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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, 2003
[ ] 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.)
6851 Jericho Turnpike, Suite 170, 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 by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
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) 9,972,284 shares as of November 7, 2003
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
2003 2002
------------- ------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 184 $ 779
Accounts receivable - trade, less allowance for doubtful accounts 4,568 4,654
Inventories 2,707 3,363
Prepaid expenses and other current assets 433 329
--------- ---------
Total current assets 7,892 9,125
Property, plant and equipment, net 1,530 1,802
Goodwill, net 2,961 2,961
Other assets 103 340
--------- ---------
Total assets $ 12,486 $ 14,228
========= =========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Senior debt $ 25,303 $ 25,070
Subordinated notes 6,144 6,144
6% convertible subordinated debentures 385 385
Accounts payable 5,773 5,241
Accrued expenses 2,546 2,640
Accrued interest payable 3,332 2,639
Accrued commissions 414 566
Accrued deferred compensation 72 329
Income taxes payable 18 302
Short-term loan 5 8
--------- ---------
Total current liabilities 43,992 43,324
--------- ---------
Deferred compensation 1,124 839
--------- ---------
Total long-term liabilities 1,124 839
--------- ---------
Total liabilities 45,116 44,163
--------- ---------
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 10,003,224 shares at September 30, 2003 and December 31, 2002 100 100
Additional paid-in capital 76,059 76,059
Accumulated deficit (102,704) (100,023)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (4,147) (4,133)
--------- ---------
(30,692) (27,997)
Treasury stock, at cost (1,938) (1,938)
--------- ---------
Total stockholders' deficit (32,630) (29,935)
--------- ---------
Total liabilities and stockholders' deficit $ 12,486 $ 14,228
========= =========
See accompanying notes to consolidated financial statements.
Page 2 of 15
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,
2003 2002
------------- -------------
Sales $ 14,125 $ 16,329
Cost of sales 10,006 11,308
-------- --------
Gross profit 4,119 5,021
-------- --------
Selling, general and administrative expenses 4,559 5,448
Research and development expenses 1,553 1,998
Impairment loss -- 800
-------- --------
Total expenses 6,112 8,246
-------- --------
Operating loss (1,993) (3,225)
Interest expense (940) (1,488)
Interest income 1 5
Gain on sale of investment in joint venture -- 450
Other income (expense), net (26) 60
-------- --------
Loss before income taxes (2,958) (4,198)
Income tax (expense) benefit 277 (23)
-------- --------
Net loss $ (2,681) $ (4,221)
======== ========
Other comprehensive loss:
Foreign currency translation adjustments (14) (32)
-------- --------
Comprehensive loss $ (2,695) $ (4,253)
======== ========
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.27) $ (0.42)
======== ========
Weighted average shares outstanding 9,972 9,961
======== ========
Diluted per share amounts:
Net loss per share of common stock $ (0.27) $ (0.42)
======== ========
Weighted average shares outstanding 9,972 9,961
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 15
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,
2003 2002
------------- -------------
Sales $ 5,787 $ 5,093
Cost of sales 3,728 3,068
------- -------
Gross profit 2,059 2,025
------- -------
Selling, general and administrative expenses 1,435 1,818
Research and development expenses 520 611
------- -------
Total expenses 1,955 2,429
------- -------
Operating income (loss) 104 (404)
Interest expense (313) (310)
Interest income -- 1
Other income (expense), net -- 30
------- -------
Loss before income taxes (209) (683)
Income tax expense (5) (13)
------- -------
Net loss $ (214) $ (696)
======= =======
Other comprehensive loss:
Foreign currency translation adjustments 36 (27)
------- -------
Comprehensive loss $ (178) $ (723)
======= =======
Per share data:
Basic per share amounts:
Net loss per share of common stock $ (0.02) $ (0.07)
======= =======
Weighted average shares outstanding 9,972 9,972
======= =======
Diluted per share amounts:
Net loss per share of common stock $ (0.02) $ (0.07)
======= =======
Weighted average shares outstanding 9,972 9,972
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30, September 30,
2003 2002
------------- -----------
Cash flows from operating activities:
Net loss $(2,681) $(4,221)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 402 498
Amortization of debt discounts -- 3
Impairment loss -- 800
Gain on sale of investment in joint venture -- (450)
Changes in operating assets and liabilities:
Accounts receivable 86 (1,712)
Inventories 656 1,777
Prepaid expenses (104) 207
Other assets 237 (304)
Accounts payable, accrued expenses and other liabilities 735 316
------- -------
Net cash used in operating activities (669) (3,086)
------- -------
Cash flows from investing activities:
Capital expenditures, net (77) (50)
------- -------
Net cash used in investing activities (77) (50)
------- -------
Cash flows from financing activities:
Proceeds from senior debt 233 2,901
Proceeds from exercised options and warrants -- 4
Repayments of short term loans (3) (2)
------- -------
Net cash provided by financing activities 230 2,903
------- -------
Effect of exchange rate changes on cash (79) (80)
------- -------
Decrease in cash and cash equivalents (595) (313)
Cash and equivalents - beginning of the year 779 1,204
------- -------
Cash and equivalents - end of the period $ 184 $ 891
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 4 $ 9
======= =======
Cash paid for income taxes $ 8 $ 15
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 15
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, 2002. 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 in
these financial statements. The audit opinion included in the December 31, 2002
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 2003 are not necessarily indicative of results for
the year. See Note 3.
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, 2003 December 31, 2002
------------------ -----------------
(in thousands)
Parts and components $ 1,224 $ 1,767
Work-in-process 541 208
Finished goods 942 1,388
-------------- -----------------
$ 2,707 $ 3,363
============== =================
Note 3: Senior and Subordinated Debt
On September 30, 2003, the Company's debt to its senior lender was
$25,303,000. Under a prior amendment, the loan became due and payable on
December 31, 2002. On November 13, 2003, the senior lender granted an extension
to January 15, 2004. As a result, the entire balance of the Company's
obligations to its senior lender becomes due and payable on that date. The
Company does not have the ability to pay the senior debt or the subordinated
debt described in the following paragraph. If the maturity of the senior debt is
not extended beyond January 15, 2004, and if the senior lender demands payment
of all or a significant portion of the loan when due, the Company will not be
able to continue in business and may seek protection under the Bankruptcy Code.
Our senior lender has not required us to pay interest on approximately
$23,000,000 of senior debt since March 1, 2002. Accordingly, the financial
statements do not reflect any interest charges on that amount which would have
been payable but for the senior lender's waiver of interest.
As of September 30, 2003, the Company's short-term debt also included
$6,144,000 of subordinated debt that became due on July 3, 2001 and $385,000 of
6% debentures which became due on July 2, 2002.
Page 6 of 15
Accrued interest on the subordinated notes was approximately $2,974,000, which
represents interest from July 2000 through September 30, 2003, and accrued
interest on the 6% debentures was $58,000. The Company's senior lender has
precluded it from paying any principal or interest on the subordinated debt.
Note 4: Accounting for Stock Based Compensation
The Company applies the intrinsic value method as outlined in APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for stock options. Under the intrinsic value method, no
compensation expense is recognized if the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant. Accordingly, no compensation cost has been recognized. SFAS
No. 123, "Accounting for Stock-based Compensation," requires the Company to
provide pro forma information regarding net loss and net loss per share of
common stock as if compensation cost for the Company's stock option programs had
been determined in accordance with the fair value method prescribed therein.
Since there was no stock-based compensation in the nine months ended September
30, 2003 and 2002, pro forma loss is the same as the reported net loss.
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 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, 2002 in the basis
of measurement of segment revenues and profit or loss, and no significant change
in the Company's assets.
Nine Months Ended Three Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------ ------------------ ------------------- ------------------
Sales:
Line $ 7,944,000 $ 7,126,000 $ 3,712,000 $ 2,894,000
OSS 2,450,000 5,240,000 860,000 1,004,000
Signal 3,023,000 3,368,000 952,000 956,000
------------ ------------ ------------ ------------
$ 13,417,000 $ 15,734,000 $ 5,524,000 $ 4,854,000
============ ============ ============ ============
Segment profit (loss):
Line $ 806,000 $ (524,000) $ 821,000 $ 213,000
OSS (1,648,000) (7,000) (315,000) 11,000
Signal 814,000 (122,000) 255,000 234,000
------------ ------------ ------------ ------------
$ (28,000) $ (653,000) $ 761,000 $ 458,000
============ ============ ============ ============
Page 7 of 15
The following table reconciles segment totals to consolidated totals:
Nine Months Ended Three Months Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
------------------ ------------------ ------------------ ------------------
Sales:
Total revenue for reportable
segments $ 13,417,000 $ 15,734,000 $ 5,524,000 $ 4,854,000
Other revenue 708,000 595,000 263,000 239,000
------------ ------------ ------------ ------------
Consolidated total revenue $ 14,125,000 $ 16,329,000 $ 5,787,000 $ 5,093,000
============ ============ ============ ============
Operating loss:
Total segment profit (loss)
for reportable segments $ (28,000) $ (653,000) $ 761,000 $ 458,000
Corporate and unallocated (1,965,000) (2,572,000) (657,000) (862,000)
------------ ------------ ------------ ------------
Consolidated total
Operating income (loss) $ (1,993,000) $ (3,225,000) $ 104,000 $ (404,000)
============ ============ ============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Reference is made to the information provided under "Critical Accounting
Policies and Estimates" in our Form 10-K for the year ended December 31, 2002.
Although our orders and sales for Line equipment increased in the third quarter
of 2003, our business continues to be impaired by our financial position, and we
cannot assure you that the increase in orders and sales will continue for any
significant period. We are continuing to encounter delays in shipping a portion
of backlog in a timely manner, as key suppliers are reluctant to provide us with
credit. In addition, there have been periods during the three and nine months
ended September 30, 2003 that we did not have the funds either to prepay
suppliers or to make purchases on a COD basis. Our business will be impaired if,
and to the extent that, we are not able to make purchases necessary to fill our
orders. Our senior lender is not providing us with any additional funds, and our
obligations to the senior lender, which are described below and in Note 3,
become due on January 15, 2004.
Our senior lender has not required us to pay or accrue interest on
approximately $23,000,000 of senior debt since March 1, 2002. Accordingly, the
financial statements do not reflect any interest charges on that amount which
would have been payable but for the senior lender's waiver of interest.
We have been seeking to raise funds from the sale of one or more of our
divisions, and were engaged in negotiations with respect to the potential sale
of certain assets of one of our divisions. In the past, we have engaged in
negotiations with respect to sales of our divisions, and none of such
negotiations resulted in an agreement. In the event that we are not able to sell
any of our divisions, we will evaluate alternatives available to us, which may
include the discontinuation of unprofitable operations and it may be necessary
for us to seek protection under the Bankruptcy Code.
Page 8 of 15
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, September 30,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of sales 71% 69% 64% 60%
Gross profit 29% 31% 36% 40%
Selling, general and administrative
expenses 32% 33% 25% 36%
Research and development expenses 11% 12% 9% 12%
Impairment loss 0% 5% 0% 0%
Operating Income/(loss) (14%) (20%) 2% (8%)
Interest expense - net (7%) (9%) (6%) (6%)
Gain on sale of joint venture 0% 3% 0% 0%
Other 2% 0% 0% 0%
Net loss (19%) (26%) (4%) (14%)
The Company's sales by product line for the periods ended September 30,
2003 and 2002 are as follows:
Nine Months Ended September 30,
-------------------------------
$(000)
2003 2002
---- ----
Line connection/protection equipment $ 7,944 56% $ 7,126 44%
OSS equipment 2,450 17% 5,240 32%
Signal Processing 3,023 22% 3,368 20%
Other 708 5% 595 4%
------- --- ------- ---
$14,125 100% $16,329 100%
======= === ======= ===
Three Months Ended September 30,
--------------------------------
$(000)
2003 2002
---- ----
Line connection/protection equipment $3,712 64% $2,894 57%
OSS equipment 860 15% 1,004 20%
Signal Processing 952 16% 956 19%
Other 263 5% 239 4%
------ --- ------ ---
$5,787 100% $5,093 100%
====== === ====== ===
Page 9 of 15
Results of Operations
Our sales for the nine months ended September 30, 2003 compared to the
nine months ended September 30, 2002 decreased by $2,204,000 (13%) from
$16,329,000 in 2002 to $14,125,000 in 2003. Sales for the quarter ended
September 30, 2003 of $5,787,000 increased by $694,000 (14%) compared to
$5,093,000 for the quarter ended September 30, 2002. The decrease in sales for
the nine months is primarily attributed to a 53% decline in sales from our OSS
business. The increase in sales for the three month period results from a 28%
increase in the Line equipment offset by a 14% decline in sales from our OSS
business unit and no material change in the Signal revenue.
Line equipment sales for the nine months ended September 30, were
$7,944,000 compared to $7,126,000 in the same period of 2002, an increase of
$818,000 (11%). Sales for the three months ended September 30 increased by
$818,000 (28%) from $2,894,000 in 2002 to $3,712,000 in 2003. The increase for
the three months ended September 30, 2003 reflects significant increased sales
primarily to customers in the United Kingdom.
OSS sales for the nine months ended September 30, 2003 were $2,450,000
compared to $5,240,000 in the same period of 2002, a decrease of $2,790,000
(53%). OSS sales for the three months ended September 30, 2003 were $860,000
compared to $1,004,000 in the same period of 2002, a decrease of $144,000 (14%).
The decrease in sales for the nine and three months resulted from our inability
to secure new orders attributable to the slowdown in the telecommunications
market and the effects of our financial condition, and from lower levels of
contract completion compared to the similar period of the prior year.
Signal sales for the nine months ended September 30, 2003 were $3,023,000
compared to $3,368,000 in the same period of 2002, a decrease of $345,000 (10%).
Sales for the three months ended September 30, 2003 compared to 2002, decreased
$4,000 from $956,000 to $952,000. These decreases in sales were primarily due to
shortages of materials resulting from the refusal of several of our suppliers to
ship us on credit due to our financial condition.
Gross margin for the nine months ended September 30, 2003 was 29% compared
to 31% for the nine months ended September 30, 2002. Gross margin for the
quarter ended September 30, 2003 was 36% compared to 40% for the quarter ended
September 30, 2002. Line equipment margins rose during the quarter and nine
months ended September 30, 2003, as compared to 2002, due to increased revenue,
as noted above, which enabled us to better absorb manufacturing overhead. These
gains were offset by lower margins from the OSS business unit during the three
and nine months ended September 30, 2003 as compared to 2002, resulting in part
from the underabsorption of fixed expenses of this business unit due to the low
revenue levels. The Signal margins also increased, primarily from the better
absorption of overhead.
Selling, general and administrative expenses decreased by $889,000 (16%)
from $5,448,000 to $4,559,000 for the nine months ended September 30, 2003
compared to 2002. For the quarter ended September 30, 2003 selling general and
administrative expenses decreased by $383,000 (21%) from 2002. This decrease
relates primarily to our ongoing efforts to reduce personnel and consulting
services, and reduced OSS sales commissions reflecting our current OSS level of
business.
Research and development expenses decreased by $445,000 (22%) and by
$91,000 (15%) for the nine and three months ended September 30, 2003 from the
comparable periods in 2002. These decreases
Page 10 of 15
resulted from our efforts to reduce expenses primarily related to the OSS
business. Our failure to fund research and development could adversely affect
our capability to offer products based on developing technologies, which could
affect both our efforts to sell product in future years and our attractiveness
to potential buyers.
At June 30, 2002, we determined that goodwill related to our Signal
division was impaired based upon attaining a fair market value estimate during
discussions with respect to the proposed sale of the Signal division. 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 reducing the carrying value of the goodwill to $2,961,000. Furthermore, we
cannot give assurance that further write-downs will not be necessary. The
goodwill for our Line and OSS divisions had previously been written off.
As a result of the above, for the nine months ended September 30, 2003 vs.
the nine months of 2002 our operating loss decreased from $3,225,000 to
$1,993,000 (38%). We recorded an operating income of $104,000 for the quarter
ended September 30, 2003 as compared to an operating loss of $404,000 for the
quarter ended September 30, 2002, a 126% improvement.
Interest expense for the nine months ended September 30, 2003 compared to
September 30, 2002 decreased by $548,000 (37%) from $1,488,000 in 2002 to
$940,000 in 2003. Interest expense for the three-month period ending September
30, 2003 compared to the same three months of 2002, increased by $3,000 (1%)
from $310,000 in 2002 to $313,000 in 2003. This increase is attributable to our
amended agreement with our senior lender, which provides that the old term loan,
in the principal amount of approximately $23,000,000, bears no interest
commencing March 1, 2002 until such time as the lender, in its sole discretion,
resumes interest charges. The senior lender has not resumed interest charges.
The tax benefit for the nine months ended September 30, 2003 resulted
principally from the settlement of an outstanding tax obligation of $274,000 of
one of our subsidiaries for $30,000.
As a result of the foregoing, we incurred a net loss of $2,681,000, $0.27
per share (basic and diluted), for the nine months ended September 30, 2003,
compared with a net loss of $4,221,000, $0.42 per share (basic and diluted), for
the nine months ended September 30, 2002. The net loss for the three months
ended September 30, 2003 was $214,000, $0.02 per share (basic and diluted),
compared with a net loss for the three months ended September 30, 2002 of
$696,000, $0.07 per share (basic and diluted).
Liquidity and Capital Resources
At September 30, 2003, we had cash and cash equivalents of $184,000
compared with $779,000 at December 31, 2002. Our working capital deficit at
September 30, 2003 was $36,100,000 compared to a working capital deficit of
$34,199,000 at December 31, 2002. Our outstanding senior and subordinated debt,
with the reduced level of cash on hand and inventory, and the increased level of
accounts payable, resulted in the increase in the working capital deficiency.
During the nine months of 2003, the net cash used by us in operations was
$669,000 and we are continuing to operate with a negative cash flow.
As of September 30, 2003, our debt includes $25,303,000 of senior debt
which matures on January 15, 2004, $6,144,000 of subordinated debt that became
due on July 3, 2001, and $385,000 of 6% debentures, which became due on July 2,
2002. The maturity date of the senior debt reflects an extension
Page 11 of 15
of the maturity of our senior debt. On August 29, 2003, the senior lender
granted an extension to November 15, 2003, and on November 13, 2003, the senior
lender granted a further extension to January 15, 2004. Interest on the
subordinated notes was approximately $2,974,000, which represents interest from
July 2000 through September 30, 2003, and interest on the 6% debentures was
$58,000. We do not have sufficient resources to pay either the senior lender or
the subordinated lenders, we are unable to generate such cash from our
operations, and our senior lender is not making any further advances to us and
has precluded us from making any payments on the subordinated debt. We also do
not have any prospects of obtaining an alternate senior lender to replace our
present lender.
Our financial condition and stock price effectively preclude us from
raising funds through the issuance of debt or equity securities, we have no
other source of funds other than operations, and we are generating a negative
cash flow. We have in the past sought to raise funds through the sale of one or
more of our divisions, but our efforts to date have been unsuccessful. Even if
we were able to sell all of our divisions, it is unlikely that we would generate
sufficient cash to pay our senior lender in full.
If the senior lender does not extend the maturity date of our obligations
beyond January 15, 2004 and demands payment of all or a significant portion of
our obligations to the senior lender, we will not be able to continue in
business and we may seek protection under the Bankruptcy Code. We cannot assure
you that our senior lender will not demand payment of all or a significant
portion of our obligations. Furthermore, even if our senior lender grants us
additional extensions, it may nonetheless be necessary for us to seek protection
under the Bankruptcy Code.
As a result of our continuing financial difficulties:
o we are having and we may continue to have difficulty performing our
obligations under our OSS contracts, which could result in the
cancellation of contracts or the loss of future business and
penalties for non-performance;
o we are continuing to have difficulty in obtaining new business from
either existing customers or new customers, although, as noted
above, our orders and sales for Line products increased during the
three months ended September 30, 2003; and
o a number of creditors have engaged attorneys or collection agencies,
or commenced legal actions against us.
We are seeking to address our need for liquidity by exploring
alternatives, including the possible sale of one or more of our divisions. Even
if a sale is completed, we may still be unable to operate profitably and it may
be necessary for us to seek protection under the Bankruptcy Code.
Page 12 of 15
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, 2002 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 3. Quantitative and Qualitative Disclosure About Market Risk.
Although we conduct operations outside of the United States, most of our
contracts and sales are dollar denominated. A portion of the revenue from our
United Kingdom operations and the majority of our United Kingdom expenses are
denominated in Sterling. Any Sterling-denominated receipts are promptly
converted into United States dollars. We do not engage in any hedging or other
currency transactions. For the nine months ended September 30, 2003 and 2002,
the currency translation adjustment was not significant in relation to our total
revenue.
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 other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
See Note 3 of Notes to Unaudited Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for information concerning
defaults on our subordinated debt.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certificate of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On August 14, 2003, the Company reported its results of operations
for the quarter ended June 30, 2003 under Item 9.
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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 14, 2003 By /s/William V. Carney
---------------------------
William V. Carney
Chairman of the Board
and Chief Executive Officer
Dated November 14, 2003 By /s/Edward B. Kornfeld
---------------------------
Edward B. Kornfeld
Senior Vice President
and Chief Financial Officer
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