SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] 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
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(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
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(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) 9,909,248 shares as of May 7, 2001
Page 1 of 11
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
2001 2000
---- ----
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 397 $ 2,366
Accounts receivable - trade, less allowance for doubtful accounts 7,722 7,425
Inventories 6,763 7,150
Prepaid expenses and other current assets 1,826 1,130
-------- --------
Total current assets 16708 18,071
Property, plant and equipment, net 4,333 4,555
Goodwill, net 10,159 10,357
Other assets 764 1,191
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Total assets $ 31,964 $ 34,174
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of senior debt $ 20,346 $ 20,746
Subordinated notes 6,144 6,144
Accounts payable 8,426 7,173
Accrued expenses 5,521 5,385
Accrued interest payable 980 766
Accrued commissions 1,594 1,553
Accrued deferred compensation 196 196
Income taxes payable 259 259
Short-term loans -- 1
-------- --------
Total current liabilities 43,466 42,223
-------- --------
6% convertible subordinated debentures 378 376
Deferred compensation 897 987
Income taxes payable 120 154
Other long-term liabilities 905 918
Minority interest 203 308
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Total long-term liabilities 2,503 2,743
-------- --------
Total liabilities 45,969 44,966
-------- --------
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
9,856,056 and 9,817,165 shares at March 31, 2001 and December 31, 2000 99 98
Additional paid-in capital 75,995 75,980
Accumulated deficit (84,367) (81,135)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,794) (3,797)
-------- --------
(12,067) (8,854)
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (14,005) (10,792)
-------- --------
Total liabilities and stockholders' deficit $ 31,964 $ 34,174
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 11
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share data)
Three Months Ended
March 31, March 31,
2001 2000
---- ----
Sales $ 7,042 $ 15,928
Cost of sales 5,628 10,212
-------- --------
Gross profit 1,414 5,716
Selling, general and administrative expenses 2,578 3,135
Research and development expenses 1,187 1,408
-------- --------
Total expenses 3,765 4,543
-------- --------
Operating income (loss) (2,351) 1,173
Interest expense (1,003) (934)
Interest income 16 27
Other income (expense), net 28 5
-------- --------
Income (loss) before income taxes and minority interest (3,310) 271
Income tax expense (15) (30)
Minority interest 92 65
-------- --------
Net income (loss) $ (3,233) $ 306
======== ========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 3 37
-------- --------
Comprehensive income (loss) $ (3,230) $ 343
======== ========
Per share data:
Basic per share amounts:
Net income (loss) per share of common stock $ (0.33) $ 0.03
======== ========
Weighted average shares outstanding 9,836 9,661
======== ========
Diluted per share amounts:
Net income (loss) per share of common stock $ (0.33) $ 0.03
======== ========
Weighted average shares outstanding 9,836 10,707
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 11
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31, March 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $(3,233) $ 306
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Non-cash financing expenses 61 --
Depreciation and amortization 439 374
Amortization of debt discounts 2 14
Minority interest (92) (65)
Changes in operating assets and liabilities:
Accounts receivable (297) (5,380)
Inventories 387 293
Prepaid expenses (696) (37)
Other assets 365 (108)
Accounts payable, accrued expenses and other liabilities 1,507 2,861
------- -------
Net cash used in operating activities (1,557) (1,742)
------- -------
Cash flows from investing activities:
Capital expenditures, net (36) (664)
------- -------
Net cash used in investing activities (36) (664)
------- -------
Cash flows from financing activities:
Proceeds from senior debt -- 2,550
Repayments of senior debt (400) (400)
Proceeds from exercised options and warrants 16 118
Repayments of short term loans (1) (36)
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Net cash provided by (used in) financing activities (385) 2,232
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Effect of exchange rate changes on cash 9 36
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Decrease in cash and cash equivalents (1,969) (138)
Cash and equivalents - beginning of the year 2,366 3,245
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Cash and equivalents - end of the period $ 397 $ 3,107
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 726 $ 996
======= =======
Cash paid for income taxes $ 77 $ 20
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 11
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, 2000. The audit opinion included in the December 31, 2000 Form 10-K annual
report contained an explanatory paragraph regarding the Company's ability to
continue as a going concern. Results for the interim period are not necessarily
indicative of results for the year.
Note 2: Inventories
Inventories are stated at the lower of cost (on the average or first-in,
first-out methods) or market. The composition of inventories at the end of the
respective periods is as follows:
March 31, 2001 December 31, 2000
-------------- -----------------
(in thousands)
Parts and components $4,245 $4,973
Work-in-process 583 543
Finished goods 1,935 1,634
------ ------
$6,763 $7,150
====== ======
Note 3: Senior Debt
On March 31, 2001, the Company's debt to its senior lender was
$20,346,000. During the three months then ended, the Company repaid principal of
$400,000. The current agreement with the senior lender expires on July 3, 2001
and, accordingly, the senior debt has been classified as a current liability at
March 31, 2001.
The Company's borrowings exceed the maximum borrowings under the borrowing
base formula. In March 2001, the senior lender agreed to allow the Company to
defer the repayment of borrowings in excess of the maximum under the formula,
defer all monthly facility fees and the April 1, 2001 principal payment to the
earlier of the termination of the agreement on July 3, 2001 or the sale of one
or more of the divisions of the Company. The agreement also precluded the
Company from making any payments on indebtedness to any subordinated creditors,
although it permits payment of accounts payable in the ordinary course of
business.
In April 2001, the Company and its senior lender agreed to add all current
and future interest due, which will be computed at 14%, to the principal balance
through the July 2, 2001. As consideration, the Company agreed to reduce the
exercise price of the outstanding warrants to purchase approximately 570,000
shares of common stock held by its senior lender to $0.25 per share.
Page 5 of 11
Financial debt covenants include an interest coverage ratio measured
quarterly, limitations on the incurrence of indebtedness, limitations on capital
expenditures, and prohibitions on declarations of any cash or stock dividends or
the repurchase of the Company's stock. As of March 31, 2001, the Company was not
in compliance with the interest coverage covenant. The Company has obtained a
waiver of such non-compliance from its senior lender related to the interest
coverage ratio and the over advance under the line through July 2, 2001.
Note 4: Subordinated Notes
As of March 31, 2001, the Company has outstanding $6,144,000 of
subordinated notes, of which $900,000 was due on January 2, 2001 and $5,244,000
becomes due on July 2, 2001. Pursuant to the Company's agreement with its senior
lender, the Company is prohibited from paying principal and interest on the
subordinated notes.
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 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.
There has been no significant change from December 31, 2000 in the basis
of measurement of segment revenues and profit or loss, and no significant change
in the Company's assets.
Three Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
Sales:
Line $ 3,848,000 6,094,000
OSS 1,365,000 8,114,000
Signal 1,652,000 1,578,000
------------ ------------
$ 6,865,000 15,786,000
============ ============
Segment profit (loss):
Line $ 536,000 1,269,000
OSS (2,314,000) 551,000
Signal 345,000 302,000
------------ ------------
$ (1,433,000) 2,122,000
============ ============
Page 6 of 11
The following table reconciles segment totals to consolidated totals:
Three Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
Sales:
Total revenue for reportable segments $ 6,865,000 15,786,000
Other revenue 177,000 142,000
----------- -----------
Consolidated total revenue $ 7,042,000 15,928,000
=========== ===========
Operating income (loss):
Total segment profit for reportable segments $(1,433,000) 2,122,000
Corporate and unallocated (918,000) (949,000)
----------- -----------
Consolidated total operating income (loss) $(2,351,000) 1,173,000
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's consolidated statements of operations for the periods
indicated below, shown as a percentage of sales, are as follows:
Three Months Ended
------------------
March 31,
---------
2001 2000
---- ----
Sales 100% 100%
Cost of Sales 80% 64%
Gross Profit 20% 36%
Selling, general and administrative expenses 36% 20%
Research and development expenses 17% 9%
Operating income (loss) (33%) 7%
Interest expense - net (14%) (5%)
Other 0% 0%
Minority interest 1% 0%
Net income (loss) (46%) 2%
The Company's sales by product line for the periods ended March 31, 2001
and 2000 are as follows:
Three Months Ended March 31,
----------------------------
$(000)
2001 2000
---- ----
Line connection/protection equipment $ 3,848 55% $ 6,094 38%
OSS equipment 1,365 19% 8,114 51%
Signal Processing 1,652 23% 1,578 10%
Other 177 3% 142 1%
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$ 7,042 100% $15,928 100%
=================== ===================
Page 7 of 11
Results of Operations
The Company's sales for the quarter ended March 31, 2001 were $7,042,000
representing a decrease of $8,886,000 (56%) compared to the quarter ended March
31, 2000 of $15,928,000. The overall decrease in sales reflects decreased sales
of OSS and Line equipment. Signal sales increased by $74,000 (5%) from
$1,578,000 to $1,652,000 for the 2000 and 2001 quarters, respectively.
Line equipment sales decreased by $2,246,000 (37%) from $6,094,000 for the
March 2000 quarter to $3,848,000 for the March 2001 quarter. The decline in line
equipment sales reflected a significant decline in sales to one customer,
Telmex, which was not offset by major orders from any other customers. During
the March 2000 quarter, we sold approximately $2.7 million of product to Telmex,
whereas our sales to Telmex in the March 2001 quarter were not significant.
OSS sales decreased by $6,749,000 (83%) from $8,114,000 for the quarter
ended March 31, 2000 to $1,365,000 for the quarter ended March 31, 2001. The
decreased sales resulted from lower shipments to Fujitsu Telecommunications
Europe Limited which provided approximately $5,900,000 of sales in the March
2000 quarter.
Gross margin for the March 2001 quarter was 20% compared to 36% for the
March 2000 quarter. This decline in gross margin is attributable to the
decreased level of sales. Because of the low volume of sales, the Company was
unable to absorb certain fixed expenses associated with the OSS contracts.
Selling, general and administrative expenses decreased by $557,000 (18%)
from $3,135,000 in the March 2000 quarter to $2,578,000 in the March 2001
quarter. This decrease relates primarily to the Company's efforts to reorganize
its sales and marketing efforts of its OSS division.
Research and development expenses decreased by $221,000 (16%) from
$1,408,000 in the March 2000 quarter to $1,187,000 in the March 2001 quarter.
This decrease in research and development expenses results from the Company's
efforts to reduce its expenses, primarily related to the OSS business.
As a result of the foregoing, the Company had an operating loss of
$2,351,000 for the March 2001 quarter, as compared to operating income of
$1,173,000 for the March 2000 quarter.
Interest expense increased by $69,000 (7%) from $934,000 in 2000 to
$1,003,000 in 2001. This change is attributable primarily to increased levels of
borrowing from the senior lender.
As the result of the foregoing, the Company generated a net loss of
$3,233,000, $0.33 per share (basic and diluted), for the March 2001 quarter
versus net income of $306,000, $0.03 per share (basic and diluted), for the
March 2000 quarter.
Page 8 of 11
Liquidity and Capital Resources
At March 31, 2001, the Company had cash and cash equivalents of $397,000
compared with $2,366,000 at December 31, 2000. The Company's working capital
deficit at March 31, 2001 was $26,758,000, compared to a working capital deficit
of $24,152,000 at December 31, 2000. The reduced level of cash on hand resulted
in the increase in the working capital deficiency. During the March 2001 quarter
of, the net cash used by the Company in operations was $1,557,000.
As of March 31, 2001, the Company has senior debt of $20,346,000
outstanding. The current agreement with the senior lender expires on July 3,
2001 and, accordingly, has been classified as a current liability at March 31,
2001. The Company's borrowings exceed the maximum borrowings under the borrowing
base formula. In March 2001, the senior lender agreed to allow the Company to
defer the repayment of borrowings in excess of the maximum under the formula,
defer all monthly facility fees and the April 1, 2001 principal payment to the
earlier of the termination of the agreement on July 3, 2001 or the sale of one
or more of the divisions of the Company. The senior lender prohibited us from
making any payments on indebtedness to any subordinated creditors except to pay
accounts payable in the ordinary course of business. In April 2001, the Company
and its senior lender agreed to add all current and future interest due, which
will be computed at 14%, to the principal balance through July 2, 2001. In
addition, we were not in compliance with the interest coverage covenant and
borrowing base coverage under the agreement and obtained a waiver from our
senior lender through July 2, 2001.
As of March 31, 2001, we had outstanding $6,144,000 of subordinated notes,
of which $900,000 became due on January 2, 2001 and the balance of $5,244,000
becomes due on July 2, 2001. We did not have the resources to pay the $900,000
of subordinated debt on January 2, 2001 and approximately $440,000 of interest
which was due on January 2, 2001. We have an agreement in principle with the
holders of a majority of the outstanding subordinated notes or their
representatives with respect to an extension of the maturity date of the notes.
The agreement in principle is subject to the execution of a definitive agreement
with the holders of the subordinated debt. The agreement in principle
contemplates an extension of the maturity date of the notes to June 30, 2002,
subject to earlier prepayment if we sell one or more divisions, an increase in
the interest rate to 17.5% per annum, a reduction in the exercise price of the
warrants held by the noteholders to $.25 per share, and the ability of the
noteholders to convert the notes and accrued interest into common stock after
December 31, 2001 at $.25 per share unless we have called the notes for
redemption. In addition, the holders of the subordinated notes will have the
right to elect one director of our board. We cannot assure you that we will be
able to negotiate a definitive agreement with the noteholders.
Our cash availability during 2001 and thereafter may be affected by a
number of factors. At March 31, 2001, we had no cash available under our credit
facility and we had borrowed more than the amount available to us under our
borrowing base. To the extent that credit is not available, we may have
difficulty performing our obligations under our contracts, which could result in
the cancellation of contracts or the loss of future business. In addition,
$1,160,000 of senior debt and $900,000 of subordinated debt became due in
January 2001 and $24,830,000 of senior and subordinated debt will become due in
July 2001. As noted above, we have an agreement in principle with the holders of
a majority of the outstanding subordinated notes or their representatives with
respect to an extension of the maturity date of the notes. The agreement in
principle is subject to the execution of a definitive agreement with the holders
of the subordinated debt. We are continuing to negotiate with our senior lender
with respect to an extension beyond the July 3, 2001 maturity of our current
facility. However, we do not presently have the ability to pay these debts and,
if we cannot finalize a definitive agreement with the holders of the
subordinated debt, obtain either an extension on the maturity of our senior debt
or an alternative financing source or raise funds from the sale of one of our
divisions, we may be unable to meet these financial obligations.
Page 9 of 11
We are addressing our need for liquidity by seeking to extend our
agreement with our senior lender, finalize a definitive agreement with the
holders of the subordinated debt, and sell of one or more of our divisions.
Although we have been engaged in negotiations with respect to the sale of one of
our divisions, these negotiations were terminated without our entering into any
agreement. Although we are continuing to explore the possible sale of one or
more of our divisions, we cannot assure you that we will be successful in these
efforts. Because of our present stock price, it is highly unlikely that we will
be able to raise funds through the sales of our equity securities, and our
financial condition prevents us from issuing debt securities. 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.
Forward Looking Statements
Statements contained in this Form 10-Q include forward-looking statements
that are subject to risks and uncertainties. The statements in this Form 10-Q
that are not descriptions of historical facts may be forward-looking statements
that are subject to risks and uncertainties. In particular, statements in this
Form 10-Q that state our 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, 2000 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, any
one or more of which could cause actual results to differ materially from those
stated in such statements.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 10 of 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PORTA SYSTEMS CORP.
Dated May 14, 2001 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated May 14, 2001 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
Page 11 of 11