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, 1997
[ ] 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) 2,191,702 shares as of May 5, 1997
Page 1 of 11 pages
<PAGE>
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
1997 1996
-------- --------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,968 $ 2,584
Accounts receivable - trade, less
allowance for doubtful accounts 11,509 16,034
Inventories 6,898 7,424
Prepaid expenses 754 782
Other receivable 254 531
-------- --------
Total current assets 24,383 27,355
-------- --------
Property, plant and equipment, net 5,019 5,422
Deferred computer software, net 1,406 1,676
Goodwill, net 11,443 11,555
Other assets 4,106 4,650
-------- --------
Total assets $ 46,357 $ 50,658
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Convertible subordinated debentures $ 2,079 $ 2,096
Zero coupon senior subordinated convertible notes 25,908 --
Current portion of long-term debt 1,000 750
Accounts payable 3,686 6,056
Accrued expenses 8,761 9,004
Accrued interest payable 657 583
Accrued commissions 2,110 2,708
Accrued deferred compensation 1,140 1,232
Income taxes payable 780 780
Short-term loans 47 31
-------- --------
Total current liabilities 46,168 23,240
-------- --------
Long-term debt 16,470 16,835
Zero coupon senior subordinated convertible notes -- 25,885
Notes payable net of current maturities 3,084 3,084
Income taxes payable 802 802
Other long-term liabilities 484 653
Minority interest 788 863
-------- --------
Total long-term liabilities 21,628 48,122
Stockholders' deficit:
Preferred stock, no par value; authorized
1,000,000 shares, none issued -- --
Common stock, par value $.01; authorized
40,000,000 shares, issued 2,224,490 and
2,223,861 shares at March 31, 1997 and
December 31, 1996, respectively 22 22
Additional paid-in capital 36,562 36,561
Foreign currency translation adjustment (4,356) (4,014)
Accumulated deficit (51,294) (50,900)
-------- --------
(19,066) (18,331)
Treasury stock, at cost (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
-------- --------
Total stockholders' deficit (21,439) (20,704)
-------- --------
Total liabilities and stockholders' deficit $ 46,357 $ 50,658
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 11 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
----------------------
March 31, March 31,
1997 1996
-------- --------
Sales $ 12,480 $ 13,221
Cost of sales 8,466 8,883
-------- --------
Gross profit 4,014 4,338
Selling, general and administrative expenses 2,587 3,412
Research and development expenses 1,151 871
-------- --------
Total expenses 3,738 4,283
-------- --------
Operating income 276 55
Interest expense (916) (2,178)
Interest income 42 9
Other 135 (151)
-------- --------
Loss before income taxes, minority interest
and extraordinary gain (463) (2,265)
Income tax expense (14) (13)
Minority interest 75 110
-------- --------
Loss before extraordinary gain (402) (2,168)
Extraordinary gain 8 3,033
-------- --------
Net income (loss) $ (394) $ 865
======== ========
Per share data:
Loss before extraordinary gain $ (0.06) $ (0.80)
Extraordinary gain 0.00 1.15
-------- --------
Net income (loss) $ (0.06) $ 0.35
======== ========
Weighted average shares outstanding 6,142 2,625
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 11 pages
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PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
-------------------
March 31, March 31,
1997 1996
------- -------
Cash flows from operating activities:
Net income (loss) $ (394) $ 865
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Extraordinary gain (8) (3,033)
Non-cash financing expenses 241 1,109
Depreciation and amortization 802 1,005
Amortization of discount on convertible
subordinated debentures 10 31
Minority interest (75) (110)
Changes in assets and liabilities:
Accounts receivable 4,525 (359)
Inventories 802 1,077
Prepaid expenses 28 (171)
Other receivables (223) --
Deferred computer software (13) (33)
Other assets 406 (587)
Accounts payable, accrued expenses
and other liabilities (3,393) (1,261)
------- -------
Net cash provided by (used in)
operating activities 2,708 (1,467)
Cash flows from investing activities:
Proceeds from disposal of assets
held for sale, net 500 6,793
Capital expenditures (27) (159)
------- -------
Net cash provided by investing activities 473 6,634
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 254 1,250
Repayments of long-term debt (369) (6,503)
Proceeds from (repayments of) short term loans 16 (43)
------- -------
Net cash used in financing activities (99) (5,296)
------- -------
Effect of exchange rates on cash (698) 332
------- -------
Increase in cash and cash equivalents 2,384 203
Cash and equivalents - beginning of the year 2,584 1,109
------- -------
Cash and equivalents - end of the period $ 4,968 $ 1,312
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 782 $ 833
======= =======
Cash paid for income taxes $ 34 $ 6
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 11 pages
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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 annual report to stockholders for the year ended
December 31, 1996. Results for the first three months of 1997 are not
necessarily indicative of results for the year.
Note 2: Inventories
Inventories are valued at the lower of cost or market. Inventory costs at
March 31, 1997 have been computed using a standard cost system. The composition
of inventories at the end of the respective periods is as follows:
March 31, 1997 December 31,1996
-------------- ----------------
(in thousands)
Parts and components $4,796 $4,557
Work-in-process 764 515
Finished goods 1,338 2,352
------ ------
$6,898 $7,424
====== ======
Note 3: Long-Term Contracts
Accounts receivable include approximately $900,000 at March 31, 1997 in
excess costs and related profits over amounts billed relating to long-term
contracts under which the Company provides specialized products to major
international customers. Substantially all such amounts are expected to be
billed during the remainder of 1997.
Note 4: 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Convertible Notes
As of March 31, 1997, the Company had outstanding $2,079,000 of its 6%
convertible Subordinated Debentures due July 1, 2002 (the Debentures), net of
original issue discount amortized to principal over the term of the debt using
the effective interest rate method, of $196,000. The face amount of the
outstanding Debentures was $2,275,000 at March 31, 1997.
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of March 31, 1997 amounted to $458,000. As of March 31, 1997 the
Company is in default under the provisions of the Debentures.
Page 5 of 11 pages
<PAGE>
Note 4: 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Convertible Notes (continued)
As of March 31, 1997, the Company had exchanged approximately $33,800,000
principal amount of the Debentures, net of unamortized discount and accrued
interest expense for 655,720 shares of the Company's common stock and
$25,932,000 of Notes. As of March 31, 1997 $25,908,000 Notes are outstanding
after the conversion of 24,000 shares to common stock.
The exchange of the Debentures for the Notes and common stock was accounted
for as a troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15. Since the future principal and interest payments
under the Notes is less than the carrying value of the Debentures, the Notes
were recorded for the amount of the future cash payments, and not discounted. In
addition, no future interest expense will be recorded on the exchanged Notes. As
a result of the exchange, the Company recognized an extraordinary gain of $8,000
and $3,033,000 for the three months ended March 31, 1997 and 1996, receptively.
Note 5: Long-Term Debt
On March 31, 1997, the Company's long-term debt consisted of senior debt
under its credit facility in the amount of $17,470,000. The credit facility is
secured by substantially all of the Company's assets. All obligations except
undrawn letters of credit, letter of credit guarantees and the deferred fee
notes bear interest at 12%. The Company incurs a fee of 2% on the average
balance of undrawn letters of credit and letter of credit guarantees
outstanding. In addition, the Company is obligated to pay a monthly facility fee
of $50,000 and the loan agreement requires a minimum quarterly amortized payment
of $250,000 commencing for the quarter ending June 30, 1997.
Financial debt covenants include an interest coverage ratio measured
quarterly, limitations on the incurrence of indebtedness, limitations on capital
expenditures, and prohibitions on declarations of any cash or stock dividends or
the repurchase of the Company's stock. As of March 31,1997, the Company is in
compliance with the above covenants.
Page 6 of 11 pages
<PAGE>
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,
-------------------
1997 1996
---- ----
Sales 100% 100%
Cost of Sales 68% 67%
Gross Profit 32% 33%
Selling, general and administrative expenses 21% 26%
Research and development expenses 9% 7%
Operating income 2% 0%
Interest expense - net (7%) (16%)
Other 1% (1%)
Minority interest 1% 1%
Extraordinary item 0% 23%
Net income (loss) (3%) 7%
The Company's sales by product line for the periods ended March 31, 1997
and 1996 are as follows:
Three Months Ended
March 31,
--------------------------------
1997 1996
-------------- --------------
Line connection/protection equipment* $ 6,795 54% $ 5,797 44%
OSS equipment 3,992 32% 5,900 44%
Signal Processing 1,603 13% 1,437 11%
Other 90 1% 87 1%
-------------- --------------
$ 12,480 100% $ 13,221 100%
============== ==============
* Includes sales of fiber optics products of $0 and $452,000 for the quarter
ended March 31, 1997 and 1996, respectively.
Page 7 of 11 pages
<PAGE>
Liquidity and Capital Resources
As of March 31, 1997, the Company continues to incur net losses before
extraordinary gains. The Company will be required to refinance or restructure
certain existing notes payable which become due on January 2, 1998 as discussed
in the following paragraph. This factor continues to raise substantial doubt
about the Company's ability to continue as a going concern. Furthermore, the
unaudited consolidated financial statements do not include any adjustments that
might result from the inability of the Company to refinance or restructure such
notes.
At March 31, 1997 the Company had cash and cash equivalents of $4,986,000
compared with $2,584,000 at December 31, 1996. The Company's working capital
deficit at March 31, 1997 was $21,785,000, compared to working capital of
$4,100,000 at December 31, 1996. At March 31, 1997, $25,908,000 of Zero coupon
convertible subordinated notes (the Notes), which are due on January 2, 1998,
are classified as current liabilities. At March 31, 1997 the Company does not
have sufficient resources to pay the Notes when they mature and it is likely
that it cannot generate such cash from its operations or from its existing
credit facilities. Although the Company is seeking to refinance or restructure
the Notes, no assurance can be given that it will be successful in these
efforts. If the Company is unable to refinance or restructure the Notes or the
holders of the Notes do not convert such Notes to common stock, the Company's
liquidity may be severely impaired and the Company's business may be materially
and adversely affected.
At March 31, 1997, the Company's long-term debt to its senior secured
lender, Foothill Capital Corporation ("Foothill"), consisted of a credit
facility in the amount of $17,470,000 of which approximately $15,900,000 and
$1,500,000 relates to the term loan and the revolving line of credit,
respectively. The agreement provides for loan principal payments of $750,000 in
1997 and requires the Company to pay additional principal payments if certain
"adjusted cash flow amounts", as defined, exceed certain amounts. In addition,
the Company is obligated to pay a monthly facility fee of $50,000. As of March
31, 1997, the Company's availability under its $2,000,000 revolving line of
credit is approximately $500,000.
As of March 31, 1997, the Company had remaining outstanding $2,079,000 of
its 6% Debentures, net of original issue discounts amortized to principal over
the term of the debt using the effective interest rate method, of $196,000. The
face amount of the outstanding Debentures was $2,275,000.
Interest on the 6% debentures is payable on July 1 of each year. The
interest accrued as of March 31, 1997 amounted to $458,000. As of March 31, 1996
the Company is in default under the provisions of the Debentures. Accordingly,
such debt has been classified as a current liability at March 31, 1997.
Page 8 of 11 pages
<PAGE>
Results of Operations
The Company's sales for the quarter ended March 31, 1997 were $12,480,000
which decreased by $741,000 (6%) compared to the quarter ended March 31, 1995 of
$13,221,000. Sales of line connection/protection equipment increased by $998,000
from $5,797,000 for the 1996 quarter to $6,795,000 for the 1997 quarter. Within
this product line, sales of copper products increased $1,450,000 (27%). As a
result of the sale of the fiber optics business unit, the Company had no sales
of fiber optic products at March 31, 1997 compared to $452,000 during the same
quarter of 1996. OSS sales decreased by $1,908,000 (32%) from $5,900,000 for the
quarter ended March 31,1996 to $3,992,000 for the quarter ended March 31,1997.
Signal processing sales increased for the quarter ended March 31, 1997 by
$166,000 from $1,437,000 in the 1996 quarter compared to $1,603,000 in the 1997
quarter. The increased sales relating the line connection/protection and signal
processing units resulted from the availability of funds which enabled to
Company to procure materials which was lacking during the first quarter of 1996.
These funds were made available as a result of the March 1996 amended agreement
with Foothill. The decline in the OSS sales primarily resulted from delays of
the installation of several OSS systems.
Cost of sales for the quarter ended March 31, 1997, as a percentage of
sales, increased from the quarter ended March 31, 1996 from 67% to 68%. This
slight increase reflects the change in the product mix and certain fixed
expenses associated with the OSS business.
Selling, general and administration expenses decreased by $825,000 (34%)
from $3,412,000 to $2,587,000. This reduction reflects the Company's efforts to
reduce costs and expenses, and the elimination of the expenses as related to the
fiber optics business unit.
Research and development expenses increased by $271,000 (31%) from $871,000
to $1,142,000. This increase in research and development expenses results from
the Company's efforts develop new products, primarily related to the OSS
business.
As a result of the foregoing, the Company had operating income of $276,000
for the quarter ended March 31, 1997, as compared to operating income of $55,000
for the quarter ended March 31, 1996. Operating income for the first quarter of
1996 was negatively affected by the fiber optics operation which was sold in
March 1996.
Interest expense decreased by $1,262,000 from $2,178,000 in 1996 to
$916,000 in 1997. This change is attributable primarily to a decrease in
interest expense related to the exchange of the Company's 6% Convertible
Subordinated Debentures and reduced borrowing due to the repayments to our
senior lender. In addition, during the quarter ended March 31, 1996, the Company
incurred additional interest expense as a result of the recognition in that
period of certain deferred borrowing costs related to its loans from its senior
lender.
The Company incurred a loss before extraordinary gains of $402,000 and
$2,168,000 for the quarter ended March 31, 1997 and 1996, receptively.
Primarily, the reduction in the loss reflects the elimination of the expenses as
related to the fiber optics business and the reduction of interest expense.
Page 9 of 11 pages
<PAGE>
Results of Operations (continued)
In the first quarter ended March 31, 1997 and 1996, respectively, the
Company recorded an $8,000 and $3,033,000 gain from the early extingushment its
6% Convertible Subordinated Debt as a result of the exchange of the 6% Debt for
Zero Coupon Notes and common stock.
As the result of the foregoing, the Company generated a net loss of
$394,000, $0.06 per share, for the quarter ended March 31, 1997 versus net
income of $865,000, $0.07 per share, for the quarter ended March 31, 1996. The
calculation of the weighted average shares, for the quarter ended March 31, 1997
and 1996, assumes the conversion of the Notes which are considered to be a
common stock equivalent.
Page 10 of 11 pages
<PAGE>
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 8, 1997 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
Dated May 8, 1997 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
Page 11 of 11 pages
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,968
<SECURITIES> 0
<RECEIVABLES> 11,509
<ALLOWANCES> 0
<INVENTORY> 6,898
<CURRENT-ASSETS> 24,383
<PP&E> 5,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,357
<CURRENT-LIABILITIES> 46,168
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> (21,461)
<TOTAL-LIABILITY-AND-EQUITY> 46,357
<SALES> 12,480
<TOTAL-REVENUES> 12,480
<CGS> 8,466
<TOTAL-COSTS> 3,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 916
<INCOME-PRETAX> (463)
<INCOME-TAX> 14
<INCOME-CONTINUING> (402)
<DISCONTINUED> 0
<EXTRAORDINARY> 8
<CHANGES> 0
<NET-INCOME> (394)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
