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, 1999
[ ] 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: 9,488,561 shares as of
November 1, 1999
Page 1 of 14 pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
Assets (Unaudited)
------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,743 $ 3,044
Accounts receivable, net 12,272 19,802
Inventories 7,148 8,944
Prepaid expenses and other current assets 1,982 1,716
-------- --------
Total current assets 24,145 33,506
-------- --------
Property, plant and equipment, net 3,876 4,213
Deferred computer software, net 22 82
Goodwill, net 11,250 11,597
Other assets 2,564 2,738
-------- --------
Total assets $ 41,857 $ 52,136
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of senior debt $ 2,000 $ 2,000
12% subordinated notes 5,921 --
Accounts payable 4,687 6,893
Accrued expenses 5,972 6,266
Accrued interest payable 426 545
Accrued commissions 1,887 2,438
Income taxes payable 513 762
Accrued deferred compensation 196 196
Short-term loans 45 144
-------- --------
Total current liabilities 21,647 19,244
-------- --------
Senior debt net of current maturities 13,118 11,188
12% subordinated notes -- 5,685
6% convertible subordinate debentures 369 365
Deferred compensation 987 1,021
Income taxes payable 400 719
Other long-term liabilities 960 776
Minority interest 999 1,154
-------- --------
Total long-term liabilities 16,833 20,908
-------- --------
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 9,488,692 and 9,484,742 shares at September 30, 1999 and December 31,
1998, respectively 95 95
Additional paid-in capital 75,143 75,135
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,932) (3,754)
Accumulated deficit (65,955) (57,273)
-------- --------
5,351 14,203
Treasury stock, at cost (1,938) (1,938)
Receivable for employee stock purchases (36) (281)
-------- --------
Total stockholders' equity 3,377 11,984
-------- --------
Total liabilities and stockholders' equity $ 41,857 $ 52,136
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 2 of 14 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
------------- --------------
<S> <C> <C>
Sales $ 27,032 $ 45,160
Cost of sales 19,704 26,247
-------- --------
Gross profit 7,328 18,913
-------- --------
Selling, general and administrative expenses 9,226 10,089
Research and development expenses 4,575 4,807
-------- --------
Total expenses 13,801 14,896
-------- --------
Operating income (loss) (6,473) 4,017
Interest expense (2,608) (2,663)
Interest income 138 205
Other income 158 981
Debt conversion expense --- (945)
-------- --------
Income (loss) before income taxes, minority interest,
and extraordinary item (8,785) 1,595
Income tax expense (53) (209)
Minority interest 155 (133)
-------- --------
Income (loss) before extraordinary item (8,683) 1,253
Extraordinary gain --- 76
-------- --------
Net income (loss) $ (8,683) $ 1,329
======== ========
Per share data:
Basic per share amounts:
Income (loss) before extraordinary item $ (0.92) $ 0.14
Extraordinary item --- 0.00
-------- --------
Net income (loss) per share of common stock $ (0.92) $ 0.14
======== ========
Weighted average shares outstanding 9,487 9,247
======== ========
Diluted per share amounts:
Income (loss) before extraordinary item $ (0.92) $ 0.13
Extraordinary item --- 0.00
-------- --------
Net income (loss) per share of common stock $ (0.92) $ 0.13
======== ========
Weighted average shares outstanding 9,487 9,977
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 14 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1999 1998
------------ -------------
<S> <C> <C>
Sales $ 8,397 $ 14,217
Cost of sales 6,519 8,625
-------- --------
Gross profit 1,878 5,592
-------- --------
Selling, general and administrative expenses 3,203 3,122
Research and development expenses 1,828 1,794
-------- --------
Total expenses 5,031 4,916
-------- --------
Operating income (loss) (3,153) 676
Interest expense (888) (881)
Interest income 34 48
Other income 1 269
-------- --------
Income (loss) before income taxes and minority interest (4,006) 112
Income tax expense (38) (9)
Minority interest 45 (57)
-------- --------
Net income (loss) $ (3,999) $ 46
======== ========
Per share data:
Basic per share amounts:
Net income (loss) per share of common stock $ (0.42) $ 0.01
======== ========
Weighted average shares outstanding 9,489 9,299
======== ========
Diluted per share amounts:
Net income (loss) per share of common stock $ (0.42) $ 0.01
======== ========
Weighted average shares outstanding 9,489 9,734
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 14 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net income (loss) $(8,683) $ 1,329
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (178) 204
------- -------
Comprehensive income (loss) $(8,861) $ 1,533
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Net income (loss) $(3,999) $ 46
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (110) 77
------- -------
Comprehensive income (loss) $(4,109) $ 123
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 14 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $(8,683) $ 1,329
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Extraordinary gain -- (76)
Non-cash debt conversion expense -- 945
Non-cash financing expenses 18 311
Non-cash interest charges -- 304
Non-cash employee stock bonuses 8 --
Depreciation and amortization 1,144 1,631
Amortization of debt discounts 240 189
Minority interest (155) 131
Changes in assets and liabilities:
Accounts receivable 7,530 (3,732)
Inventories 1,796 5
Prepaid expenses (266) (622)
Other assets 99 215
Accounts payable, accrued expenses and other liabilities (3,588) (1,383)
------ -------
Net cash used in operating activities (1,857) (753)
------ -------
Cash flows from investing activities:
Proceeds from disposal of assets 243 --
Capital expenditures (588) (503)
Repayments of employee loans 245 --
------ ------
Net cash used in investing activities (100) (503)
------ ------
Cash flows from financing activities:
Proceeds from senior debt 3,350 6
Repayments of senior debt (1,420) (4,455)
Proceeds from 12% subordinated debentures and warrants -- 6,000
Repayment of Zero coupon senior subordinated convertible notes -- (2,796)
Repayments of short term loans (99) (93)
------ ------
Net cash provided by (used in) financing activities 1,831 (1,338)
------ ------
Effect of exchange rates on cash (175) 202
------ ------
Decrease in cash and cash equivalents (301) (2,392)
Cash and equivalents - beginning of the year 3,044 5,091
------ ------
Cash and equivalents - end of the period $ 2,743 $ 2,699
======= =======
Supplemental cash flow disclosures:
Cash paid for interest expense $ 2,007 $ 1,857
======= =======
Cash paid for income taxes $ 364 $ 188
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 6 of 14 pages
<PAGE>
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, 1998. Results for the first nine months of 1999 are not necessarily
indicative of results for the year.
Note 2: Inventories
Inventories are valued at lower of cost or market. Inventory at
September 30, 1999 has been computed using a standard cost system. The
composition of inventories at the end of the respective periods is as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31,1998
------------------ ----------------
(in thousands)
<S> <C> <C>
Parts and components $3,586 $4,959
Work-in-process 1,240 743
Finished goods 2,322 3,242
------ ------
$7,148 $8,944
====== ======
</TABLE>
Note 3: Senior Debt
On September 30, 1999, the Company's debt to its senior lender was
$15,118,000. During the nine and three months ended September 30, 1999, the
Company repaid principal of $1,420,000 and $400,000, respectively. The Company
borrowed $3,350,000 and $1,550,000 during the nine and three-month periods ended
September 30, 1999, respectively. Subsequent to September 30, 1999, the Company
borrowed an additional $1,250,000 and repaid $400,000, resulting in a balance
owed of approximately $16,000,000. Based on anticipated principal payments,
$2,000,000 has been classified as a current liability at September 30, 1999.
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, 1999, the Company was
not in compliance with the interest coverage covenant and has obtained a waiver
of such non-compliance from its senior lender.
Note 4: 12% Subordinated Notes
As of September 30, 1999, the Company has outstanding $6,000,000 of
12 % Subordinated Notes due January 3, 2000 ("12% Notes") which are classified
as a current liability. The carrying value of such 12% Notes as of September 30,
1999 is $5,921,000 which is net of related issuance discount. During the quarter
ended March 31, 1999, pursuant to the terms of the 12% Notes, the Company issued
Series C Warrants to purchase 150,000 shares of common stock at an average price
of $1.94 per share to the holders of the 12% Notes. The Series C Warrants,
together with the Series B Warrants issued in 1998, were valued at $630,000 and
recorded as part of additional paid in capital in 1998.
Page 7 of 14 pages
<PAGE>
Note 5: Segments 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.
Total assets for the Company declined from December 31, 1998 to
September 30, 1999 primarily due to decreased accounts receivable primarily from
the Line and OSS segments. There has been no significant change from December
31, 1998 in the basis of measurement of segment revenues and profit or loss.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
Revenue:
<S> <C> <C> <C> <C>
Line $14,633,000 $17,503,000 $ 5,472,000 $ 6,906,000
OSS 7,690,000 21,263,000 1,424,000 5,519,000
Signal 4,544,000 6,246,000 1,435,000 1,726,000
----------- ----------- ----------- -----------
$26,867,000 $45,012,000 $ 8,331,000 $14,151,000
=========== =========== =========== ===========
<CAPTION>
Segment profit (loss):
<S> <C> <C> <C> <C>
Line $ 3,218,000 $ 4,513,000 $ 1,011,000 $ 1,950,000
OSS (7,176,000) 1,039,000 (3,186,000) (1,045,000)
Signal 1,071,000 1,823,000 262,000 527,000
----------- ----------- ----------- -----------
$(2,887,000) $ 7,375,000 $(1,913,000) $ 1.432,000
=========== =========== =========== ===========
</TABLE>
The following table reconciles segment totals to consolidated totals:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
Revenue:
<S> <C> <C> <C> <C>
Total revenue
for reportable
segments $26,867,000 $45,012,000 $ 8,331,000 $14,151,000
Other
Revenue 165,000 148,000 66,000 66,000
----------- ----------- ----------- -----------
Consolidated
total revenue $27,032,000 $45,160,000 $ 8,397,000 $14,217,000
=========== =========== =========== ===========
<CAPTION>
Operating income (loss):
<S> <C> <C> <C> <C>
Total segment
profit (loss) for
reportable
segments $(2,887,000) $ 7,375,000 $(1,913,000) $ 1,432,000
Corporate and
unallocated (3,586,000) (3,358,000) (1,240,000) (756,000)
----------- ----------- ----------- -----------
Consolidated
total operating
income (loss) $(6,473,000) $ 4,017,000 $(3,153,000) $ 676,000
=========== =========== =========== ===========
</TABLE>
Page 8 of 14 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:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100% 100% 100% 100%
Cost of sales 73% 58% 78% 61%
Gross profit 27% 42% 22% 39%
Selling, general and administrative expenses 34% 22% 38% 22%
Research and development expenses 17% 11% 22% 12%
Operating income (loss) (24%) 9% (38%) 5%
Interest expense - net (9%) (5%) (10%) (6%)
Other income 1% 2% 0% 1%
Debt conversion expense 0% (2%) 0% 0%
Minority interest 0% 0% 0% 0%
Income taxes 0% (1%) 0% 0%
Extraordinary item 0% 0% 0% 0%
Net income (loss) (32%) 3% (48%) 0%
</TABLE>
The Company's sales by product line for the periods ended September
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Line connection/protection
equipment ("Line") $ 14,633 54% $ 17,503 39%
Operations Support Systems ("OSS") 7,690 28% 21,263 47%
Signal Processing ("Signal") 4,544 17% 6,246 14%
Other 165 1% 148 0%
-------------- ----------------
$ 27,032 100% $ 45,160 100%
============== ================
<CAPTION>
Three Months Ended
------------------
September 30,
-------------
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Line $ 5,472 65% $ 6,906 49%
OSS 1,424 17% 5,519 39%
Signal 1,435 17% 1,726 12%
Other 66 1% 66 0%
--------------- ---------------
$ 8,397 100% $ 14,217 100%
=============== ===============
</TABLE>
Page 9 of 14 pages
<PAGE>
Results of Operations
- ---------------------
The Company's sales for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998 decreased $18,128,000 (40%)
from $45,160,000 in 1998 to $27,032,000 in 1999. Sales for the quarter ended
September 30, 1999 of $8,397,000 decreased by $5,820,000 (41%) compared to
$14,217,000 for the quarter ended September 30, 1998. The decreased sales for
the three and nine months are due primarily to a decline in sales by the OSS
division although sales from all divisions declined from the comparable periods
of 1998. The Company expects to strengthen sales during the fourth quarter of
1999 and such trends such continue into 2000.
The line sales for the nine months ended September 30, 1999 compared
to September 30, 1998 decreased from $17,503,000 to $14,633,000 or $2,870,000
(16%). Line connection sales for the three months ended September 30, decreased
by $1,434,000 (21%) from $6,906,000 in 1998 to $5,472,000 in 1999. The decrease
for both the nine and three months ended September 30, 1999 reflects reduced
unit sales primarily to customers in Mexico.
OSS sales for the nine months ended September 30, 1999 was $7,690,000
compared to the nine months ended September 30, 1998 of $21,263,000, a decrease
of $13,573,000 (64%). Sales for the three months ended September 30, 1999 were
$1,424,000 compared to sales for the three months ended September 30, 1998 of
$5,519,000, a decrease of $4,095,000 (74%). The decrease in sales during the
nine and three months ended September 30, 1999 resulted from delays in the
installation of certain contracts and delays in obtaining certain anticipated
large new orders which are now anticipated to be secured in the fourth quarter
of 1999. Subsequent to September 30, 1999, the Company has secured two OSS
contracts totaling approximately $17,000,000. The first contract is with the
Philippines Long Distance Telephone Co. for approximately $5,000,000 and is
subject to the customer securing financing. The second contract is with a major
European telecommunications, equipment supplier for approximately $12,000,000.
Signal sales for the nine months ended September 30, 1999 were
$4,544,000 compared to the nine months ended September 30, 1998 of $6,246,000, a
decrease of $1,702,000 (27%). Signal processing sales for the three months ended
September 30, 1999 were $1,435,000, compared to the three months ended September
30, 1998 of $1,726,000, a decrease of $291,000 (17%). The decrease in sales for
the nine and three-month periods primarily reflects delays in deliveries which
are expected during 2000. Furthermore, during the nine and three months ended
September 30, 1998, revenue was positively affected by shipments on multiple
year sales orders to certain military customers, which were secured during the
latter part of 1997.
Cost of sales for the nine months ended September 30, 1999, as a
percentage of sales was 73% compared to the nine months ended September 30, 1998
of 58%. For the quarter ended September 30, 1999, cost of sales as a percentage
of sales was 78% compared to the same period of 1998 of 61%. The decline in
gross margin is primarily attributed to inefficiency resulting in the inability
to absorb certain fixed expenses associated with the OSS contracts over a
substantially lower revenue base which resulted in a negative margin for OSS of
32% for the September 30, 1999 quarter.
Page 10 of 14 pages
<PAGE>
Results of Operations (continued)
- ---------------------------------
Selling, general and administrative expenses decreased by $863,000
(9%) from $10,089,000 to $9,226,000 for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. This decrease resulted
primarily from lower commissions associated with the decreased revenues for the
OSS business for the period. For the quarters ended September 30, 1999 and 1998
selling, general and administrative expenses increased by $81,000 (3%) from
$3,122,000 to $3,203,000, respectively, as a result of professional fees
incurred relating to the establishment of several new contracts.
Research and development expenses decreased by $232,000 (5%) for the
nine months ended September 30, 1999 and increased by $34,000 (2%) for the three
months ended September 30, 1999 from the comparable periods in 1998,
respectively.
As a result of the above, for the nine months ended September 30,
1999 compared to the comparable nine months of 1998, the Company had an
operating loss of $6,473,000 in 1999 and operating income of $4,017,000 in 1998.
The Company had an operating loss of $3,153,000 for the quarter ended September
30, 1999 as compared to operating income of $676,000 for the quarter ended
September 30, 1998.
Other income for the nine months ended September 30, 1998 included
$400,000 from the settlement of litigation, $167,000 of additional funds
received from the settlement of the sale of the Israeli business, and $234,000
from the settlement of outstanding liabilities.
During the nine months ended September 30, 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.
During the nine months ended September 30, 1998 the Company recorded
a $76,000 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.
Income tax expense decreased for the nine months ended September 30,
1999 compared to 1998 by $156,000 from $209,000 to $53,000 due to the Company's
losses for the period.
As the result of the foregoing the Company incurred a net loss after
extraordinary items of $8,683,000, $0.92 per share (basic and diluted) for the
nine months ended September 30, 1999 compared with net income after
extraordinary items of $1,329,000, $0.14 per share (basic) and $0.13 per share
(diluted), for the nine months ended September 30, 1998. The net loss for the
three months ended September 30, 1999 was $3,999,000, $0.42 per share (basic and
diluted), compared with net income for the three months ended September 30, 1998
of $46,000, $0.01 per share (basic and diluted).
Page 11 of 14 pages
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999 the Company had cash and cash equivalents of
$2,743,000 compared with $3,044,000 at December 31, 1998. The Company's working
capital at September 30, 1999 was $2,498,000, compared to working capital of
$14,262,000 at December 31, 1998. The decline in working capital results from
the operating losses for the nine months ended September 30, 1999, which is
reflected in a reduced level of accounts receivable. In addition, approximately
$6,000,000 of the decreased working capital results from the shift of the 12%
Notes from long-term to current liabilities.
As of September 30, 1999, the Company's loan and security agreement
with its senior secured lender, which expires January 2, 2001, provides the
Company, under its revolving line of credit and its letter of credit facility,
with combined availability totaling $9,000,000. The combined availability is
subject to the Company's borrowing base and amounts outstanding under the
revolver and committed letters of credit. The Company had $15,118,000
outstanding as of September 30, 1999 of which $1,592,000 was a non-interest
bearing note, $2,850,000 was outstanding against the revolving line of credit,
and $10,676,000 was a term loan agreement. Subsequent to September 30, 1999, the
company borrowed an additional $1,250,000 and repaid $400,000, resulting in a
balance owed of approximately $16,000,000. As discussed in Note 3, the Company
was not in compliance with the interest coverage covenant under the agreement
and obtained a waiver from its senior lender for the period ended September 30,
1999. Further, if losses continue during the fourth quarter the Company may be
in violation of its loan covenants at December 31, 1999. If the Company is in
violation, the lender may not grant a waiver, which would result in all of the
Company's obligations to the senior lender becoming due. Any action by the
senior lender to force collection of the obligations owed, could materially and
adversely affect the Company's ability to continue in business.
As of September 30, 1999, the Company's current liabilities include
$5,921,000, net of unamortized debt discount of $79,000, of the principal value
$6,000,000 12% Notes, all of which are due and payable on January 3, 2000. At
September 30, 1999, the Company does not have sufficient resources to pay the
12% Notes when they mature and it is likely that it cannot generate such cash
from its operations. Although the Company is seeking to refinance or restructure
the 12% Notes and believes it will be able to prior to the maturity date, no
assurance can be given that it will be successful in these efforts. If the
Company is unable to refinance or restructure the 12% Notes, the Company will
also be in violation of its loan agreement with its senior lender, and its
business may be materially and adversely affected.
Legal
- -----
Subsequent to September 30, 1999, the Company received a demand for
arbitration for commissions allegedly owed to a former sales representative. The
Company believes it has meritorious defenses against this claim.
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 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 to be completed prior to the end of 1999.
Page 12 of 14 pages
<PAGE>
Year 2000 Issue (continued)
- ---------------------------
The Company has assigned a team to monitor Year 2000 compliance. The
Company believes that its products are Year 2000 compliant. The team is charged
with ensuring Year 2000 compliance for all hardware and software products
through its purchasing process, as well as assessing the Year 2000 readiness and
risk to the Company of its critical vendors and suppliers. The team is also
responsible to coordinate Year 2000 compliance for its internal systems and
devices. At present, Year 2000 compliance of the Company's internal systems and
devices is scheduled to be substantially complete by December 31, 1999.
The Company has and expects to incur internal staff costs as well as
other expenses necessary to prepare its systems for the year 2000. The Company
has replaced some systems and upgraded others. Maintenance or modification costs
have been expensed as incurred. To date the cost of this program approximates
$500,000, with approximately $200,000 representing internal costs to the Company
and $300,000 representing external equipment and services. The total cost effort
does not include potential costs related to any customer or other claims or the
cost of internal hardware or software replaced in the normal course of business.
Based upon current information and assessment, the Company does not believe that
the Year 2000 issue as discussed above will be material to its financial
position or results of operations or that its business will be adversely
affected in any material respect. Nevertheless, achieving Year 2000 compliance
is dependent upon many factors, some of which are not completely within the
Company's control. Should either the Company's internal systems or one or more
of its critical vendors or suppliers fail due to Year 2000 issues, the Company's
business and its results of operations could be adversely affected.
The Company has evaluated the worst case scenarios in the event that
its products, systems, or business partners are not Year 2000 ready and has
formulated contingency plans to operate.
Statements contained in this Year 2000 disclosure are subject to
certain protection under the Year 2000 Information and Readiness Disclosure Act.
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, 1998 and in other documents filed by
the Company with the Securities and Exchange Commission.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 13 of 14 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 November 10, 1999 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
Dated November 10, 1999 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Vice President and Chief
Financial Officer
Page 14 of 14 pages
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