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, 1998
[ ] 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) 9,298,713 shares as of May 4, 1998
Page 1 of 12 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,
1998 1997
-------- --------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,812 $ 5,091
Accounts receivable - trade, less allowance
for doubtful accounts 17,068 14,891
Inventories 7,930 8,159
Prepaid expenses and other current assets 1,777 1,266
-------- --------
Total current assets 31,587 29,407
-------- --------
Property, plant and equipment, net 4,542 4,667
Deferred computer software, net 428 543
Goodwill, net 11,943 12,059
Other assets 3,585 4,324
-------- --------
Total assets $ 52,085 $ 51,000
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Convertible subordinated debentures $ 359 $ 1,758
Current portion of long-term debt 1,906 1,900
Accounts payable 4,414 5,796
Accrued expenses 8,279 8,656
Accrued interest payable 404 398
Accrued commissions 2,241 2,444
Accrued deferred compensation 1,106 1,228
Income taxes payable 838 853
Short-term loans 91 120
-------- --------
Total current liabilities 19,638 23,153
-------- --------
Senior debt 10,028 12,978
12% subordinated debentures 5,370 --
Zero coupon senior subordinated convertible notes -- 2,796
Notes payable net of current maturities 3,084 3,084
Income taxes payable 682 649
Other long-term liabilities 503 487
Minority interest 995 1,040
-------- --------
Total long-term liabilities 20,662 21,034
Stockholders' equity:
Preferred stock, no par value; authorized
1,000,000 shares, none issued -- --
Common stock, par value $.01; authorized
20,000,000 shares, issued 9,298,742 and
8,644,304 shares at March 31, 1998 and
December 31, 1997, respectively 93 86
Additional paid-in capital 74,970 70,926
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,885) (4,027)
Accumulated deficit (57,020) (57,799)
-------- --------
14,158 9,186
Treasury stock, at cost (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
-------- --------
Total stockholders' equity 11,785 6,813
-------- --------
Total liabilities and stockholders' equity $ 52,085 $ 51,000
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 12 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,
1998 1997
-------- --------
Sales $ 16,292 $ 12,480
Cost of sales 9,605 8,466
-------- --------
Gross profit 6,687 4,014
Selling, general and administrative expenses 3,467 2,587
Research and development expenses 1,330 1,151
-------- --------
Total expenses 4,797 3,738
-------- --------
Operating income 1,890 276
Interest expense (857) (916)
Interest income 78 42
Other income (expense), net 509 135
Debt conversion expense (945) --
-------- --------
Income (loss) before income taxes, minority
interest and extraordinary gain 675 (463)
Income tax expense (16) (14)
Minority interest 45 75
Income (loss) before extraordinary gain 704 (402)
Extraordinary gain on early extinguishment of debt 76 8
-------- --------
Net income (loss) $ 780 $ (394)
======== ========
Per share data:
Basic per share amounts:
Income (loss) before extraordinary gain $ 0.08 $ (0.17)
Extraordinary gain 0.01 0.00
-------- --------
Net income (loss) per share of common stock $ 0.09 $ (0.17)
======== ========
Weighted average shares outstanding 9,141 2.337
======== ========
Diluted per share amounts:
Income (loss) before extraordinary gain $ 0.07 $ (0.17)
Extraordinary gain 0.01 0.00
-------- --------
Net income (loss) per share of common stock $ 0.08 $ (0.17)
======== ========
Weighted average shares outstanding 9,774 2,337
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 12 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended
March 31, March 31,
1998 1997
-------- --------
Net income (loss) $ 780 $ (394)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 142 (342)
-------- --------
Comprehensive income (loss) $ 922 $ (736)
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 12 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 780 $ (394)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Extraordinary gain (76) (8)
Non-cash debt conversion expense 945 --
Non-cash financing expenses 144 241
Depreciation and amortization 538 802
Amortization of discount on convertible subordinated debentures 2 10
Minority interest 45 (75)
Changes in operating assets and liabilities:
Accounts receivable (2,177) 4,525
Inventories 229 802
Prepaid expenses (511) 28
Other receivables -- (223)
Deferred computer software -- (13)
Other assets 559 406
Accounts payable, accrued expenses and other liabilities (1,385) (3,393)
-------- --------
Net cash provided by (used in) operating activities (907) 2,708
Cash flows from investing activities:
Proceeds from disposal of assets held for sale, net -- 500
Capital expenditures, net (112) (27)
-------- --------
Net cash provided by (used in ) investing activities (112) 473
-------- --------
Cash flows from financing activities:
Proceeds from senior debt 6 254
Repayments of senior debt (2,950) (369)
Proceeds from 12% subordinated debentures 6,000 --
Repayment of Zero coupon senior subordinated convertible notes (2,796) --
Proceeds from (repayments of) short term loans (29) 16
-------- --------
Net cash provided by (used in) financing activities 231 (99)
-------- --------
Effect of exchange rate changes on cash 509 (698)
-------- --------
Increase (decrease) in cash and cash equivalents (279) 2,384
Cash and equivalents - beginning of the year 5,091 2,584
-------- --------
Cash and equivalents - end of the period $ 4,812 $ 4,968
======== ========
Supplemental cash flow disclosure:
Cash paid for interest expense $ 630 $ 782
======== ========
Cash paid for income taxes $ 44 $ 34
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 12 pages
<PAGE>
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, 1997. Results for the interim period 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, 1998 and December 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, 1998 December 31,1997
-------------- ----------------
(in thousands)
Parts and components $ 5,078 $ 5,349
Work-in-process 1,261 1,079
Finished goods 1,590 1,731
-------------- --------------
$ 7,930 $ 8,159
============== ==============
Note 3: 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Convertible Notes
During the quarter ended March 31, 1998, the Company (i) repaid the
remaining balance, $2,796,000, of the Zero Coupon Senior Subordinated Notes (the
"Notes") from the proceeds of the 12% Subordinated Notes (note 5) (ii) exchanged
$250,000 additional principal amount of the 6% Convertible Subordinated
Debentures (the "Debentures") for approximately 58,000 shares of common stock
and (iii) issued approximately 330,000 shares of common stock in exchange for
$1,260,000 principal amount of its Debentures and accrued interest. As a result
of these transactions, the Company recorded an extraordinary gain of $76,000 and
debt conversion expense of $945,000, net of interest forgiven, in the first
quarter of 1998. After giving affect to these transactions, the Company has no
Notes outstanding and $385,000 principal amount of Debentures outstanding as
described below.
As of March 31, 1998, the Company had outstanding $359,000 of the
Debentures due July 1, 2002, net of original issue discount amortized to
principal over the term of the debt using the effective interest rate method, of
$26,000. The face amount of the outstanding Debentures was $385,000 at March 31,
1998.
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of March 31, 1998 amounted to $87,000. As of March 31, 1998 the
Company is in default under the interest payment provisions of the Debentures.
The Company intends to remedy the default during the second quarter of 1998.
Page 6 of 12 pages
<PAGE>
Note 4: Senior Debt
On March 31, 1998, the Company's long-term debt consisted of senior debt
under its credit facility in the amount of $11,934,000. 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 $325,000. During the quarter the Company repaid principal of $2,950,000.
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, 1998, the Company is in
compliance with the above covenants.
Note 5: 12% Subordinated Notes
In January 1998, the Company raised $6,000,000 from the private placement
of 60 units at $100,000 per unit. Each unit consisted of (a) the Company's 12 %
Subordinated Note due January 3, 2000 (a "12% Note"), in the principal amount of
$100,000, and (b) a Series B Common Stock Purchase Warrant (a "Series B
Warrant") to purchase 10,000 shares of Common Stock at $3.00 per share through
December 31, 2002. In the event that any 12% Note is outstanding one year from
the date on which such 12% Note is issued (the "Anniversary Date of the Note"),
the Company shall issue to the holder of such 12% Note on the Anniversary Date
of the Note a Series C Warrant to purchase 25 shares of Common Stock for each
$1,000 principal amount of 12% Notes outstanding on the Anniversary Date of the
Note. The Series C Warrant will have an exercise price equal to the average
closing prices of the Common Stock on each of the five trading days preceding
the Anniversary Date of the Note with respect to which the Series C Warrant is
being issued and will expire on December 31, 2003. The proceeds from the sale of
the Units was used principally to pay the remaining principal amount of Zero
Coupon Notes which had not been converted of $2,796,000 (note 3) and to reduce
the Company's senior debt by approximately $2,950,000 (note 4). The balance of
such proceeds was added to working capital. The Series B and Series C Warrants
were valued at $630,000 and were recorded as part of additional paid in capital.
Accordingly, the Company recorded the net 12% Note at a value of $5,370,000. In
connection with the private placement of these units, the Company issued to its
investment banking firm 120,000 shares of common stock.
Page 7 of 12 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,
-----------------
1998 1997
---- ----
Sales 100% 100%
Cost of Sales 59% 68%
Gross Profit 41% 32%
Selling, general and administrative expenses 21% 21%
Research and development expenses 8% 9%
Operating income 12% 2%
Interest expense - net (5%) (7%)
Other 3% 1%
Debt conversion expense (5%) --
Minority interest 0% 1%
Extraordinary item 0% 0%
Net income (loss) 5% (3%)
The Company's sales by product line for the periods ended March 31, 1998
and 1997 are as follows:
Three Months Ended
March 31,
--------------------------
1998 1997
---- ----
Line connection/protection equipment $ 4,769 29% $ 6,795 54%
OSS equipment 9,173 57% 3,992 32%
Signal Processing 2,325 14% 1,603 13%
Other 25 0% 90 1%
-------------- --------------
$16,292 100% $12,480 100%
============== ==============
Page 8 of 12 pages
<PAGE>
Results of Operations
The Company's sales for the quarter ended March 31, 1998 were $16,292,000
which increased by $3,812,000 (31%) compared to the quarter ended March 31, 1997
of $12,480,000. The overall increase in sales reflects increased sales of OSS
and Signal processing products which were partially offset by a decrease in
sales of line connection/protection products.
Sales of line connection/protection equipment decreased by $2,026,000
(30%) from $6,795,000 to $4,769,000 for the 1997 and 1998 quarters,
respectively. This decrease reflects changes in the product mix and reduced unit
purchases from the Company's largest customer, British Telecommunications plc
("BT"). During 1997, the Company amended an agreement to supply certain line
connection/protection equipment to BT, which included certain new products. The
amended agreement resulted in a lower selling price for existing products and
prices that resulted in a reduced gross margin for new products. Sales to BT
during the 1997 quarter were made pursuant to the old agreement, while the
amended agreement applied to sales in the 1998 period. In addition, the number
of units purchased by BT declined in the 1998 period from the 1997 period.
Orders for line connection/protection equipment from BT remains at the reduced
rate.
OSS sales increased by $5,181,000 (130%) from $3,992,000 for the quarter
ended March 31,1997 to $9,173,000 for the quarter ended March 31,1998. The
increased sales during the 1998 quarter resulted from the attainment of certain
milestones on OSS contracts which are accounted for using a percentage of
completion method. Furthermore, OSS sales during the first quarter of 1997 were
at a reduced level since certain contract milestones were attained later in the
year, resulting in recognition of revenue at such later time.
Signal processing sales increased for the quarter ended March 31, 1998 by
$722,000 (45%) from $1,603,000 in the 1997 quarter compared to $2,325,000 in the
1998 quarter. The increase reflects shipments on multiple year sales orders to
certain military customers which were secured during the latter part of 1997.
Cost of sales for the quarter ended March 31, 1998, as a percentage of
sales, was 59% compared with the quarter ended March 31, 1997 of 68%. This
improvement in gross margin is attributable to the Company's continuing effort
to increase manufacturing productivity and the absorption, over a larger revenue
base, of certain fixed expenses associated with the OSS contracts.
Selling, general and administration expenses increased by $880,000 (34%)
from $2,587,000 to $3,467,000. This increase reflects higher sales commissions,
primarily on OSS contracts, based upon the increased revenues for the 1998
quarter.
Research and development expenses increased by $179,000 (16%) from
$1,151,000 to $1,330,000. This increase in research and development expenses
results from the Company's efforts to develop new products, primarily related to
the OSS business.
As a result of the foregoing, the Company had operating income of
$1,890,000 for the quarter ended March 31, 1998, as compared to operating income
of $276,000 for the quarter ended March 31, 1997.
Page 9 of 12 pages
<PAGE>
Results of Operations (continued)
Interest expense decreased by $59,000 from $916,000 in 1997 to $857,000 in
1998. 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 levels of borrowing from the senior lender, which were offset by
partially by interest on the 12% Subordinated Notes.
Other income for the quarter ended March 31, 1998 includes $400,000 from
the settlement of litigation.
During the quarter ended March 31 ,1998, the Company recorded debt
conversion expense of $945,000 as a result of the conversion of Zero Coupon
Notes and 6% Convertible Subordinated Debentures to common stock.
For the quarter ended March 31, 1998, the Company had income before
extraordinary gain of $704,000 compared to a loss before extraordinary gain of
$402,000 for the quarter ended March 31, 1997.
In the first quarter ended March 31, 1998 and 1997, respectively, the
Company recorded a $76,000 and $8,000 gain from the early extingushment of 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 net income of
$780,000, $0.09 per share (basic) and $0.08 per share (diluted), for the quarter
ended March 31, 1998 versus a net loss of $394,000, $0.17 per share (basic and
diluted), for the quarter ended March 31, 1997.
Liquidity and Capital Resources
At March 31, 1998 the Company had cash and cash equivalents of $4,812,000
compared with $5,091,000 at December 31, 1997. The Company's working capital at
March 31, 1998 was $11,949,000, compared to working capital of $6,254,000 at
December 31, 1997. The improved working capital reflects (i) increased accounts
receivable (ii) reduced balance of the 6% Debentures and (iii) lower balances of
accounts payable and commissions payable.
As of March 31, 1998, the Company's loan and security agreement with its
senior secured lender, which expires August 1999, provided the Company, under
its revolving line of credit and its letter of credit facility, with combined
availability totaling $9,000,000. In addition, the Company has $11,934,000
outstanding as of March 31, 1998 under a term loan agreement.
Page 10 of 12 pages
<PAGE>
Liquidity and Capital Resources (continued)
During the quarter ended March 31, 1998, the Company raised $6,000,000
from the private placement of its 12% Subordinated Notes due January 3, 2000.
The proceeds from the sale of the Units was used principally to pay the
remaining $2,796,000 principal amount of Notes which had not been converted
(Note 3) and to reduce the Company's senior debt to Foothill by approximately
$2,950,000 (Note 4). The balance of such proceeds was added to working capital.
The Company believes that its current cash position, internally generated
cash flow and its loan facility will be sufficient to satisfy the Company's
anticipated operating needs for at least the ensuing twelve months.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
a date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. This
is referred to the as the "Year 2000 Issue." Management has initiated a Company
wide program to prepare the Company's computer systems and applications for year
2000 compliance including potential obligations to update its customer's systems
to the extent required under their contracts. The Company expects to incur
internal staff costs as well as other expenses necessary to prepare its systems
for the year 2000. The Company expects to both replace some systems and upgrade
others. Maintenance or modification costs will be expensed as incurred. The
total cost of this effort is still being evaluated, but is not expected to be
material to the Company.
Forward Looking Statements
Statements contained in this Form 10-Q include forward-looking statements
that are subject to risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in this Form 10-Q, the Company's Annual Report on
From 10-K for the year ended December 31, 1997 and in other documents filed by
the Company with the Securities and Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A current report on form 8-K (Item 5), dated January 2, 1998,
was filed.
Page 11 of 12 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 12, 1998 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated May 12, 1998 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
Page 12 of 12 pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,812
<SECURITIES> 0
<RECEIVABLES> 17,068
<ALLOWANCES> 0
<INVENTORY> 7,930
<CURRENT-ASSETS> 31,587
<PP&E> 4,542
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,085
<CURRENT-LIABILITIES> 19,638
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 11,692
<TOTAL-LIABILITY-AND-EQUITY> 52,085
<SALES> 16,292
<TOTAL-REVENUES> 16,292
<CGS> 9,605
<TOTAL-COSTS> 4,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 857
<INCOME-PRETAX> 675
<INCOME-TAX> 16
<INCOME-CONTINUING> 704
<DISCONTINUED> 0
<EXTRAORDINARY> 76
<CHANGES> 0
<NET-INCOME> 780
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
