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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.................to...................
Commission file number 1-8191
PORTA SYSTEMS CORP.
-------------------
(Exact name of registrant as specified in its charter)
Delaware 11-2203988
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Underhill Boulevard, Syosset, New York
------------------------------------------
(Address of principal executive offices)
11791
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(Zip Code)
516-364-9300
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(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) 9,979,442 shares as of October 30, 2002
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2002 2001
------------- ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 891 1,204
Accounts receivable - trade, less
allowance for doubtful accounts 5,996 4,284
Inventories 3,429 5,206
Prepaid expenses and other current assets 645 852
--------- -------
Total current assets 10,961 11,546
Property, plant and equipment, net 1,928 2,328
Goodwill, net 2,961 3,761
Other assets 502 198
--------- -------
Total assets $ 16,352 17,833
========= =======
Liabilities and Stockholders' Deficit
Current liabilities:
Senior debt $ 24,996 22,095
Subordinated notes 6,144 6,144
6% convertible subordinated debentures 385 382
Accounts payable 6,199 7,023
Accrued expenses 4,239 3,417
Accrued interest payable 2,403 1,593
Accrued commissions 599 1,607
Accrued deferred compensation 338 196
Income taxes payable 291 314
Short-term loans 9 11
--------- -------
Total current liabilities 45,603 42,782
--------- -------
Deferred compensation 847 900
--------- -------
Total long-term liabilities 847 900
--------- -------
Total liabilities 46,450 43,682
--------- -------
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 -- 10,003,224 and
9,947,421 shares at September 30, 2002
and December 31, 2001 100 99
Additional paid-in capital 76,059 76,056
Accumulated deficit (100,130) (95,909)
Accumulated other comprehensive loss:
Foreign currency translation
adjustment (4,189) (4,157)
--------- -------
(28,160) (23,911)
--------- -------
Treasury stock, at cost (1,938) (1,938)
--------- -------
Total stockholders' deficit (30,098) (25,849)
--------- -------
Total liabilities and
stockholders' deficit $ 16,352 17,833
========= =======
See accompanying notes to consolidated financial statements.
Page 2 of 17
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Nine Months Ended
September 30, September 30,
2002 2001
------------- -------------
Sales $16,329 21,996
Cost of sales 11,308 16,154
------- ------
Gross profit 5,021 5,842
------- ------
Selling, general and administrative
expenses 5,448 7,452
Research and development expenses 1,998 3,545
Impairment loss 800 --
------- ------
Total expenses 8,246 10,997
------- ------
Operating loss (3,225) (5,155)
Interest expense (1,488) (3,459)
Interest income 5 29
Gain on sale of assets -- 684
Gain on sale of investment in joint
venture 450 --
Other income (expense), net 60 62
------- ------
Loss before income taxes and
minority interest (4,198) (7,839)
Income tax expense (23) (28)
Minority interest -- 225
------- ------
Net loss $(4,221) (7,642)
======= ======
Other comprehensive loss:
Foreign currency translation
adjustments (32) (203)
------- ------
Comprehensive loss $(4,253) (7,845)
======= ======
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.42) (0.78)
======= ======
Weighted average shares outstanding 9,955 9,854
======= ======
Diluted per share amounts:
Net loss per share of common stock $ (0.42) (0.78)
======= ======
Weighted average shares outstanding 9,955 9,854
======= ======
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 17
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
Three Months Ended
September 30, September 30,
2002 2001
------------- -------------
Sales $ 5,093 6,039
Cost of sales 3,068 4,536
------- -------
Gross profit 2,025 1,503
------- -------
Selling, general and administrative
expenses 1,818 2,090
Research and development expenses 611 924
------- -------
Total expenses 2,429 3,014
------- -------
Operating loss (404) (1,511)
Interest expense (310) (1,164)
Interest income 1 4
Gain on sale of assets -- 684
Other income (expense), net 30 19
------- -------
Loss before income taxes
and minority interest (683) (1,968)
Income tax expense (13) (11)
Minority interest -- 81
------- -------
Net loss $ (696) (1,898)
======= =======
Other comprehensive loss:
Foreign currency translation
adjustments (27) (183)
------- -------
Comprehensive loss $ (723) $(2,081)
======= =======
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.07) $ (0.19)
======= =======
Weighted average shares outstanding 10,003 9,925
======= =======
Diluted per share amounts:
Net loss per share of common stock $ (0.07) $ (0.19)
======= =======
Weighted average shares outstanding 10,003 9,925
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 17
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $(4,221) $(7,642)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Gain on sale of assets -- (684)
Depreciation and amortization 498 1,507
Amortization of debt discounts 3 5
Impairment loss 800 --
Minority interest -- (225)
Gain on sale of investment
in joint venture (450) --
Changes in operating assets and
liabilities:
Accounts receivable (1,712) 1,516
Inventories 1,777 1,243
Prepaid expenses 207 184
Other assets (304) 444
Accounts payable, accrued expenses
and other liabilities 316 (573)
------- -------
Net cash used in operating
activities (3,086) (4,225)
------- -------
Cash flows from investing activities:
Proceeds from the sale of assets -- 1,850
Capital expenditures, net (50) (178)
------- -------
Net cash provided by (used in)
investing activities (50) 1,672
------- -------
Cash flows from financing activities:
Proceeds from senior debt 2,901 1,594
Repayments of senior debt -- (874)
Proceeds from exercised options
and warrants 4 36
Proceeds (repayments) of short
term loans (2) 88
------- -------
Net cash provided by
financing activities 2,903 844
------- -------
Effect of exchange rate changes on cash (80) (215)
------- -------
Decrease in cash and cash equivalents (313) (1,924)
Cash and equivalents - beginning of the year 1,204 2,366
------- -------
Cash and equivalents - end of the period $ 891 $ 442
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 9 $ 916
======= =======
Cash paid for income taxes $ 15 $ 103
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 17
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, 2001. These financial statements have been prepared assuming that the
Company will continue as a going concern and, accordingly, do not include any
adjustments that might result from the outcome of the uncertainties described
within. The audit opinion included in the December 31, 2001 Form 10-K annual
report contained an explanatory paragraph regarding the Company's ability to
continue as a going concern. Results for the third quarter or the first nine
months of 2002 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 method) or market. The composition of inventories at the end of the
respective periods is as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
(in thousands)
Parts and components $1,746 $3,217
Work-in-process 434 192
Finished goods 1,249 1,797
------ ------
$3,429 $5,206
====== ======
Note 3: Sale of Investment in Joint Venture
In April 2002, the Company sold its 50% interest in Woo Shin Electro
Systems Co., a Korean company, for $450,000 to its joint venture partner.
Payment was made by the forgiveness of commissions, totaling $450,000, which
were owed to its sales representation company owned by our joint venture
partner, with respect to sales made by Woo Shin Electro Systems Co. in Korea.
The investment in the joint venture had previously been written down to zero as
the Company's share of the losses of the joint venture exceeded its investment.
Therefore, the transaction was reflected as a $450,000 reduction in accrued
commissions and a non-cash gain on sale of investment in joint venture.
Note 4: Senior Debt
On September 30, 2002, the Company's debt to its senior lender was
$24,996,000, including principal and accrued interest. The current agreement
with the senior lender, as amended in March and May 2002 and described below,
expires on December 31, 2002, at which time all of the senior debt becomes due.
Accordingly, all senior debt is classified as a current liability at September
30, 2002.
Page 6 of 17
In March 2002, the senior lender agreed to an amended and restated loan
and security agreement whereby a new term loan was established with a maximum
principal amount of $1,500,000 and subsequently increased in May 2002 to
$2,250,000. The agreement allows the Company to draw monies subject to the
senior lender's receipt and approval of a weekly disbursement budget. Any
advances under this agreement are subject to the discretion of the senior
lender. Obligations under the new term loan bear interest at 12%, which interest
shall accrue monthly and be added to the principal until September 1, 2002 when
interest for the month of August 2002 shall be paid and interest shall continue
to be paid each subsequent month. The agreement provides that all indebtedness
prior to March 1, 2002 is reflected as an old term loan in the amount of
$22,610,000, which includes the principal balance due at December 31, 2001 plus
accrued interest though March 1, 2002. The old term loan bears no interest until
such time as the senior lender in its sole discretion notifies the Company that
interest shall be payable. Both the new and old term loans are due on December
31, 2002. Additionally, the senior lender has prohibited the Company from making
any payments on indebtedness to any subordinated creditors, but the Company is
not prohibited from paying accounts payable in the ordinary course of business.
Finally, the agreement allows for standby letters of credit not to exceed a
maximum of $573,000. As of September 30, 2002, the Company has borrowed
$2,250,000, the maximum principal amount under the new term loan, and the total
principal and interest on the new term loan was $2,386,000.
Note 5: Subordinated Notes
As of September 30, 2002, the Company has outstanding $6,144,000 of
subordinated notes and $2,051,000 of accrued interest, which were due and
payable, but which the Company did not have the resources to pay. In addition,
the senior lender had precluded the Company from making payments on the
subordinated debt (note 4).
Note 6: Recent Accounting Pronouncements
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
in the first quarter of 2002. Effective January 1, 2002, the Company ceased
amortization of goodwill resulting in a decrease of $595,000 in amortization for
the nine months ended September 30, 2002 compared to the same period in 2001.
Instead of amortizing goodwill over a fixed period of time, the Company will
measure the fair value of the acquired business at least annually to determine
if goodwill has been impaired. In addition, the Company completed the first step
of the goodwill transitional impairment test by June 30, 2002, which requires
determining the fair value of the reporting unit, as defined by SFAS 142, and
comparing it to the carrying value of the net assets allocated to the reporting
unit. The Company determined that there was no impairment loss resulting from
the transitional impairment test.
At December 31, 2001, the Company's goodwill was $3,761,000, all of which
related to its Signal division. During the second quarter of 2002, the Company
was engaged in discussions with respect to the sale of the Signal division.
Based on those discussions the Company determined that goodwill was impaired and
it estimated that the amount of the impairment was $800,000. This amount was
charged to operations in the quarter ended June 30, 2002. Furthermore, the
Company cannot give assurances that further write-downs will not be necessary.
The following schedule presents adjusted net loss, basic net loss per
share and diluted net loss per share, exclusive of goodwill amortization
expense, for the nine months ended September 30, 2001 and the three months ended
September 30, 2001, had the standard been adopted for those periods.
Page 7 of 17
Nine Months Three Months
Ended Ended
September 30, 2001 September 30, 2001
------------------- ------------------
Reported net loss ..................... $(7,642) $(1,898)
Add back: Goodwill amortization ... 595 198
------- -------
Adjusted net loss ..................... $(7,047) $(1,700)
======= =======
Basic net loss per share:
Reported net loss ................. $ (0.78) $ (0.19)
Goodwill amortization ............. 0.06 0.02
------- -------
Adjusted net loss per share ........... $ (0.72) $ (0.17)
======= =======
Diluted net loss per share:
Reported net loss ................. $ (0.78) $ (0.19)
Goodwill amortization ............. 0.06 0.02
------- -------
Adjusted diluted net loss per share ... $ (0.72) $ (0.17)
======= =======
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which changes the accounting for
costs such as lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. We do not expect the adoption of this
standard to have a material effect on our results of operations.
Note 7: Segment Data
The Company has three reportable segments: Line Connection and Protection
Equipment ("Line") whose products interconnect copper telephone lines to
switching equipment and provide fuse elements that protect telephone equipment
and personnel from electrical surges; Operating Support Systems ("OSS") whose
products automate the testing, provisioning, maintenance and administration of
communication networks and the management of support personnel and equipment;
and Signal Processing ("Signal") whose products are used in data communication
devices that employ high frequency transformer technology.
The factors used to determine the above segments focused primarily on the
types of products and services provided, and the type of customer served. Each
of these segments is managed separately from the others, and management
evaluates segment performance based on operating income.
There has been no significant change from December 31, 2001 in the basis
of measurement of segment revenues and profit or loss, and no significant change
in the Company's assets.
Page 8 of 17
Nine Months Ended Three Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Sales:
Line $ 7,126,000 $10,501,000 $2,894,000 $ 3,184,000
OSS 5,240,000 7,110,000 1,004,000 1,632,000
Signal 3,368,000 3,914,000 956,000 1,086,000
----------- ----------- ---------- -----------
$15,734,000 $21,525,000 $4,854,000 $ 5,902,000
=========== =========== ========== ===========
Segment profit (loss):
Line $ (524,000) $ 1,079,000 $ 213,000 $ 326,000
OSS (7,000) (3,876,000) 11,000 (1,192,000)
Signal* (122,000) 643,000 234,000 224,000
----------- ----------- ---------- -----------
$ (653,000) $(2,154,000) $ 458,000 $ (642,000)
=========== =========== ========== ===========
*Includes an impairment loss of $800,000 that was charged against the operations
of Signal in the second quarter of 2002.
The following table reconciles segment totals to consolidated totals:
Nine Months Ended Three Months Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Sales:
Total revenue for
reportable segments $15,734,000 $21,525,000 $4,854,000 $ 5,902,000
Other revenue 595,000 471,000 239,000 137,000
----------- ----------- ---------- -----------
Consolidated total revenue $16,329,000 $21,996,000 $5,093,000 $ 6,039,000
=========== =========== ========== ===========
Operating loss:
Total segment profit (loss)
for reportable segments $ (653,000) $(2,154,000) 458,000 $ (642,000)
Corporate and unallocated (2,572,000) (3,001,000) (862,000) (869,000)
----------- ----------- ---------- -----------
Consolidated total
operating loss $(3,225,000) $(5,155,000) $ (404,000) $(1,511,000)
=========== =========== ========== ===========
Page 9 0f 17
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:
Nine Months Ended Three Months Ended
September 30, September30,
----------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of sales 69% 73% 60% 75%
Gross profit 31% 27% 40% 25%
Selling, general and administrative
expenses 33% 34% 36% 35%
Research and development expenses 12% 16% 12% 15%
Impairment loss 5% -- 0% --
Operating loss (20%) (23%) (8%) (25%)
Interest expense - net (9%) (16%) (6%) (19%)
Gain on sale of joint venture 3% -- 0% --
Gain on sale of assets -- 3% -- 12%
Other 0% 0% 0% 0%
Minority interest -- 1% -- 1%
Net loss (26%) (35%) (14%) (31%)
The Company's sales by product line for the periods ended September 30, 2002 and
2001 are as follows:
Nine Months Ended September 30,
-------------------------------
$(000)
2002 2001
---- ----
Line connection/protection
equipment $ 7,126 44% $10,501 48%
OSS equipment 5,240 32% 7,110 32%
Signal Processing 3,368 20% 3,914 18%
Other 595 4% 471 2%
------- --- ------- ---
$16,329 100% $21,996 100%
======= === ======= ===
Three Months Ended September 30,
--------------------------------
$(000)
2002 2001
---- ----
Line connection/protection
equipment $2,894 57% $3,184 53%
OSS equipment 1,004 20% 1,632 27%
Signal Processing 956 19% 1,086 18%
Other 239 4% 137 2%
------ --- ------ ---
$5,093 100% $6,039 100%
====== === ====== ===
Page 10 of 17
Results of Operations
Our sales for the nine months ended September 30, 2002 compared to the
nine months ended September 30, 2001 decreased by $5,667,000 (26%) from
$21,996,000 in 2001 to $16,329,000 in 2002. Sales for the quarter ended
September 30, 2002 of $5,093,000 decreased by $946,000 (16%) compared to
$6,039,000 for the quarter ended September 30, 2001. The sales decrease for both
the nine months and three months periods reflects declines in sales from all
three business units.
Line sales for the nine months ended September 30, decreased from
$10,501,000 to $7,126,000, or $3,375,000 (32%) from 2001 to 2002. Sales for the
three months ended September 30 decreased by $290,000 (9%) from $3,184,000 in
2001 to $2,894,000 in 2002. The decrease for both the nine months and three
months ended September 30, 2002 reflects reduced sales volume to customers in
the United Kingdom and the general slowdown in the telecommunications industry.
OSS sales for nine months ended September 30, 2002 were $5,240,000
compared to the nine months ended September 30, 2001 of $7,110,000, a decrease
of $1,870,000 (26%). OSS sales for the three months ended September 30, 2002
were $1,004,000 compared to the three months ended September 30, 2001 of
$1,632,000, a decrease of $628,000 (38%). The decreased sales during the nine
and three months ended September 30, 2002 resulted from the inability to secure
new orders primarily from the slowdown in the telecommunication market and from
lower levels of contract completion compared to the similar period of the prior
year. Additionally, as a result of our change to the equity method effective
October 1, 2001 and subsequent sale in April 2002 of our interest in our Korean
joint venture, we did not recognize any revenue from OSS sales in Korea during
2002, whereas during the third quarter and nine months of 2001, our share of the
revenue generated by the Korean venture was $382,000 and $1,066,000,
respectively.
Signal sales for the nine months ended September 30, 2002 were $3,368,000
compared to the nine months ended September 30, 2001 of $3,914,000, a decrease
of $546,000 (14%). Sales for the quarter ended September 30, 2002 compared to
2001, decreased $130,000 (12%) from $1,086,000 to $956,000. The decrease in
sales for the nine and three months was primarily due to the temporary
disruption of our supply chain and a key customer hold on a shipment. Both
situations were resolved in October of 2002.
Gross margin for the nine months ended September 30, 2002 was 31% compared
to 27% for the nine months ended September 30, 2001. Gross margin for the
quarter ended September 30, 2002 was 40% compared to 25% for the quarter ended
September 30, 2001. The margin improvement for both the nine months and the
quarter resulted from a reduction to the costs associated with certain OSS
contracts reflecting our ability to replace a high cost software vendor with
comparable lower cost software. Offsetting this improvement were lower margins
associated with our Line business that was unable to absorb certain fixed
expenses in relation to lower sales volume.
Selling, general and administrative expenses decreased by $2,004,000 (27%)
from $7,452,000 to $5,448,000 for the nine months ended September 30, 2002
compared to 2001. For the quarter ended September 30, 2002 selling general and
administrative expenses decreased by $271,000 (13%) from 2001. This decrease
relates primarily to reduced salaries and benefits, consulting services and
commissions reflecting our current level of business.
Page 11 of 17
Research and development expenses decreased by $1,547,000 (44%) and by
$313,000 (34%) for the nine and three months ended September 30, 2002 from the
comparable periods in 2001. This decrease in research and development expenses
for both nine and three months resulted from our efforts to reduce expenses
primarily related to the OSS business.
At December 31, 2001, our goodwill was $3,761,000, all of which related to
our Signal division. We determined that this goodwill had been impaired as of
June 30, 2002. We engaged in discussions with respect to the sale of that
division during the second quarter of 2002, and based on those discussions we
estimated that the impairment loss was approximately $800,000. This amount was
charged to operations in the quarter ended June 30, 2002. Furthermore, the
negotiations relating to the sale of the Signal division have been discontinued.
We cannot give any assurances that further write-downs will not be necessary.
As a result of the above, for the nine months ended September 30, 2002
compared to 2001, we had an operating loss of $3,225,000 in 2002 versus an
operating loss of $5,155,000 in 2001. We had an operating loss of $404,000 for
the quarter ended September 30, 2002 as compared to an operating loss of
$1,511,000 for the quarter ended September 30, 2001.
Interest expense for the nine months ended September 30, 2002 compared to
September 30, 2001 decreased by $1,971,000 (57%) from $3,459,000 in 2001 to
$1,488,000 in 2002. Interest expense for the three-month period ending September
30, 2002 compared to the same three months of 2001, decreased by $854,000 (73%)
from $1,164,000 in 2001 to $310,000 in 2002. The reduced level of interest
expense is attributable to our amended agreement with our senior lender whereby
the old term loan bears no interest during the three and nine months ended
September 30, 2002. (See Note 4 of notes to unaudited financial statements).
In April 2002, we sold our 50% interest in Woo Shin Electro Systems Co, a
Korean company, for $450,000 to our joint venture partner. Payment was made by
the forgiveness of commissions, totaling $450,000, which we owed to our sales
representation company owned by our joint venture partner, with respect to sales
made by Woo Shin Electro Systems Co. in Korea.
As a result of the foregoing, we incurred a net loss of $4,221,000, $0.42
per share (basic and diluted), for the nine months ended September 30, 2002,
compared with a net loss of $7,642,000, $0.78 per share (basic and diluted), for
the nine months ended September 30, 2001. The net loss for the three months
ended September 30, 2002 was $696,000, $0.07 per share (basic and diluted),
compared with a net loss for the three months ended September 30, 2001 of
$1,898,000, $0.19 per share (basic and diluted).
Liquidity and Capital Resources
At September 30, 2002, we had cash and cash equivalents of $891,000
compared with $1,204,000 at December 31, 2001. Our working capital deficit at
September 30, 2002 was $34,642,000 compared to a working capital deficit of
$31,236,000 at December 31, 2001. The increased level of senior debt resulted in
the increase in the working capital deficiency. During the nine months of 2002,
the net cash used by us in operations was $3,086,000.
As of September 30, 2002, our debt includes $24,996,000 of senior debt
that matures on December 31, 2002, and $6,144,000 of subordinated debt that
became due on July 3, 2001. We were unable to pay the interest payment on the
subordinated notes of approximately $2,051,000, which represents interest from
July 2000 through September 30, 2002. At September 30, 2002, we did not have
sufficient
Page 12 of 17
resources to pay either the senior lender or the subordinated lenders and it is
unlikely that we can generate such cash from our operations, and our senior
lender has precluded us from making payments on the subordinated debt.
On March 1, 2002, and as amended on May 10, 2002, our senior lender and we
agreed to amend our restated loan and security agreement whereby a new term loan
was established with a maximum principal amount of $2,250,000. The agreement
allows us to draw monies subject to our senior lender's receipt and approval of
a weekly disbursement budget. Obligations under the new term loan shall bear
interest at 12%. The agreement also establishes all indebtedness prior to March
1, 2002 as an old term loan in the amount of $22,610,000, which includes the
balance due at December 31, 2001 plus accrued interest though March 1, 2002. The
old term loan bears no interest until such time as the senior lender in its sole
discretion notifies us that interest shall be payable. Both the new and old term
loans are due on December 31, 2002. As part of this agreement, the senior lender
continues to preclude us from making any payments on indebtedness to any
subordinated creditors except to pay accounts payable in the ordinary course of
business. The $2,250,000 advance from our senior lender was made at the
discretion of the senior lender. Since we have borrowed the maximum, our senior
lender has no obligation to fund future operations. If we require additional
funds and the senior lender ceases funding our operations, unless we have
obtained alternative financing, we will be unable to continue in business.
Furthermore, unless we obtain funding from another source, including the sale of
one of more of our divisions, we will not be able to pay our senior lender on
December 31, 2002, and we may not be able to continue in business.
As of September 30, 2002, we had remaining outstanding $385,000 of 6%
Debentures which became due on July 2, 2002. The interest accrued on the 6%
Debentures is payable on July 1 of each year. Due to the restriction imposed by
our senior lender precluding us from making any payments on indebtedness to any
subordinated debt holder, we were unable to pay the interest due of $23,000
which was due on each of July 1, 2001 and 2002, and we were unable to pay the
principal of $385,000 which was due on July 2, 2002. Additionally, we have been
notified by the trustee that the non-payment caused an event of default.
As of September 30, 2002, we had outstanding $6,144,000 of subordinated
notes, all of which became due during 2001. We did not have the resources to
pay, and we did not pay, either the principal or interest on the subordinated
notes and are restricted by our senior lender from making such payments. The
holder of a subordinated note in the principal amount of $500,000 has commenced
an action seeking payment of the principal and interest on his note. However,
the court has denied the holder's motion for a summary judgment.
As a result of our continuing financial difficulties:
o we are having and we may continue to have difficulty performing our
obligations under our contracts, which could result in the
cancellation of contracts or the loss of future business and
penalties for non-performance;
o we are having and we may continue to have difficulty in obtaining
new business from either existing customers or new customers;
o we may have difficulty selling one or more of our divisions on terms
which we consider reasonable;
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o our significant decrease in research and development may affect the
price that a potential buyer of one or more of our divisions is
willing to pay; and
o a number of creditors, including one holder of our subordinated
notes, as discussed above, have engaged attorneys or collection
agencies or commenced legal actions against us, and some of them
have obtained judgments against us.
The creditors include five former senior executives who have deferred
compensation agreements with us. The total payments due under these agreements
are approximately $1.9 million, of which $133,000 was due at September 30, 2002,
and an additional $69,000 will become due during the remainder of 2002. Other
claimants who have already either commenced litigation or otherwise sought
collection or who have obtained judgments against us are due approximately
$600,000. If we are unable to reach a settlement with these creditors and others
who have not yet brought claims, and these claimants obtain judgments against us
or, in the case of creditors who have already obtained judgments, if the
creditors seek to enforce the judgment, it may be necessary for us, or our
senior lender may require us, to seek protection under the Bankruptcy Code.
We are seeking to address our need for liquidity by exploring
alternatives, including the possible sale of one or more of our divisions.
Although we are engaged in discussions with respect to the sale of one of our
divisions, we have not signed any agreements with respect to such a sale, and we
cannot give any assurance that we will be able to sell any divisions on
reasonable terms, if at all. Furthermore, if we sell a division, we anticipate
that a substantial portion of the net proceeds will be made to our senior lender
and we will not receive a significant amount, if any, of working capital from
such a sale.
During 2001 and 2002, we took steps to reduce overhead and headcount. We
will continue to look to reduce costs while we seek additional business from new
and existing customers. Our senior lender has precluded us from making any
payments on indebtedness to any subordinated creditors. Because of our present
stock price, it is highly unlikely that we will be able to raise funds through
the sales of our equity securities, and our financial condition prevents us from
issuing debt securities. In the event that we are unable to extend our debt
obligations and sell one or more of our divisions, we cannot assure you that we
will be able to continue in operations. Furthermore, we believe that our losses
and our financial position are having and will continue to have an adverse
effect upon our ability to develop new business as competitors and potential
customers question our ability both to perform our obligations under any
agreements we may enter and to continue in business. We have been informally
advised by British Telecommunications, which was one of our largest customers
that, because of our financial position, it will not place orders with us for
OSS products until we can demonstrate that we are financially viable. However,
this customer continues to place orders for OSS maintenance and modest orders
for line test products. The substantially reduced level of purchases by this
customer has had an adverse effect upon our operations. In addition, the audit
opinion included in the December 31, 2001 Form 10-K annual report contained an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
On October 22, 2002, the American Stock Exchange suspended trading of our
common stock and made application with the Securities and Exchange Commission to
strike our common stock from listing and registration effective at the opening
of trading on November 12, 2002. The action by the Exchange is based on our
failure to meet the Exchange's minimum requirements for continued listing. As a
result, our stock is subject to the Securities and Exchange Commission's penny
stock rules, which may increase our difficulty in seeking to raise funds.
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Forward Looking Statements
Statements contained in this Form 10-Q include forward-looking statements
that are subject to risks and uncertainties. In particular, statements in this
Form 10-Q that state the Company's intentions, beliefs, expectations,
strategies, predictions or any other statements relating to our future
activities or other future events or conditions are "forward-looking
statements." Forward-looking statements are subject to risks, uncertainties and
other factors, including, but not limited to, those identified under "Risk
Factors," in our Form 10-K for the year ended December 31, 2001 and those
described in Management's Discussion and Analysis of Financial Conditions and
Results of Operations" in our Form 10-K and this Form 10-Q, and those described
in any other filings by us with the Securities and Exchange Commission, as well
as general economic conditions and economic conditions affecting the
telecommunications industry, any one or more of which could cause actual results
to differ materially from those stated in such statements.
Item 4. Controls and Procedures
Our chief executive officer and chief financial officer have supervised
and participated in an evaluation of the effectiveness of our disclosure
controls and procedures as of a date within 90 days of the date of this report,
and based on their evaluations, they believe that our disclosure controls and
procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934,
as amended) are designed to ensure that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods
specified in the Commission's rules and forms. As a result of the evaluation,
there were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Page 15 of 17
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 13, 2002 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated November 13, 2002 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS
The undersigned chief executive officer and chief financial officer of the
Registrant do hereby certify that this Quarterly Report on Form 10-Q fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Act
of 1934, as amended, and that the information contained in this report fairly
presents, in all material respects, the financial condition and results of
operations of the Registrant at the dates and for the periods shown in such
report.
Dated November 13, 2002 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated November 13, 2002 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
William V. Carney does hereby certify that he is the duly elected and incumbent
chief executive officer and Edward B. Kornfeld does hereby certify that he is
the duly elected and incumbent chief financial officer of Porta Systems Corp.
(the "issuer") and each of them does hereby certify, with respect to the
issuer's Form 10-Q for the quarter ended September 30, 2002 (the "report") as
follows:
1. He has reviewed the report;
2. Based on his knowledge, the report does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the report;
Page 16 of 17
3. Based on his knowledge, the financial statements, and other financial
information included in the report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the issuer as of, and for, the periods presented in the report;
4. He and the other certifying officer are responsible for establishing and
maintaining disclosure controls and procedures, as defined in Rule
13a-14(c) of the Securities Exchange Act of 1934, as amended, for the
issuer and have:
i. Designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its
consolidated subsidiaries, is made known to them by others within
those entities, particularly during the period in which the periodic
reports are being prepared;
ii. Evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
the report (the "Evaluation Date"); and
iii. Presented in the report their conclusions about the effectiveness of
the disclosure controls and procedures based on the required
evaluation as of the Evaluation Date
5. He and the other certifying officer have disclosed to the issuer's
auditors and to the audit committee of the board of directors (or persons
fulfilling the equivalent function):
i. All significant deficiencies in the design or operation of internal
controls which could adversely affect the issuer's ability to
record, process, summarize and report financial data and have
identified for the issuer's auditors any material weaknesses in
internal controls; and
ii. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
6. He and the other certifying officer have indicated in the report whether
or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of their most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
---------------------------- ---------------------------
William V. Carney Edward B. Kornfeld
Chief Executive Officer Chief Financial Officer
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