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, 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
(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) 9,976,964 shares as of May 7, 2002
[table of contents]
Page 1 of 14
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
2002 2001
---------- -----------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 469 $ 1,204
Accounts receivable - trade, less allowance for doubtful accounts 4,850 4,284
Inventories 4,396 5,206
Prepaid expenses and other current assets 1,194 852
-------- --------
Total current assets 10,909 11,546
Property, plant and equipment, net 2,154 2,328
Goodwill, net 3,761 3,761
Other assets 73 198
-------- --------
Total assets $ 16,897 $ 17,833
-------- --------
Liabilities and Stockholders' Deficit
Current liabilities:
Senior debt $ 23,776 $ 22,095
Subordinated notes 6,144 6,144
6% convertible subordinated debentures 384 382
Accounts payable 6,708 7,023
Accrued expenses 3,795 3,417
Accrued interest payable 1,929 1,593
Accrued commissions 1,193 1,607
Accrued deferred compensation 196 196
Income taxes payable 301 314
Short-term loans 10 11
-------- --------
Total current liabilities 44,436 42,782
-------- --------
Deferred compensation 924 900
-------- --------
Total long-term liabilities 924 900
-------- --------
Total liabilities 45,360 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 March 31, 2002 and December 31, 2001 100 99
Additional paid-in capital 76,057 76,056
Accumulated deficit (98,546) (95,909)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (4,136) (4,157)
-------- --------
(26,525) (23,911)
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (28,463) (25,849)
-------- --------
Total liabilities and stockholders' deficit $ 16,897 $ 17,833
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 14
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive (Loss)
(In thousands, except per share data)
Three Months Ended
March 31, March 31,
2002 2001
------- --------
Sales $ 4,744 $ 7,042
Cost of sales 3,866 5,628
------- -------
Gross profit 878 1,414
Selling, general and administrative expenses 1,868 2,578
Research and development expenses 759 1,187
------- -------
Total expenses 2,627 3,765
------- -------
Operating loss (1,749) (2,351)
Interest expense (874) (1,003)
Interest income 2 16
Other income (expense), net (3) 28
------- -------
Loss before income taxes and minority interest (2,624) (3,310)
Income tax expense (13) (15)
Minority interest -- 92
------- -------
Net loss $(2,637) $(3,233)
======= =======
Other comprehensive income, net of tax:
Foreign currency translation adjustments 21 3
Comprehensive loss $(2,616) $(3,230)
======= =======
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.26) $ (0.33)
======= =======
Weighted average shares outstanding 9,972 9,836
======= =======
Diluted per share amounts:
Net loss per share of common stock $ (0.26) $ (0.33)
======= =======
Weighted average shares outstanding 9,972 9,836
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 14
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31, March 31,
2002 2001
------- ---------
Cash flows from operating activities:
Net (loss) $(2,637) $(3,233)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Non-cash financing expenses -- 61
Depreciation and amortization 167 439
Amortization of debt discounts 2 2
Minority interest -- (92)
Changes in operating assets and liabilities:
Accounts receivable (566) (297)
Inventories 810 387
Prepaid expenses and other current assets (342) (696)
Other assets 125 365
Accounts payable, accrued expenses and other liabilities 14 1,507
------- -------
Net cash used in operating activities (2,427) (1,557)
------- -------
Cash flows from investing activities:
Capital expenditures, net (5) (36)
------- -------
Net cash used in investing activities (5) (36)
------- -------
Cash flows from financing activities:
Proceeds from senior debt 1,681 --
Repayments of senior debt -- (400)
Proceeds from exercised options and warrants 2 16
Repayments of short term loans (1) (1)
------- -------
Net cash provided by (used in) financing activities 1,682 (385)
------- -------
Effect of exchange rate changes on cash 15 9
------- -------
Decrease in cash and cash equivalents (735) (1,969)
Cash and equivalents - beginning of the year 1,204 2,366
------- -------
Cash and equivalents - end of the period $ 469 $ 397
------- -------
Supplemental cash flow disclosure:
Cash paid for interest expense $ 6 $ 726
======= =======
Cash paid for income taxes $ 27 $ 77
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 14
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 first three 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 methods) or market. The composition of inventories at the end of the
respective periods is as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
(in thousands)
Parts and components $2,402 $3,217
Work-in-process 389 192
Finished goods 1,605 1,797
------ ------
$4,396 $5,206
====== ======
Note 3: Senior Debt
On March 31, 2002, the Company's debt to its senior lender was
$23,776,000. During the three months then ended, the Company borrowed
$1,681,000. The current agreement with the senior lender, as amended in March
2002 and described below, expires on December 31, 2002 and, accordingly, the
senior debt has been classified as a current liability at March 31, 2002.
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. The agreement allows the Company to draw monies
subject to the senior lender's receipt and approval of a weekly disbursement
budget. Advances under this agreement are subject to the sole and absolute
discretion of the senior lender. As of April 22, 2002, the Company had drawn
down the full amount of the new term loan. On May 10, 2002, the senior lender
agreed to a further amendment to the loan and security agreement to permit the
Company to borrow up to an additional $750,000. Obligations under the new term
loan bear interest at 12%, and principal and interest on the note are due on
December 31, 2002, which interest shall accrue monthly and be applied 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 from March 1, 2002 until such time as the senior
lender
Page 5 of 14
in its sole discretion notifies the Company that the old term loan shall
thereafter accrue interest which 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.
Note 4: Subordinated Notes
As of March 31, 2002, the Company has outstanding $6,144,000 of
subordinated notes and $1,588,000 of accrued interest, which were due and
payable. These notes matured in January and July 2001; however, the Company did
not have the resources to pay the $6,144,000 principal and $1,588,000 of
interest due on the subordinated debt. In addition, the senior lender had
precluded the Company from making payments on the subordinated debt (Note 3).
Note 5: Sale of Ownership in Joint Venture
As of December 31, 2001, we had a 50% ownership interest in Woo Shin
Electro Systems Co, a Korean company ("Woo Shin"). In April 2002, we sold our
interest in Woo Shin for $450,000 to Mr. J.C. Jun, the owner of the other 50% of
Woo Shin. Payment was made by the forgiveness of commissions, totaling $450,000,
which the Company owed to a company owned by Mr. Jun with respect to sales made
by Woo Shin.
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 $198,000 in amortization for
the three months ended March 31, 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 will complete 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 will not be able to determine the impact of SFAS 142
on its consolidated financial statements until such time as it applies all of
its provisions. Any impairment loss resulting from the transitional impairment
test will be recorded as a cumulative effect of a change in accounting principle
for the quarter ending June 30, 2002. Any subsequent impairment losses will be
reflected in operating income (loss) in the statement of operations.
Page 6 of 14
The following schedule presents net loss, basic net loss per share and
diluted net loss per share, exclusive of goodwill amortization expense, for the
three months ended March 31, 2001, for which the standard had not been adopted.
Three Months Ended
March 31, 2001
------------------
(In thousands)
Reported net loss ......................................... $(3,233)
Add back: Goodwill amortization .......................... 198
-------
Adjusted net loss ......................................... $(3,035)
=======
Basic net loss per share:
Reported net loss ................................ $ (0.33)
Goodwill amortization ............................ 0.02
-------
Adjusted net loss per share ............................... $ (0.31)
=======
Diluted net loss per share:
Reported net loss ................................ $ (0.33)
Goodwill amortization ............................ 0.02
-------
Adjusted diluted net loss per share ....................... $ (0.31)
=======
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.
Page 7 of 14
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.
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Sales:
Line $ 1,470,000 $ 3,848,000
OSS 2,045,000 1,365,000
Signal 1,076,000 1,652,000
------------ -----------
$ 4,591,000 $ 6,865,000
============ ===========
Segment profit (loss):
Line $ (661,000) $ 536,000
OSS (279,000) (2,314,000)
Signal 107,000 345,000
------------ -----------
$ (833,000) $(1,433,000)
============ ===========
The following table reconciles segment totals to consolidated totals:
Three Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Sales:
Total revenue for reportable
segments $ 4,591,000 $ 6,865,000
Other revenue 153,000 177,000
------------ -----------
Consolidated total revenue $ 4,744,000 $ 7,042,000
============ ===========
Operating loss:
Total segment loss for
reportable segments $ (833,000) $(1,433,000)
Corporate and unallocated (916,000) (918,000)
------------ -----------
Consolidated total
operating loss $ (1,749,000) $(2,351,000)
============ ===========
Page 8 of 14
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,
2002 2001
---- ----
Sales 100% 100%
Cost of Sales 82% 80%
Gross Profit 18% 20%
Selling, general and administrative expenses 39% 36%
Research and development expenses 16% 17%
Operating loss (37%) (33%)
Interest expense - net (18%) (14%)
Other 0% 0%
Minority interest -- 1%
Net (loss) (55%) (46%)
The Company's sales by product line for the periods ended March 31, 2002
and 2001 are as follows:
Three Months Ended March 31,
$(000)
2002 2001
---- ----
Line connection/protection equipment $1,470 31% $3,848 55%
OSS equipment 2,045 43% 1,365 19%
Signal Processing 1,076 23% 1,652 23%
Other 153 3% 177 3%
----------- -----------
$4,744 100% $7,042 100%
=========== ===========
Results of Operations
Our sales for the quarter ended March 31, 2002 were $4,744,000
representing a decrease of $2,298,000 (33%) compared to the quarter ended March
31, 2001 of $7,042,000. The overall decrease in sales reflects reduced sales of
Line and Signal equipment partially offset by increased sales from OSS.
Line equipment sales decreased by $2,378,000 (62%) from $3,848,000 for the
March 2001 quarter to $1,470,000 for the March 2002 quarter. The reduced sales
level reflected a decrease in volume of sales to United States and United
Kingdom customers. The ability to sell line equipment products reflects both the
Company's weak financial position as well as the general slowdown in the
telecommunications industry.
OSS sales increased by $680,000 (50%) from $1,365,000 for the quarter
ended March 31, 2001 to $2,045,000 for the quarter ended March 31, 2002. The
increased sales resulted from higher levels of contract completion during the
current quarter as compared to the same quarter last year.
Page 9 of 14
Signal processing revenue for the quarter ended March 31, 2002 compared to
2001 decreased by $576,000 (35%) from $1,652,000 to $1,076,000. The decrease in
sales primarily reflects delays in the receipt of certain anticipated contracts
and the continued slowdown in the order rate from customers during the first
quarter of 2002.
Gross margin for the March 2002 quarter was 18% compared to 20% for the
March 2001 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 Line and Signal
units.
Selling, general and administrative expenses decreased by $710,000 (28%)
from $2,578,000 in the March 2001 quarter to $1,868,000 in the March 2002
quarter. This decrease relates primarily to reduced salaries and benefits,
consulting services and commissions reflecting our current level of business.
However, because of our significantly reduced level of sales, our selling,
general and administrative expenses represented a larger percentage of sales -
39% in the March 2002 quarter as compared with 36% in the March 2001 quarter.
Research and development expenses decreased by $428,000 (36%) from
$1,187,000 in the March 2001 quarter to $759,000 in the March 2002 quarter. This
decrease in research and development expenses results from our efforts to reduce
expenses primarily related to the OSS business. Our inability to fund research
and development could adversely affect our ability to offer products based on
developing technologies, which could affect our ability to sell product in
future years.
As a result of the foregoing, we had an operating loss of $1,749,000 for
the March 2002 quarter, as compared to an operating loss of $2,351,000 for the
March 2001 quarter.
Interest expense decreased by $129,000 (13%) from $1,003,000 in 2001 to
$874,000 in 2002. This change is attributable primarily to our amended agreement
with our senior lender whereby the old term loan bears no interest commencing
March 1, 2002 until such time as the lender, in its sole discretion, resumes
interest charges.
As the result of the foregoing, our net loss was $2,637,000, $.26 per
share (basic and diluted), for the March 2002 quarter versus a net loss of
$3,233,000, $.33 per share (basic and diluted), for the March 2001 quarter.
Our losses are continuing, and we cannot give any assurance that we will
be able to operate profitably in the future. As a result of the deterioration of
our operating revenue resulting from both market conditions and our financial
condition, we are evaluating various options, including the sale of one or all
of our divisions as well as a reorganization under the Bankruptcy Code.
Liquidity and Capital Resources
At March 31, 2002, we had cash and cash equivalents of $469,000 compared
with $1,204,000 at December 31, 2001. Our working capital deficit at March 31,
2002 was $33,527,000, compared to a working capital deficit of $31,236,000 at
December 31, 2001. The reduced level of cash on hand and inventory, and
increased level of senior debt, resulted in the increase in the working capital
deficiency. During the March 2002 quarter, the net cash used by us in operations
was $2,427,000, which was partially offset by additional borrowings from our
senior lender of $1,681,000. Our senior lender has no obligation to advance us
any funds, and, if our operations do not generate a positive cash flow or we do
not obtain funds from other sources, we may be unable to continue in business.
Page 10 of 14
As of March 31, 2002, our debt includes $23,776,000 of senior debt that
matures on December 31, 2002, and $6,144,000 of subordinated debt that became
due in January and July 2001. We were unable to pay the principal or interest on
the subordinated notes. Interest on the subordinated notes amounted to
approximately $1,588,000, which represents interest from July 2000 through March
31, 2002. At March 31, 2002, we did not have sufficient resources to pay either
the senior lender or the subordinated lenders, 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.
On March 1, 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 $1,500,000. 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%. As of April 22, 2002, we had drawn down the full amount of this new
facility. On May 10, 2002, the senior lender agreed to a further amendment to
the loan and security agreement to increase the maximum additional borrowings by
$750,000, and any additional advances are to be made in the sole and exclusive
discretion of the senior lender. The agreement with our senior lender
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 the old
loan shall thereafter accrue interest, which shall be payable. Both the new and
old term loans expire 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 additional $750,000 being advanced by our senior lender
is being advanced at the sole and exclusive discretion of the senior lender and
such advances are dependent on, among other things, the perception of the senior
lender that we are either stemming our losses or effecting a sale of one or more
of our divisions. If 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 or 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 March 31, 2002, we had remaining outstanding $384,000 of 6%
Debentures, net of original issue discount of $1,000, which mature July 2, 2002.
The face amount of the outstanding 6% Debentures was $385,000. 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 on July 1, 2001. Thus, interest due at March 31, 2002 was $41,000.
Additionally, we have been notified by the trustee that the non-payment of the
interest caused an event of default.
As of March 31, 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
recently denied the holder's motion for a summary judgment on the grounds that
the terms of the note did not give him permission to obtain a judgment while we
remained in default to the senior debt holder.
Page 11 of 14
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; 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.
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 $146,000 was due at March 31, 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 preliminary 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 any significant amount of working capital
from such a sale. During 2001 and early 2002, we have taken 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
is 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, British Telecommunications continues to place
orders for OSS maintenance and modest orders for line test products. The
significantly reduced level of business from this customer is having a material
adverse effect upon our operations. In addition, our auditors included in their
report on our December 31, 2001 audited financial statements an explanatory
paragraph about our ability to continue as a going concern.
Page 12 of 14
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 13 of 14
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, 2002 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated May 14, 2002 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
Page 14 of 14