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, 2002
|_| 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
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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) 9,979,442 shares as of August 5, 2002
PART I. - FINANCIAL INFORMATION
Item 1 - Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
2002 2001
-------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 388 1,204
Accounts receivable - trade, less
allowance for doubtful accounts 7,243 4,284
Inventories 3,292 5,206
Prepaid expenses and other current assets 509 852
-------- --------
Total current assets 11,432 11,546
Property, plant and equipment, net 2,034 2,328
Goodwill, net 2,961 3,761
Other assets 65 198
-------- --------
Total assets $ 16,492 17,833
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Senior debt $ 24,921 22,095
Subordinated notes 6,144 6,144
6% convertible subordinated debentures 385 382
Accounts payable 6,608 7,023
Accrued expenses 3,546 3,417
Accrued interest payable 2,166 1,593
Accrued commissions 643 1,607
Accrued deferred compensation 348 196
Income taxes payable 293 314
Short-term loans 9 11
-------- --------
Total current liabilities 45,063 42,782
-------- --------
Deferred compensation 803 900
-------- --------
Total long-term liabilities 803 900
-------- --------
Total liabilities 45,866 43,682
-------- --------
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 --
9,976,964 and 9,947,421 shares at
June 30, 2002 and December 31, 2001 100 99
Additional paid-in capital 76,059 76,056
Accumulated deficit (99,433) (95,909)
Accumulated other comprehensive loss:
Foreign currency translation
adjustment (4,162) (4,157)
-------- --------
(27,436) (23,911)
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (29,374) (25,849)
-------- --------
Total liabilities and stockholders'
deficit $ 16,492 17,833
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 16
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Six Months Ended
June 30, June 30,
2002 2001
-------- --------
Sales $ 11,236 15,957
Cost of sales 8,241 11,618
-------- --------
Gross profit 2,995 4,339
-------- --------
Selling, general and administrative expenses 3,628 5,362
Research and development expenses 1,387 2,621
Impairment loss 800 --
-------- --------
Total expenses 5,815 7,983
-------- --------
Operating loss (2,820) (3,644)
Interest expense (1,178) (2,295)
Interest income 3 25
Gain on sale of investment in joint venture 450 --
Other income (expense), net 30 43
-------- --------
Loss before income taxes and
minority interest (3,515) (5,871)
Income tax expense (9) (17)
Minority interest -- 144
-------- --------
Net loss $ (3,524) (5,744)
======== ========
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (5) (20)
-------- --------
Comprehensive loss $ (3,529) (5,764)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.35) (0.58)
======== ========
Weighted average shares outstanding 9,986 9,872
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.35) (0.58)
======== ========
Weighted average shares outstanding 9,986 9,872
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 16
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Three Months Ended
June 30, June 30,
2002 2001
-------- -------
Sales $ 6,492 8,915
Cost of sales 4,375 5,990
------- -------
Gross profit 2,117 2,925
------- -------
Selling, general and administrative
expenses 1,761 2,784
Research and development expenses 627 1,434
Impairment loss 800 --
------- -------
Total expenses 3,188 4,218
------- -------
Operating loss (1,071) (1,293)
Interest expense (304) (1,292)
Interest income 1 9
Gain on sale of investment in joint venture 450 --
Other income (expense), net 33 15
------- -------
Loss before income taxes and
minority interest (891) (2,561)
Income tax benefit (expense) 4 (2)
Minority interest -- 52
------- -------
Net loss $ (887) (2,511)
======= =======
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (26) (23)
------- -------
Comprehensive loss $ (913) $(2,534)
======= =======
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.09) $ (0.25)
======= =======
Weighted average shares outstanding 9,999 9,900
======= =======
Diluted per share amounts:
Net loss per share of common stock $ (0.09) $ (0.25)
======= =======
Weighted average shares outstanding 9,999 9,900
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 16
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30, June 30,
2002 2001
-------- -------
Cash flows from operating activities:
Net loss $(3,524) $(5,744)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash financing expenses -- 123
Depreciation and amortization 342 1,067
Amortization of debt discounts 3 3
Impairment loss 800 --
Minority interest -- (144)
Gain on sale of investment in joint venture (450) --
Changes in operating assets and liabilities:
Accounts receivable (2,959) 1,327
Inventories 1,914 1,071
Prepaid expenses 343 (8)
Other assets 133 405
Accounts payable, accrued expenses and
other liabilities (193) (131)
------- -------
Net cash used in operating activities (3,591) (2,031)
------- -------
Cash flows from investing activities:
Capital expenditures, net (19) (150)
------- -------
Net cash used in investing activities (19) (150)
------- -------
Cash flows from financing activities:
Proceeds from senior debt 2,826 824
Repayments of senior debt -- (400)
Proceeds from exercised options and warrants 4 30
Repayments of short term loans (2) 12
------- -------
Net cash provided by financing activities 2,828 466
------- -------
Effect of exchange rate changes on cash (34) 3
------- -------
Decrease in cash and cash equivalents (816) (1,712)
Cash and equivalents - beginning of the year 1,204 2,366
------- -------
Cash and equivalents - end of the period $ 388 $ 654
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 6 $ 899
======= =======
Cash paid for income taxes $ 27 $ 99
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 16
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, 2001. 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
within. The audit opinion included in the December 31, 2001 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 2002 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 method) or market. The composition of inventories at the end of the
respective periods is as follows:
June 30, 2002 December 31, 2001
------------- -----------------
(in thousands)
Parts and components $2,142 $3,217
Work-in-process 383 192
Finished goods 767 1,797
------ ------
$3,292 $5,206
====== ======
Note 3: Sale of Investment in Joint Venture
In April 2002, the Company sold its 50% interest in Woo Shin Electro
Systems Co., a Korean company, for $450,000 to its joint venture partner.
Payment was made by the forgiveness of commissions, totaling $450,000, which
were owed to its sales representation company owned by our joint venture
partner, with respect to sales made by Woo Shin Electro Systems Co. in Korea.
The investment in the joint venture had previously been written down to zero as
the Company's share of the losses of the joint venture exceeded its investment.
Therefore, the transaction was reflected as a $450,000 reduction in accrued
commissions and a non-cash gain on sale of investment in joint venture.
Note 4: Senior Debt
On June 30, 2002, the Company's debt to its senior lender was $24,921,000.
During the six and three months ended June 30, 2002, the Company borrowed
$2,826,000 and $1,145,000, respectively. The current agreement with the senior
lender, as amended in March and May 2002 and described below, expires on
December 31, 2002, at which time all of the senior debt becomes due.
Accordingly, all senior debt is classified as a current liability at June 30,
2002.
Page 6 of 16
In March 2002, the senior lender agreed to an amended and restated loan
and security agreement whereby a new term loan was established with a maximum
principal amount of $1,500,000 and subsequently increased in May 2002 to
$2,250,000. The agreement allows the Company to draw monies subject to the
senior lender's receipt and approval of a weekly disbursement budget. Any
advances under this agreement are subject to the discretion of the senior
lender. Obligations under the new term loan bear interest at 12%, which interest
shall accrue monthly and be added to the principal until September 1, 2002 when
interest for the month of August 2002 shall be paid and interest shall continue
to be paid each subsequent month. The agreement provides that all indebtedness
prior to March 1, 2002 is reflected as an old term loan in the amount of
$22,610,000, which includes the principal balance due at December 31, 2001 plus
accrued interest though March 1, 2002. The old term loan bears no interest until
such time as the senior lender in its sole discretion notifies the Company that
interest shall be payable. Both the new and old term loans are due on December
31, 2002. Additionally, the senior lender has prohibited the Company from making
any payments on indebtedness to any subordinated creditors, but the Company is
not prohibited from paying accounts payable in the ordinary course of business.
Finally, the agreement allows for standby letters of credit not to exceed a
maximum of $573,000. As of June 30, 2002, the Company has borrowed $2,250,000,
the maximum principal amount.
Note 5: Subordinated Notes
As of June 30, 2002, the Company has outstanding $6,144,000 of
subordinated notes and $1,820,000 of accrued interest, which were due and
payable, but which the Company did not have the resources to pay. In addition,
the senior lender had precluded the Company from making payments on the
subordinated debt (note 4).
Note 6: Recent Accounting Pronouncements
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
in the first quarter of 2002. Effective January 1, 2002, the Company ceased
amortization of goodwill resulting in a decrease of $397,000 in amortization for
the six months ended June 30, 2002 compared to the same period in 2001. Instead
of amortizing goodwill over a fixed period of time, the Company will measure the
fair value of the acquired business at least annually to determine if goodwill
has been impaired. In addition, the Company completed the first step of the
goodwill transitional impairment test by June 30, 2002, which requires
determining the fair value of the reporting unit, as defined by SFAS 142, and
comparing it to the carrying value of the net assets allocated to the reporting
unit. The Company determined that there was no impairment loss resulting from
the transitional impairment test.
At December 31, 2001, the Company's goodwill was $3,761,000, all of which
related to its Signal division. The Company has been attempting to sell one or
more of its divisions and, during the second quarter of 2002, has been in
discussions in respect to the sale of the Signal division. Based on those
discussions the Company has determined that goodwill has been impaired and it
estimated that the amount of the impairment is $800,000. This amount has been
charged to operations in the quarter ended June 30, 2002. Furthermore, the
Company cannot give assurance that the negotiations relating to the sale of the
Signal division will result in a sale of this division or that further
writedowns will not be necessary.
The following schedule presents proforma net loss, basic net loss per
share and diluted net loss per share, exclusive of goodwill amortization
expense, for the six months ended June 30, 2001 and the three months ended June
30, 2001, had the standard been adopted for those periods.
Page 7 of 16
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2001
---------------- ------------------
Reported net loss ........................ $ (5,744) $ (2,511)
Add back: Goodwill amortization ....... 397 198
--------- ---------
Adjusted net loss ........................ $ (5,347) $ (2,313)
========= =========
Basic net loss per share:
Reported net loss ..................... $ (0.58) $ (0.25)
Goodwill amortization ................. 0.04 0.02
--------- ---------
Adjusted net loss per share .............. $ (0.54) $ (0.23)
========= =========
Diluted net loss per share:
Reported net loss ..................... $ (0.58) $ (0.25)
Goodwill amortization ................. 0.04 0.02
--------- ---------
Adjusted diluted net loss per share ...... $ (0.54) $ (0.23)
========= =========
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for fiscal years beginning after December 15, 2001. The Statement
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria required to classify an asset as
held-for-sale. Under the statement, more dispositions will qualify for
discontinued operations treatment in the statement of operations, which requires
expected future operating losses from discontinued operations to be displayed in
discontinued operations in the period in which the losses are incurred. The
Statement is effective for fiscal years beginning after December 15, 2001. The
Company does not expect at this time that the adoption of SFAS 144 will have a
material impact on its consolidated financial statements.
Note 7: 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; 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, 2001 in the basis
of measurement of segment revenues and profit or loss, and no significant change
in the Company's assets.
Page 8 of 16
Six Months Ended Three Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Sales:
Line $ 4,232,000 $ 7,316,000 $ 2,762,000 $ 3,468,000
OSS 4,236,000 5,478,000 2,191,000 4,113,000
Signal 2,412,000 2,828,000 1,336,000 1,176,000
------------ ------------ ------------ ------------
$ 10,880,000 $ 15,622,000 $ 6,289,000 $ 8,757,000
============ ============ ============ ============
Segment profit (loss):
Line $ (706,000) $ 753,000 $ (46,000) $ 217,000
OSS (48,000) (2,684,000) 231,000 (370,000)
Signal 444,000 410,000 337,000 65,000
------------ ------------ ------------ ------------
$ (310,000) $ (1,521,000} $ 522,000 $ (88,000)
============ ============ ============ ============
The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Sales:
Total revenue for reportable
segments $ 10,880,000 $ 15,622,000 $ 6,289,000 $ 8,757,000
Other revenue 356,000 335,000 203,000 158,000
------------ ------------ ------------ ------------
Consolidated total revenue $ 11,236,000 $ 15,957,000 $ 6,492,000 $ 8,915,000
============ ============ ============ ============
Operating loss:
Total segment profit (loss)
for reportable segments $ (310,000) $ (1,521,000) $ 522,000 $ (88,000)
Impairment loss (800,000) -- (800,000) --
Corporate and unallocated (1,710,000) (2,123,000) (793,000) (1,205,000)
------------ ------------ ------------ ------------
Consolidated total
operating loss $ (2,820,000) $ (3,644,000) $ (1,071,000) $ (1,293,000)
============ ============ ============ ============
Page 9 of 16
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,
---------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of sales 73% 73% 67% 67%
Gross profit 27% 27% 33% 33%
Selling, general and administrative
expenses 32% 34% 27% 31%
Research and development expenses 12% 16% 10% 16%
Impairment loss 7% -- 12% --
Operating loss (25%) (23%) (16%) (14%)
Interest expense - net (10%) (14%) (5%) (14%)
Gain on sale of joint venture 4% -- 7% --
Other 0% 0% 0% 0%
Minority interest -- 1% -- 0%
Net loss (31%) (36%) (14%) (28%)
The Company's sales by product line for the periods ended June 30, 2002 and 2001
are as follows:
Six Months Ended June 30,
---------------------------------------
$(000)
2002 2001
-------------- ---------------
Line connection/protection
equipment $ 4,232 38% $ 7,316 46%
OSS equipment 4,236 38% 5,478 34%
Signal Processing 2,412 21% 2,828 18%
Other 356 3% 335 2%
-------------- ---------------
$11,236 100% $15,957 100%
============== ===============
Three Months Ended June 30,
---------------------------------------
$(000)
2002 2001
-------------- ---------------
Line connection/protection
equipment $ 2,762 42% $ 3,468 39%
OSS equipment 2,191 34% 4,113 46%
Signal Processing 1,336 21% 1,176 13%
Other 203 3% 158 2%
-------------- ---------------
$ 6,492 100% $ 8,915 100%
============== ===============
Page 10 of 16
Results of Operations
Our sales for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001 decreased by $4,721,000 (30%) from $15,957,000 in
2001 to $11,236,000 in 2002. Sales for the quarter ended June 30, 2002 of
$6,492,000 decreased by $2,423,000 (27%) compared to $8,915,000 for the quarter
ended June 30, 2001. The decrease in sales for the six months is attributed to
all three business units and for the three month period reflects lower level of
sales from Line test/protection equipment and OSS equipment divisions.
Line sales for the six months ended June 30, decreased from $7,316,000 to
$4,232,000, or $3,084,000 (42%) from 2001 to 2002. Sales for the three months
ended June 30 decreased by $706,000 (20%) from $3,468,000 in 2001 to $2,762,000
in 2002. The decrease for both the six months and three months ended June 30,
2002 reflects reduced sales primarily due to reduced sales volume to customers
in the United Kingdom and by the general slowdown in the telecommunications
industry.
OSS sales for six months ended June 30, 2002 were $4,236,000 compared to
the six months ended June 30, 2001 of $5,478,000, a decrease of $1,242,000
(23%). OSS sales for the three months ended June 30, 2002 were $2,191,000
compared to the three months ended June 30, 2001 of $4,113,000, a decrease of
$1,922,000 (47%). The decreased sales during the six and three months ended June
30, 2002 resulted from the inability to secure new orders and from lower levels
of contract completion compared to the similar period of the prior year.
Additionally, as a result of our change to the equity method and subsequent sale
of our interest in our Korean joint venture, we did not recognize any revenue
from OSS sales in Korea during 2002, whereas during the second quarter and six
months of 2001, our share of the revenue generated by the Korean venture was
$469,000 and $684,000 respectively.
Signal sales for the six months ended June 30, 2002 were $2,412,000
compared to the six months ended June 30, 2001 of 2,828,000, a decrease of
$416,000 (15%). Sales for the quarter ended June 30, 2002 compared to 2001,
increased $160,000 (14%) from $1,176,000 to $1,336,000. The decrease in sales
for the six months was primarily due to a lower level of contract sales, while
the increased level of sales in the second quarter resulted from an increase in
the normal order rate.
Gross margin for the six months ended June 30, 2002 was 27% compared to
27% for the six months ended June 30, 2001. Gross margin for the quarter ended
June 30, 2002 was 33% compared to 33% for the quarter ended June 30, 2001.
Selling, general and administrative expenses decreased by $1,734,000 (32%)
from $5,362,000 to $3,628,000 for the six months ended June 30, 2002 compared to
2001. For the quarter ended June 30, 2002 selling general and administrative
expenses decreased by $1,023,000 (37%) from 2001. This decrease relates
primarily to reduced salaries and benefits, consulting services and commissions
reflecting our current level of business.
Research and development expenses decreased by $1,234,000 (47%) and by
$807,000 (56%) for the six and three months ended June 30, 2002 from the
comparable periods in 2001. This decrease in research and development expenses
for both six and three months resulted from our efforts to reduce expenses
primarily related to the OSS business.
Page 11 of 16
At December 31, 2001, our goodwill was $3,761,000, all of which related to
our Signal division. We have determined that this goodwill has been impaired as
of June 30, 2002. We have been attempting to sell one or more of our divisions
and during the second quarter of 2002 we have been in discussions with respect
to the sale of the Signal division. Based on those discussions we estimate that
the impairment loss is approximately $800,000. This amount has been charged to
operations in the quarter ended June 30, 2002. Furthermore, we cannot give
assurance that the negotiations relating to the sale of the Signal division will
result in a sale of this division or that further writedowns will not be
necessary.
As a result of the above, for the six months ended June 30, 2002 compared
to 2001, we had an operating loss of $2,820,000 in 2002 versus an operating loss
of $3,644,000 in 2001. We had an operating loss of $1,071,000 for the quarter
ended June 30, 2002 as compared to an operating loss of $1,293,000 for the
quarter ended June 30, 2001.
Interest expense for the six months ended June 30, 2002 compared to June
30, 2001 decreased by $1,117,000 (49%) from $2,295,000 in 2001 to $1,178,000 in
2002. Interest expense for the three-month period ending June 30, 2002 compared
to the same three months of 2001, decreased by $988,000 (76%) from $1,292,000 in
2001 to $304,000 in 2002. The reduced level of interest expense is attributable
to our amended agreement with our senior lender whereby the old term loan bears
no interest during the three and six months ended June 30, 2002. (See Note 4 of
notes to unaudited financial statements).
In April 2002, we sold our 50% interest in Woo Shin Electro Systems Co, a
Korean company, for $450,000 to our joint venture partner. Payment was made by
the forgiveness of commissions, totaling $450,000, which we owed to our sales
representation company owned by our joint venture partner, with respect to sales
made by Woo Shin Electro Systems Co. in Korea.
As a result of the foregoing, we incurred a net loss of $3,524,000, $0.35
per share (basic and diluted), for the six months ended June 30, 2002, compared
with a net loss of $5,744,000, $0.58 per share (basic and diluted), for the six
months ended June 30, 2001. The net loss for the three months ended June 30,
2002 was $887,000, $0.09 per share (basic and diluted), compared with a net loss
for the three months ended June 30, 2001 of $2,511,000, $0.25 per share (basic
and diluted).
Liquidity and Capital Resources
At June 30, 2002, we had cash and cash equivalents of $388,000 compared
with $1,204,000 at December 31, 2001. Our working capital deficit at June 30,
2002 was $33,631,000 compared to a working capital deficit of $31,236,000 at
December 31, 2001. The increased level of senior debt resulted in the increase
in the working capital deficiency. During the six months of 2002, the net cash
used by us in operations was $3,591,000.
As of June 30, 2002, our debt includes $24,921,000 of senior debt that
matures on December 31, 2002, and $6,144,000 of subordinated debt that became
due on July 3, 2001. We were unable to pay the interest payment on the
subordinated notes of approximately $1,819,000, which represents interest from
July 2000 through June 30, 2002. At June 30, 2002, 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 payments on the subordinated debt.
Page 12 of 16
On March 1, 2002, and as amended on May 10, 2002, our senior lender and we
agreed to an amended and restated loan and security agreement whereby a new term
loan was established with a maximum principal amount of $2,250,000. The
agreement allows us to draw monies subject to our senior lender's receipt and
approval of a weekly disbursement budget. Obligations under the new term loan
shall bear interest at 12%. Secondly, the agreement establishes all indebtedness
prior to March 1, 2002 as an old term loan in the amount of $22,610,000, which
includes the balance due at December 31, 2001 plus accrued interest though March
1, 2002. The old term loan bears no interest until such time as the senior
lender in its sole discretion notifies us that interest shall be payable. Both
the new and old term loans are due on December 31, 2002. As part of this
agreement, the senior lender continues to preclude us from making any payments
on indebtedness to any subordinated creditors except to pay accounts payable in
the ordinary course of business. The $2,250,000 advance from our senior lender
was made at the discretion of the senior lender. Since we have borrowed the
maximum, our senior lender has no obligation to fund future operations. If we
require additional funds and the senior lender ceases funding our operations,
unless we have obtained alternative financing, we will be unable to continue in
business. Furthermore, unless we obtain funding from another source, including
the sale of one of more of our divisions, we will not be able to pay our senior
lender on December 31, 2002, and we may not be able to continue in business.
As of June 30, 2002, we had remaining outstanding $385,000 of 6%
Debentures which became due on July 2, 2002. The interest accrued on the 6%
Debentures is payable on July 1 of each year. Due to the restriction imposed by
our senior lender precluding us from making any payments on indebtedness to any
subordinated debt holder, we were unable to pay the interest due of $23,000
which was due on each of July 1, 2001 and 2002, and we were unable to pay the
principal of $385,000 which was due on July 2, 2002. Additionally, we have been
notified by the trustee that the non-payment caused an event of default.
As of June 30, 2002, we had outstanding $6,144,000 of subordinated notes,
all of which became due during 2001. We did not have the resources to pay, and
we did not pay, either the principal or interest on the subordinated notes and
are restricted by our senior lender from making such payments. The holder of a
subordinated note in the principal amount of $500,000 has commenced an action
seeking payment of the principal and interest on his note. However, the court
has denied the holder's motion for a summary judgment.
As a result of our continuing financial difficulties:
o we are having and we may continue to have difficulty performing our
obligations under our contracts, which could result in the
cancellation of contracts or the loss of future business and
penalties for non-performance;
o we are having and we may continue to have difficulty in obtaining
new business from either existing customers or new customers; and
o we may have difficulty selling one or more of our divisions on terms
which we consider reasonable; and
o a number of creditors, including one holder of our subordinated
notes, as discussed above, have engaged attorneys or collection
agencies or commenced legal actions against us, and some of them
have obtained judgments against us, including a former landlord who
has obtained a $400,000 judgment against us.
Page 13 of 16
The creditors include five former senior executives who have deferred
compensation agreements with us. The total payments due under these agreements
are approximately $1.9 million, of which $133,000 was due at June 30, 2002 and
an additional $78,000 will become due during the remainder of 2002. Other
claimants who have already either commenced litigation or otherwise sought
collection or who have obtained judgments against us are due approximately
$600,000. If we are unable to reach a settlement with these creditors and others
who have not yet brought claims, and these claimants obtain judgments against us
or, in the case of creditors who have already obtained judgments, if the
creditors seek to enforce the judgment, it may be necessary for us, or our
senior lender may require us, to seek protection under the Bankruptcy Code.
We are seeking to address our need for liquidity by exploring
alternatives, including the possible sale of one or more of our divisions.
Although we are engaged in discussions with respect to the sale of one of our
divisions, we have not signed any agreements with respect to such a sale, and we
cannot give any assurance that we will be able to sell any divisions on
reasonable terms, if at all. Furthermore, if we sell a division, we anticipate
that a substantial portion of the net proceeds will be made to our senior lender
and we will not receive a significant amount, if any, of working capital from
such a sale.
During 2001 and 2002, we took steps to reduce overhead and headcount. We
will continue to look to reduce costs while we seek additional business from new
and existing customers. Our senior lender has precluded us from making any
payments on indebtedness to any subordinated creditors. 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. Furthermore, we believe that our losses
and our financial position are having and will continue to have an adverse
effect upon our ability to develop new business as competitors and potential
customers question our ability both to perform our obligations under any
agreements we may enter and to continue in business. We have been informally
advised by British Telecommunications, which was one of our largest customers
that, because of our financial position, it will not place orders with us for
OSS products until we can demonstrate that we are financially viable. However,
this customer continues to place orders for OSS maintenance and modest orders
for line test products. The substantially reduced level of purchases by this
customer has had an adverse effect upon our operations. In addition, our
auditors included in their report an explanatory paragraph about our ability to
continue as a going concern.
In July 2002, we were notified by the American Stock Exchange of its
intention to delist our common stock based on our failure to meet the Exchange's
minimum requirements for continued listing. We have requested a hearing;
however, no assurance can be given that the hearing will change the view of the
Exchange.
Page 14 of 16
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, 2001 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 15 of 16
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 14, 2002 By /s/ William V. Carney
-----------------------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated August 14, 2002 By /s/ Edward B. Kornfeld
-----------------------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS
The undersigned chief executive officer and chief financial officer of the
Registrant do hereby certify that this Quarterly Report on Form 10-Q fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Act
of 1934, as amended, and that the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of the Registrant at the dates and for the periods shown in such
report.
Dated August 14, 2002 By /s/ William V. Carney
-----------------------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated August 14, 2002 By /s/ Edward B. Kornfeld
-----------------------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
Page 16 of 16