-----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, E7Jyi77hKqi1dNVdGDpoBEDqKjhaS0ZPSIU6iYeYULVD8NBMsyX9xMg+N+roM7QR VmMD6c5+qGEE8YHCJcQbtw== 0000891092-99-000484.txt : 19990816 0000891092-99-000484.hdr.sgml : 19990816 ACCESSION NUMBER: 0000891092-99-000484 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688445 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 June 30, 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) 9,488,661 shares as of August 6, 1999 Page 1 of 14 pages PART I.- FINANCIAL INFORMATION Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) June 30, December 31, 1999 1998 --------- ------------ Assets (Unaudited) ------ Current assets: Cash and cash equivalents $ 3,399 $ 3,044 Accounts receivable, net 11,784 19,802 Inventories 8,524 8,944 Prepaid expenses 1,932 1,716 ------- ------- Total current assets 25,639 33,506 ------- ------- Property, plant and equipment, net 3,774 4,213 Deferred computer software, net 42 82 Goodwill, net 11,366 11,597 Other assets 2,615 2,738 ------- ------- Total assets $43,436 $52,136 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current portion of senior debt $ 2,000 2,000 12% subordination debentures 5,843 -- Accounts payable 3,349 6,893 Accrued expenses 5,688 6,266 Accrued interest payable 615 545 Accrued commissions 1,966 2,438 Income taxes payable 498 762 Accrued deferred compensation 196 196 Short-term loans 82 144 ------- ------- Total current liabilities 20,237 19,244 ------- ------- Senior debt net of current maturities 11,968 11,188 12% subordinated debentures -- 5,685 6% convertible subordinated debentures 368 365 Deferred Compensation 942 1,021 Income taxes payable 445 719 Other long-term liabilities 1,017 776 Minority interest 1,044 1,154 ------- ------- Total long-term liabilities 15,784 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 June 30, 1999 and December 31, 1998 95 95 Additional paid-in capital 75,135 75,135 Accumulated other comprehensive loss: Foreign currency translation adjustment (3,822) (3,754) Accumulated deficit (61,956) (57,273) ------- ------- 9,452 14,203 Treasury stock, at cost (1,938) (1,938) Receivable for employee stock purchases (99) (281) ------- ------- Total stockholders' equity 7,415 11,984 ------- ------- Total liabilities and stockholders' equity $43,436 $52,136 ======= =======
See accompanying notes to consolidated financial statements. Page 2 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Six Months Ended June 30, June 30, 1999 1998 ---------- --------- Sales $ 18,635 $ 30,943 Cost of sales 13,185 17,622 -------- -------- Gross profit 5,450 13,321 Selling, general and administrative expenses 6,023 6,967 Research and development expenses 2,747 3,013 -------- -------- Total expenses 8,770 9,980 -------- -------- Operating income (loss) (3,320) 3,341 Interest expense (1,720) (1,782) Interest income 104 157 Other income 158 712 Debt conversion expense -- (945) -------- -------- Income (loss) before income taxes, minority interest and extraordinary item (4,778) 1,483 Income tax expense (15) (200) Minority interest 110 (76) -------- -------- Income (loss) before extraordinary item (4,683) 1,207 Extraordinary item -- 76 -------- -------- Net income (loss) $ (4,683) $ 1,283 ======== ======== Per share data: Basic per share amounts: Income (loss) before extraordinary item $ (0.49) $ 0.13 Extraordinary item -- 0.01 -------- -------- Net income (loss) per share of common stock $ (0.49) $ 0.14 ======== ======== Weighted average shares outstanding 9,485 9,220 ======== ======== Diluted per share amounts: Income (loss) before extraordinary item $ (0.49) $ 0.12 Extraordinary item -- 0.01 -------- -------- Net income (loss) per share of common stock $ (0.49) $ 0.13 ======== ======== Weighted average shares outstanding 9,485 10,075 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended June 30, June 30, 1999 1998 -------- --------- Sales $ 9,109 $ 14,651 Cost of sales 6,470 8,017 -------- -------- Gross profit 2,639 6,634 Selling, general and administrative expenses 3,269 3,500 Research and development expenses 1,477 1,683 -------- -------- Total expenses 4,746 5,183 -------- -------- Operating income (loss) (2,107) 1,451 Interest expense (927) (925) Interest income 36 79 Other income 21 203 -------- -------- Income (loss) before income taxes, minority interest and extraordinary item (2,977) 808 Income tax expense (7) (184) Minority interest 44 (121) -------- -------- Net income (loss) $ (2,940) $ 503 ======== ======== Per share data: Basic per share amounts: Net income per share of common stock $ (0.31) $ 0.05 ======== ======== Weighted average shares outstanding 9,485 9,299 ======== ======== Diluted per share amounts: Net income per share of common stock $ (0.31) $ 0.05 ======== ======== Weighted average shares outstanding 9,485 10,345 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 4 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Comprehensive Income (Loss) Six Months Ended June 30, June 30, 1999 1998 -------- -------- Net income (loss) $(4,683) $ 1,283 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (68) 127 ------- ------- Comprehensive income (loss) $(4,751) $ 1,410 ======= ======= Three Months Ended June 30, June 30, 1999 1998 -------- -------- Net income (loss) $(2,940) $ 503 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (27) (15) ------- ------- Comprehensive income (loss) $(2,967) $ 488 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 5 of 14 pages
PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands) Six Months Ended June 30, June 30, 1999 1998 -------- -------- Cash flows from operating activities: Net income (loss) $(4,683) $ 1,283 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain -- (76) Non-cash debt conversion expense -- 945 Non-cash financing expenses 14 228 Write off of interest expense -- 304 Depreciation and amortization 723 1,080 Amortization of discount on convertible subordinated debentures 161 108 Minority interest (110) 76 Changes in assets and liabilities: Accounts receivable 8,018 (940) Inventories 420 56 Prepaid expenses (216) (437) Other assets 71 (68) Accounts payable, accrued expenses and other liabilities (4,900) (1,873) ------- ------- Net cash provided by (used in ) operating activities (502) 686 ------- ------- Cash flows from investing activities: Proceeds from disposal of assets 243 -- Capital expenditures (226) (297) Repayment of employee loans 182 -- ------- ------- Net cash provided by (used in) investing activities 199 (297) ------- ------- Cash flows from financing activities: Proceeds from senior debt 1,800 6 Repayments of senior debt (1,020) (3,883) Proceeds from 12% subordinated debentures and warrants -- 6,000 Repayment of Zero coupon senior subordinated convertible notes -- (2,796) (Repayments of) proceeds from short term loans (62) (57) ------- ------- Net cash provided by (used in) financing activities 718 (730) ------- ------- Effect of exchange rate changes on cash (60) 127 ------- ------- Increase (decrease) in cash and cash equivalents 355 (214) Cash and equivalents - beginning of the year 3,044 5,091 ------- ------- Cash and equivalents - end of the period $ 3,399 $ 4,877 ======= ======== Supplemental cash flow disclosures: Cash paid for interest expense $ 1,381 $ 1,219 ======= ======= Cash paid for income taxes $ 306 $ 82 ======= =======
See accompanying notes to unaudited consolidated financial statements. Page 6 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 six months of 1999 are not necessarily indicative of results for the year. Note 2: Inventories Inventories are valued at lower of cost or market. Inventory costs at June 30, 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: June 30, 1999 December 31,1998 ------------- ---------------- (in thousands) Parts and components $4,291 $4,959 Work-in-process 944 743 Finished goods 3,289 3,242 ------ ------ $8,524 $8,944 ====== ====== Note 3: Senior Debt On June 30, 1999, the Company's debt to its senior lender was $13,968,000. During the six and three months ended June 30, 1998, the Company repaid principal of $1,020,000 and $400,000, respectively. The Company borrowed $1,800,000 during the six and three-month periods ended June 30, 1999. Based on anticipated principal payments, $2,000,000 has been classified as a current liability at June 30, 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 June 30, 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 June 30, 1999, the Company has outstanding $6,000,000 of 12 % Subordinated Notes due January 3, 2000 ("12% Notes") which are classified as a current liability. The carrying value of such 12% Notes as of June 30, 1999 is $5,843,000 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 7 of 14 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 June 30, 1999 due to decreased accounts receivable primarily from the Line and OSS segments. There has been no significant change from December 31, 1998 in the basis of measurement of segment revenues and profit or loss.
Six Months Ended Three Months Ended June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- Revenue: Line $ 9,161,000 $ 10,600,000 $ 4,533,000 $ 5,831,000 OSS 6,268,000 15,743,000 3,065,000 6,569,000 Signal 3,109,000 4,520,000 1,486,000 2,195,000 ------------ ------------ ------------ ------------ $ 18,538,000 $ 30,863,000 $ 9,084,000 $ 14,595,000 ============ ============ ============ ============ Segment profit: Line $ 2,207,000 $ 2,564,000 $ 839,000 $ 1,684,000 OSS (3,990,000) 2,083,000 (2,090,000) 544,000 Signal 809,000 1,296,000 349,000 549,000 ------------ ------------ ------------ ------------ $ (974,000) $ 5,943,000 $ (902,000) $ 2,777,000 ============ ============ ============ ============
The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 ------------- ------------- ------------- ------------- Revenue: Total revenue for reportable segments $ 18,538,000 $ 30,863,000 $ 9,084,000 $ 14,595,000 Other revenue 97,000 80,000 25,000 56,000 ------------ ------------ ------------ ------------ Consolidated total revenue $ 18,635,000 $ 30,943,000 $ 9,109,000 $ 14,651,000 ============ ============ ============ ============ Operating income: Total segment Profit for reportable segments$ $ (974,000) $ 5,943,000 $ (902,000) $ 2,777,000 Corporate and unallocated (2,346,000) (2,602,000) (1,205,000) (1,326,000) ------------ ------------ ------------ ------------ Consolidated total operating income $ (3,320,000) $ 3,341,000 $ (2,107,000) $ 1,451,000 ============ ============ ============ ============
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:
Six Months Ended Three Months Ended ---------------- ------------------ June 30, June 30, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of Sales 71% 57% 71% 55% Gross Profit 29% 43% 29% 45% Selling, general and administrative expenses 32% 22% 36% 24% Research and development expenses 15% 10% 16% 11% Operating income (18%) 11% (23%) 10% Interest expense - net (9%) (5%) (10%) (6%) Other income 1% 2% 0% 1% Debt conversion expense 0% (3%) 0% 0% Minority interest 1% 0% 1% (1%) Income taxes 0% (1%) 0% (1%) Extraordinary item 0% 0% 0% 0% Net income (25%) 4% (32%) 3%
The Company's sales by product line for the periods ended June 30, 1999 and 1998 are as follows: Six Months Ended ---------------- June 30, -------- 1999 1998 ---- ---- (Dollars in thousands) Line $ 9,161 49% $10,600 34% OSS 6,268 33% 15,743 51% Signal 3,109 17% 4,520 15% Other 97 1% 80 0% -------------- ------------------ $18,635 100% $30,943 100% ============== ================== Three Months Ended ------------------ June 30, -------- 1999 1998 ---- ---- (Dollars in thousands) Line $ 4,533 50% $ 5,830 40% OSS 3,065 34% 6,570 45% Signal 1,486 16% 2,195 15% Other 25 0% 53 0% ---------------- ----------------- $ 9,109 100% $14,651 100% ================ ================= Page 9 of 14 pages Results of Operations The Company's sales for the six months ended June 30, 1999 compared to the six months ended June 30, 1998 decreased by $12,308,000 (40%) from $30,943,000 in 1998 to $18,635,000 in 1999. Sales for the quarter ended June 30, 1999 of $9,109,000 decreased by $5,542,000 (38%) compared to $14,651,000 for the quarter ended June 30, 1998. The decrease in sales for the six and three month periods are due primarily to reduced sales from the OSS division for these periods, although sales from Line Connection and Signal also decreased for both the six and three month periods. Line sales for the six months ended June 30 decreased from $10,600,000 to $9,161,000, or $1,439,000 (14%) from 1998 to 1999. Sales for the three months ended June 30 decreased by $1,298,000 (22%) from $5,831,000 in 1998 to $4,533,000 in 1999. The decrease for both the six and three months ended June 30, 1999 reflects reduced unit sales primarily to customers in the United States and Mexico. OSS sales for the six months ended June 30, 1999 was $6,268,000 compared to the six months ended June 30, 1998 of $15,743,000, a decrease of $9,475,000 (60%). OSS revenue for the three months ended June 30, 1999 was $3,065,000 compared to the three months ended June 30, 1998 of $6,569,000, a decrease of $3,504,000 (53%). The decrease in sales during the six and three months ended June 30, 1999 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 third and fourth quarters of 1999. Signal sales for the six months ended June 30, 1999 were $3,109,000 compared to the six months ended June 30, 1998 of $4,520,000, a decrease of $1,411,000 (31%). Sales for the three months ended June 30, 1999 were $1,486,000 compared to the three months ended June 30, 1998 of $2,195,000, a decrease of $709,000 (32%). The decrease in sales for the six and three-month periods primarily reflects customer requested postponements and are anticipated to generate sales beginning in the fourth quarter of 1999. Furthermore, 1998 revenue was positively effected by shipments on multiple year sales orders to certain military customers, which were secured during the latter part of 1997. Cost of sales for the six months and the quarter ended June 30, 1999, as a percentage of sales compared to the same periods of 1998, increased from 57% to 71% and from 55% to 71%, respectively. The decline in gross margin is primarily attributed to inefficiency resulting in the inability to absorb certain fixed expenses associated with the OSS contracts over a substantially lower revenue base. Selling, general and administration expenses decreased by $944,000 (14%) from $6,967,000 to $6,023,000 for the six months ended June 30, 1999 compared to 1998. For the quarter ended June 30, 1999 selling, general and administration expenses decreased by $231,000 (7%) from 1998. The decrease from 1998 to 1999 for the six and three months primarily reflects lower sales commissions based upon the reduced revenues for the first six months of 1999. Research and development expenses decreased by $266,000 (9%) and by $206,000 (12%) for the six and three months ended June 30, 1999 from the comparable periods in 1998, respectively. The decreased expenses resulted from the completion of certain development projects. This decrease was somewhat offset by increased development expenses related to the Company's efforts to develop new products, primarily related to the OSS business. Page 10 of 14 pages Results of Operations (continued) As a result of the above, for the six months ended June 30, 1999 compared to 1998, the Company had an operating loss of $3,320,000 in 1999 versus operating income $3,341,000 in 1998. The Company had an operating loss of $2,107,000 for the quarter ended June 30, 1999 as compared to operating income of $1,451,000 for the quarter ended June 30, 1998. Other income for the six months ended June 30, 1998 included $400,000 from the settlement of litigation and $167,000 of additional funds received from the settlement of the sale of the Company's Israeli business. During the six months ended June 30, 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. In the six months ended June 30, 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. Income tax expense decreased for the six months ended June 30, 1999 compared to 1998 by $185,000 from $200,000 to $15,000, and for the three months ended June 30, 1999 compared to 1998 by $177,000 from $184,000 to $7,000 due to the Company's losses for the respective periods. As the result of the foregoing the Company incurred a net loss of $4,683,000, $0.49 per share (basic and diluted) for the six months ended June 30, 1999 compared with net income after extraordinary items of $1,283,000, $0.14 per share (basic) and $0.13 per share (diluted), for the six months ended June 30, 1998. The net loss for the three months ended June 30, 1999 was $2,940,000, $0.31 per share (basic and diluted), compared with net income for the three months ended June 30, 1998 of $503,000, $0.05 per share (basic and diluted). Liquidity and Capital Resources At June 30, 1999 the Company had cash and cash equivalents of $3,399,000 compared with $3,044,000 at December 31, 1998. The Company's working capital at June 30, 1999 was $5,402,000, 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 June 30, 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. The combined availability is subject to the Company's borrowing base and amounts outstanding under the revolver and committed letters of credit. In addition, the Company has $13,968,000 outstanding as of June 30, 1999 of which $1,542,000 was a non-interest bearing note, $1,750,000 was outstanding against the revolving line of credit, 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 June 30, 1999. Page 11 of 14 pages Liquidity and Capital Resources (continued) As of June 30, 1999, the Company's current liabilities include $5,843,000, net of unamortized debt discount of $157,000, of the principal value $6,000,000 12% Subordinated Notes, all of which are due and payable on January 3, 2000. At June 30, 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. 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. 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, 1998 and in other documents filed by the Company with the Securities and Exchange Commission. PART II-OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The Company's 1999 Annual Meeting of Stockholders was held on June 23, 1999. At the annual meeting, the stockholders (i) reelected its present board, consisting of Messrs. William V. Carney, Seymour Joffe, Michael A. Tancredi, Warren H. Esanu, Herbert H. Feldman, Stanley Kreitman, Lloyd I. Miller, III and Robert Schreiber (ii) approved the 1999 Incentive and Non-Qualified Stock Option Plan, (iii) approved the 1999 Employee Stock Purchase Plan and (iv) ratified the appointment of BDO Seidman, LLP as independent auditors for the year ended December 31, 1999. Each director received at least 8,431,003 votes for his election. Set forth below is the vote on the other matters approved at the meeting. Matter Votes For Votes Against Abstentions ------ --------- ------------- ----------- 1999 Incentive and Non-Qualified Stock Option Plan 4,489,138 503,048 38,389 1999 Employee Stock Purchase Plan 4,511,517 385,372 37,346 Appointment of Auditors 8,421,459 77,022 24,496 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 August 11, 1999 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board Dated August 11, 1999 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Senior Vice President and Chief Financial Officer Page 14 of 14 pages EX-27 2 FDS --
5 PORTA SYSTEMS CORP FINANCIAL DATA SCHEDULE 6-mos Dec-31-1999 Jan-01-1998 Jun-30-1999 3,399 0 11,784 0 8,524 25,639 3,774 0 43,436 20,237 0 0 0 95 7,320 43,436 18,635 18,635 13,185 8,770 0 0 1,720 (4,778) 15 (4,683) 0 0 0 4,683 (0.49) (0.49)
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