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, 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
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(Zip Code)
516-364-9300
------------
(Company's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common Stock (par value $0.01) 9,909,248 shares as of August 6, 2001
Page 1 of 14
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
2001 2000
-------- ------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 654 $ 2,366
Accounts receivable -- trade, less allowance for doubtful accounts 6,098 7,425
Inventories 6,079 7,150
Prepaid expenses and other current assets 1,138 1,130
-------- --------
Total current assets 13,969 18,071
-------- --------
Property, plant and equipment, net 4,045 4,555
Goodwill, net 9,960 10,357
Other assets 661 1,191
-------- --------
Total assets $ 28,635 $ 34,174
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Senior debt $ 21,170 $ 20,746
Subordinated notes 6,144 6,144
Accounts payable 7,344 7,173
Accrued expenses 4,690 5,385
Accrued interest payable 1,176 766
Accrued commissions 1,674 1,553
Income taxes payable 278 259
Accrued deferred compensation 196 196
Short-term loans 13 1
-------- --------
Total current liabilities 42,685 42,223
-------- --------
6% convertible subordinated debentures 379 376
Deferred compensation 902 987
Income taxes payable 117 154
Other long-term liabilities 883 918
Minority interest 155 308
-------- --------
Total long-term liabilities 2,436 2,743
-------- --------
Total liabilities 45,121 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
9,909,248 shares at June 30, 2001 and 9,817,165 shares at
December 31, 2000 99 98
Additional paid-in capital 76,048 75,980
Accumulated deficit (86,878) (81,135)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,817) (3,797)
-------- --------
(14,548) (8,854)
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (16,486) (10,792)
-------- --------
Total liabilities and stockholders' deficit $ 28,635 $ 34,174
======== ========
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)
Six Months Ended
June 30, June 30,
2001 2000
-------- --------
Sales $ 15,957 $ 29,756
Cost of sales 11,618 20,470
-------- --------
Gross profit 4,339 9,286
Selling, general and administrative expenses 5,362 6,998
Research and development expenses 2,621 3,067
-------- --------
Total expenses 7,983 10,065
-------- --------
Operating loss (3,644) (779)
Interest expense (2,295) (1,965)
Interest income 25 56
Other income 43 12
-------- --------
Loss before income taxes and minority interest (5,871) (2,676)
Income tax expense (17) (61)
Minority interest 144 156
-------- --------
Net loss $ (5,744) $ (2,581)
======== ========
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (20) (98)
-------- --------
Comprehensive loss $ (5,764) $ (2,679)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.58) $ (0.27)
======== ========
Weighted average shares outstanding 9,872 9,722
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.58) $ (0.27)
======== ========
Weighted average shares outstanding 9,872 9,722
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 14
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,
2001 2000
-------- --------
Sales $ 8,915 $ 13,828
Cost of sales 5,990 10,258
-------- --------
Gross profit 2,925 3,570
Selling, general and administrative expenses 2,784 3,863
Research and development expenses 1,434 1,659
-------- --------
Total expenses 4,218 5,522
-------- --------
Operating loss (1,293) (1,952)
Interest expense (1,292) (1,031)
Interest income 9 29
Other income 15 7
-------- --------
Loss before income taxes and minority interest (2,561) (2,947)
Income tax expense (2) (31)
Minority interest 52 91
-------- --------
Net loss $ (2,511) $ (2,887)
======== ========
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (23) (135)
-------- --------
Comprehensive loss $ (2,534) $ (3,022)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.25) $ (0.30)
======== ========
Weighted average shares outstanding 9,900 9,782
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.25) $ (0.30)
======== ========
Weighted average shares outstanding 9,900 9,782
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 14
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30, June 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $(5,744) $(2,581)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Non-cash financing expenses 123 15
Depreciation and amortization 1,067 776
Amortization of discount on convertible
subordinated debentures 3 13
Minority interest (144) (156)
Changes in assets and liabilities:
Accounts receivable 1,327 (217)
Inventories 1,071 248
Prepaid expenses (8) (77)
Other assets 405 3
Accounts payable, accrued expenses and other
liabilities (131) (517)
------- -------
Net cash used in operating activities (2,031) (2,493)
------- -------
Cash flows from investing activities:
Capital expenditures, net (150) (1,285)
------- -------
Net cash used in investing activities (150) (1,285)
------- -------
Cash flows from financing activities:
Proceeds from senior debt 824 4,490
Repayments of senior debt (400) (982)
Proceeds from exercised options and warrants 30 140
Net proceeds of short term loans 12 (39)
------- -------
Net cash provided by financing activities 466 3,469
Effect of exchange rate changes on cash 3 (117)
------- -------
Decrease in cash and cash equivalents (1,712) (286)
Cash and equivalents -- beginning of the year 2,366 3,245
------- -------
Cash and equivalents -- end of the period $ 654 $ 2,959
======= =======
Supplemental cash flow disclosures:
Cash paid for interest expense $ 899 $ 1,853
======= =======
Cash paid for income taxes $ 99 $ 109
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 14
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 to stockholders for the year ended
December 31, 2000. The audit opinion included in the December 31, 2000 Form 10-K
annual report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern. Results for the first six months of 2001 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:
June 30, 2001 December 31, 2000
------------- -----------------
(in thousands)
Parts and components $3,398 $4,973
Work-in-process 648 543
Finished goods 2,033 1,634
------ ------
$6,079 $7,150
====== ======
Note 3: Senior Debt
On June 30, 2001, the Company's debt to its senior lender was $21,170,000.
During the six and three months ended June 30, 2001, the Company repaid
principal of $400,000 and $0, respectively. The Company borrowed $824,000 during
the six and three-month periods ended June 30, 2001. The agreement with the
senior lender expires on September 5, 2001 and, accordingly, the senior debt has
been classified as a current liability at June 30, 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 September 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 and recorded as interest expense
and additional paid in capital.
Page 6 of 14
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 June 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 4: Subordinated Notes
As of June 30, 2001, the Company has outstanding $6,144,000 of
subordinated notes, of which $900,000 was due on January 2, 2001 and $5,244,000
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.
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. See Note 6.
Note 5: Segment Data
The Company has three reportable segments: Line Connection and Protection
Equipment ("Line") whose products interconnect copper telephone lines to
switching equipment and provides fuse elements that protect telephone equipment
and personnel from electrical surges; Operating Support Systems ("OSS") whose
products automate the testing, provisioning, maintenance and administration of
communication networks and the management of support personnel and equipment;
and Signal Processing ("Signal") whose products are used in data communication
devices that employ high frequency transformer technology.
The factors used to determine the above segments focused primarily on the
types of products and services provided, and the type of customer served. Each
of these segments is managed separately from the others, and management
evaluates segment performance based on operating income.
There has been no significant change from December 31, 2000 in the basis
of measurement of segment revenues and profit or loss, and no significant change
in the Company's assets.
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Sales:
Line $ 7,316,000 $ 10,512,000 $ 3,468,000 $ 4,418,000
OSS 5,478,000 15,305,000 4,113,000 7,191,000
Signal 2,828,000 3,588,000 1,176,000 2,010,000
------------ ------------ ------------ ------------
$ 15,622,000 $ 29,405,000 $ 8,757,000 $ 13,619,000
============ ============ ============ ============
Segment profit (loss):
Line $ 753,000 $ 1,905,000 $ 217,000 $ 636,000
OSS (2,684,000) (727,000) (370,000) (1,278,000)
Signal 410,000 642,000 65,000 340,000
------------ ------------ ------------ ------------
$ (1,521,000) $ 1,820,000 $ (88,000) $ (302,000)
============ ============ ============ ============
Page 7 of 14
The following table reconciles segment totals to consolidated totals:
Six Months Ended Three Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Sales:
Total revenue for reportable
segments $ 15,622,000 $ 29,405,000 $ 8,757,000 $ 13,619,000
Other revenue 335,000 351,000 158,000 209,000
------------ ------------ ------------ ------------
Consolidated total revenue $ 15,957,000 $ 29,756,000 $ 8,915,000 $ 13,828,000
============ ============ ============ ============
Operating income (loss):
Total segment Profit (loss)
for reportable segments $ (1,521,000) $ 1,820,000 $ (88,000) $ (302,000)
Corporate and unallocated (2,123,000) (2,599,000) (1,205,000) (1,650,000)
------------ ------------ ------------ ------------
Consolidated total
operating loss $ (3,644,000) $ (779,000) $ (1,293,000) $ (1,952,000)
============ ============ ============ ============
Note 6: Legal Proceedings
In July 2001, the holder of a subordinated note in the principal amount of
$500,000 commenced an action against the Company in the United States District
Court for the Southern District of New York seeking payment of the principal and
accrued interest on their subordinated notes which were payable in July 2001.
The payment of the note is subordinated to payment of the Company's senior debt
and the Company believes that the subordination provision of the note prohibits
payment by the Company. The Company's obligations under the subordinated notes
are reflected as current liabilities on the Company's balance sheet.
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.
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.
Page 8 of 14
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$9,960,000. Amortization expense during the six-month period ended June 30, 2001
was $397,000. 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.
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of Sales 73% 69% 67% 74%
Gross Profit 27% 31% 33% 26%
Selling, general and administrative
expenses 34% 24% 31% 28%
Research and development expenses 16% 10% 16% 12%
Operating loss (23%) (3%) (14%) (14%)
Interest expense -- net (14%) (6%) (14%) (7%)
Other income 0% 0% 0% 0%
Minority interest 1% 0% 0% 0%
Income taxes 0% 0% 0% 0%
Net loss (36%) (9%) (28%) (21%)
The Company's sales by product line for the periods ended June 30, 2001
and 2000 are as follows:
Six Months Ended
----------------
June 30,
--------
2001 2000
---- ----
(Dollars in thousands)
Line $ 7,316 46% $10,512 35%
OSS 5,478 34% 15,305 52%
Signal 2,828 18% 3,588 12%
Other 335 2% 351 1%
------- --- ------- ---
$15,957 100% $29,756 100%
======= === ======= ===
Three Months Ended
------------------
June 30,
--------
2001 2000
---- ----
(Dollars in thousands)
Line $ 3,468 39% $ 4,418 32%
OSS 4,113 46% 7,191 52%
Signal 1,176 13% 2,010 15%
Other 158 2% 209 1%
------- --- ------- ---
$ 8,915 100% $13,828 100%
======= === ======= ===
Page 9 of 14
Results of Operations
The Company's sales for the six months ended June 30, 2001 compared to the
six months ended June 30, 2000 decreased by $13,799,000 (46%) from $29,756,000
in 2000 to $15,957,000 in 2001. Sales for the quarter ended June 30, 2001 of
$8,915,000 decreased by $4,913,000 (36%) compared to $13,828,000 for the quarter
ended June 30, 2000. The decrease in sales for the six and three month periods
reflects lower levels of sales from all divisions.
Line sales for the six months ended June 30 decreased from $10,512,000 to
$7,316,000, or $3,196,000 (30%) from 2000 to 2001. Sales for the three months
ended June 30 decreased by $950,000 (22%) from $4,418,000 in 2000 to $3,468,000
in 2001. The decrease for the six and three months ended June 30, 2001 reflects
reduced sales primarily to customers in the United Kingdom and Mexico and a
general slow down in the telecommunications industry.
OSS sales for the six months ended June 30, 2001 were $5,478,000 compared
to the six months ended June 30, 2000 of $15,305,000, a decrease of $9,827,000
(64%). OSS revenue for the three months ended June 30, 2001 was $4,113,000
compared to the three months ended June 30, 2000 of $7,191,000, a decrease of
$3,078,000 (43%). Both the six-month and three months ended June 30, 2001
include approximately $1,000,000 of revenue generated from the Company's initial
iScan order. The decreased sales during the six and three months ended June 30,
2001 reflected lower shipments to Fujitsu Telecommunications Europe Limited
which provided approximately $11,000,000 and $5,100,000, respectively, of sales
in the six and three months periods of 2000. These shipments were made pursuant
to a contract which was completed during 2000.
Signal sales for the six months ended June 30, 2001 were $2,828,000
compared to the six months ended June 30, 2000 of $3,588,000, a decrease of
$760,000 (21%). Sales for the three months ended June 30, 2001 were $1,176,000
compared to the three months ended June 30, 2000 of $2,010,000, a decrease of
$834,000 (41%). The decrease in sales for the six and three-month periods
primarily reflects customer requested shipping delays and a general slowdown in
the order rate from customers.
Gross margin for the six months ended June 30, 2001 was 27% compared to
31% for the six months ended June 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 June 30, 2001 was 33% compared to 26% for the quarter ended June 30, 2000.
This improvement in gross margin is attributable to sales of iScan software at a
high margin and a reduced level of expenses reflecting the Company's
reorganization of its OSS division, which was somewhat offset by lower margins
from the line and signal business units due to reduced sales volumes.
Selling, general and administrative expenses decreased by $1,636,000 (23%)
from $6,998,000 to $5,362,000 for the six months ended June 30, 2001 compared to
2000. For the quarter ended June 30, 2001 selling, general and administrative
expenses decreased by $1,079,000 (28%) from 2000. The decrease from 2000 to 2001
for the six 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 $446,000 (15%) and by
$225,000 (14%) for the six and three months ended June 30, 2001 from the
comparable periods in 2000. This decrease in research and development expenses
for both the six and three months resulted from the Company's efforts to reduce
its expenses, primarily related to the OSS business.
Page 10 of 14
Results of Operations (continued)
As a result of the above, for the six months ended June 30, 2001 compared
to 2000, the Company had an operating loss of $3,644,000 in 2001 versus an
operating loss of $779,000 in 2000. The Company had an operating loss of
$1,293,000 for the quarter ended June 30, 2001 as compared to an operating loss
of $1,952,000 for the quarter ended June 30, 2000.
Interest expense for the six months ended June 30, 2001 compared to June
30, 2000 increased by $330,000 (17%) from $1,965,000 in 2000 to $2,295,000 in
2001. Interest expense for the three-month period ending June 30, 2001 compared
to the same three months of 2000, increased by $261,000 (25%) from $1,031,000 in
2000 to $1,292,000 in 2001. This change is attributable primarily to increased
levels of borrowing 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
$5,744,000, $0.58 per share (basic and diluted), for the six months ended June
30, 2001, compared with a net loss of $2,581,000, $0.27 per share (basic and
diluted), for the six months ended June 30, 2000. The net loss for the three
months ended June 30, 2001 was $2,511,000, $0.25 per share (basic and diluted),
compared with a net loss for the three months ended June 30, 2000 of $2,887,000,
$0.30 per share (basic and diluted).
Liquidity and Capital Resources
At June 30, 2001, the Company had cash and cash equivalents of $654,000
compared with $2,366,000 at December 31, 2000. The Company's working capital
deficit at June 30, 2001 was $28,716,000, 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 six months ended June 30, 2001,
the Company used $2,031,000 in operations.
As of June 30, 2001, the Company has senior debt of $21,170,000
outstanding, all of which is shown as a current liability. The current agreement
with the senior lender was set to expire on July 3, 2001 and was extended to
September 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 September 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 11 of 14
Liquidity and Capital Resources (continued)
As of June 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 are 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 as of the date of this Form 10-Q, 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 June 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 or the loss of future business. In addition,
$21,170,000 of senior debt becomes due on September 5, 2001 and $7,230,000 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
September 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, finalize a definitive agreement with the
holders of the subordinated debt, and sell of one or more of our divisions.
Although we are continuing to explore the possible sale of one or more of our
divisions, we cannot assure you that we will be successful in these efforts.
Because of our present stock price, it is highly unlikely that we will be able
to raise funds through the sales of our equity securities, and our financial
condition prevents us from issuing debt securities. In the event that we are
unable to extend our debt obligations and sell one or more of our divisions, we
cannot assure you that we will be able to continue in operations. 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.
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.
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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 1. Legal Proceedings
In July 2001, Ramon R. Obed, Donatella Elser and Henry R.C. Elser,
trustees under a trust for the benefit of Peter F.D. Elser, commenced an action
in the United States District Court for the Southern District of New York
against the Company seeking payment of the principal and interest of the
Company's subordinated note in the principal amount of $500,000. The Company
believes that the subordination provision of the note prohibits payment by the
Company. The Company's obligations under the subordinated notes are reflected as
current liabilities on the Company's balance sheet. Mr. Peter F.D. Elser
(deceased) is the father of Mr. Marco Elser, a director. Mr. Marco Elser is one
of the class of beneficiaries. Mr. Marco Elser is not a trustee nor does he have
the power to direct the trustees of the trust or the right to vote or dispose of
the securities owned by the trust.
Item 3. Defaults Upon Senior Securities
The Company has failed to pay the principal and interest of $7,048,000 as
of June 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 3, 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 3 and 4
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
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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 9, 2001 By /s/ William V. Carney
----------------------------------
William V. Carney
Chairman of the Board
Dated August 9, 2001 By /s/ Edward B. Kornfeld
----------------------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
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