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, 2000
[ ] 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) 9,785,310 shares as of May 4, 2000
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)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $ 3,107 $ 3,245
Accounts receivable - trade, less allowance for doubtful accounts 17,517 12,137
Inventories 8,600 8,893
Prepaid expenses and other current assets 1,410 1,373
-------- --------
Total current assets 30,634 25,648
Property, plant and equipment, net 4,668 4,193
Goodwill, net 10,902 11,076
Other assets 2,630 2,531
-------- --------
Total assets $ 48,834 $ 43,448
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of senior debt $ 2,000 $ 2,000
Subordinated notes 900 ---
Accounts payable 11,103 8,831
Accrued expenses 6,819 5,723
Accrued interest payable 515 588
Accrued commissions 1,621 1,864
Accrued deferred compensation 196 196
Income taxes payable 240 267
Short-term loans 8 44
-------- --------
Total current liabilities 23,402 19,513
-------- --------
Senior debt, net of current maturities 17,668 15,518
Subordinated notes 5,126 6,013
6% convertible subordinated debentures 372 371
Deferred compensation 917 1,004
Income taxes payable 301 352
Other long-term liabilities 945 971
Minority interest 1,028 1,093
-------- --------
Total long-term liabilities 26,357 25,322
-------- --------
Total Liabilities 49,759 44,835
-------- --------
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
9,760,400 and 9,638,861 shares at March 31, 2000 and December 31, 1999 98 96
Additional paid-in capital 75,426 75,310
Accumulated deficit (70,652) (70,959)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,859) (3,896)
-------- --------
1,013 551
Treasury stock, at cost (1,938) (1,938)
-------- --------
Total stockholders' deficit (925) (1,387)
-------- --------
Total liabilities and stockholders' deficit $ 48,834 $ 43,448
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 11 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Sales $ 15,928 $ 9,526
Cost of sales 10,212 6,715
-------- --------
Gross profit 5,716 2,811
Selling, general and administrative expenses 3,135 2,754
Research and development expenses 1,408 1,270
-------- --------
Total expenses 4,543 4,024
-------- --------
Operating income (loss) 1,173 (1,213)
Interest expense (934) (793)
Interest income 27 68
Other income (expense), net 5 136
-------- --------
Income (loss) before income taxes and minority interest 271 (1,802)
Income tax expense (30) (8)
Minority interest 65 66
-------- --------
Net income (loss) $ 306 $ (1,744)
======== ========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 37 (41)
-------- --------
Comprehensive income (loss) $ 343 $ (1,785)
======== ========
Per share data:
Basic per share amounts:
Net income (loss) per share of common stock $ 0.03 $ (0.18)
======== ========
Weighted average shares outstanding 9,661 9.485
======== ========
Diluted per share amounts:
Net income (loss) per share of common stock $ 0.03 $ (0.18)
======== ========
Weighted average shares outstanding 10,707 9.485
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 11 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 306 $(1,744)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Non-cash financing expenses --- 7
Depreciation and amortization 374 386
Amortization of debt discounts 14 80
Minority interest (65) (66)
Changes in operating assets and liabilities:
Accounts receivable (5,380) 5,554
Inventories 293 (505)
Prepaid expenses (37) (654)
Other assets (108) 103
Accounts payable, accrued expenses and other liabilities 2,861 (3,562)
------- -------
Net cash used in operating activities (1,742) (401)
------- -------
Cash flows from investing activities:
Proceeds from disposal of assets --- 243
Capital expenditures, net (664) (96)
Proceeds from exercised options and warrants 118 ---
Repayment of employee loans --- 89
------- -------
Net cash provided by (used in) investing activities (546) 236
------- -------
Cash flows from financing activities:
Proceeds from senior debt 2,550 ---
Repayments of senior debt (400) (620)
Proceeds from (repayments of) short term loans (36) (31)
------- -------
Net cash provided by (used in) financing activities 2,114 (651)
------- -------
Effect of exchange rate changes on cash 36 (47)
------- -------
Decrease in cash and cash equivalents (138) (863)
Cash and equivalents - beginning of the year 3,245 3,044
------- -------
Cash and equivalents - end of the period $ 3,107 $ 2,181
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 996 $ 525
======= =======
Cash paid for income taxes $ 20 $ 60
======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 11 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 Form 10-K annual report for the year ended December
31, 1999. Results for the interim period 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:
March 31, 2000 December 31, 1999
-------------- -----------------
(in thousands)
Parts and components $ 5,491 $ 5,558
Work-in-process 1,005 584
Finished goods 2,104 2,751
------- -------
$ 8,600 $ 8,893
======= =======
Note 3: Senior Debt
On March 31, 2000, the Company's debt to its senior lender was
$19,668,000. During the three months then ended, the Company borrowed $2,550,000
and repaid principal of $400,000. Based on required principal payments,
$2,000,000 has been classified as a current liability at March 31, 2000.
In April 2000, the Company and its senior lender agreed to extend the loan
and security agreement to July 3, 2001. As consideration, Porta agreed to reduce
the exercise price of the outstanding warrants held by its senior lender to
$2.00 per share. At March 31, 2000, the senior lender held warrants to purchase
approximately 470,000 shares of common stock.
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, 2000, the Company was in
compliance with its financial covenants.
Note 4: Subordinated Notes
As of March 31, 2000, the Company has outstanding $6,064,000 of
subordinated notes. In April 2000, the Company and the holders of 85% of the
subordinated notes agreed to eliminate the requirement that Porta meet specific
financial goals for Porta to extend the maturity date of their subordinated
notes to July 3, 2001. As a result, notes in the principal amount of $900,000
are due January 3, 2001 and note in the principal amount of $5,164,000 is due
July 3, 2001. The carrying value of such combined subordinated notes as of March
31, 2000 is $6,026,000 which is net of a related issuance discount.
Page 5 of 11 pages
<PAGE>
In connection with the extension agreement, the Company agreed to issue to
the noteholders warrants to purchase 127,500 shares of common stock at $3.00 per
share. The Company may issue to any other noteholders, who agree to this
amendment, warrants to purchase up to 22,500 shares of common stock at $3.00 per
share. The warrants to purchase 150,000 shares of common stock which were
previously authorized, will be issued if the notes are extended.
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.
Total assets for the Company increased from December 31, 1999 to March 31,
2000 due to increased accounts receivable primarily from the OSS segment. There
has been no significant change from December 31, 1999 in the basis of
measurement of segment revenues and profit or loss.
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
Sales:
Line $ 6,094,000 4,628,000
OSS 8,114,000 3,202,000
Signal 1,578,000 1,623,000
------------ ------------
$ 15,786,000 9,453,000
============ ============
Segment profit:
Line $ 1,269,000 1,368,000
OSS 551,000 (1,901,000)
Signal 302,000 461,000
------------ ------------
$ 2,122,000 (72,000)
============ ============
Page 6 of 11 pages
<PAGE>
The following table reconciles segment totals to consolidated totals:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Sales:
Total revenue for reportable segments $ 15,786,000 9,453,000
Other revenue 142,000 73,000
------------ ------------
Consolidated total revenue $ 15,928,000 9,526,000
============ ============
Operating income:
Total segment profit for reportable segments $ 2,122,000 (72,000)
Corporate and unallocated (949,000) (1,141,000)
------------ ------------
Consolidated total operating income $ 1,173,000 (1,213,000)
============ ============
</TABLE>
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,
---------
2000 1999
------ ------
Sales 100% 100%
Cost of Sales 64% 70%
Gross Profit 36% 30%
Selling, general and administrative expenses 20% 29%
Research and development expenses 9% 13%
Operating income (loss) 7% (13%)
Interest expense - net (5%) (7%)
Other 0% 1%
Minority interest 0% 1%
Net income (loss) 2% (18%)
The Company's sales by product line for the periods ended March 31,
2000 and 1999 are as follows:
Three Months Ended March 31,
----------------------------
$(000)
2000 1999
---- ----
Line connection/protection equipment $ 6,094 38% $ 4,628 48%
OSS equipment 8,114 51% 3,202 34%
Signal Processing 1,578 10% 1,623 17%
Other 142 1% 73 1%
------------------- -------------------
$15,928 100% $ 9,526 100%
=================== ===================
Page 7 of 11 pages
<PAGE>
Results of Operations
The Company's sales for the quarter ended March 31, 2000 were $15,928,000
representing an increased of $6,402,000 (67%) compared to the quarter ended
March 31, 1999 of $9,526,000. The overall increase in sales reflects increased
sales of OSS and Line equipment. Signal sales decreased by $45,000 (3%) from
$1,623,000 to $1,578,000 for the 1999 and 2000 quarters, respectively.
Line equipment sales increased by $1,466,000 (32%) from $4,628,000 for the
quarter ended March 31, 1999 to $6,094,000 for the quarter ended March 31, 2000.
This increase in sales is primarily attributable to sales of approximately
$2,700,000 pursuant to a $3,100,000 purchase order from Telefonos de Mexico S.A.
de C.V. (Telmex).
OSS sales increased by $4,912,000 (153%) from $3,202,000 for the quarter
ended March 31,1999 to $8,114,000 for the quarter ended March 31, 2000. The
increased sales resulted from sales of approximately $5,900,000 to Fujitsu
Telecommunications Europe Limited under a $12,000,000 supply contract.
Gross Margin for the quarter ended March 31, 2000, as a percentage of
sales, was 36% compared to 30% for the quarter ended March 31, 1999. This
improvement in gross margin is attributable to the increased level of sales,
which enabled the Company to absorb more efficiently certain fixed expenses
associated with the OSS contracts.
Selling, general and administrative expenses increased by $381,000 (14%)
from $2,754,000 in March 1999 to $3,135,000 in March 2000. This increase relates
primarily to the Company's efforts to increase its sales and marketing
effectiveness in order to secure future business.
Research and development expenses increased by $138,000 (11%) from
$1,270,000 in March 1999 to $1,408,000 in March 2000. 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
$1,173,000 for the quarter ended March 31, 2000, as compared to an operating
loss of $1,213,000 for the quarter ended March 31, 1999.
Interest expense increased by $141,000 (18%) from $793,000 in 1999 to
$934,000 in 2000. This change is attributable primarily to increased levels of
borrowing from the senior lender.
As the result of the foregoing, the Company generated net income of
$306,000, $0.03 per share (basic and diluted), for the quarter ended March 31,
2000 versus a net loss of $1,744,000, $0.18 per share (basic and diluted), for
the quarter ended March 31, 1999.
Page 8 of 11 pages
<PAGE>
Liquidity and Capital Resources
At March 31, 2000, the Company had cash and cash equivalents of $3,107,000
compared with $3,245,000 at December 31, 1999. The Company's working capital at
March 31, 2000 was $7,232,000, compared to working capital of $6,135,000 at
December 31, 1999. The increase in working capital reflects an increased level
of accounts receivable, which was partially offset by an increased level of
accounts payable.
During the first quarter of 2000, the net cash used by the Company in
operations was $1,742,000. The principal source of cash during the quarter was a
net increase of $2,150,000 in loans from the senior lender.
As of March 31, 2000, the Company's loan and security agreement with its
senior secured lender provided the Company, under its revolving line of credit
and its letter of credit facility, with combined availability totaling
$9,000,000. Under this agreement the unused portion at March 31, 2000 was
approximately $400,000. The Company has $19,668,000 outstanding as of March 31,
2000, of which $7,750,000 was pursuant to the revolving line of credit,
$1,242,000 was a non-interest-bearing note and $10,676,000 was a term loan
agreement. In April 2000, the Company and its senior lender agreed to extend the
loan and security agreement to July 3, 2001.
As of March 31, 2000, the Company has outstanding $6,064,000 of
subordinated notes. In April 2000, the Company and the holders of 85% of the
subordinated notes agreed to eliminate the requirement that Porta meet specific
financial goals for Porta to extend the maturity date of their subordinated
notes to July 3, 2001. As a result, notes in the principal amount of $900,000
are due January 3, 2001 and note in the principal amount of $5,164,000 is due
July 3, 2001. The carrying value of such combined subordinated notes as of March
31, 2000 is $6,026,000 which is net of a related issuance discount.
The Company believes that its current cash position and internally
generated cash flow will be sufficient to satisfy the Company's anticipated
operating needs for at least the ensuing twelve months. However, in order to
fulfill its current purchase obligations under its existing contracts and sales
orders, the Company may be required to seek a short term increase in its credit
line. Such an increase may not be granted, in which event the Company's ability
to perform its obligations in a timely manner may be impaired.
Page 9 of 11 pages
<PAGE>
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 initiated a company-wide
program to prepare our computer systems and applications for year 2000
compliance. To date, the Company has not experienced any significant Year 2000
issues.
Porta incurred internal staff costs as well as other expenses necessary to
prepare its systems for the year 2000, replacing some systems and upgrading
others. The total cost of this program, which was incurred during 1999, was
approximately $500,000, with approximately $200,000 representing internal costs
and $300,000 representing external equipment and services. The Company has not
incurred any expenses related to the Year 2000 Issue in 2000.
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, 1999 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 None
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 12, 2000 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated May 12, 2000 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
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 3,107
<SECURITIES> 0
<RECEIVABLES> 17,517
<ALLOWANCES> 0
<INVENTORY> 8,600
<CURRENT-ASSETS> 30,634
<PP&E> 4,668
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,834
<CURRENT-LIABILITIES> 23,402
<BONDS> 0
98
0
<COMMON> 0
<OTHER-SE> (1,023)
<TOTAL-LIABILITY-AND-EQUITY> 48,834
<SALES> 15,928
<TOTAL-REVENUES> 15,928
<CGS> 10,212
<TOTAL-COSTS> 4,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 934
<INCOME-PRETAX> 271
<INCOME-TAX> 30
<INCOME-CONTINUING> 306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 306
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
</TABLE>
