SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(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) 9,928,130 shares as of November 6, 2001
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2001 2000
------------- ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 442 $ 2,366
Accounts receivable - trade, less
allowance for doubtful accounts 5,909 7,425
Inventories 5,907 7,150
Prepaid expenses and other
current assets 946 1,130
-------- --------
Total current assets 13,204 18,071
-------- --------
Property, plant and equipment, net 2,825 4,555
Goodwill, net 9,761 10,357
Other assets 622 1,191
-------- --------
Total assets $ 26,412 $ 34,174
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Senior debt $ 21,467 $ 20,746
Subordinated notes 6,144 6,144
6% convertible subordinated
debentures 381 --
Accounts payable 7,273 7,173
Accrued expenses 4,240 5,385
Accrued interest payable 1,213 766
Accrued commissions 1,681 1,553
Income taxes payable 255 259
Accrued deferred compensation 196 196
Short-term loans 89 1
-------- --------
Total current liabilities 42,939 42,223
-------- --------
6% convertible subordinated
debentures -- 376
Deferred compensation 944 987
Income taxes payable 117 154
Other long-term liabilities 900 918
Minority interest 75 308
-------- --------
Total long-term liabilities 2,036 2,743
-------- --------
Total liabilities 44,975 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 9,928,130 shares at
September 30, 2001 and 9,817,165
shares at December 31, 2000 99 98
Additional paid-in capital 76,053 75,980
Accumulated other comprehensive loss:
Foreign currency translation
adjustment (4,000) (3,797)
Accumulated deficit (88,777) (81,135)
-------- --------
(16,625) (8,854)
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (18,563) (10,792)
-------- --------
Total liabilities and
stockholders' deficit $ 26,412 $ 34,174
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Nine Months Ended
September 30, September 30,
2001 2000
------------- -------------
Sales $ 21,996 $ 40,951
Cost of sales 16,154 28,813
-------- --------
Gross profit 5,842 12,138
-------- --------
Selling, general and administrative
expenses 7,452 10,277
Research and development expenses 3,545 4,530
-------- --------
Total expenses 10,997 14,807
-------- --------
Operating loss (5,155) (2,669)
Interest expense (3,459) (3,087)
Interest income 29 88
Gain on sale of assets 684 --
Other income (expense) 62 (163)
-------- --------
Loss before income taxes and
minority interest (7,839) (5,831)
Income tax expense (28) (94)
Minority interest 225 188
-------- --------
Net loss $ (7,642) $ (5,737)
======== ========
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (203) (249)
-------- --------
Comprehensive loss $ (7,845) $ (5,986)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.78) $ (0.59)
======== ========
Weighted average shares outstanding 9,854 9,747
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.78) $ (0.59)
======== ========
Weighted average shares outstanding 9,854 9,747
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Three Months Ended
September 30, September 30,
2001 2000
------------- -------------
Sales $ 6,039 $ 11,195
Cost of sales 4,536 8,343
-------- --------
Gross profit 1,503 2,852
-------- --------
Selling, general and administrative
expenses 2,090 3,279
Research and development expenses 924 1,463
-------- --------
Total expenses 3,014 4,742
-------- --------
Operating loss (1,511) (1,890)
Interest expense (1,164) (1,122)
Interest income 4 32
Gain on sale of assets 684 --
Other income (expense) 19 (175)
-------- --------
Loss before income taxes and
minority interest (1,968) (3,155)
Income tax expense (11) (33)
Minority interest 81 32
-------- --------
Net loss $ (1,898) $ (3,156)
======== ========
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments (183) (151)
-------- --------
Comprehensive loss $ (2,081) $ (3,307)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common
stock $ (0.19) $ (0.32)
======== ========
Weighted average shares
outstanding 9,925 9,796
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.19) $ (0.32)
======== ========
Weighted average shares outstanding 9,925 9,796
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000
Cash flows from operating activities:
Net loss $(7,642) $(5,737)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Non-cash financing expenses -- --
Gain on sale of assets (684) --
Depreciation and amortization 1,507 1,156
Amortization of debt discounts 5 42
Minority interest (225) (188)
Changes in assets and liabilities:
Accounts receivable 1,516 2,629
Inventories 1,243 827
Prepaid expenses 184 (587)
Other assets 444 371
Accounts payable, accrued
expenses and other liabilities (573) (2,118)
------- -------
Net cash used in operating
activities (4,225) (3,605)
------- -------
Cash flows from investing activities:
Proceeds from the sale of assets 1,850 --
Capital expenditures (178) (1,091)
Proceeds from exercised options
and warrants 36 158
------- -------
Net cash used in investing
activities 1,708 (933)
------- -------
Cash flows from financing activities:
Proceeds from senior debt 1,594 5,010
Repayments of senior debt (874) (1,382)
Proceeds from subordinated notes -- 80
Proceeds (repayments) of
short term loans 88 (42)
------- -------
Net cash provided by
financing activities 808 3,666
------- -------
Effect of exchange rates on cash (215) (210)
------- -------
Decrease in cash and cash equivalents (1,924) (1,082)
Cash and equivalents - beginning
of the year 2,366 3,245
------- -------
Cash and equivalents - end of
the period $ 442 $ 2,163
======= =======
Supplemental cash flow disclosures:
Cash paid for interest expense $ 916 $ 3,096
======= =======
Cash paid for income taxes $ 103 $ 147
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 15
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Management's Responsibility For Interim Financial Statements Including
All Adjustments Necessary For Fair Presentation
Management acknowledges its responsibility for the preparation of the
accompanying interim consolidated financial statements which reflect all
adjustments, consisting of normal recurring adjustments, considered necessary in
its opinion for a fair statement of its consolidated financial position and the
results of its operations for the interim periods presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 2000. 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, 2000 Form 10-K annual
report contained an explanatory paragraph regarding the Company's ability to
continue as a going concern. Results for the first nine months of 2001 are not
necessarily indicative of results for the year.
Note 2: Sale of Property
During August 2001, the Company sold its Glen Cove, New York facility for
$1,850,000 and recognized a gain on the sale of $684,000, net of expenses of
$180,000. Of the net proceeds of $1,670,000, $474,000 was used to reduce
outstanding principal and $350,000 to reduce outstanding interest obligations to
the Company's senior lender. The Company retained the remaining proceeds of
$846,000 for working capital purposes.
Note 3: 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:
September 30, 2001 December 31, 2000
------------------ -----------------
(in thousands)
Parts and components $3,350 $4,973
Work-in-process 854 543
Finished goods 1,703 1,634
------ ------
$5,907 $7,150
====== ======
Note 4: Senior Debt
On September 30, 2001, the Company's debt to its senior lender was
$21,467,000. During the nine and three months ended September 30, 2001, the
Company repaid principal of $874,000 and $474,000 respectively. The Company
borrowed $1,594,000 and $770,000 during the nine and three-month periods ended
September 30, 2001, respectively. The agreement with the senior lender expires
on December 5, 2001 at which time the remaining balance becomes due.
Accordingly, the senior debt has been classified as a current liability at
September 30, 2001.
Page 6 of 15
The Company's borrowings exceed the maximum borrowings under the borrowing
base formula. The senior lender has 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 all principal payments to the earlier of the
termination of the agreement on December 5, 2001 or the sale of one or more of
the divisions or assets of the Company. The agreement also precludes 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 loan expiration date. 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. The value
of the reduction in exercise price was $39,000, which was recorded as interest
expense and additional paid in capital.
Financial debt covenants include an interest coverage ratio measured
quarterly, limitations on the incurrence of indebtedness, limitations on capital
expenditures, and prohibitions on declarations of any cash or stock dividends or
the repurchase of the Company's stock. As of September 30, 2001, the Company was
not in compliance with the interest coverage covenant. The Company has obtained
from the senior lender a waiver of non-compliance with the interest coverage
ratio and the over advance under the line through the loan expiration date. The
senior lender has prohibited the Company from making payments to the holders of
subordinated debt as long as the indebtedness to the senior lender is
outstanding.
Note 5: Subordinated Notes
As of September 30, 2001, the Company has outstanding $6,144,000 of
subordinated notes, of which $900,000 became due on January 2, 2001 and
$5,244,000 became 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. See Note 4. The Company is engaged in negotiations
with respect to an extension of its obligations on the subordinated notes, but
it cannot give assurance that it will be successful in entering into such an
agreement. In July 2001, the holder of a subordinated note in the principal
amount of $500,000 commenced an action against the Company on its note.
Note 6: 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.
Page 7 of 15
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------ ------------------
Revenue:
Line $ 10,501,000 $ 14,801,000 $ 3,184,000 $ 4,289,000
OSS 7,110,000 19,977,000 1,632,000 4,672,000
Signal 3,914,000 5,668,000 1,086,000 2,080,000
------------ ------------ ------------ ------------
$ 21,525,000 $ 40,446,000 $ 5,902,000 $ 11,041,000
============ ============ ============ ============
Segment profit (loss):
Line $ 1,079,000 $ 2,382,000 $ 326,000 $ 477,000
OSS (3,876,000) (2,697,000) (1,192,000) (1,970,000)
Signal 643,000 1,146,000 224,000 504,000
------------ ------------ ------------ ------------
$ (2,154,000) $ 831,000 $ (642,000) $ (989,000)
============ ============ ============ ============
The following table reconciles segment totals to consolidated totals:
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2000 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------ ------------------
Revenue:
Total revenue for
reportable segments $ 21,525,000 $ 40,446,000 $ 5,902,000 $ 11,041,000
Other revenue 471,000 505,000 137,000 154,000
------------ ------------ ------------ ------------
Consolidated total
revenue $ 21,996,000 $ 40,951,000 $ 6,039,000 $ 11,195,000
============ ============ ============ ============
Operating loss:
Total segment profit
(loss) for reportable
segments $ (2,154,000) $ 831,000 $ (642,000) $ (989,000)
Corporate and
unallocated (3,001,000) (3,500,000) (869,000) (901,000)
------------ ------------ ------------ ------------
Consolidated total
operating loss $ (5,155,000) $ (2,669,000) $ (1,511,000) $ (1,890,000)
============ ============ ============ ============
Note 7: New Accounting Standards
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
Page 8 of 15
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of goodwill
is $9,761,000. Amortization expense during the nine-month period ended September
30, 2001 was $596,000. Currently, the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operations.
Page 9 of 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's consolidated statements of operations for the periods
indicated below, shown as a percentage of sales, are as follows:
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, September 30,
----------------- ------------------
2001 2000 2001 2000
------ ------ ------ ------
Sales 100% 100% 100% 100%
Cost of sales 73% 70% 75% 75%
Gross profit 27% 30% 25% 25%
Selling, general and
administrative expenses 34% 25% 35% 29%
Research and development
expenses 16% 11% 15% 13%
Operating loss (23%) (6%) (25%) (17%)
Interest expense - net (16%) (7%) (19%) (10%)
Gain on sale of assets 3% 0% 12% 0%
Other income 0% (1%) 0% (1%)
Minority interest 1% 0% 1% 0%
Income taxes 0% 0% 0% 0%
Net loss (35%) (14%) (31%) (28%)
The Company's sales by product line for the periods ended September 30,
2001 and 2000 are as follows:
Nine Months Ended
-----------------
September 30,
-------------
2001 2000
---- ----
(Dollars in thousands)
Line connection/protection
equipment ("Line") $10,501 48% $14,801 36%
Operations Support
Systems ("OSS") 7,110 32% 19,977 49%
Signal Processing ("Signal") 3,914 18% 5,668 14%
Other 471 2% 505 1%
------------- --------------
$21,996 100% $40,951 100%
============= ==============
Three Months Ended
------------------
September 30,
-------------
2001 2000
---- ----
(Dollars in thousands)
Line $ 3,184 53% $ 4,289 38%
OSS 1,632 27% 4,672 42%
Signal 1,086 18% 2,080 19%
Other 137 2% 154 1%
------------- --------------
$ 6,039 100% $11,195 100%
============= ==============
Page 10 of 15
Results of Operations
The Company's sales for the nine months ended September 30, 2001 compared
to the nine months ended September 30, 2000 decreased $18,955,000 (46%) from
$40,951,000 in 2000 to $21,996,000 in 2001. Sales for the quarter ended
September 30, 2001 of $6,039,000 represented a decrease of $5,156,000 (46%) from
sales of $11,195,000 for the quarter ended September 30, 2000. The decreased
sales for the three and nine months were due to lower sales from all divisions.
The line sales for the nine months ended September 30, 2001 compared to
September 30, 2000 decreased from $14,801,000 to $10,501,000 or $4,300,000
(29%). Line sales for the third quarter decreased by $1,105,000 (26%) from
$4,289,000 in 2000 to $3,184,000 in 2001. The decrease in sales for the
nine-month period is primarily attributable to reduced sales in Mexico and the
United Kingdom. The decrease for the three months ended September 30, 2001
reflects reduced sales primarily to customers in the United Kingdom. Both the
nine and three month results were adversely affected by the general slowdown in
the telecommunications industry.
OSS sales for the nine months ended September 30, 2001 were $7,110,000
compared to the nine months ended September 30, 2000 of $19,977,000, a decrease
of $12,867,000 (64%). Sales for the three months ended September 30, 2001 were
$1,632,000 compared to sales for the three months ended September 30, 2000 of
$4,672,000, a decrease of $3,040,000 (65%). The decrease in sales during the
nine and three months ended September 30, 2001 was negatively impacted by
reduced opportunities in Europe and by delays we encountered in obtaining
software from a vendor necessary to complete certain contracts.
Signal sales for the nine months ended September 30, 2001 were $3,914,000
compared to the nine months ended September 30, 2000 of $5,668,000, a decrease
of $1,754,000 (31%). Signal processing sales for the three months ended
September 30, 2001 were $1,086,000, compared to the three months ended September
30, 2000 of $2,080,000, a decrease of $994,000 (48%). The decrease in sales for
the nine and three-month periods primarily reflects delays in the receipt of
certain anticipated contracts and a general slowdown in the order rate from
customers.
Gross margin for the nine months ended September 30, 2001 was 27% compared
to 30% for the nine months ended September 30, 2000. This decline in gross
margin is attributable to the decreased level of sales. Due to the low level of
sales, the Company was unable to absorb certain fixed expenses associated with
the OSS contracts primarily in the first quarter of 2001. Gross margin for the
quarter ended September 30, 2001 was 25% compared to 25% for the quarter ended
September 30, 2000.
Selling, general and administrative expenses decreased by $2,825,000 (27%)
from $10,277,000 to $7,452,000 for the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000. Selling, general and
administrative expenses decreased by $1,189,000 (36%) from $3,279,000 in the
quarter ended September 30, 2000 to $2,090,000 in the comparable quarter of
2001. The decrease from 2000 to 2001 for the nine and three months primarily
reflects reduced professional legal expenses and decreased expenses reflecting
the Company's reorganization of its sales and marketing efforts of its OSS
division.
Research and development expenses decreased by $985,000 (22%) for the nine
months ended September 30, 2001 and by $539,000 (37%) for the three months ended
September 30, 2001 from the comparable periods in 2000, respectively. This
decrease in research and development expenses for both the nine and three months
resulted from the Company's efforts to reduce its expenses, primarily related to
the OSS business.
Page 11 of 15
Results of Operations (continued)
As a result of the above, the Company had an operating loss of $5,155,000
for the nine months ended September 30, 2001 compared to an operating loss of
$2,669,000 in the comparable period of 2000. The Company had an operating loss
of $1,511,000 for the quarter ended September 30, 2001 as compared to an
operating loss of $1,890,000 for the quarter ended September 30, 2000.
Interest expense for the nine months ended September 30, 2001 compared to
September 30, 2000 increased by $372,000 (12%) from $3,087,000 in 2000 to
$3,459,000 in 2001. Interest expense for the three-month period ending September
30, 2001 compared to the same three months of 2000, increased by $42,000 (4%)
from $1,122,000 in 2000 to $1,164,000 in 2001. This change is attributable
primarily to increased levels of borrowing, including capitalized interest
expense, from and increased interest rate payable to the Company's senior
lender.
As the result of the foregoing, the Company incurred a net loss of
$7,642,000, $0.78 per share (basic and diluted) for the nine months ended
September 30, 2001, compared with a net loss of $5,737,000, $0.59 per share
(basic and diluted), for the nine months ended September 30, 2000. The net loss
for the three months ended September 30, 2001 was $1,898,000, $0.19 per share
(basic and diluted), compared with a net loss for the three months ended
September 30, 2000 of $3,156,000, $0.32 per share (basic and diluted).
Liquidity and Capital Resources
At September 30, 2001 the Company had cash and cash equivalents of
$442,000 compared with $2,366,000 at December 31, 2000. The Company had a
working capital deficit at September 30, 2001 of $29,735,000, compared to a
working capital deficit of $24,152,000 at December 31, 2000. The working capital
deficiency reflects the current liabilities to the senior and subordinated
lenders together with the effect of the reduced level of business, which
resulted in reduced receivables and increased accrued liabilities. During the
nine months ended September 30, 2001, the Company used $4,225,000 in operations.
As of September 30, 2001, the Company had senior debt of $21,467,000
outstanding, all of which is shown as a current liability. The current agreement
with the senior lender expires on December 5, 2001. The Company's borrowings
exceed the maximum borrowings under the borrowing base formula. The senior
lender has 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 all
principal payments to the earlier of the termination of the agreement on
December 5, 2001 or the sale of one or more of the divisions or assets of the
Company. The senior lender prohibited us from making any payments on
indebtedness to any subordinated creditors, although it has consented to the
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 loan
expiration date. 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 the loan expiration date.
Page 12 of 15
Liquidity and Capital Resources (continued)
As of September 30, 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 became due on July 2, 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. We have been
engaged in negotiations 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 previously announced agreement in principal has
not resulted in an agreement and the Company cannot give any assurance that it
will be able to negotiate such an extension. 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, as described below.
Our cash availability during 2001 and thereafter may be affected by a
number of factors. At September 30, 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, the loss of future business or the ability to
satisfy other vendor obligations. In addition, $21,467,000 of senior debt
becomes due on December 5, 2001 and $7,278,000 of subordinated debt and interest
became due in July 2001. We are continuing to negotiate with our senior lender
with respect to an extension beyond the December 5, 2001 maturity of our current
facility and with the holders of the subordinated notes with respect to an
extension of the maturity of those notes. 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.
We are addressing our need for liquidity by seeking to extend our
agreement with our senior lender, to negotiate an agreement with the holders of
the subordinated debt, and sell one or more of our divisions. Although we are
engaged in negotiations with respect to a sale of one or more of our divisions,
we cannot assure you that we will be successful in these efforts. In the event
of a sale, we do not believe that the net sales proceeds will provide us with
sufficient funds to enable us to pay all of our senior and subordinated debt. In
that event we will seek to obtain an agreement with our senior and subordinated
lenders to accept equity for the amount due them which is in excess of the net
sales proceeds. The issuance of such equity would result in substantial dilution
to our present stockholders. Our failure to obtain such an agreement with our
lenders would have a very material adverse effect upon our ability to continue
our operations.
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 may have an
adverse effect upon our ability to develop new business as competitors and
potential customers question our ability to continue in business. We have been
informally advised by 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 loss of this customer would have a material adverse effect upon our
operations.
Page 13 of 15
Liquidity and Capital Resources (continued)
The holder of a subordinated note in the principal amount of $500,000 has
commenced an action against the Company seeking payment of the principal and
interest on the note. The Company believes that the subordination provision of
the note prohibits payment by the Company; however, if the noteholder obtains a
judgment against the Company and seeks to collect on the judgment, the senior
lender may seek to foreclose on the Company's obligations to it. In such event,
or in the event that the Company is unable to extend its senior and subordinated
loan obligations or sell one or more of its divisions, the Company may be unable
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. 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, 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 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 3. Defaults Upon Senior Securities
The Company has failed to pay the principal and interest of $7,278,000 as
of September 30, 2001 on its subordinated notes. Notes in the principal amount
of $900,000 were due on January 2, 2001, and the remaining notes, in the
principal amount of $5,244,000, were due on July 2, 2001. The subordinated notes
are subordinated to payment of the Company's obligations to its senior lender,
which has prohibited the Company from paying the subordinated notes. See Notes 4
and 5 of Notes to Consolidated Financial Statements in this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 14 of 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PORTA SYSTEMS CORP.
Dated November 8, 2001 By /s/ William V. Carney
--------------------------
William V. Carney
Chairman of the Board
Dated November 8, 2001 By /s/ Edward B. Kornfeld
--------------------------
Edward B. Kornfeld
Vice President and Chief Financial Officer
Page 15 of 15