-----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, OAS28psw59EQB+Zn+zUg2THg2RAxIGcdcRBzjQK4xxuV4pcc1ByejFRr+zyxMBrx FZONEoX4Vd7eoNoQ30whqg== 0000891092-99-000275.txt : 19990517 0000891092-99-000275.hdr.sgml : 19990517 ACCESSION NUMBER: 0000891092-99-000275 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623566 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, 1999 [ ] 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) 9,485,761 shares as of May 3, 1999 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, 1999 1998 ---- ---- (Unaudited) Assets Current assets: Cash and cash equivalents $ 2,181 $ 3,044 Accounts receivable - trade, less allowance for doubtful accounts 14,248 19,802 Inventories 9,449 8,944 Prepaid expenses and other current assets 2,370 1,716 -------- -------- Total current assets 28,248 33,506 -------- -------- Property, plant and equipment, net 3,841 4,213 Deferred computer software, net 62 82 Goodwill, net 11,481 11,597 Other assets 2,609 2,738 -------- -------- Total assets $ 46,241 $ 52,136 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Current portion of senior debt $ 2,000 $ 2,000 12% subordinated debentures 5,764 -- Accounts payable 4,304 6,893 Accrued expenses 6,035 6,266 Accrued interest payable 367 545 Accrued commissions 2,066 2,438 Accrued deferred compensation 196 196 Income taxes payable 732 762 Short-term loans 113 144 -------- -------- Total current liabilities 21,577 19,244 -------- -------- Senior debt net of current maturities 10,568 11,188 12% subordinated debentures -- 5,685 6% convertible subordinated debentures 366 365 Deferred compensation 897 1,021 Income taxes payable 484 719 Other long-term liabilities 973 776 Minority interest 1,088 1,154 -------- -------- Total long-term liabilities 14,376 20,908 -------- -------- 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 9,484,742 shares at March 31, 1999 and December 31, 1998 95 95 Additional paid-in capital 75,135 75,135 Accumulated deficit (59,017) (57,273) Accumulated other comprehensive loss: Foreign currency translation adjustment (3,795) (3,754) -------- -------- 12,418 14,203 Treasury stock, at cost (1,938) (1,938) Receivable for employee stock purchases (192) (281) -------- -------- Total stockholders' equity 10,288 11,984 -------- -------- Total liabilities and stockholders' equity $ 46,241 $ 52,136 ======== ======== 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, 1999 1998 ---- ---- Sales $ 9,526 $ 16,292 Cost of sales 6,715 9,605 -------- -------- Gross profit 2,811 6,687 Selling, general and administrative expenses 2,754 3,467 Research and development expenses 1,270 1,330 -------- -------- Total expenses 4,024 4,797 -------- -------- Operating income (loss) (1,213) 1,890 Interest expense (793) (857) Interest income 68 78 Other income (expense), net 136 509 Debt conversion expense -- (945) -------- -------- Income (loss) before income taxes, minority interest and extraordinary gain (1,802) 675 Income tax expense (8) (16) Minority interest 66 45 -------- -------- Income (loss) before extraordinary gain (1,744) 704 Extraordinary gain on early extinguishment of debt -- 76 -------- -------- Net income (loss) $ (1,744) $ 780 ======== ======== Per share data: Basic per share amounts: Income (loss) before extraordinary gain $ (0.18) $ 0.08 Extraordinary gain -- 0.01 Net income (loss) per share of common stock $ (0.18) $ 0.09 ======== ======== Weighted average shares outstanding 9,485 9.141 ======== ======== Diluted per share amounts: Income (loss) before extraordinary gain $ (0.18) $ 0.07 Extraordinary gain -- 0.01 -------- -------- Net income (loss) per share of common stock $ (0.18) $ 0.08 ======== ======== Weighted average shares outstanding 9,485 9.774 ======== ======== 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, 1999 1998 ---- ---- Net income (loss) $(1,744) $ 780 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (41) 142 ------- ------- Comprehensive income (loss) $(1,785) $ 922 ======= ======= 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, 1999 1998 ---- ---- Cash flows from operating activities: Net income (loss) $(1,744) $ 780 Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary gain -- (76) Non-cash debt conversion expense -- 945 Non-cash financing expenses 7 144 Depreciation and amortization 386 538 Amortization of discount on convertible subordinated debentures 80 2 Minority interest (66) 45 Changes in operating assets and liabilities: Accounts receivable 5,554 (2,177) Inventories (505) 229 Prepaid expenses (654) (511) Other assets 103 559 Accounts payable, accrued expenses and other liabilities (3,562) (1,385) ------- ------- Net cash used in operating activities (401) (907) ------- ------- Cash flows from investing activities: Proceeds from disposal of assets 243 -- Capital expenditures, net (96) (112) Repayment of employee loans 89 -- ------- ------- Net cash provided by (used in) investing activities 236 (112) ------- ------- Cash flows from financing activities: Proceeds from senior debt -- 6 Repayments of senior debt (620) (2,950) Proceeds from 12% subordinated debentures -- 6,000 Repayment of Zero coupon senior subordinated convertible notes -- (2,796) Proceeds from (repayments of) short term loans (31) (29) ------- ------- Net cash provided by (used in) financing activities (651) 231 ------- ------- Effect of exchange rate changes on cash (47) 509 ------- ------- Decrease in cash and cash equivalents (863) (279) Cash and equivalents - beginning of the year 3,044 5,091 ------- ------- Cash and equivalents - end of the period $ 2,181 $ 4,812 ======= ======= Supplemental cash flow disclosure: Cash paid for interest expense $ 525 $ 630 ======= ======= Cash paid for income taxes $ 60 $ 44 ======= =======
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, 1998. 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, 1999 and December 31, 1998 have been computed using a standard cost system. The composition of inventories at the end of the respective periods is as follows: March 31, 1999 December 31,1998 -------------- ---------------- (in thousands) Parts and components $4,502 $4,959 Work-in-process 995 743 Finished goods 3,952 3,242 ------ ------ $9,449 $8,944 ====== ====== Note 3: Senior Debt On March 31, 1999, the Company's debt to its senior lender was $12,568,000. During the three months then ended, the Company repaid principal of $620,000. Based on required principal payments, $2,000,000 has been classified as a current liability at March 31, 1999. 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, 1999, the Company was not in compliance with the interest coverage covenant and obtained a waiver from its senior lender. Note 4: 12% Subordinated Notes As of March 31, 1999, the Company has outstanding $6,000,000 of 12 % Subordinated Notes due January 3, 2000 ("12% Notes") which have been classified as a current liability. The carrying value of such 12% Notes as of March 31, 1999 is $5,764,000 which is net of a related issuance discount. During the quarter ended March 31, 1999, pursuant to the terms of the 12% Notes, the Company issued to the holders of the 12% Notes Series C Warrants to purchase 150,000 shares of common stock at an average price of $1.94 per share to the holders of the 12% Notes. The Series C Warrants, together with the Series B Warrants issued in 1998, were valued at $630,000 and recorded as part of additional paid in capital in 1998. Page 6 of 12 pages Note 5: Segments 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. Total assets for the Company declined from December 31, 1998 to March 31, 1999 due to decreased accounts receivable primarily from the OSS segment. There has been no significant change from December 31, 1998 in the basis of measurement of segment revenues and profit or loss. Three Months Ended March 31, 1999 March 31, 1998 -------------- -------------- Revenue: Line $ 4,628,000 4,769,000 OSS 3,202,000 9,173,000 Signal 1,623,000 2,325,000 ----------- ---------- $ 9,453,000 16,267,000 =========== ========== Segment profit: Line $ 1,368,000 881,000 OSS (1,901,000) 1,541,000 Signal 461,000 747,000 ----------- ---------- $ (72,000) 3,169,000 =========== ========== Page 7 of 12 pages The following table reconciles segment totals to consolidated totals: Three Months Ended March 31, 1999 March 31, 1998 -------------- -------------- Revenue: Total revenue for reportable segments $ 9,453,000 16,267,000 Other revenue 73,000 25,000 ----------- ---------- Consolidated total revenue $ 9,526,000 16,292,000 =========== ========== Operating income: Total segment profit for reportable segments $ (72,000) 3,169,000 Corporate and unallocated (1,141,000) (1,279,000) ----------- ---------- Consolidated total operating income $(1,213,000) 1,890,000 =========== ========== 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, 1999 1998 ---- ---- Sales 100% 100% Cost of Sales 70% 59% Gross Profit 30% 41% Selling, general and administrative expenses 29% 21% Research and development expenses 13% 8% Operating income (loss) (13%) 12% Interest expense - net (7%) (5%) Other 1% 3% Debt conversion expense 0% (5%) Minority interest 1% 0% Extraordinary item 0% 0% Net income (loss) (18%) 5% The Company's sales by product line for the periods ended March 31, 1999 and 1998 are as follows: Three Months Ended March 31, $(000) 1999 1998 ---- ---- Line connection/protection equipment $ 4,628 48% $ 4,769 29% OSS equipment 3,202 34% 9,173 57% Signal Processing 1,623 17% 2,325 14% Other 73 1% 25 0% ------------- ------------- $ 9,526 100% $16,292 100% ============= ============= Page 8 of 12 pages Results of Operations The Company's sales for the quarter ended March 31, 1999 were $9,526,000 which decreased by $6,766,000 (42%) compared to the quarter ended March 31, 1998 of $16,292,000. The overall decrease in sales primarily reflects decreased sales of OSS and Signal. Sales of Line equipment decreased by $141,000 (3%) from $4,769,000 to $4,628,000 for the 1998 and 1999 quarters, respectively. OSS sales decreased by $5,971,000 (65%) from $9,173,000 for the quarter ended March 31,1998 to $3,202,000 for the quarter ended March 31,1999. The decreased sales during the 1999-quarter resulted from delays in the installation of certain contracts and delays in obtaining certain anticipated large new orders which are now anticipated to be secured in the latter part of the second quarter or in the third quarter of 1999. Signal sales decreased for the quarter ended March 31, 1999 by $702,000 (30%) from $2,325,000 in the 1998 quarter compared to $1,623,000 in the 1999 quarter. This decline was due to the completion of a one time large order during the first quarter of 1998 that did not replicate itself in the first quarter of 1999. Cost of sales for the quarter ended March 31, 1999, as a percentage of sales, was 70% compared with the quarter ended March 31, 1998 of 59%. This decline in gross margin is attributable to the inability of the reduced revenue base to absorb certain fixed expenses associated with the OSS contracts. Selling, general and administrative expenses decreased by $713,000 (21%) from $3,467,000 in March 1998 to $2,754,000 in March 1999. This decrease reflects the Company's continuing cost containment measures and lower sales commissions based upon the decreased revenues. Research and development expenses decreased by $60,000 (5%) from $1,330,000 in March 1998 to $1,270,000 in March 1999. As a result of the foregoing, the Company had an operating loss of $1,213,000 for the quarter ended March 31, 1999, as compared to operating income of $1,890,000 for the quarter ended March 31, 1998. Interest expense decreased by $64,000 from $857,000 in 1998 to $793,000 in 1999. This change is attributable primarily to reduced levels of borrowing from the senior lender, which were offset partially by interest on the 12% Subordinated Notes. Other income for the quarter ended March 31, 1998 included $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. Page 9 of 12 pages Results of Operations (continued) In the first quarter ended March 31, 1998, the Company recorded a $76,000 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 a net loss of $1,744,000, $0.18 per share (basic and diluted), for the quarter ended March 31, 1999 versus net income of $780,000, $0.09 per share (basic) and $0.08 per share (diluted), for the quarter ended March 31, 1998. Liquidity and Capital Resources At March 31, 1999 the Company had cash and cash equivalents of $2,181,000 compared with $3,044,000 at December 31, 1998. The Company's working capital at March 31, 1999 was $6,671,000, compared to working capital of $14,262,000 at December 31, 1998. The decline in working capital reflects (i) decreased accounts receivable and (ii) the shift of the 12% subordinated notes from long-term to current liabilities. As of March 31, 1999, the Company's loan and security agreement with its senior secured lender, which expires January 2, 2001, provides 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 $12,568,000 outstanding as of March 31, 1999 of which $1,892,000 was a non-interest bearing note and $10,676,000 was a term loan agreement. As discussed in Note 3, the Company was not in compliance with the interest coverage covenant and obtained a waiver from its senior lender for the period ended March 31, 1999. As of March 31, 1999, the Company's current liabilities includes $6,000,000 12% Subordinated Notes, all of which are due and payable on January 3, 2000. At March 31, 1999 the Company does not have sufficient resources to pay the Notes when they mature and it is likely that it cannot generate such cash from its operations. Although the Company is seeking to refinance or restructure the Notes and believes it will be able to prior to the maturity date, no assurance can be given that it will be successful in these efforts. If the Company is unable to refinance or restructure the Notes, the Company's business may be materially and adversely affected. Page 10 of 12 pages Year 2000 Issue Many existing computer programs use only two digits to identify a year in a date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. This is referred to as the "Year 2000 Issue." Management has initiated a company-wide program to prepare the Company's computer systems and applications for year 2000 compliance. The Company has assigned a team to monitor Year 2000 compliance. With respect to the products the Company offers for sale, the Company has verified that the products are Year 2000 compliant. The team is charged with ensuring Year 2000 compliance for all hardware and software products through its purchasing process, as well as assessing the Year 2000 readiness and risk to the Company of its critical vendors and suppliers. The team is also responsible to coordinate Year 2000 compliance for its internal systems and devices. At present, Year 2000 compliance of the Company's internal systems and devices is scheduled to be substantially complete by September 1999. 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. Management estimates that the cost of this program will approximate $500,000, with approximately $200,000 representing incremental costs to the Company. The total cost effort does not include potential costs related to any customer or other claims or the cost of internal hardware or software replaced in the normal course of business. Based upon current information and assessment, the Company does not believe that the Year 2000 issue as discussed above will be material to its financial position or results of operations or that its business will be adversely affected in any material respect. Nevertheless, achieving Year 2000 compliance is dependent upon many factors, some of which are not completely within the Company's control. Should either the Company's internal systems or one or more of its critical vendors or suppliers fail due to Year 2000 issues, the Company's business and its results of operations could be adversely affected. The Company has evaluated the worst case scenarios in the event that its products, systems, or business partners are not Year 2000 ready and has formulated contingency plans to operate. If the Company's investigations suggest that there is a significant risk that certain products, systems, or business partners might not be Year 2000 ready, the Company will execute its contingency plans accordingly. Statements contained in this Year 2000 disclosure are subject to certain protection under the Year 2000 Information and Readiness Disclosure Act. Forward Looking Statements Statements contained in this Form 10-Q include forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those identified in this Form 10-Q, the Company's Annual Report on From 10-K for the year ended December 31, 1998 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 None 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 14, 1999 By /s/William V. Carney ------------------------------ William V. Carney Chairman of the Board and Chief Executive Officer Dated May 14, 1999 By /s/Edward B. Kornfeld ------------------------------ Edward B. Kornfeld Senior Vice President and Chief Financial Officer Page 12 of 12 pages PAGE 12 EX-27 2 FDS --
5 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,181 0 14,248 0 9,449 28,248 3,841 0 46,241 21,577 0 0 0 95 10,193 46,241 9,526 9,526 6,715 4,024 0 0 793 (1,802) 8 (1,744) 0 0 0 (1,744) (0.18) (0.18)
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