-----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, T8tkdmRkPyBTjAFujyr9necjJkNvWWH2DFvVvsSASGeq826VpfQ5FqatXa7nLcIs khBPfMx7ezaTHPoAp01FLQ== 0001144204-04-011597.txt : 20040812 0001144204-04-011597.hdr.sgml : 20040812 20040812102846 ACCESSION NUMBER: 0001144204-04-011597 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08460 FILM NUMBER: 04968787 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 v05551_10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from............to............. Commission file number 1-8191 PORTA SYSTEMS CORP. ------------------- (Exact name of registrant as specified in its charter) Delaware 11-2203988 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6851 Jericho Turnpike, Suite 170, Syosset, New York --------------------------------------------------- (Address of principal executive offices) 11791 ----- (Zip Code) 516-364-9300 ------------ (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Common stock (par value $0.01) 9,972,284 shares as of July 22, 2004 PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 2004 2003 --------- ------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 717 $ 469 Accounts receivable - trade, less allowance for doubtful accounts 3,698 3,898 Inventories 3,121 3,004 Prepaid expenses and other current assets 464 472 --------- --------- Total current assets 8,000 7,843 Property, plant and equipment, net 1,356 1,466 Goodwill, net 2,961 2,961 Other assets 73 85 --------- --------- Total assets $ 12,390 $ 12,355 ========= ========= Liabilities and Stockholders' Deficit Current liabilities: Senior debt $ 25,562 $ 25,387 Subordinated notes 6,144 6,144 6% convertible subordinated debentures 385 385 Accounts payable 4,827 5,635 Accrued expenses 2,481 3,117 Accrued interest payable 4,040 3,563 Accrued commissions 270 284 Deferred compensation 58 58 Income taxes payable 8 95 --------- --------- Total current liabilities 43,775 44,668 --------- --------- Deferred compensation 894 925 --------- --------- Total long-term liabilities 894 925 --------- --------- Total liabilities 44,669 45,593 ========= ========= Stockholders' deficit: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 20,000,000 shares, issued 10,003,224 shares at June 30, 2004 and December 31, 2003 100 100 Additional paid-in capital 76,059 76,059 Accumulated deficit (102,232) (103,380) Accumulated other comprehensive loss: Foreign currency translation adjustment (4,268) (4,079) --------- --------- (30,341) (31,300) Treasury stock, at cost (1,938) (1,938) --------- --------- Total stockholders' deficit (32,279) (33,239) --------- --------- Total liabilities and stockholders' deficit $ 12,390 $ 12,355 ========= =========
See accompanying notes to unaudited consolidated financial statements. Page 2 of 18 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except per share amounts) Six Months Ended June 30, June 30, 2004 2003 -------- -------- Sales $ 14,372 $ 8,338 Cost of sales 8,875 6,278 -------- -------- Gross profit 5,497 2,060 -------- -------- Selling, general and administrative expenses 2,642 3,141 Research and development expenses 1,021 1,016 -------- -------- Total expenses 3,663 4,157 -------- -------- Operating income(loss) 1,834 (2,097) Interest expense (660) (627) Interest income -- 1 Other income (expense), net -- (26) -------- -------- Income (loss) before income taxes 1,174 (2,749) Income tax (expense) benefit (26) 282 -------- -------- Net income (loss) $ 1,148 $ (2,467) ======== ======== Other comprehensive loss: Foreign currency translation adjustments (189) (50) -------- -------- Comprehensive income (loss) $ 959 $ (2,517) ======== ======== Per share data: Basic per share amounts: Net income (loss) per share of common stock $ 0.12 $ (0.25) ======== ======== Weighted average shares outstanding 9,972 9,972 ======== ======== Diluted per share amounts: Net income (loss) per share of common stock $ 0.12 $ (0.25) ======== ======== Weighted average shares outstanding 9,972 9,972 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 18 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) (In thousands, except per share amounts) Three Months Ended June 30, June 30, 2004 2003 ------- ------- Sales $ 6,272 $ 3,964 Cost of sales 3,905 2,897 ------- ------- Gross profit 2,367 1,067 ------- ------- Selling, general and administrative expenses 1,176 1,586 Research and development expenses 508 444 ------- ------- Total expenses 1,684 2,030 ------- ------- Operating income (loss) 683 (963) Interest expense (337) (320) Other income (expense), net -- (26) ------- ------- Income (loss) before income taxes 346 (1,309) Income tax benefit (expense) (26) 268 ------- ------- Net income (loss) $ 320 $(1,041) ======= ======= Other comprehensive gain (loss): Foreign currency translation adjustments (75) 30 ------- ------- Comprehensive income (loss) $ 245 $(1,011) ======= ======= Per share data: Basic per share amounts: Net income (loss) per share of common stock $ 0.03 $ (0.10) ======= ======= Weighted average shares outstanding 9,972 9,972 ======= ======= Diluted per share amounts: Net income (loss) per share of common stock $ 0.03 $ (0.10) ======= ======= Weighted average shares outstanding 9,972 9,972 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 4 of 18 PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands)
Six Months Ended June 30, June 30, 2004 2003 ------- ------- Cash flows from operating activities: Net income (loss) $ 1,148 $(2,467) Adjustments to reconcile net income (loss) to net cash provided by ( used in) operating activities: Depreciation and amortization 191 259 Changes in operating assets and liabilities: Accounts receivable 200 1,043 Inventories (117) 429 Prepaid expenses 8 (60) Other assets 12 223 Accounts payable, accrued expenses and other liabilities (1,100) 114 ------- ------- Net cash provided by ( used in) operating activities 342 (459) ------- ------- Cash flows from investing activities: Capital expenditures, net (80) (74) ------- ------- Net cash used in investing activities (80) (74) ------- ------- Cash flows from financing activities: Increase in senior debt 175 152 Repayments of short term loans -- (2) ------- ------- Net cash provided by financing activities 175 150 ------- ------- Effect of exchange rate changes on cash (189) (59) ------- ------- Increase (decrease) in cash and cash equivalents 248 (442) Cash and equivalents - beginning of the year 469 779 ------- ------- Cash and equivalents - end of the period $ 717 $ 337 ======= ======= Supplemental cash flow disclosure: Cash paid for interest expense $ 34 $ 3 ======= ======= Cash paid for income taxes $ 34 $ 6 ======= =======
See accompanying notes to unaudited consolidated financial statements. Page 5 of 18 PORTA SYSTEMS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's Form 10-K annual report for the year ended December 31, 2003. These financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of the uncertainties described in these financial statements. The audit opinion included in the December 31, 2003 Form 10-K annual report contained an explanatory paragraph regarding the Company's ability to continue as a going concern. Results for the second quarter or the first six months of 2004 are not necessarily indicative of results for the year. See Note 3. Note 2: Inventories Inventories are stated at the lower of cost (on the average or first-in, first-out method) or market. The composition of inventories at the end of the respective periods is as follows: June 30, 2004 December 31, 2003 ------------- ----------------- (in thousands) Parts and components $1,563 $1,673 Work-in-process 549 427 Finished goods 1,009 904 ------ ------ $3,121 $3,004 ====== ====== Note 3: Senior and Subordinated Debt On June 30, 2004, the Company's debt to its senior lender was $25,562,000. Under recent amendment, the loan becomes due and payable on August 30, 2004. If the agreement is not extended beyond August 30, 2004, or if the senior lender demands payment of all or a significant portion of the loan when due, the Company will not be able to continue in business and may seek protection under the Bankruptcy Code. Pursuant to our agreement with our senior lender, we have not paid or accrued interest on $22,600,000 of senior debt since March 2002. As a result, our statements of operations do not reflect any interest charges on this portion of our senior debt for 2003 or 2004. The senior lender has the right at any time to require us to pay interest; however, our obligation to pay interest will not require us to pay interest on such senior debt for periods prior to the date the senior lender requires us to commence interest payments. We continue to accrue interest on obligations to our senior lender which were incurred subsequent to March 2002. The increase in senior debt reflects accrued interest. Page 6 of 18 As of June 30, 2004, the Company's short-term debt also included $6,144,000 of subordinated debt that became due on July 3, 2001 and $385,000 of 6% debentures which became due on July 2, 2002. Accrued interest on the subordinated notes was approximately $3,667,000, which represents interest from July 2000 through June 30, 2004, and accrued interest on the 6% debentures was $92,000. The Company's senior lender has precluded it from paying any principal or interest on the subordinated debt. Note 4: Accounting for Stock Based Compensation The Company applies the intrinsic value method as outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Under the intrinsic value method, no compensation expense is recognized if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost has been recognized. SFAS No. 123, "Accounting for Stock-based Compensation," requires the Company to provide pro forma information regarding net loss and net loss per share of common stock as if compensation cost for the Company's stock option programs had been determined in accordance with the fair value method prescribed therein. Since there was no stock-based compensation in the six months ended June 30, 2004 and 2003, pro forma income (loss) is the same as the reported net income (loss). Note 5: Segment Data The Company has three reportable segments: Line Connection and Protection Equipment ("Line") whose products interconnect copper telephone lines to switching equipment and provide fuse elements that protect telephone equipment and personnel from electrical surges; Signal Processing ("Signal") whose products are used in data communication devices that employ high frequency transformer technology, and Operating Support Systems ("OSS") whose products automate the testing, provisioning, maintenance and administration of communication networks and the management of support personnel and equipment. The factors used to determine the above segments focused primarily on the types of products and services provided, and the type of customer served. Each of these segments is managed separately from the others, and management evaluates segment performance based on operating income. There has been no significant change from December 31, 2003 in the basis of measurement of segment revenues and profit or loss, and no significant change in the Company's assets.
Six Months Ended Three Months Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Sales: Line $ 10,399,000 $ 4,232,000 $ 4,427,000 $ 2,071,000 Signal 2,591,000 2,071,000 1,289,000 1,006,000 OSS 1,346,000 1,590,000 536,000 677,000 ------------ ------------ ------------ ------------ $ 14,336,000 $ 7,893,000 $ 6,252,000 $ 3,754,000 ============ ============ ============ ============ Segment profit (loss): Line $ 2,755,000 $ (15,000) $ 1,120,000 $ (18,000) Signal 1,036,000 559,000 580,000 210,000 OSS (900,000) (1,333,000) (602,000) (480,000) ------------ ------------ ------------ ------------ $ 2,891,000 $ (789,000) $ 1,098,000 $ (288,000) ============ ============ ============ ============
Page 7 of 18 The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Sales: Total revenue for reportable segments $ 14,336,000 $ 7,893,000 $ 6,252,000 $ 3,754,000 Other revenue 36,000 445,000 20,000 210,000 ------------ ------------ ------------ ------------ Consolidated total revenue $ 14,372,000 $ 8,338,000 $ 6,272,000 $ 3,964,000 ============ ============ ============ ============ Operating income (loss): Total segment income (loss) for reportable segments $ 2,891,000 $ (789,000) $ 1,098,000 $ (288,000) Corporate and unallocated (1,057,000) (1,308,000) (415,000) (675,000) ------------ ------------ ------------ ------------ Consolidated total Operating income (loss) $ 1,834,000 $ (2,097,000) $ 683,000 $ (963,000) ============ ============ ============ ============
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:
Six Months Ended Three Months Ended ---------------- ------------------ June 30, June 30, -------- -------- 2004 2003 2004 2003 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of sales 62% 75% 62% 73% Gross profit 38% 25% 38% 27% Selling, general and administrative expenses 18% 38% 19% 40% Research and development expenses 7% 12% 8% 11% Operating income (loss) 13% (25%) 11% (24%) Interest expense - net (5%) (8%) (5%) (8%) Other 0% 3% (1)% 6% Net income (loss) 8% (30%) 5% (26%)
Page 8 of 18 The Company's sales by product line for the periods ended June 30, 2004 and 2003 are as follows:
Six Months Ended June 30, ------------------------- $(000) 2004 2003 ---- ---- Line connection/protection equipment $10,399 72% $ 4,232 51% Signal Processing 2,591 18% 2,071 25% OSS equipment 1,346 10% 1,590 19% Other 36 0% 445 5% ----------------- ------------------ $14,372 100% $ 8,338 100% ================= ================== Three Months Ended June 30, --------------------------- $(000) 2004 2003 ---- ---- Line connection/protection equipment $ 4,427 71% $ 2,071 52% Signal Processing 1,289 21% 1,006 26% OSS equipment 536 8% 677 17% Other 20 0% 210 5% ----------------- ------------------ $ 6,272 100% $ 3,964 100% ================= ==================
Overview We operate in the telecommunications industry, and our customer base consists largely of government-owned and privately-owned telecommunications companies. During the recent past, the telecommunications industry has been affected by a worldwide slowdown, and many, if not most, telecommunications companies have scaled back plans for expansion, which has resulted in a significant drop in the requirements for products including products such as those sold by the Company. The improvement shown in the results of operations for the quarter and six months ended June 30, 2004 results from an increase in sales of our Line products to British Telecommunications and, to a lesser extent in the US and other international markets. Our business is divided into three segments -- line connection and protection equipment ("Line") which interconnects copper telephone lines to switching equipment and provides fuse elements that protect telephone equipment and personnel from electrical surges; signal processing ("Signal") equipment which is used in data communication devices that employ high frequency transformer technology; and Operating Support Systems ("OSS") which automate the testing, provisioning, maintenance and administration of communication networks and the management of support personnel and equipment. Because our OSS contracts are long-term contracts, our customers and potential customers have raised concerns about our financial condition and our ability to perform our obligations under our contracts, as well as to provide ongoing services. We recognize revenue from OSS contracts on a percentage-of-completion basis primarily measured by the attainment of milestones. We recognize anticipated losses, if any, in the period in which they are identified. We are continuing to sustain operating losses from the OSS division. As a result, during 2003 we further scaled back our OSS operations. We now perform maintenance and warranty services for existing customers and we have limited our marketing effort for Page 9 of 18 OSS products to selected markets. Even with the reduced scale of OSS operations, we are continuing to incur an operating loss in this division, and we may never be able to operate profitably with our present level of marketing and sales activity in this division. If we are not able to generate profits from these operations, we may discontinue our OSS operations. Our Line equipment is designed to connect copper-wired telecommunications networks and to protect telecommunications equipment from voltage surges. We market this equipment to telephone operating companies in the United States and foreign countries. Our Line division generated an operating profit for the three and six months ended June 30, 2004 as a result of increased sales to British Telecommunications and to a lesser extent in the US and other international markets. We market Signal equipment principally for use in defense and aerospace applications. The Signal division generated an operating profit for the three and six months ended June 30, 2004 and the comparable periods of 2003. We recognize revenue from Line and Signal products when the product is shipped. Our obligations to our senior lender mature on August 30, 2004. The senior lender has expressed concern as to whether our business is or can be either viable or saleable in the context of its ability to realize any meaningful percentage of our debt to it. Although the senior lender has during the past years, extended the maturity date from time to time as we approached an expiration date, we cannot give any assurance that the senior lender will extend the loan beyond August 30, 2004 or that if an extension is granted, that the extension will not be the final extension which the senior lender grants to us. If the senior lender does not extend the maturity date of our obligations or demands payment of all or a significant portion of our obligations due to the senior lender, we will not be able to continue in business and it will be necessary for us to seek protection under the Bankruptcy Code. We cannot assure you that our senior lender will not demand payment of all or a significant portion of our obligations or that we will not seek protection under the Bankruptcy Code in anticipation of a decision by the senior lender to demand payment. Results of Operations Our sales for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 increased by $6,034,000 (72%) from $8,338,000 in 2003 to $14,372,000 in 2004. Sales for the quarter ended June 30, 2004 were $6,272,000, an increase of $2,308,000 (58%) from the sales of $3,964,000 for the quarter ended June 30, 2003. The increased sales level resulted primarily from increased sales of Line products to British Telecommunications that commenced in the third quarter of 2003, as a result of an increase by British Telecommunication in the availability of DSL Lines in the United Kingdom, and to a lesser extent, from increase in sales of our domestic and other international Line business and Signal products. The cash flow generated from the increased sales to BT enabled us to improve our relations with our suppliers and increase our sales of Line equipment in the domestic and other international markets. Line equipment sales for the six months ended June 30, 2004 compared to the six months ended June 30, 2003 increased by $6,167,000 (146%) from $4,232,000 to $10,399,000. Sales for the three months ended June 30 increased by $2,356,000 (114%) from $2,071,000 in 2003 to $4,427,000 in 2004. The increase in sales for the six and the three months primarily reflects increased sales volume to British Telecommunications as stated above. Signal sales for the six months ended June 30, 2004 were $2,591,000, compared to $2,071,000 in the same period of 2003, an increase of $520,000 (25%). Sales for the three months ended June 30, 2004 compared to 2003, increased by $283,000 (28%) from $1,006,000 to $1,289,000. These increases resulted Page 10 of 18 from an increased level of business and our ability to ship orders from backlog on a more timely basis, the result of a better cash flow of operations, than in the comparable period of 2003. OSS sales for the six months ended June 30, 2004 were $1,346,000, compared with $1,590,000 in the same period of 2003, a decrease of $244,000 (15%). OSS sales for the three months ended June 30, 2004 were $536,000 compared to $677,000 in the same period of 2003, a decrease of $141,000 (21%). The decrease in sales for the six and three months resulted from a lower level of new contracts resulting from the reduction in the scope of our OSS operations and marketing effort. Gross margin for the six months ended June 30, 2004 was 38% compared to 25% for the six months ended June 30, 2003. Gross margin for the quarter ended June 30, 2004 was 38% compared to 27% for the quarter ended June 30, 2003. This increase is the result of better absorption of manufacturing overhead created by the increase in revenue from our Line business and reduced OSS costs, both of which enabled us to operate more efficiently than in the comparable periods of 2003. Selling, general and administrative expenses decreased by $499,000 (16%) from $3,141,000 to $2,642,000 for the six months ended June 30, 2004 compared to 2003. For the quarter ended June 30, 2004 selling, general and administrative expenses decreased by $410,000 (26%) from 2003. This decrease relates primarily to the scaleback in our sales expenses in our OSS division. Research and development expenses increased modestly by $5,000 and by $64,000 for the six and three months ended June 30, 2004 from the comparable periods in 2003. However, because of our limited resources, our research and development effort is not substantial, and is oriented more toward modest enhancements on our existing products rather than developments of new technology. Our absence of significant research and development could impair our business over the long term. Income tax expense for the six months and the three months ended June 30, 2004 relates to state and foreign taxes. No federal income tax expense has been provided due to the availability of net operating loss carryforwards. The tax benefit for the six months and three months ended June 30, 2003 resulted principally from the settlement of an outstanding tax obligation of one of our subsidiaries. As a result of the above, for the six months ended June 30, 2004, we had an operating income of $1,834,000 versus an operating loss of $2,097,000 for the comparable period of 2003. We had an operating income of $683,000 for the quarter ended June 30, 2004 as compared to an operating loss of $963,000 for the quarter ended June 30, 2003. Pursuant to our agreement with our senior lender, we have not paid or accrued interest on $22,600,000 of senior debt since March 2002. As a result, our statements of operations do not reflect any interest charges on this portion of our senior debt for 2003 or 2004. The senior lender has the right at any time to require us to pay interest; however, our obligation to pay interest will not require us to pay interest on such senior debt for periods prior to the date the senior lender requires us to commence interest payments. We continue to accrue interest on obligations to our senior lender which were incurred subsequent to March 2002. As a result of the foregoing, we generated net income of $1,148,000, $0.12 per share (basic and diluted), for the six months ended June 30, 2004, compared with a net loss of $2,467,000, $0.25 per share (basic and diluted), for the six months ended June 30, 2003. The net income for the three months ended June 30, 2004 was $320,000, $0.03 per share (basic and diluted), compared with a net loss for the three months ended June 30, 2003 of $1,041,000, $0.10 per share (basic and diluted). Page 11 of 18 Liquidity and Capital Resources At June 30, 2004, we had cash and cash equivalents of $717,000 compared with $469,000 at December 31, 2003. Our working capital deficit at June 30, 2004 was $35,775,000 compared to a working capital deficit of $36,825,000 at December 31, 2003, a reduction of $1,050,000 in our working capital deficit. This improvement was a result of our improved operating results for the six months ended June 30, 2004. During the six months of 2004, our operations generated net cash of $342,000. As of June 30, 2004, our debt includes $25,562,000 of senior debt which matured on June 30, 2004, $6,144,000 of subordinated debt that became due on July 3, 2001, and $385,000 of 6% debentures which became due on July 2, 2002. We were unable to pay the interest payment on the subordinated notes of approximately $3,667,000, that represents interest from July 2000 through June 30, 2004, and interest on the 6% debentures was $92,000. We have been notified by the trustee of 6% debentures that the non-payment of the principal and interest caused an event of default. At June 30, 2004, we did not have sufficient resources to pay either the senior lender or the subordinated lenders; and it is unlikely that we can generate such cash from our operations, and our senior lender has precluded us from making any payments on the subordinated debt. Our financial condition and stock price effectively preclude us from raising funds through the issuance of debt or equity securities, we have no other source of funds other than operations, which is not sufficient to make any significant payment on the principal or interest on our senior debt. We do not have any prospects of obtaining an alternate senior lender to replace our present lender. Although we have scaled back our OSS operations, we are having, and may continue to have, difficulty performing our obligations under our OSS contracts, which could result in the cancellation of contracts or the loss of future business and penalties for non-performance. Furthermore, one creditor has engaged a collection agency, and a vendor has commenced arbitration proceedings against us alleging breach of contract. We have sought to address our need for liquidity by exploring alternatives, including the possible sale of one or more of our divisions. During the past three years, we were engaged in discussions with respect to the possible sale of one or more of our divisions; however, those negotiations were terminated without reaching an agreement, and we may not be able to sell those divisions on acceptable, if any, terms. We will continue to consider the sale of one or more of our divisions; however, if we sell a division, we anticipate that a substantial portion, if not all, of the net proceeds will be paid to our senior lender and we will not receive any significant amount of working capital from such a sale. Furthermore, if we only sell one division, we may be unable to reduce overhead sufficiently to enable us to operate the remaining divisions profitably. During 2002 and 2003, we took steps to reduce overhead and headcount by relocating the executive, sales/marketing, accounting and research and development departments to less expensive offices in Syosset, NY and further reduced the OSS personnel as part of the scaling-down effort. During the six months ended June 30, 2004, we have continued to look to reduce costs while we seek additional business from new and existing customers. In the event that we are unable to extend our debt obligations and sell one or more of our divisions, we cannot assure you that we will be able to continue in operations. Furthermore, although we generated net income for the quarter and six months ended June 30, 2004, our ability to operate profitably in the Page 12 of 18 future is dependent upon the continuation of orders from British Telecommunications and the domestic and other international markets. Our senior lender has waived payment of interest on $22,600,000 of our debt to our senior lender. See Note 3. The senior lender has the right to require us to pay interest on a current basis at any time. If the senior lender requires us to pay interest, it may impair our ability to continue in operations, since the interest, at the loan rate, could exceed any profit which we may generate. Forward Looking Statements Statements contained in this Form 10-Q include forward-looking statements that are subject to risks and uncertainties. In particular, statements in this Form 10-Q that state the Company's intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are "forward-looking statements." Forward-looking statements are subject to risks, uncertainties and other factors, including, but not limited to, those identified under "Risk Factors," in our Form 10-K for the year ended December 31, 2003 and those described in Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K and this Form 10-Q, and those described in any other filings by us with the Securities and Exchange Commission, as well as general economic conditions and economic conditions affecting the telecommunications industry, any one or more of which could cause actual results to differ materially from those stated in such statements. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Although we conduct operations outside of the United States, most of our contracts and sales are dollar denominated. A portion of the revenue from our United Kingdom operations and the majority of our United Kingdom expenses are denominated in Sterling. Any Sterling-denominated receipts are promptly converted into United States dollars. We do not engage in any hedging or other currency transactions. For the six months ended June 30, 2004 and 2003, the currency translation adjustment was not significant in relation to our total revenue. Item 4. Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective in alerting them to material information that is required to be included in the reports that we file or submit under the Securities Exchange Act of 1934. Page 13 of 18 Internal Control over Financial Reporting There has been no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities. See Note 3 of Notes to Unaudited Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for information concerning defaults on our subordinated debt. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On April 1, 2004 the Company reported its results of operations for the year ended December 31, 2003. On May 17, 2004 the Company reported its results of operations for the first quarter ended March 31, 2004. Page 14 of 18 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 12, 2004 By /s/William V. Carney -------------------- William V. Carney Chairman of the Board and Chief Executive Officer Dated: August 12, 2004 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld President, Chief Operating Officer and Chief Financial Officer Page 15 of 18 EX-31.1 2 v05551_ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William V. Carney, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Porta Systems Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ William V. Carney --------------------- Dated: August 12, 2004 William V. Carney Chief Executive Officer Page 16 of 18 EX-31.2 3 v05551_ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Edward B. Kornfeld, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Porta Systems Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/Edward B. Kornfeld --------------------- Dated: August 12, 2004 Edward B. Kornfeld Chief Financial Officer Page 17 of 18 EX-32.1 4 v05551_ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-Q of Porta Systems Corp. (the "Company") for the period ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William V. Carney, the Chief Executive Officer of the Company, and I, Edward B. Kornfeld, Chief Financial Officer of the Company, do hereby certify pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 12, 2004 /s/ William V. Carney --------------------- William V. Carney Chief Executive Officer Dated: August 12, 2004 /s/ Edward B. Kornfeld ---------------------- Edward B. Kornfeld Chief Financial Officer This certification accompanies each Report pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by ss.906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Page 18 of 18 -----END PRIVACY-ENHANCED MESSAGE-----