-----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, VLiknFbprAzOH/XuTqMpjgGuNcoeNCGPqdRG9DM1zyyXDfcTXRNmVCd0NW6qwDl8 +MkvmZXDAkDoyNE/xvafcw== 0000891092-99-000740.txt : 19991117 0000891092-99-000740.hdr.sgml : 19991117 ACCESSION NUMBER: 0000891092-99-000740 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753149 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 September 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: 9,488,561 shares as of November 1, 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)
September 30, December 31, 1999 1998 ------------- ------------ Assets (Unaudited) ------ Current assets: Cash and cash equivalents $ 2,743 $ 3,044 Accounts receivable, net 12,272 19,802 Inventories 7,148 8,944 Prepaid expenses and other current assets 1,982 1,716 -------- -------- Total current assets 24,145 33,506 -------- -------- Property, plant and equipment, net 3,876 4,213 Deferred computer software, net 22 82 Goodwill, net 11,250 11,597 Other assets 2,564 2,738 -------- -------- Total assets $ 41,857 $ 52,136 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Current portion of senior debt $ 2,000 $ 2,000 12% subordinated notes 5,921 -- Accounts payable 4,687 6,893 Accrued expenses 5,972 6,266 Accrued interest payable 426 545 Accrued commissions 1,887 2,438 Income taxes payable 513 762 Accrued deferred compensation 196 196 Short-term loans 45 144 -------- -------- Total current liabilities 21,647 19,244 -------- -------- Senior debt net of current maturities 13,118 11,188 12% subordinated notes -- 5,685 6% convertible subordinate debentures 369 365 Deferred compensation 987 1,021 Income taxes payable 400 719 Other long-term liabilities 960 776 Minority interest 999 1,154 -------- -------- Total long-term liabilities 16,833 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 9,488,692 and 9,484,742 shares at September 30, 1999 and December 31, 1998, respectively 95 95 Additional paid-in capital 75,143 75,135 Accumulated other comprehensive loss: Foreign currency translation adjustment (3,932) (3,754) Accumulated deficit (65,955) (57,273) -------- -------- 5,351 14,203 Treasury stock, at cost (1,938) (1,938) Receivable for employee stock purchases (36) (281) -------- -------- Total stockholders' equity 3,377 11,984 -------- -------- Total liabilities and stockholders' equity $ 41,857 $ 52,136 ======== ========
See accompanying notes to unaudited consolidated financial statements. Page 2 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data)
Nine Months Ended September 30, September 30, 1999 1998 ------------- -------------- Sales $ 27,032 $ 45,160 Cost of sales 19,704 26,247 -------- -------- Gross profit 7,328 18,913 -------- -------- Selling, general and administrative expenses 9,226 10,089 Research and development expenses 4,575 4,807 -------- -------- Total expenses 13,801 14,896 -------- -------- Operating income (loss) (6,473) 4,017 Interest expense (2,608) (2,663) Interest income 138 205 Other income 158 981 Debt conversion expense --- (945) -------- -------- Income (loss) before income taxes, minority interest, and extraordinary item (8,785) 1,595 Income tax expense (53) (209) Minority interest 155 (133) -------- -------- Income (loss) before extraordinary item (8,683) 1,253 Extraordinary gain --- 76 -------- -------- Net income (loss) $ (8,683) $ 1,329 ======== ======== Per share data: Basic per share amounts: Income (loss) before extraordinary item $ (0.92) $ 0.14 Extraordinary item --- 0.00 -------- -------- Net income (loss) per share of common stock $ (0.92) $ 0.14 ======== ======== Weighted average shares outstanding 9,487 9,247 ======== ======== Diluted per share amounts: Income (loss) before extraordinary item $ (0.92) $ 0.13 Extraordinary item --- 0.00 -------- -------- Net income (loss) per share of common stock $ (0.92) $ 0.13 ======== ======== Weighted average shares outstanding 9,487 9,977 ======== ========
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 September 30, September 30, 1999 1998 ------------ ------------- Sales $ 8,397 $ 14,217 Cost of sales 6,519 8,625 -------- -------- Gross profit 1,878 5,592 -------- -------- Selling, general and administrative expenses 3,203 3,122 Research and development expenses 1,828 1,794 -------- -------- Total expenses 5,031 4,916 -------- -------- Operating income (loss) (3,153) 676 Interest expense (888) (881) Interest income 34 48 Other income 1 269 -------- -------- Income (loss) before income taxes and minority interest (4,006) 112 Income tax expense (38) (9) Minority interest 45 (57) -------- -------- Net income (loss) $ (3,999) $ 46 ======== ======== Per share data: Basic per share amounts: Net income (loss) per share of common stock $ (0.42) $ 0.01 ======== ======== Weighted average shares outstanding 9,489 9,299 ======== ======== Diluted per share amounts: Net income (loss) per share of common stock $ (0.42) $ 0.01 ======== ======== Weighted average shares outstanding 9,489 9,734 ======== ========
See accompanying notes to unaudited consolidated financial statements. Page 4 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Comprehensive Income
Nine Months Ended September 30, September 30, 1999 1998 ------------- ------------- Net income (loss) $(8,683) $ 1,329 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (178) 204 ------- ------- Comprehensive income (loss) $(8,861) $ 1,533 ======= =======
Three Months Ended September 30, September 30, 1999 1998 ------------- ------------- Net income (loss) $(3,999) $ 46 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (110) 77 ------- ------- Comprehensive income (loss) $(4,109) $ 123 ======= =======
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)
Nine Months Ended September 30, September 30, 1999 1998 ------------- ------------- Cash flows from operating activities: Net income (loss) $(8,683) $ 1,329 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 18 311 Non-cash interest charges -- 304 Non-cash employee stock bonuses 8 -- Depreciation and amortization 1,144 1,631 Amortization of debt discounts 240 189 Minority interest (155) 131 Changes in assets and liabilities: Accounts receivable 7,530 (3,732) Inventories 1,796 5 Prepaid expenses (266) (622) Other assets 99 215 Accounts payable, accrued expenses and other liabilities (3,588) (1,383) ------ ------- Net cash used in operating activities (1,857) (753) ------ ------- Cash flows from investing activities: Proceeds from disposal of assets 243 -- Capital expenditures (588) (503) Repayments of employee loans 245 -- ------ ------ Net cash used in investing activities (100) (503) ------ ------ Cash flows from financing activities: Proceeds from senior debt 3,350 6 Repayments of senior debt (1,420) (4,455) Proceeds from 12% subordinated debentures and warrants -- 6,000 Repayment of Zero coupon senior subordinated convertible notes -- (2,796) Repayments of short term loans (99) (93) ------ ------ Net cash provided by (used in) financing activities 1,831 (1,338) ------ ------ Effect of exchange rates on cash (175) 202 ------ ------ Decrease in cash and cash equivalents (301) (2,392) Cash and equivalents - beginning of the year 3,044 5,091 ------ ------ Cash and equivalents - end of the period $ 2,743 $ 2,699 ======= ======= Supplemental cash flow disclosures: Cash paid for interest expense $ 2,007 $ 1,857 ======= ======= Cash paid for income taxes $ 364 $ 188 ======= =======
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, 1998. Results for the first nine 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 at September 30, 1999 has been computed using a standard cost system. The composition of inventories at the end of the respective periods is as follows:
September 30, 1999 December 31,1998 ------------------ ---------------- (in thousands) Parts and components $3,586 $4,959 Work-in-process 1,240 743 Finished goods 2,322 3,242 ------ ------ $7,148 $8,944 ====== ======
Note 3: Senior Debt On September 30, 1999, the Company's debt to its senior lender was $15,118,000. During the nine and three months ended September 30, 1999, the Company repaid principal of $1,420,000 and $400,000, respectively. The Company borrowed $3,350,000 and $1,550,000 during the nine and three-month periods ended September 30, 1999, respectively. Subsequent to September 30, 1999, the Company borrowed an additional $1,250,000 and repaid $400,000, resulting in a balance owed of approximately $16,000,000. Based on anticipated principal payments, $2,000,000 has been classified as a current liability at September 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 September 30, 1999, the Company was not in compliance with the interest coverage covenant and has obtained a waiver of such non-compliance from its senior lender. Note 4: 12% Subordinated Notes As of September 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 September 30, 1999 is $5,921,000 which is net of related issuance discount. During the quarter ended March 31, 1999, pursuant to the terms of the 12% Notes, the Company issued 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 September 30, 1999 primarily 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.
Nine Months Ended Three Months Ended September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998 ------------------ ------------------ ------------------ ------------------ Revenue: Line $14,633,000 $17,503,000 $ 5,472,000 $ 6,906,000 OSS 7,690,000 21,263,000 1,424,000 5,519,000 Signal 4,544,000 6,246,000 1,435,000 1,726,000 ----------- ----------- ----------- ----------- $26,867,000 $45,012,000 $ 8,331,000 $14,151,000 =========== =========== =========== =========== Segment profit (loss): Line $ 3,218,000 $ 4,513,000 $ 1,011,000 $ 1,950,000 OSS (7,176,000) 1,039,000 (3,186,000) (1,045,000) Signal 1,071,000 1,823,000 262,000 527,000 ----------- ----------- ----------- ----------- $(2,887,000) $ 7,375,000 $(1,913,000) $ 1.432,000 =========== =========== =========== ===========
The following table reconciles segment totals to consolidated totals:
Nine Months Ended Three Months Ended September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998 ------------------ ------------------ ------------------ ------------------ Revenue: Total revenue for reportable segments $26,867,000 $45,012,000 $ 8,331,000 $14,151,000 Other Revenue 165,000 148,000 66,000 66,000 ----------- ----------- ----------- ----------- Consolidated total revenue $27,032,000 $45,160,000 $ 8,397,000 $14,217,000 =========== =========== =========== =========== Operating income (loss): Total segment profit (loss) for reportable segments $(2,887,000) $ 7,375,000 $(1,913,000) $ 1,432,000 Corporate and unallocated (3,586,000) (3,358,000) (1,240,000) (756,000) ----------- ----------- ----------- ----------- Consolidated total operating income (loss) $(6,473,000) $ 4,017,000 $(3,153,000) $ 676,000 =========== =========== =========== ===========
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:
Nine Months Ended Three Months Ended ----------------- ------------------ September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of sales 73% 58% 78% 61% Gross profit 27% 42% 22% 39% Selling, general and administrative expenses 34% 22% 38% 22% Research and development expenses 17% 11% 22% 12% Operating income (loss) (24%) 9% (38%) 5% Interest expense - net (9%) (5%) (10%) (6%) Other income 1% 2% 0% 1% Debt conversion expense 0% (2%) 0% 0% Minority interest 0% 0% 0% 0% Income taxes 0% (1%) 0% 0% Extraordinary item 0% 0% 0% 0% Net income (loss) (32%) 3% (48%) 0%
The Company's sales by product line for the periods ended September 30, 1999 and 1998 are as follows:
Nine Months Ended ----------------- September 30, ------------- 1999 1998 ---- ---- (Dollars in thousands) Line connection/protection equipment ("Line") $ 14,633 54% $ 17,503 39% Operations Support Systems ("OSS") 7,690 28% 21,263 47% Signal Processing ("Signal") 4,544 17% 6,246 14% Other 165 1% 148 0% -------------- ---------------- $ 27,032 100% $ 45,160 100% ============== ================ Three Months Ended ------------------ September 30, ------------- 1999 1998 ---- ---- (Dollars in thousands) Line $ 5,472 65% $ 6,906 49% OSS 1,424 17% 5,519 39% Signal 1,435 17% 1,726 12% Other 66 1% 66 0% --------------- --------------- $ 8,397 100% $ 14,217 100% =============== ===============
Page 9 of 14 pages Results of Operations - --------------------- The Company's sales for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 decreased $18,128,000 (40%) from $45,160,000 in 1998 to $27,032,000 in 1999. Sales for the quarter ended September 30, 1999 of $8,397,000 decreased by $5,820,000 (41%) compared to $14,217,000 for the quarter ended September 30, 1998. The decreased sales for the three and nine months are due primarily to a decline in sales by the OSS division although sales from all divisions declined from the comparable periods of 1998. The Company expects to strengthen sales during the fourth quarter of 1999 and such trends such continue into 2000. The line sales for the nine months ended September 30, 1999 compared to September 30, 1998 decreased from $17,503,000 to $14,633,000 or $2,870,000 (16%). Line connection sales for the three months ended September 30, decreased by $1,434,000 (21%) from $6,906,000 in 1998 to $5,472,000 in 1999. The decrease for both the nine and three months ended September 30, 1999 reflects reduced unit sales primarily to customers in Mexico. OSS sales for the nine months ended September 30, 1999 was $7,690,000 compared to the nine months ended September 30, 1998 of $21,263,000, a decrease of $13,573,000 (64%). Sales for the three months ended September 30, 1999 were $1,424,000 compared to sales for the three months ended September 30, 1998 of $5,519,000, a decrease of $4,095,000 (74%). The decrease in sales during the nine and three months ended September 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 fourth quarter of 1999. Subsequent to September 30, 1999, the Company has secured two OSS contracts totaling approximately $17,000,000. The first contract is with the Philippines Long Distance Telephone Co. for approximately $5,000,000 and is subject to the customer securing financing. The second contract is with a major European telecommunications, equipment supplier for approximately $12,000,000. Signal sales for the nine months ended September 30, 1999 were $4,544,000 compared to the nine months ended September 30, 1998 of $6,246,000, a decrease of $1,702,000 (27%). Signal processing sales for the three months ended September 30, 1999 were $1,435,000, compared to the three months ended September 30, 1998 of $1,726,000, a decrease of $291,000 (17%). The decrease in sales for the nine and three-month periods primarily reflects delays in deliveries which are expected during 2000. Furthermore, during the nine and three months ended September 30, 1998, revenue was positively affected 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 nine months ended September 30, 1999, as a percentage of sales was 73% compared to the nine months ended September 30, 1998 of 58%. For the quarter ended September 30, 1999, cost of sales as a percentage of sales was 78% compared to the same period of 1998 of 61%. 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 which resulted in a negative margin for OSS of 32% for the September 30, 1999 quarter. Page 10 of 14 pages Results of Operations (continued) - --------------------------------- Selling, general and administrative expenses decreased by $863,000 (9%) from $10,089,000 to $9,226,000 for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. This decrease resulted primarily from lower commissions associated with the decreased revenues for the OSS business for the period. For the quarters ended September 30, 1999 and 1998 selling, general and administrative expenses increased by $81,000 (3%) from $3,122,000 to $3,203,000, respectively, as a result of professional fees incurred relating to the establishment of several new contracts. Research and development expenses decreased by $232,000 (5%) for the nine months ended September 30, 1999 and increased by $34,000 (2%) for the three months ended September 30, 1999 from the comparable periods in 1998, respectively. As a result of the above, for the nine months ended September 30, 1999 compared to the comparable nine months of 1998, the Company had an operating loss of $6,473,000 in 1999 and operating income of $4,017,000 in 1998. The Company had an operating loss of $3,153,000 for the quarter ended September 30, 1999 as compared to operating income of $676,000 for the quarter ended September 30, 1998. Other income for the nine months ended September 30, 1998 included $400,000 from the settlement of litigation, $167,000 of additional funds received from the settlement of the sale of the Israeli business, and $234,000 from the settlement of outstanding liabilities. During the nine months ended September 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. During the nine months ended September 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 nine months ended September 30, 1999 compared to 1998 by $156,000 from $209,000 to $53,000 due to the Company's losses for the period. As the result of the foregoing the Company incurred a net loss after extraordinary items of $8,683,000, $0.92 per share (basic and diluted) for the nine months ended September 30, 1999 compared with net income after extraordinary items of $1,329,000, $0.14 per share (basic) and $0.13 per share (diluted), for the nine months ended September 30, 1998. The net loss for the three months ended September 30, 1999 was $3,999,000, $0.42 per share (basic and diluted), compared with net income for the three months ended September 30, 1998 of $46,000, $0.01 per share (basic and diluted). Page 11 of 14 pages Liquidity and Capital Resources - ------------------------------- At September 30, 1999 the Company had cash and cash equivalents of $2,743,000 compared with $3,044,000 at December 31, 1998. The Company's working capital at September 30, 1999 was $2,498,000, compared to working capital of $14,262,000 at December 31, 1998. The decline in working capital results from the operating losses for the nine months ended September 30, 1999, which is reflected in a reduced level of accounts receivable. In addition, approximately $6,000,000 of the decreased working capital results from the shift of the 12% Notes from long-term to current liabilities. As of September 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. The Company had $15,118,000 outstanding as of September 30, 1999 of which $1,592,000 was a non-interest bearing note, $2,850,000 was outstanding against the revolving line of credit, and $10,676,000 was a term loan agreement. Subsequent to September 30, 1999, the company borrowed an additional $1,250,000 and repaid $400,000, resulting in a balance owed of approximately $16,000,000. As discussed in Note 3, the Company was not in compliance with the interest coverage covenant under the agreement and obtained a waiver from its senior lender for the period ended September 30, 1999. Further, if losses continue during the fourth quarter the Company may be in violation of its loan covenants at December 31, 1999. If the Company is in violation, the lender may not grant a waiver, which would result in all of the Company's obligations to the senior lender becoming due. Any action by the senior lender to force collection of the obligations owed, could materially and adversely affect the Company's ability to continue in business. As of September 30, 1999, the Company's current liabilities include $5,921,000, net of unamortized debt discount of $79,000, of the principal value $6,000,000 12% Notes, all of which are due and payable on January 3, 2000. At September 30, 1999, the Company does not have sufficient resources to pay the 12% 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 12% 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 12% Notes, the Company will also be in violation of its loan agreement with its senior lender, and its business may be materially and adversely affected. Legal - ----- Subsequent to September 30, 1999, the Company received a demand for arbitration for commissions allegedly owed to a former sales representative. The Company believes it has meritorious defenses against this claim. 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 to be completed prior to the end of 1999. Page 12 of 14 pages Year 2000 Issue (continued) - --------------------------- The Company has assigned a team to monitor Year 2000 compliance. The Company believes that its 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 December 31, 1999. The Company has and expects to incur internal staff costs as well as other expenses necessary to prepare its systems for the year 2000. The Company has replaced some systems and upgraded others. Maintenance or modification costs have been expensed as incurred. To date the cost of this program approximates $500,000, with approximately $200,000 representing internal costs to the Company and $300,000 representing external equipment and services. 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. 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. PART II-OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None Page 13 of 14 pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTA SYSTEMS CORP. Dated November 10, 1999 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board Dated November 10, 1999 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Vice President and Chief Financial Officer Page 14 of 14 pages EX-27 2 FDS --
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 2,743 0 12,272 0 7,148 24,145 3,876 0 41,857 21,647 0 0 0 95 5,256 41,857 27,032 27,032 19,704 13,801 0 0 2,608 (8,785) 53 (8,683) 0 0 0 (8,683) (0.92) (0.92)
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