anniversary Date of the Note with respect to which the Series C Warrant is being issued and will expire on December 31, 2003. The proceeds from the sale of the Units was used principally to pay the remaining principal amount of Zero Coupon Notes which had not been converted of $2,796,000 (note 3) and to reduce the Company's senior debt by approximately $2,950,000 (note 4). The balance of such proceeds was added to working capital. The Series B and Series C Warrants were valued at $630,000 and were recorded as part of additional paid in capital. Accordingly, the Company recorded the net 12% Note at a value of $5,370,000. In connection with the private placement of these units, the Company issued to its investment banking firm 120,000 shares of common stock. Page 7 of 12 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: Three Months Ended March 31, ----------------- 1998 1997 ---- ---- Sales 100% 100% Cost of Sales 59% 68% Gross Profit 41% 32% Selling, general and administrative expenses 21% 21% Research and development expenses 8% 9% Operating income 12% 2% Interest expense - net (5%) (7%) Other 3% 1% Debt conversion expense (5%) -- Minority interest 0% 1% Extraordinary item 0% 0% Net income (loss) 5% (3%) The Company's sales by product line for the periods ended March 31, 1998 and 1997 are as follows: Three Months Ended March 31, -------------------------- 1998 1997 ---- ---- Line connection/protection equipment $ 4,769 29% $ 6,795 54% OSS equipment 9,173 57% 3,992 32% Signal Processing 2,325 14% 1,603 13% Other 25 0% 90 1% -------------- -------------- $16,292 100% $12,480 100% ============== ============== Page 8 of 12 pages Results of Operations The Company's sales for the quarter ended March 31, 1998 were $16,292,000 which increased by $3,812,000 (31%) compared to the quarter ended March 31, 1997 of $12,480,000. The overall increase in sales reflects increased sales of OSS and Signal processing products which were partially offset by a decrease in sales of line connection/protection products. Sales of line connection/protection equipment decreased by $2,026,000 (30%) from $6,795,000 to $4,769,000 for the 1997 and 1998 quarters, respectively. This decrease reflects changes in the product mix and reduced unit purchases from the Company's largest customer, British Telecommunications plc ("BT"). During 1997, the Company amended an agreement to supply certain line connection/protection equipment to BT, which included certain new products. The amended agreement resulted in a lower selling price for existing products and prices that resulted in a reduced gross margin for new products. Sales to BT during the 1997 quarter were made pursuant to the old agreement, while the amended agreement applied to sales in the 1998 period. In addition, the number of units purchased by BT declined in the 1998 period from the 1997 period. Orders for line connection/protection equipment from BT remains at the reduced rate. OSS sales increased by $5,181,000 (130%) from $3,992,000 for the quarter ended March 31,1997 to $9,173,000 for the quarter ended March 31,1998. The increased sales during the 1998 quarter resulted from the attainment of certain milestones on OSS contracts which are accounted for using a percentage of completion method. Furthermore, OSS sales during the first quarter of 1997 were at a reduced level since certain contract milestones were attained later in the year, resulting in recognition of revenue at such later time. Signal processing sales increased for the quarter ended March 31, 1998 by $722,000 (45%) from $1,603,000 in the 1997 quarter compared to $2,325,000 in the 1998 quarter. The increase reflects shipments on multiple year sales orders to certain military customers which were secured during the latter part of 1997. Cost of sales for the quarter ended March 31, 1998, as a percentage of sales, was 59% compared with the quarter ended March 31, 1997 of 68%. This improvement in gross margin is attributable to the Company's continuing effort to increase manufacturing productivity and the absorption, over a larger revenue base, of certain fixed expenses associated with the OSS contracts. Selling, general and administration expenses increased by $880,000 (34%) from $2,587,000 to $3,467,000. This increase reflects higher sales commissions, primarily on OSS contracts, based upon the increased revenues for the 1998 quarter. Research and development expenses increased by $179,000 (16%) from $1,151,000 to $1,330,000. This increase in research and development expenses results from the Company's efforts to develop new products, primarily related to the OSS business. As a result of the foregoing, the Company had operating income of $1,890,000 for the quarter ended March 31, 1998, as compared to operating income of $276,000 for the quarter ended March 31, 1997. Page 9 of 12 pages Results of Operations (continued) Interest expense decreased by $59,000 from $916,000 in 1997 to $857,000 in 1998. This change is attributable primarily to a decrease in interest expense related to the exchange of the Company's 6% Convertible Subordinated Debentures and reduced levels of borrowing from the senior lender, which were offset by partially by interest on the 12% Subordinated Notes. Other income for the quarter ended March 31, 1998 includes $400,000 from the settlement of litigation. During the quarter ended March 31 ,1998, the Company recorded debt conversion expense of $945,000 as a result of the conversion of Zero Coupon Notes and 6% Convertible Subordinated Debentures to common stock. For the quarter ended March 31, 1998, the Company had income before extraordinary gain of $704,000 compared to a loss before extraordinary gain of $402,000 for the quarter ended March 31, 1997. In the first quarter ended March 31, 1998 and 1997, respectively, the Company recorded a $76,000 and $8,000 gain from the early extingushment of its 6% Convertible Subordinated Debt as a result of the exchange of the 6% Debt for Zero Coupon Notes and common stock. As the result of the foregoing, the Company generated net income of $780,000, $0.09 per share (basic) and $0.08 per share (diluted), for the quarter ended March 31, 1998 versus a net loss of $394,000, $0.17 per share (basic and diluted), for the quarter ended March 31, 1997. Liquidity and Capital Resources At March 31, 1998 the Company had cash and cash equivalents of $4,812,000 compared with $5,091,000 at December 31, 1997. The Company's working capital at March 31, 1998 was $11,949,000, compared to working capital of $6,254,000 at December 31, 1997. The improved working capital reflects (i) increased accounts receivable (ii) reduced balance of the 6% Debentures and (iii) lower balances of accounts payable and commissions payable. As of March 31, 1998, the Company's loan and security agreement with its senior secured lender, which expires August 1999, provided the Company, under its revolving line of credit and its letter of credit facility, with combined availability totaling $9,000,000. In addition, the Company has $11,934,000 outstanding as of March 31, 1998 under a term loan agreement. Page 10 of 12 pages Liquidity and Capital Resources (continued) During the quarter ended March 31, 1998, the Company raised $6,000,000 from the private placement of its 12% Subordinated Notes due January 3, 2000. The proceeds from the sale of the Units was used principally to pay the remaining $2,796,000 principal amount of Notes which had not been converted (Note 3) and to reduce the Company's senior debt to Foothill by approximately $2,950,000 (Note 4). The balance of such proceeds was added to working capital. The Company believes that its current cash position, internally generated cash flow and its loan facility will be sufficient to satisfy the Company's anticipated operating needs for at least the ensuing twelve months. 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 the as the "Year 2000 Issue." Management has initiated a Company wide program to prepare the Company's computer systems and applications for year 2000 compliance including potential obligations to update its customer's systems to the extent required under their contracts. The Company expects to incur internal staff costs as well as other expenses necessary to prepare its systems for the year 2000. The Company expects to both replace some systems and upgrade others. Maintenance or modification costs will be expensed as incurred. The total cost of this effort is still being evaluated, but is not expected to be material to the Company. 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, 1997 and in other documents filed by the Company with the Securities and Exchange Commission. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K A current report on form 8-K (Item 5), dated January 2, 1998, was filed. Page 11 of 12 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 May 12, 1998 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board and Chief Executive Officer Dated May 12, 1998 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Senior Vice President and Chief Financial Officer Page 12 of 12 pages EX-27 2 FDS --
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 4,812 0 17,068 0 7,930 31,587 4,542 0 52,085 19,638 0 0 0 93 11,692 52,085 16,292 16,292 9,605 4,797 0 0 857 675 16 704 0 76 0 780 0.09 0.08
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