-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OuwyKh1oG/O3hTKC0Z5vkeJnJE1vqEnUUZ72FP3qx7S+MTo0Dgjep5QLKy4Q+Z57 7wPjD5VUvrSegTQSH0BJTA== 0000891092-97-000439.txt : 19971114 0000891092-97-000439.hdr.sgml : 19971114 ACCESSION NUMBER: 0000891092-97-000439 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08191 FILM NUMBER: 97714124 BUSINESS ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5163649300 MAIL ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 10-Q 1 FORM 10-Q 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, 1997 [ ] 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: 2,231,929 shares as of November 6, 1997 Page 1 of 14 pages PART I.- FINANCIAL INFORMATION Item 1- Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) September 30, December 31, 1997 1996 ----------- ------------ Assets (Unaudited) Current assets: Cash and cash equivalents $ 3,046 $ 2,584 Accounts receivable, net 18,388 16,034 Inventories 7,850 7,424 Prepaid expenses 1,112 782 Other receivable -- 531 -------- -------- Total current assets 30,396 27,355 -------- -------- Property, plant and equipment, net 4,793 5,422 Deferred computer software, net 826 1,676 Goodwill, net 11,217 11,555 Other assets 3,606 4,650 -------- -------- Total assets $ 50,838 $ 50,658 ======== ======== Liabilities and Stockholders' Deficit Current liabilities: Convertible subordinated debentures $ 1,771 $ 2,096 Zero coupon senior subordinated convertible notes 26,180 -- Current portion of senior debt 2,063 750 Accounts payable 5,893 6,056 Accrued expenses 9,249 9,004 Accrued interest payable 719 583 Accrued commissions 2,472 2,708 Income taxes payable 780 780 Accrual deferred compensation 1,205 1,232 Short-term loans 123 31 -------- -------- Total current liabilities 50,455 23,240 -------- -------- Senior debt 13,903 16,835 Zero coupon senior subordinated convertible notes -- 25,885 Notes payable net of current maturities 3,084 3,084 Income taxes payable 685 802 Other long-term liabilities 430 653 Minority interest 1,027 863 -------- -------- Total long-term liabilities 19,129 48,122 -------- -------- Stockholders' deficit: Preferred stock, no par value; authorized -- -- 1,000,000 shares, none issued Common stock, par value $.01; authorized 40,000,000 and 20,000,000 shares, issued 2,231,929 and 2,223,861 shares at September 30, 1997 and December 31, 1996, respectively 22 22 Additional paid-in capital 36,737 36,561 Foreign currency translation adjustment (4,433) (4,014) Accumulated deficit (48,699) (50,900) -------- -------- (16,373) (18,331) Treasury stock, at cost (2,066) (2,066) Receivable for employee stock purchases (307) (307) -------- -------- Total stockholders' deficit (18,746) (20,704) -------- -------- Total liabilities and stockholders' deficit $ 50,838 $ 50,658 ======== ======== See accompanying notes to consolidated financial statements. Page 2 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Nine Months Ended September 30, September 30, 1997 1996 ------------ ------------- Sales $ 45,934 $ 41,476 Cost of sales 28,043 27,087 -------- -------- Gross profit 17,891 14,389 -------- -------- Selling, general and administrative expenses 9,542 9,578 Research and development expenses 3,756 2,681 -------- -------- Total expenses 13,298 12,259 -------- -------- Operating income 4,593 2,130 Interest expense (2,729) (4,209) Interest income 174 73 Gain on sale of assets -- 2,264 Other income 244 62 -------- -------- Income before income taxes, minority interest, and extraordinary item 2,282 320 Income tax expense (31) (28) Minority interest (164) (44) -------- -------- Income before extraordinary item 2,087 248 Extraordinary gain 115 3,922 -------- -------- Net income $ 2,202 $ 4,170 ======== ======== Per share data: Income before extraordinary item $ 0.33 $ 0.05 Extraordinary item 0.02 0.85 -------- -------- Net income $ 0.35 $ 0.90 ======== ======== Weighted average shares outstanding 6,367 4,618 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended September 30, September 30, 1997 1996 ------------- ------------- Sales $ 17,060 $ 14,613 Cost of sales 9,948 9,343 -------- -------- Gross profit 7,112 5,270 -------- -------- Selling, general and administrative expenses 3,650 3,391 Research and development expenses 1,268 877 -------- -------- Total expenses 4,918 4,268 -------- -------- Operating income 2,194 1,002 Interest expense (889) (983) Interest income 82 31 Other income 42 44 -------- -------- Income before income taxes, minority interest and extraordinary item 1,429 94 Income tax expense (8) (22) Minority interest (179) (277) -------- -------- Income (loss) before extraordinary item 1,242 (205) Extraordinary gain 104 532 -------- -------- Net income $ 1,346 $ 327 ======== ======== Per share data: Income (loss) before extraordinary item $ 0.19 $ (0.04) Extraordinary item 0.01 0.10 -------- -------- Net income $ 0.20 $ 0.06 ======== ======== Weighted average shares outstanding 6,632 5,225 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 4 of 14 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30 September 30, 1997 1996 ----------- ------------ Cash flows from operating activities: Net income $ 2,202 $ 4,170 Adjustments to reconcile net income to net cash used in operating activities: Gain on sale of assets -- (2,264) Extraordinary gain (115) (3,922) Non-cash financing expenses 279 2,089 Realized gain on litigation settlement -- (174) Depreciation and amortization 2,381 3,177 Amortization of discount on convertible subordinated debentures 30 94 Minority interest (164) 44 Changes in assets and liabilities: Accounts receivable (2,354) (2,074) Inventories (426) 1,579 Prepaid expenses (330) 131 Other receivables 31 -- Deferred computer software -- (38) Other assets 628 (184) Accounts payable, accrued expenses and other liabilities (309) (2,696) -------- -------- Net cash provided by (used in) operating activities 1,853 (68) -------- -------- Cash flows from investing activities: Proceeds from disposal of assets held for sale, net 500 6,793 Proceeds from sale of assets -- 3,456 Capital expenditures (434) (246) -------- -------- Net cash provided by investing activities 66 10,003 -------- -------- Cash flows from financing activities: Proceeds from long-term debt 314 1,340 Repayments of long-term debt (1,933) (10,157) (Repayments of) proceeds from notes payable and short term loans 92 (118) -------- -------- Net cash used in financing activities (1,527) (8,935) -------- -------- Effect of exchange rates on cash 70 (394) -------- -------- Increase in cash and cash equivalents 462 606 Cash and equivalents - beginning of the year 2,584 1,109 -------- -------- Cash and equivalents - end of the period $ 3,046 $ 1,715 ======== ======== Supplemental cash flow disclosures: Cash paid for interest expense $ 2,298 $ 2,022 ======== ======== Cash paid for income taxes $ 74 $ 66 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 5 of 14 pages NOTES TO UNAUDITIED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim periods presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's annual report to stockholders for the year ended December 31, 1996. Results for the first nine months of 1997 are not necessarily indicative of results for the year. Note 2: Inventories Inventories are valued at lower of cost or market. Inventory costs at September 30, 1997 have been computed using a standard cost system. The composition of inventories at the end of the respective periods is as follows: September 30, 1997 December 31,1996 ------------------ ---------------- (in thousands) Parts and components $5,583 $4,557 Work-in-process 1,149 515 Finished goods 1,118 2,352 ------ ------ $7,850 $7,424 ====== ====== Note 3: 6% Convertible Subordinated Debentures and Zero Coupon Senior Subordinated Notes As of September 30, 1997, the Company had outstanding $1,771,000 of its 6% Convertible Subordinated Debentures due July 1, 2002 ("the Debentures"), net of original issue discount amortized to principal over the term of the debt using the effective interest rate method, of $149,000. The face amount of the outstanding Debentures was $1,920,000 at September 30, 1997. Interest on the Debentures is payable on July 1 of each year. The interest accrued as of September 30, 1997 amounted to $539,000. As of September 30, 1997 the Company is in default under the provisions of the Debentures. As of September 30, 1997, the Company had exchanged approximately $34,180,000 principal amount of the Debentures, net of unamortized discount and accrued interest expense for 722,650 shares of the Company's common stock and $26,204,000 of Zero Coupon Senior Subordinated Convertible Notes ("the Notes"). As of September 30, 1997, $26,180,000 of Notes are outstanding after the conversion of $24,000 of principal Notes to common stock. Page 6 of 14 pages Note 3: 6% Convertible Subordinated Debentures and Zero Coupon Senior Subordinated Convertible Notes (continued) The exchange of the Debentures for the Notes and common stock was accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15. Since the future principal and interest payments under the Notes is less than the carrying value of the Debentures, the Notes were recorded for the amount of the future cash payments, and not discounted. In addition, no future interest expense will be recorded on the exchanged Notes. As a result of the exchange, the Company recognized an extraordinary gain of $104,000 and $532,000 for the three months ended September 30, 1997 and 1996, and $115,000 and $3,922,000 for the nine months ended September 30, 1997 and 1996, receptively. Note 4: Senior Debt On September 30, 1997, the Company's senior debt under its credit facility consisted of $15,966,000. The credit facility is secured by substantially all of the Company's assets. All obligations except undrawn letters of credit, letter of credit guarantees and the deferred fee notes bear interest at 12% per annum. The Company incurs an annual fee of 2% on the average balance of undrawn letters of credit and letter of credit guarantees outstanding. In addition, the Company is obligated to pay a monthly facility fee of $50,000. The loan agreement requires a minimum quarterly amortized payment of $250,000, increasing to $325,000 for the quarter ending March 31, 1998 and for the quarters thereafter during the term of the agreement, as well as an additional principal payment if cash flow exceeds certain amounts. Based on these required principal payments, $2,063,000 has been classified as a current liability at September 30, 1997. Financial debt covenants include an interest coverage ratio measured quarterly, limitations on the incurrence of indebtedness, limitations on capital expenditures, and prohibitions on declarations of any cash or stock dividends or the repurchase of the Company's stock. As of September 30,1997, the Company is in compliance with the above covenants. Page 7 of 14 pages 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, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- Sales 100% 100% 100% 100% Cost of Sales 61% 65% 58% 64% Gross Profit 39% 35% 42% 36% Selling, general and administrative expenses 21% 23% 21% 24% Research and development expenses 8% 7% 8% 6% Operating income 10% 5% 13% 6% Interest expense - net (6%) (9%) (5%) (7%) Other income 1% 5% 0% 0% Minority interest 0% 0% (1%) (2%) Extraordinary item 0% 9% 1% 4% Net income 5% 10% 8% 1% The Company's sales by product line for the periods ended September 30, 1997 and 1996 are as follows: Nine Months Ended ----------------- September 30, ------------- 1997 1996 ---- ---- (Dollars in thousands) Line connection/protection equipment* $18,204 40% $18,710 45% OSS systems 21,093 46% 17,077 41% Signal Processing 6,203 13% 5,495 13% Other 434 1% 194 1% ------------ ------------ $45,934 100% $41,476 100% ============ ============ Three Months Ended September 30, 1997 1996 (Dollars in thousands) Line connection/protection equipment* $ 4,857 29% $ 6,004 41% OSS systems 9,790 57% 6,445 44% Signal Processing 2,261 13% 2,118 15% Other 152 1% 46 0% ------------ ------------ $17,060 100% $14,613 100% ============ ============ * Includes sales of fiber optics products of $0 and $452,000 for the nine months ended September 30, 1997 and 1996. There were no sales of fiber optic products for either the three months ended September 30, 1997 or 1996. Page 8 of 14 pages Results of Operations The Company's sales for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996 increased $4,458,000 (11%) from $41,476,000 in 1996 to $45,934,000 in 1997 and sales for the quarter ended September 30, 1997 of $17,060,000 increased by $2,447,000 (17%) compared to $14,613,000 for the quarter ended September 30, 1996. The increased sales for both the nine and three months is due primarily to higher revenue from the OSS division. OSS revenue for the nine and three months ended September 30, 1997 was $21,093,000 and $9,790,000, respectively, compared to the nine and three months ended September 30, 1996 of $17,077,000 and $6,445,000, respectively, an increase of $4,016,000 (24%) and $3,345,000 (52%) for the nine and three month periods, respectively. The increased sales relates primarily to higher revenues generated from the installation of the OSS systems. The line connection sales for the nine months ended September 30, 1997 compared to September 30, 1996 decreased from $18,710,000 to $18,204,000 or $506,000 (3%). Sales for the three months ended September 30, decreased by $1,147,000 (19%) from $6,004,000 in 1996 to $4,857,000 in 1997. The decrease reflects the completion of an agreement to supply certain products to British Telecommunications PLC (BT) and the introduction during the third quarter of 1997 of a replacement product to the same customer which has a lower selling price. In addition, the sales volume related to the new product were of a lesser quantity in the third quarter of 1997 than the previously supplied product. Orders from BT, since the end of the third quarter, remain at the reduced level. Signal processing sales for the nine and three months ended September 30, 1997 were $6,203,000 and $2,261,000, respectively, compared to the nine and three months ended September 30, 1996 of $5,495,000 and $2,118,000, an increase of $708,000 (13%) and $143,000 (7%) from 1996 to 1997, respectively. The increased revenue was generated from the earlier than anticipated completion of certain military orders and non-recurring revenue from certain engineering services. Cost of sales for the nine months ended September 30, 1997, as a percentage of sales was 61% compared to the nine months ended September 30, 1996 of 65%. For the quarter ended September 30, 1997 cost of sales, as a percentage of sales, was 58% compared to the same period of 1996 of 64%. The improvement in gross margin is attributed to the Company's continuing effort to increase manufacturing productivity and the absorption, over a larger revenue base, of certain fixed expenses associated with the OSS contracts. Selling, general and administration expenses decreased by $36,000 (less than 1%) from $9,578,000 to $9,542,000 for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996. For the quarters ended September 30, 1997 and 1996 selling, general and administration expenses increased by $259,000 (8%) from $3,391,000 to 3,650,000, respectively. This increase resulted primarily from higher commissions associated with the increased revenues for the quarter, and to a lesser extent, the Company's efforts to increase its sales and marketing effectiveness in order to secure future business. Research and development expenses increased by $1,075,000 (40%) and by $391,000 (45%) for the nine and three months ended September 30, 1997 from the comparable periods in 1996, respectively. The increased expenses results from the Company's efforts to develop new products, primarily related to the OSS business. Page 9 of 14 pages Results of Operations (continued) As a result of the above, for the nine months ended September 30, 1997 compared to comparable nine months of 1996, the Company had operating income of $4,593,000 in 1997 versus $2,130,000 in 1996. The Company had operating income of $2,194,000 for the quarter ended September 30, 1997 as compared to $1,002,000 for the quarter ended September 30, 1996. The Company's operating improvement for the nine months and the quarter ended September 30, 1997, when compared to the comparable periods ended September 30, 1996, were the results of increased revenue, the improved gross margins and its continuing efforts to maintain costs and expenses at a level appropriate with the current level of sales. Interest expense decreased for the nine months ended September 30 by $1,480,000 (35%) from $4,209,000 in 1996 to $2,729,000 in 1997. For the quarter ended September 30, interest expense decreased by $94,000 (10%) from $983,000 in 1996 to $889,000 in 1997. The decrease in interest expense in both periods is attributable primarily to the exchange of the Company's Debentures for the Notes and common stock which occurred primarily in the first and second quarters of 1996, and repayment of principal to the Company's senior lender. In addition, for the nine month period ended September 30, 1996, the Company incurred additional interest expense as a result of the recognition in that period of certain deferred borrowing costs related to its loans from its senior lender. The Company had income before extraordinary item of $2,087,000 and $248,000 for the nine months ended September 30, 1997 and 1996, respectively. For the three months ended September 30, 1997 and 1996, the Company recorded income before extraordinary item of $1,242,000 and a loss before extraordinary item of $205,000, respectively. During the nine months ended September 30, 1996, the Company had a gain of $2,264,000 on sale of assets. If not for this gain, there would have been a loss before extraordinary item for the nine months ended September 30, 1996 of $2,016,000. The improvement in income before extraordinary item reflects the increased revenue and gross margin coupled with the reduction of interest expense. During the nine months ended 1997 and 1996, respectively, the Company recorded a $115,000 and $3,922,000 extraordinary gain from the early extinguishment of debt as a result of the exchange of the Debentures for the Notes and common stock. During the three months ended September 30, 1997 and 1996, respectively, a $104,000 and $532,000 extraordinary gain was recorded as a result of such conversions. As the result of the foregoing the Company generated net income of $2,202,000, $0.35 per share for the nine months ended September 30, 1997 compared with net income of $4,170,000, $0.90 per share, for the nine months ended September 30, 1996 and net income for the quarter ended September 30, 1997 of $1,346,000, $0.20 per share, compared with net income for the quarter ended September 30, 1996 of $327,000, $0.06 per share. The calculation of the weighted average shares, for the period and quarter ended September 30, 1997, assumes the conversion of the Notes which are considered to be a common stock equivalent. Page 10 of 14 pages Liquidity and Capital Resources The Company had income from continuing operations for the nine and three months ended September 30, 1997. These results notwithstanding, the Company will be required to refinance or restructure certain existing notes payable which become due on January 2, 1998 as discussed in the following paragraph. This factor continues to raise substantial doubt about the Company's ability to continue as a going concern. Furthermore, the unaudited consolidated financial statements do not include any adjustments that might result from the inability of the Company to refinance or restructure such notes. At September 30, 1997 the Company had cash and cash equivalents of $3,046,000 compared with $2,584,000 at December 31, 1996. The Company's working capital deficit at September 30, 1997, which was affected by the classification of the Notes as current liabilities subsequent to December 31, 1996 as discussed below, was $20,059,000, compared to working capital of $4,115,000 at December 31, 1996. At September 30, 1997, $26,180,000 of the Notes, which are due on January 2, 1998, are classified as current liabilities. At September 30, 1997 the Company does not have sufficient resources to pay the Notes when they mature and it is likely that it cannot generate such cash from its operations or from its existing credit facilities. On October 10, 1997, the Company announced that it had made an offer to the holders of the Notes which would amend the terms of the Notes, subject to the tender of up to 95 % of the principal amount of the Notes for conversion. Under the amended terms, the conversion price of the Notes will be reduced to $3.65 from $6.55. In addition, the amended terms provide for the issuance of additional shares under certain conditions. The Company has obtained the commitment or tender of the holders of more than 80% of the Notes to convert their Notes in accordance with the amended terms as of November 7, 1997. The Company has certain rights to reduce the percentage of the principal amount of the Notes required to be tendered for conversion in order that the amended terms become effective and to extend the deadline for obtaining such tender. The tender period has been extended until November 14, 1997. If all of the Notes are converted on the amended terms, the Company will issue an aggregate of approximately 7.2 million shares of common stock. In addition, under certain conditions, a maximum of approximately 800,000 shares may be issued if the price of the common stock declines. If the Notes are successfully converted, such conversion would significantly reduce debt and increase equity and would result in a non-cash charge to earnings which would by determined by the common stock value on the date of the conversion. Although the Company is seeking to refinance or restructure the Notes, no assurance can be given that it will be successful in these efforts. If the Company is unable to refinance or restructure the Notes or the holders of the Notes do not convert such Notes to common stock, the Company's liquidity may be severely impaired and the Company's business may be materially and adversely affected. Page 11 of 14 pages At September 30, 1997, the Company's senior debt to its senior secured lender, Foothill Capital Corporation ("Foothill") which is due November 30, 1998, was $15,966,000 of which approximately $15,106,000 and $860,000 relates to the term loan and the revolving line of credit, respectively. The agreement provides for (i) the repayment of loan principal of $750,000 in 1997, (ii) the repayment of loan principal of $325,000 each quarter commencing March 31, 1998 and thereafter during the term of the agreement, (iii) the Company to pay additional principal payments if certain "adjusted cash flow amounts", as defined, exceed certain amounts, and (iv) the Company to pay a monthly facility fee of $50,000. For the quarter ended September 30, 1997 the additional principal payment based upon the "adjusted cash flow" amounts to $587,000. As of September 30, 1997, the Company's availability under its $9,000,000 revolving line of credit and letter of credit availability is approximately $1,557,000. Liquidity and Capital Resources (continued) As of September 30, 1997, the Company had remaining outstanding $1,771,000 of the Debentures, net of original issue discounts amortized to principal over the term of the debt using the effective interest rate method, of $149,000. The face amount of the outstanding Debentures was $1,920,000. Interest on the Debentures is payable on July 1 of each year. The interest accrued as of September 30, 1997 amounted to $539,000. As of September 30, 1997 the Company is in default under the provisions of the Debentures. Accordingly, such debt has been classified as a current liability at September 30, 1997. Page 12 of 14 pages PART II- OTHER INFORMATION Item 5. Other Information The Company has entered into a Supplemental Indenture dated October 10, 1997, pursuant to which it amended the terms of its Zero Coupon Senior Subordinated Notes due January 2, 1998 (the "Notes"), subject to receiving tender of 95% of the principal amount of the Notes for conversion by November 7, 1997. Pursuant to the Supplemental Indenture, the conversion price of the Notes will be reduced to $3.65 from $6.55. The Company has certain rights to reduce the percentage of the principal amount of the Notes required to be tendered for conversion in order that the amended terms become effective and to extend the deadline for obtaining such tender. The tender period has been extended until November 14, 1997. As of November 7, 1997, the holders of more than 80% of the Notes have tendered their Notes for conversion in accordance with the amended terms provided that the amended terms become effective. Notes in the principal amount of approximately $26,200,000 are presently outstanding. If all the Notes are converted on the amended terms, the Company will issue an aggregate of approximately 7,200,000 shares of Common Stock. In addition, under certain conditions, a maximum of approximately 800,000 shares may be issued if the price of Common Stock declines. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4.1 Supplemental Indenture dated as of October 10, 1997 between the Company and American Stock Transfer & Trust Company. (b) Reports of Form 8-K None Page 13 of 14 pages 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 12, 1997 By /s/William V. Carney --------------------------- William V. Carney Chairman of the Board Dated November 12, 1997 By /s/Edward B. Kornfeld --------------------------- Edward B. Kornfeld Vice President and Chief Financial Officer Page 14 of 14 pages EX-4.1 2 SUPPLEMENTAL INDENTURE EXHIBIT 4.1 SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE, dated as of the 10th day of October, 1997, to the Indenture (the "Indenture") dated as of November 1, 1995, by and between Porta Systems Corp., a Delaware corporation (the "Company"), as issuer, and American Stock Transfer & Trust Company (the "Trustee"), as trustee. W I T N E S S E T H: WHEREAS, the Company and the Trustee entered into the Indenture dated as of November 1, 1995 in connection with the issuance of the Company's Zero Coupon Senior Subordinated Convertible Notes due January 2, 1998 (the "Notes"); and WHEREAS, pursuant to the Indenture, the Company has issued and outstanding Notes in the principal amount of $26,156,365.00, and additional Notes in the maximum principal amount of $1,473,062.00 may be issued in exchange for the Company's 6% Convertible Subordinated Debentures Due July 1, 2002; and WHEREAS, the Company desires to modify the Conversion Price of the Notes as hereinafter provided; and WHEREAS, the modification of the Conversion Price pursuant to this Supplemental Indenture is permitted by the Indenture; WHEREFORE, the Indenture is hereby modified as follows: 1. All terms defined in the Indenture and used in this Supplemental Indenture shall have the same meanings in this Supplemental Indenture as in the Indenture. 2. Shares of Common Stock issued upon conversion of the Notes pursuant to the terms of this Supplemental Indenture are referred to as the "Conversion Shares." The person who either (i) owns the Notes or (ii) is the beneficial owner of Notes held in the name of a nominee or (iii) is a Permitted Transferee, as hereinafter defined, is referred to as a "Converting Noteholder." 3. If any Note is tendered for conversion on or subsequent to the date of this Supplemental Indenture, subject to the provisions of Paragraph 6 of this Supplemental Indenture, the following terms shall apply with respect to each such conversion. (a) The Conversion Price shall be reduced to three and 65/100 dollars ($3.65). (b) No fractional shares of Common Stock shall be issued. Cash shall be paid in lieu of fractional shares as provided in Section 15.03 of the Indenture. (c) All certificates for Conversion Shares issued to the Converting Noteholders (other than Converting Noteholders of record who do not identify the beneficial owner of the Conversion Shares within thirty (30) days after the Notes are presented for conversion) pursuant to this Supplemental Indenture shall bear the following legend: -1- "THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE WERE ISSUED UPON CONVERSION OF THE ISSUER'S ZERO COUPON SENIOR SUBORDINATED CONVERTIBLE NOTES DUE JANUARY 2, 1998. UNDER CERTAIN CONDITIONS, ADDITIONAL SHARES OF COMMON STOCK MAY BE ISSUED TO THE BENEFICIAL OWNER OF THESE SHARES (BUT NOT TO ANY TRANSFEREE OTHER THAN A PERMITTED TRANSFEREE) AS SET FORTH IN THE SUPPLEMENTAL INDENTURE DATED AS OF OCTOBER 10, 1997, BETWEEN THE ISSUER AND AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE." (d) In the event of any transfer of a Converting Noteholder's Conversion Shares, other than to a Permitted Transferee, the legend set forth in Paragraph 3(c) of this Supplemental Indenture shall not be placed on the certificates issued to the transferee, and no Contingent Shares, as hereinafter defined, shall be issued with respect to such Conversion Shares. (e) A Permitted Transferee shall mean a transferee which is either (i) the estate of the Converting Noteholder or (ii) a transferee of Conversion Shares pursuant to a transfer which reflects a transfer of record ownership only and does not reflect any change in the identity of the beneficial owner of the Conversion Shares. 4. Subject to Paragraph 5 of this Supplemental Indenture, additional shares (the "Contingent Shares") of Common Stock shall be issued to the Converting Noteholder with respect to the Converting Noteholder's Retained Shares, as hereinafter defined, in the event that the Anniversary Price, hereinafter defined, is less than $3.65, on the terms and conditions hereinafter set forth in this Paragraph 4. (a) The Anniversary Price shall mean the average closing price per share of Common Stock on the principal stock exchange or market on which the Common Stock is traded for the sixty (60) trading days immediately preceding the date which is one year from the Effective Date, as hereinafter defined; provided, however, that if, on any date, there is no trading in the Common Stock, the average of the closing bid and asked prices shall be used. (b) (i) The Effective Date shall mean the date that the Required Percentage of Notes have been tendered for conversion. The Required Percentage shall mean the percentage of the outstanding principal amount of Notes (based on the principal amount of Notes outstanding on the date of this Supplemental Indenture) which must be tendered for conversion in order for this Supplemental Indenture to become effective. The Required Percentage shall be 95%; provided, however, that the Company may, in its sole discretion, on notice to the Trustee, reduce the Required Percentage to a percentage which is not less than 85%. (ii) Notwithstanding the provisions of Paragraph 4(b)(i) of this Supplemental Indenture, the Required Percentage shall be deemed to have been attained if at least 70%, but less than 85%, of the outstanding principal amount of Notes shall have been tendered for conversion and the Company shall have delivered to the Trustee an Officers' Certificate stating that the Company has the ability to pay, and agrees to pay, the principal amount of all Notes which have not been tendered for conversion, either through available cash, then existing and in-place lines of credit or irrevocable written commitments from financially responsible parties with a demonstrated capability to fund such irrevocable written commitments. If subsequent to the delivery of the Officers' Certificate referred to in this Paragraph 4(b)(ii), the Required Percentage is attained pursuant to Paragraph 4(b)(i) of this Supplemental Indenture, this Paragraph 4(b)(ii) shall no longer apply. -2- (c) Retained Shares shall mean Conversion Shares that (i) were issued to the Converting Noteholder upon conversion of the Notes pursuant to this Supplemental Indenture, (ii) were not transferred subsequent to the initial issuance other than to a Permitted Transferee, and (iii) were held by either a Converting Noteholder or a Permitted Transferee continuously from the date of conversion to the Anniversary Date. No Contingent Shares will be issued in respect of any Conversion Shares which were sold or otherwise transferred prior to the Anniversary Date other than to a Permitted Transferee. The Company may request documentary evidence with respect to any transfer which purports to be a transfer to a Permitted Transferee. (d) In the event that the any Converting Noteholder engages in any short sales of Common Stock (including short sales against the box), the number of Retained Shares shall be reduced by the number of shares of Common Stock subject to such short sales or sales against the box. (e)(i) The number of Contingent Shares issuable with respect to the Retained Shares of any Converting Noteholder shall be determined by the following formula: Contingent Shares = (Retained Shares / N) x B x (1 - (P - $2.65)) In the foregoing formula: N shall be the number of shares determined by dividing the principal amount of Notes outstanding on the Effective Date prior to any conversion of any Notes pursuant to this Supplemental Indenture by $3.65. B shall be the number of shares of Common Stock determined by subtracting N from 8,000,000. P shall be the greater of the Anniversary Price or $2.65. If the Anniversary Price is equal to or greater than $3.65, no Contingent Shares shall be issued. (ii) In case the Company shall after the date of conversion (A) pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, (B) subdivide, split or reclassify its outstanding Common Stock into a greater number of shares, (C) effect a reverse split or otherwise combine or reclassify its outstanding Common Stock into a smaller number of shares, or (D) issue any shares by reclassification of its shares of Common Stock, the amount of Contingent Shares which may be issued and the related dollar amounts contained in this paragraph (e) will be adjusted accordingly. (f) Prior to the issuance of any Contingent Shares to any Converting Noteholder, the Trustee and the Company shall have received from the beneficial owner a statement to the effect that, except as expressly set forth on such statement, (i) the Conversion Shares beneficially owned by the Converting Noteholder have been beneficially owned by the Converting Noteholder (including any Permitted Transferees) for an uninterrupted period of time commencing on the date of the conversion of the Notes until the Anniversary Date, (ii) the Converting Noteholder has not engaged in any short sales of Common Stock (including short sales against the box), and (iii) the Converting Noteholder has not assigned or transferred any beneficial interest in any of the Conversion Shares. -3- 5. No Contingent Shares shall be issued in the event that, for any period of twenty (20) consecutive trading days during the period commencing on the Effective Date and ending on the day prior to one year from the Effective Date, the average closing price of the Common Stock on the principal stock exchange or market on which the Common Stock is traded is at least $3.65. In making the foregoing computation, if, on any date, there is no trading in the Common Stock, the average of the closing bid and asked prices shall be used for such date. 6. In the event that the Required Percentage of Notes shall not be tendered for conversion by November 7, 1997, this Supplemental Indenture shall terminate and have no force or effect, and the Indenture shall continue in full force and effect as if it had not been amended by this Supplemental Indenture. Notwithstanding the foregoing, the Company shall have the right, in its sole discretion to postpone the date by which the Required Percentaged of Notes must be converted on one or more occasions from November 7, 1997 to a date not later than December 1, 1997, which date may be extended with the consent of the holders of a majority of the principal amount of Notes which had been tendered for conversion. 7. Each Note shall, without any action on the part of the holder, be entitled the benefits of this Supplemental Indenture. 8. Except as amended by this Supplemental Indenture, the Indenture shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. PORTA SYSTEMS CORP. By:_____________________________________ William V. Carney, Chairman and Chief Executive Officer AMERICAN STOCK TRANSFER & TRUST COMPANY By:_____________________________________ , Authorized Officer -4- EX-27 3 FDS --
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 3,046 0 18,388 0 7,850 30,396 4,793 0 50,838 50,455 0 0 0 22 (18,768) 50,838 45,934 45,934 28,043 13,298 0 0 2,729 2,282 31 2,087 0 115 0 2,202 0.35 0.35
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