-----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, Kg+ba7qIlMtTQ4TZHqePlbnU3oZNwJ5u2Ab6vTMKAgcGD4/dpzLpOFHcikKKZn+w UIY8uWnTOwxVYVAjFaNgZA== 0000891092-96-000052.txt : 19960402 0000891092-96-000052.hdr.sgml : 19960402 ACCESSION NUMBER: 0000891092-96-000052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08191 FILM NUMBER: 96543367 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-K 1 FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 (I.R.S. Employer of incorporation or organization) Identification No.) 575 Underhill Boulevard, Syosset, New York 11791 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 364-9300 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 American Stock Exchange (Title of Class) (Name of Exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10K. [X] State aggregate market value of the voting stock held by non-affiliates of the registrant: $7,564,711 as of March 22, 1996. Indicate the number of shares outstanding of each of the registrant's class of common stock, as of the latest practicable date: 10,086,281 shares of Common Stock, par value $.01 per share, as of March 22, 1996. DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement in connection with its 1996 Annual Meeting of Stockholders to be filed within 120 days of the close of the registrant's fiscal year is incorporated by reference into Part III of the Report. ================================================================================ Item 1. Business Porta Systems Corp. (the "Company") develops, designs, manufactures and markets a broad range of proprietary and standard telecommunications equipment and systems for sale in the United States and abroad. The Company's core products fall into three categories: o Computer-based operational support systems ("OSS") which automate the operational, administrative, maintenance and testing functions within telephone companies. These systems are marketed principally to foreign telephone operating companies in developing countries and Europe. o Telecommunications connection equipment and systems which are used both to connect copper-wired telecommunications networks and to protect telecommunications equipment from voltage surges. The copper connection equipment and systems are marketed to telephone operating companies in the United States and foreign countries, with the largest customer being British Telecommunications plc ("BT"), and manufacturers and owners of telecommunications equipment. o To a significantly lesser extent, signal processing, which are radio-based communications systems sold principally for military uses. In March, 1996 the Company sold its fiber optics connector business. See "Recent Developments". Porta Systems Corp. is a Delaware corporation incorporated in 1972 as the successor to a New York corporation incorporated in 1969. The Company's principal offices are located at 575 Underhill Boulevard, Syosset, New York 11791; telephone number, 516-364-9300. References to the Company include its subsidiaries, unless the context indicates otherwise. Markets for the Company's Products The Company supplies equipment and systems to telephone companies for use in providing telecommunications services to their customers and to businesses for use with their internal telecommunication systems. The markets served by the Company are described below: Telecommunications Systems in Emerging Countries. Telephone networks in certain regions of the world, notably Latin America, Eastern Europe and certain areas in the Asia/Pacific region, utilize telephone switching systems of older analog technology. These networks were designed to carry voice traffic and are not well suited for high speed data transmissions or for other forms of telecommunications that operate more effectively with digital telecommunications equipment and lines. The telephone networks in these countries are also characterized by a very low ratio of telephone lines to population. A country with an emerging telecommunications network may want to rapidly add access lines in order to increase the availability of telephone service among its population and to significantly upgrade the quality of the lines already in service. The Company's OSS systems are designed to meet many of the needs of a rapidly growing telephone network. These computerized administrative and provisioning OSS systems facilitate rapid expansion without a comparable increase in the requirement for skilled technicians, while the computerized line test system insures increased quality and rapid maintenance and repair of 1 subscriber local loops. The automated data base which computerizes the inventory and maintenance history of all subscriber lines in service helps to keep the rapid growth under control. As a telephone company expands the number of its subscriber lines, it also requires connection equipment to interconnect and protect those lines in its central offices. The Company provides a complete line of copper connection equipment for this purpose. In the more advanced countries, the movement towards fiber optic circuits has resulted in a stagnation or decline in the market for copper connection equipment, while the less developed countries, such as those with emerging networks or those upgrading to digital switching systems, provide a growing market for copper connection and protection equipment. During 1995, approximately 47% of the Company's sales were made to customers in emerging markets. Such sales include both OSS and copper connection products. Digital Systems. In regions such as Western Europe, telephone networks have achieved an acceptable ratio of available telephone lines to population. However, the switching systems may utilize analog technology and are more suited to carrying voice transmissions. These telephone companies are upgrading their networks by replacing the older analog switching systems with newer digital systems. The increased sensitivity of the newer digital switches to small amounts of voltage requires the telephone company which is upgrading to digital switching systems to also upgrade its central office connection/protection systems in order to meet these more stringent protection requirements. The Company is a major worldwide supplier of central office connection/protection systems. During 1995, approximately 34% of the Company's sales were made to customers in this category. Multi-Media Systems. More advanced telephone companies, such as those in the United States and Japan, are upgrading their networks to carry not only voice traffic but also increasing volumes of many different forms of telecommunications, such as video, facsimile, image and high speed data transmission. The United States is also experiencing the emergence of alternative local carriers. This rise in data communications requirements has been fueled largely by the rapid growth of personal computers and workstations connected together through local area networks and their need to communicate both locally and throughout the nation. This rapid rise in the volume and speeds of data communications in America's business environment requires an upgrade of the telecommunications distribution wiring systems within buildings and campuses as well as within the external telephone networks. The Company offers a broad line of systems and equipment to upgrade a building's telecommunications distribution system so that it can serve the increased data communications speeds of today and tomorrow. During 1995, sales of multi-media systrems accounted for approximately 7% of the Company's sales. Fiber Optics Networks. In March 1996, the Company sold its fiber-optics connector business. See "Recent Developments". 2 During 1995, sales of fiber optics products represented approximately 4% of the Company's sales. Signal Processing. The Company's line of signal processing products is supplied to customers in the military and aerospace industry as well as manufacturers of medical equipment and video systems. The primary communication standard in new military and aerospace systems is the MIL-STD-1553 Command Response Data Bus, and applications require an extremely high level of reliability and performance. Products are designed to be application specific to satisfy the requirements of each military or aerospace program. The Company has earned a reputation in the aerospace industry for developing and supplying cost effective products with the highest reliability. The Company's wideband transformers are required for ground noise elimination in video imaging systems and are used extensively in television and broadcast industry, medical imaging and industrial process control. If not eliminated, ground noise caused by poor electrical system wiring or power supplies, results in significant deterioration in system performance (poor picture quality, process failures in instrumentation, etc.). The wideband transformers provide a cost effective and quick solution to the problem without the need of redesign of the rest of the system. During 1995, signal processing equipment accounted for approximately 8% of the Company's sales. Products The first of the Company's two principal telecommunications product categories is telecommunications connection equipment and systems, which are used by telephone operating companies, by owners of private telecommunications equipment and by manufacturers and suppliers of telephone central office and customer premises equipment. The second of the Company's two principal telecommunications product categories is operations support systems or OSS systems, which are used primarily by telephone operating companies. A third line of the Company's products, sold under the name North Hills Signal Processing, is high frequency wideband transformers and MIL-STD-1553 data bus couplers. The table below shows, for the last three fiscal years, the contribution made to the Company's sales by each of its major segments of the telecommunications industry (excluding sales from discontinued operations of $2,979,000 for the period beginning January 1, 1993 and ended May 11, 1993): 3 Sales by Product Category Years Ended December 31, 1995 1994 1993 ---- ---- ---- (Dollars in thousands) OSS Systems $28,988 47% $21,516 31% $17,709 26% Line Connect- ing/Protecting Equipment (*) 26,867 44% 40,800 59% 42,945 63% Signal Proses sing 4,857 8% 5,221 8% 5,485 8% Other 469 1% 1,448 2% 2,002 3% ------- ------- ------- ------- ------- ------- Total $61,181 100% $68,985 100% $68,141 100% ======= ======= ======= ======= ======= ======= (*) Includes sales of fiber products of $6,513,000 in 1995, $12,150,000 in 1994, and $8,654,000 in 1993. Operations Support Systems. The Company's OSS systems are used primarily by telephone operating companies. The Company's principal OSS system is its computer-based testing system--the Line Condition Report ("LCR")--which is a major item of capital equipment and typically sells for prices ranging from several hundred thousand to several million dollars. The Company also manufactures and sells a number of other products which are used in testing, maintenance and repair of telephone equipment. The LCR, introduced in the mid-1970's, was the first computer-controlled electronic system used to automatically test for and diagnose problems in customer lines and to notify service personnel of required maintenance. The associated Mechanized Line Report ("MLR") data base system provides automated record keeping (including repair and disposition records) and analyzes these records for identification of recurring problems and equipment deterioration. The Company has devoted substantial resources to developing and obtaining market acceptance for its LCR/MLR systems and has continued to modify and enhance its LCR service features. The Company's LCRs have been sold to telephone operating companies in a number of foreign countries as well as in the United States. The Company also develops software-based systems for telephone companies and provides telephone company line testing products to foreign customers. The Company's software, which can be packaged and integrated with the LCR, provides additional OSS functions, such as the automated assignment of telephone company facilities for the provision of service. 4 The Company's OSS systems are complex systems which, in most applications, incorporate features designed to respond to the purchaser's operational requirements and the particular characteristics of the purchaser's telephone system. As a result, the negotiation of a contract for an OSS system is an individualized and highly technical process. In addition, contracts for OSS systems frequently provide for manufacturing, delivery, installation, testing and purchaser acceptance phases which take place over periods ranging from several months to a year or more. Such contracts typically contain performance guarantees by the Company and clauses imposing penalties on the Company if "in-service" dates are not met. The installation, testing and purchaser acceptance phases of these contracts may last longer than contemplated by the contracts and, accordingly, amounts due under the contracts may not be collected for extended periods. Delays in purchaser acceptance of the systems and in the Company's receipt of final contract payments have occurred in connection with a number of foreign sales. In addition, the Company has experienced no steady or predictable flow of orders for OSS systems. Telecommunications Connection Equipment. The Company's telecommunications copper connection/protection equipment and systems are used by telephone operating companies, by owners of private telecommunications equipment and by manufacturers and suppliers of telephone central office and customer premises equipment. Products of the types comprising the Company's line of telecommunications connection equipment are included as integral parts of all domestic and foreign telephone and telecommunications systems. Such products are sold in a worldwide market which grows generally in proportion to increases in the number of telephone subscribers and owners of private telecommunications equipment, as well as to increases in upgrades to modern digital switching technology. The Company's traditional connection equipment consists of connector blocks and protection modules used by telephone companies to interconnect copper-based subscriber lines to switching equipment lines. The protector modules protect central office personnel and equipment from unwanted electrical surges which might find their way onto subscriber lines. The need for protection products has increased as a result of the worldwide move to digital technology, which is extremely sensitive to damage by electrical overloads, and because private owners of telecommunications equipment now have the responsibility to protect their equipment from damage from electrical surges. Line connecting/protecting equipment usually incorporates protector modules to safeguard equipment and personnel from injury due to power surges. Currently, these products include a variety of connector blocks, protector modules and frames used in telephone central switching offices, PBX installations and multiple user facilities. The Company also has developed an assortment of frames for use in conjunction with the Company's traditional line of connecting/protecting products. Frames for the interconnection of copper circuits are specially designed structures which, when equipped with connector blocks and protectors, interconnect and protect telephone lines and distribute them in an orderly fashion, allowing access for repairs and changes in line connections. One of the Company's frame products, the CAM frame, is designed to permit computer-assisted analysis and recording of the optimum placement of connections for telephone lines on the connector blocks mounted on the frame. The Company's telecommunications copper connection/protection equipment, including its line connecting/protecting products, is used by several of the operating companies of the seven regional Bell holding companies, as well as by independent telephone operating companies in the United States and owners of private telecommunications equipment. These products are also purchased by other companies for inclusion within their systems. In addition, the Company's telecommunications connection products have been sold to telephone operating 5 companies in various foreign countries. This equipment is compatible with existing telephone systems both within and outside the United States and can generally be used without modification, although the Company can design modifications to accommodate the specific needs of its customers. Marketing and Sales The Company operates through three business units which are organized by product line and with each having responsibility for the sales and marketing of its products. When appropriate to obtain sales in foreign countries, the Company may enter into arrangements and technology transfer agreements covering its products with local manufacturers and participate in manufacturing and licensing arrangements with local telephone equipment suppliers. In the United States and throughout the world, the Company uses independent distributors in the marketing of Company products to the customer premises equipment market. All distributors marketing copper-based products also market directly competing products. In addition, the Company continues to promote the direct marketing relationships it forged in the past with telephone operating companies. In 1985, the Company signed a three year supply contract with British Telecommunications plc ("BT") for the Company's line connecting/protecting products, which contract was renewed for a period of sixteen years in May 1988. The renewed contract requires no minimum purchases by BT. During 1995, 1994, and 1993, BT purchased $17,252,000, $11,566,000, and $12,713,000, respectively, of the Company's products. During these years, additional sales of the Company's products were also made at the direction of BT to certain unaffiliated suppliers to BT for resale to BT. The contract also provides for a ten year cross license which, in effect, enables BT to use certain of the Company's proprietary information to modify or enhance products provided to BT and permits those products to be manufactured for its own purposes. The Company and BT have further modified the cross license to provide that such products may be manufactured by BT for its own purposes only if the Company is unable to supply such products to BT. Under the cross license, the Company is to be paid a royalty on any products (including modified or enhanced products) manufactured under the license, and the Company is obligated to pay BT a royalty on products the Company manufactures and sells which utilize BT enhancements or modifications. The Company has engaged in no manufacturing activity under this cross license to date, although it has received certain royalties, which are not significant in amount, from BT pursuant to the license in respect of products manufactured for BT by others. The Company's OSS systems have primarily been sold to foreign telephone operating companies, and the contracts relating to OSS systems are principally negotiated directly between the Company and these purchasers. The North Hills Signal Processing line of products have been sold primarily to US military and aerospace prime contractors, and domestic OEMs and End Users. Approximately 90% of the sales are domestic, with the aerospace and military accounting for 60%. The following table sets forth for the last three fiscal years the Company's sales to customers by geographic region: 6 Sales to Customers By Geographic Region (1) (2) Year Ended December 31, ---------------------- 1995 1994 1993 ---- ---- ---- (Dollars in thousands) United States and Puerto Rico $16,445 27% $24,150 35% 24,714 36% United Kingdom 22,230 36% 17,761 26% 26,971 40% Other Europe 2,831 5% 4,344 6% 2,750 4% Latin America 4,743 8% 7,917 11% 8,665 13% Asia/Pacific 13,470 22% 12,909 19% 4,068 6% Middle East 899 1% 1,009 2% 691 1% Other 563 1% 895 1% 282 -- ------- ------- ------- ------- ------- ------- Total Sales $61,181 100% $68,985 100% $68,141 100% ======= ======= ======= ======= ======= ======= (1) Excludes sales attributable to the Company's discontinued operations of $2,979,000 during the period beginning January 1, 1993 and ended May 11, 1993. (2) For information regarding the amount of sales, operating profit or loss and identifiable assets attributable to each of the Company's geographic areas, see Note 22 to the Consolidated Financial Statements. In foreign markets, the Company faces considerable competition from other United States and foreign telephone equipment manufacturers with substantial resources. In addition, the Company recognizes that, in selling to customers in foreign countries, there are inherent risks not normally present in the case of sales to United States customers, including increased difficulty in identifying and designing systems compatible with purchasers' operational requirements; extended delays under OSS systems contracts in the completion of testing and purchaser acceptance phases and the Company's receipt of final payments; and political and economic change. In addition, to the extent that the Company establishes facilities in foreign countries, the Company faces risks associated with currency devaluation, inability to convert local currency into dollars and political instability. Manufacturing The Company's computer-based testing products include the Company's proprietary testing circuitry and computer programs, which have been upgraded to provide platform independent solutions based on UNIX-type operating systems. The testing products also incorporate disk data storage, data terminals ("CRTs"), teleprinters and minicomputers purchased by the Company. These products are installed and tested by the Company on its customers' premises. 7 At present, the Company's manufacturing operations are conducted at facilities located in Glen Cove, New York; Kingsville, Texas; Matamoros, Mexico and Korea. The Company from time to time also uses subcontractors to augment various aspects of its production activities and periodically explores the feasibility of conducting operations at lower cost manufacturing facilities located abroad. In pursuing sales opportunities with foreign telephone companies, the Company may locate its production activities in foreign countries which require domestic involvement in the production of equipment purchased for their telephone systems and in foreign countries which, in addition, require full or partial technology transfers to domestic enterprises. Source and Availability of Components The Company purchases the standard components used in the manufacture of its products from a number of suppliers and generally attempts to assure itself that the components are available from more than one source. The Company purchases the minicomputers used in its OSS systems from Digital Equipment Corporation ("DEC'). However, because the Company's software is now platform independent, the Company could use other computer equipment in its systems if the Company were unable to purchase DEC products. Other components, such as CRTs and teleprinters, used in connecting with the Company's electronic products could be obtained from alternate sources and readily integrated with the Company's products. Backlog At December 31, 1995, the Company's backlog was $22,569,000 compared with approximately $25,333,000 at December 31, 1994. Of the December 31, 1995 backlog, approximately $17,091,000 represented orders from foreign telephone operating companies, including $3,205,000 attributable to the contract with BT. See "Marketing and Sales". The Company expects to ship substantially all of its December 31, 1995 backlog during 1996. However, certain of the Company's OSS contracts provide for deliveries subsequent to December 31, 1996. Patents The Company is the owner of a number of utility and design patents and patent applications. In addition, the Company has sought foreign patent protection for a number of its products. From time to time the Company enters into licensing and technical information agreements under which it receives or grants rights to produce certain specified subcomponents used in certain of the Company's products or in connection with products developed by the Company. These agreements are for varying terms and provide for the payment of royalties or technical license fees. While the Company considers patent protection important to the development of its business, and produces certain subcomponents of its products under licensing agreements, the Company believes that its success depends primarily upon its engineering, manufacturing and marketing skills. Accordingly, the Company does not believe that a denial of any of its pending patent applications, expiration of any of its patents, a determination that any of the patents which have been granted to it are invalid or the cancellation of any of its existing license agreements would have a materially adverse effect on the Company's business. 8 Competition The telephone equipment market in which the Company does business is characterized by intense competition, rapid technological change and a movement to private ownership of telecommunications equipment. In competing for telephone operating company business, the purchase price of equipment and associated operating expenses have become significant factors, along with product design and long-standing equipment supply relationships. In the customer premises equipment market, the Company is functioning in a market characterized by distributors and installers of equipment and by commodity pricing. The Company competes directly with a number of large and small telephone equipment manufacturers in the United States, with AT&T continuing to be the Company's principal United States competitor. AT&T's greater resources, extensive research and development facilities, long-standing equipment supply relationships with the operating companies of the regional holding companies and history of manufacturing and marketing products similar in function to those produced by the Company continue to be significant factors in the Company's competitive environment. Currently, AT&T and a number of companies with greater financial resources than the Company produce, or have the design and manufacturing capabilities to produce, products competitive with the Company's products. In meeting this competition, the Company relies primarily on the performance and design characteristics of its products of comparable performance or design, endeavors to offer its products at prices and with warranties that will make its products competitive. In connection with overseas sales of its line connecting/protecting equipment, the Company has met with significant competition from United States and foreign manufacturers of comparable equipment and expects this competition to continue. In addition to AT&T, a number of the Company's overseas competitors have significantly greater resources than the Company. The Company competes directly with a limited number of substantial domestic and international companies with respect to its sales of OSS systems. In meeting this competition, the Company relies primarily on the features of its line testing equipment and endeavors to offer such equipment at prices and with warranties that will make it competitive. Significant Customers Sales made to BT amounted to $17,252,000, or approximately 28% of the Company's 1995 sales. Sales to Korea Telecommunications Authority amounted to $7,651,000 or 13% in 1995 sales. No other customers account for 5% of the Company's sales in 1995. In addition, the former Bell operating companies continue to be the ultimate purchasers of a significant portion of the Company's products sold in the United States, while sales to foreign telephone operating companies constitute the major portion of the Company's foreign sales. The Company's contracts with these customers require no minimum purchases by such customers. Significant customers for the Signal Processing products include the major US Aerospace companies, Department of Defense service depots and OEMs in the medical imaging and process control equipment. Both catalog and custom designed products are sold to these customers. Some contracts are multi-year procurements. 9 Research and Development Activities During the fiscal years ended December 31, 1995, 1994 and 1993, the Company spent approximately $6,103,000, $3,959,000, and $6,075,000, respectively, on its research and development activities (excluding the research and development activities from discontinued operations). All research and development was Company sponsored. Employees As of March 15, 1996, the Company had 354 employees of which 139 were employed in the United States, 144 were employed in Mexico, 28 were employed in the United Kingdom, and 43 were employed in Korea. The Company believes that its relations with its employees have been good, and it has never experienced a work stoppage. The Company's employees are not covered by contracts with labor unions, except for its hourly employees in Mexico who are covered by a contract with the union representing such hourly employees that expires on December 31, 1996. Recent Developments Sale of Fiber Optics Business Segment On March 13, 1996 the Company sold the assets of its fiber optics business segment to Augat Inc. for $7,893,000 and assumption by the buyer of approximately $1,400,000 of certain liabilities. The Company received, at closing, $6,793,000. The balance was escrowed and will be released over the next 12 months based on certain conditions being met. The Company generated approximately $6,500,000 of revenue in 1995. The sales proceeds were used primarily to reduce the Company's outstanding senior debt, with the balance used to provide working capital for the Company's operations. Amendment and Extension of Loan Agreement On March 13, 1996 the Company amended and extended its Loan and Security agreement with its senior lender. The term of this agreement was extended from November 30, 1996 to November 30, 1998 and provides for waivers of previous events of defaults. The agreement additionally provides for a $2,000,000 revolving line of credit and a $7,000,000 Letters of Credit and Letters of Credit Guarantee facility. This facility is limited to a Borrowing Base that is equal to 80% of eligible accounts receivable and 60% of eligible inventory. Interest will be charged on all outstanding borrowings (except for undrawn Letters of Credit and Letters of Credit Guarantees) at 12%. The agreement requires Facility Fees of $600,000 annually, payable at a rate of $50,000 per month commencing on November 30, 1996 and continuing to the end of the agreement. As part of the agreement, the payment due on a $2,474,000 non-interest bearing Deferred Funding Fee Note, with originally scheduled payments of $1,237,000, $618,000 and $619,000 due on November 30, 1995, May 30, 1996 and November 30, 1996, respectively, were extended to November 30, 1998. In addition, the annual Facility Fee of $310,000, due November 30, 1995, and a $300,000 non-interest bearing Net Worth Enhancement Fee Note which was due during 1995 and 1996 was also extended to November 30, 1998. This agreement calls for amortization of the principal of the term loan commencing on June 30, 1997 as follows: $250,000 each June 30, 1997, September 30, 1997, and on December 31, 1997, and $325,000 each on March 31, 1998 and on the last day of each quarter thereafter during the term of this agreement. There 10 is also a provision that requires the Company to pay this senior lender additional principal, beginning with the periods stated above, based on an "Adjusted Cash Flow Amount" formula calculation. In addition, the Agreement includes an interest coverage ratio measured quarterly beginning with the quarter to end June 30, 1996 and to be measured each quarter of the agreement. This credit facility is secured by substantially all of the assets of the Company. In connection with this agreement, the senior lender was issued warrants to purchase 1,000,000 shares of the Company's common stock at $1 per share. These warrants are in addition to warrants previously issued to this senior lender. 6% Subordinated Debt Exchange Offer On November 30, 1995, the Company offered holders of its 6% Convertible Subordinated Debentures due July 1, 2002, to exchange $1,000 principal amount of such debt for 97 shares of the Company's common stock, par value $.01 per share, and $767.22 of principal of a new Zero Coupon Senior Subordinated Convertible Note due January 2, 1998. As of March 22, 1996 approximately 80% of the outstanding Debentures have been exchanged. The Company issued its new zero coupon notes and shares of Common Stock. This transaction will improve the Company's balance sheet and cash flow (see "Management Discussion and Analysis"). American Stock Exchange In 1995 the Company reported that it does not presently satisfy all of the American Stock Exchange's financial guidelines for the continued listing of its common stock. In the event that this situation is not remedied, there can be no assurance that the listing of its common stock will continue. Item 2. Properties The Company currently leases approximately 20,400 square feet of executive, sales, marketing and research and development space located in Syosset, New York; 9,300 square feet of office space used for software development located in Charlotte, North Carolina; and 48,900 square feet of manufacturing and warehousing space at two locations in Kingsville, Texas. The Company owns a 31,000 square foot manufacturing and research and develolpment facility located in Glen Cove, New York. These facilities represent substantially all of the Company's office, plant and warehouse space in the United States. The Syosset, New York lease was extended to June 30, 1998; the Charlotte, North Carolina lease expires in April 1997 and the Kingsville, Texas leases expire in July 1996 and December 1999. The aggregate annual rental is approximately $1,300,000. The Company's wholly-owned Mexican subsidiary, Porta Systems, S.A. de C.V., owns its approximately 40,000 square foot Matamoros, Mexico facility. A wholly-owned subsidiary of the Company located in the United Kingdom owns a 34,261 square foot facility located in Coventry, England, which facility comprises all of the Company's office, plant and warehouse space in the United Kingdom. The Company believes its properties are adequate for its needs. 11 Item 3. Legal Proceedings The Company and certain of its present and former officers and directors are defendants in eight alleged class actions which have been consolidated and are pending in the United States District Court for the Eastern District of New York. The actions allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 under such Act. The plaintiffs seek, among other remedies, unspecified monetary damages. In March 1996, the Company executed a Stipulation of Settlement to settle the class action, and an order of preliminary approval of settlement was approved by the Court. The agreement is subject to certain conditions precedent, including the maintenance by the Company's common stock of a certain minimum market value. The settlement, if consummated, will include a cash payment by the Company's insurers and issuance by the Company of 1,100,000 shares of its common stock, to be distributed in accordance with a plan to be approved by the Court. Under the agreement, the Company is not required to contribute any cash towards the proposed settlement. The Company denies the material allegations and admits no liability of any sort in connection with the settlement and dismissal of the action. Notice of the court hearing on the settlement has been sent to class members, and the hearing is scheduled for June 7, 1996. The Company and its wholly-owned Mexican subsidiary, Porta Systems, S.A. de C.V., were named, together with numerous other entities, as defendants in a multi-plaintiff lawsuit captioned Alvear v. Leonard Electric Products Company, et al. (Case Nos. 93-03-1354-A and 94-05-2553-A), filed in the District Court for the State of Texas located in Cameron County, Texas. The material allegations of the complaint charged that the defendants, including the Company and its subsidiary, had been negligent in their use and handling of various hazardous substances and that plaintiffs, or their children, have been severely injured and have suffered damage in unspecified amounts as a result. Plaintiffs have also requested an award of exemplary damages. The Company and its subsidiary agreed to settle such lawsuit with the plaintiffs in return for payment of a sum of $120,000 and the Partial Final Judgment with respect to such settlement was executed by Judge Benjamin Euresti, Jr. on November 23, 1994. An intervention filed by two additional plaintiffs by separate counsel has been settled with respect to one plaintiff for $2,500. The other plaintiff cannot be located and a motion has been filed for dismissal as to that plaintiff. Item 4. Submission of Matters to a Vote of Securities Holders During the fourth quarter of 1995, there were no matters required to be submitted to a vote of security holders of the Company. 12 Item Pursuant to Instruction 3 of Item 401 (b) of Regulation S-K: Executive Officers of the Company as of March 31, 1996 First Elected to Name and Position Age Position ----- -------- Warren H. Esanu 53 1996 Chairman of the Board Edward R. Olson 55 1995 President, Chief Operating Officer William V. Carney 58 1988, 1989, 1990 and Vice Chairman, Senior 1970, respectively Vice President, Chief Technical Officer and Secretary Michael A. Tancredi 66 1984 and 1978, Vice President respectively Treasurer Edward B. Kornfeld 52 1995 Vice President Chief Financial Officer John J. Gazzo 53 1984 Vice President Prem G. Chandran 44 1995 Vice President All of the Company's officers serve at the pleasure of the Board of Directors. Of the executive officers listed above, Messrs. Esanu, Carney and Tancredi are also members of the Board of Directors. There is no family relationship between any of the executive officers listed above. Mr. Esanu was elected Chairman of the Board in March 1996. He has been a director of the Company since 1989. Mr. Esanu will continue to serve as of counsel to Esanu Katsky Korins & Siger, a position he has held for more than five years. Esanu Katsky Korins & Siger is general counsel to the Company. Mr. Esanu is also a founding partner and Chairman of Paul Reed Smith Guitars Limited Partnership (Maryland), a leading manufacturer of premium-priced electrical guitars. He is also a senior officer and director of a number of real estate management companies. Mr. Esanu devotes only a portion of his time to the Company. Mr. Olson was elected President and Chief Operating Officer of the Company in November 1995. Mr. Olson is also one of the principals of KPMG BayMark Strategies LLC. Mr. Olson continues in this position while serving as President and Chief Operating Officer of the Company. Prior to 1994 Mr. Olson was president of Ed Olson Consulting Group Ltd. for approximately five years. In 13 addition, Mr. Olson is a member of the Board of Directors and/or officer of various other corporations. Mr. Olson devotes only a portion of his time to the Company. Mr. Carney has been Secretary and director since 1970 and has been Senior Vice President since November 1989 and Chief Technical Officer from December 1990. He was elected Vice Chairman in January 1988. He was Senior Vice President-Mechanical Engineering from January 1988 to November 1989 and was Senior Vice President-Manufacturing from March 1984 to February 1985, Senior Vice President-Operations from June 1977 to February 1984 and Vice President from 1970 to June 1977. Mr. Tancredi has been Vice President since March 1984, Treasurer since April 1978 and Director since 1970. He was Vice President from April 1978 to February 1984 and Comptroller from April 1971 to March 1978. Mr. Kornfeld was elected a Vice President-Finance and Chief Financial Officer of the Company in October 1995. Prior to his election to this position, Mr. Kornfeld held positions with several companies for more than five years, including Excel Technology Inc. (Quantronix Corp.) and Anorad Corporation. Mr. Gazzo has been Vice President-Marketing of the Company since April 1993 and was general manager of its Porta Electronics Division from November 1989 to April 1993; he was the Company's Vice President-Research and Development from March 1984 to November 1989 and was Vice President-Engineering from February 1978 to February 1984. Prior to that time, he was Chief Engineer of the Company. Mr. Chandran was elected an officer in December 1995. Mr. Chandran had been with the Company as Assistant Vice President of Engineering since 1991. Prior to 1991, he was Vice President of Engineering of North Hills Electronics, acquired by the Company in 1991, for more than five years. 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded on the American Stock Exchange, Inc. under the symbol PSI. The following table sets forth, for the period January 1, 1994 through December 31, 1995, the quarterly high and low sales prices for the Company's Common Stock on the consolidated transaction reporting systems for American Stock Exchange listed issues. High Low ---- --- 1994 First Quarter 12 3/4 9 7/8 Second Quarter 10 7/8 9 3/4 Third Quarter 8 7/8 6 Fourth 6 3/4 4 1/2 1995 First Quarter 6 1/4 3 3/8 Second Quarter 4 5/8 2 5/8 Third Quarter 4 3/8 1 Fourth Quarter 2 1/2 5/8 The Company did not declare or pay any cash dividends in 1995 or 1994. It is the present policy of the Company to retain earnings to finance the growth and development of the business and therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, the Company's Amended and Restated Loan and Security Agreement prohibits the Company from paying cash dividends on its Common Stock. As of March 15, 1996, the number of holders of record of the Company's Common Stock was 593. Item 6. Selected Financial Data The following table sets forth certain selected consolidated financial information of the Company. For further information, see the Consolidated Financial Statements and other information set forth in Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7: 15 Year Ended December 31,
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (In thousands, except per share data) Income Statement Data: Sales $ 61,181 $ 68,985 $ 68,141 $ 68,993 $ 81,957 Operating income (loss) (19,884) (17,541) (3,916) (11,466) 8,971 Income (loss) be- fore discontin- ued operations and extraordinary item (29,297) (39,995) (7,493) (8,539) 6,930 Net Income (loss) (31,041) (39,995) (9,545) (14,977) 8,498 Income (loss) per share from continuing operations $ (4.01) $ (5.61) $ (1.08) $ (1.24) $ 1.06 Cash dividends declared -- -- -- -- -- Number of shares used in calcu- lating net in- come (loss) per share 7,307 7,133 6,909 6,890 6,555 Balance Sheet Data: Total Assets $ 60,591 $ 84,963 $ 109,948 $ 130,345 $ 107,303 Long-term debt excluding current maturities $ 55,389 $ 57,310 $ 49,931 $ 34,205 $ 20,430 Stockholders' (deficit) equity ($ 29,323) $ 1,525 $ 39,841 $ 49,486 $ 65,809
16 Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations. The Company's consolidated statements of operations for the three years ended December 31, 1995 as a percentage of sales follows: Ended December 31, 1995 1994 1993 ---- ---- ---- Sales 100% 100% 100% Cost of sales 92% 90% 73% ---- ---- ---- Gross Profit 8% 10% 27% Selling, general and administrative expenses 27% 29% 24% Research and development expenses 10% 6% 9% Litigation settlement 2% -- -- Writedown of net assets sold 1% -- -- Operating loss (33%) (25%) (6%) Interest expense (14%) (8%) (7%) Interest income -- -- -- Other (1%) (3%) (4%) ---- ---- Loss from continuing operations before income taxes and minority interest (47%) (36%) (17%) Income tax (benefit) expense -- 22% (6%) ---- ---- ---- Loss before discontinued operations (48%) (58%) (11%) Provision for loss on disposal of discontinued operations 6% -- (3%) Extraordinary gain on early extinguishment of debt 3% -- -- ---- ---- ---- Net loss (51%) (58%) (14%) ---- ---- ---- 17 Financial Condition The Company's working capital changed from $13,700,000 at December 31, 1994 to a working capital deficit of $8,200,000 at December 31, 1995. At September 30, 1995, the Company had a working capital deficit of $48,900,000. The improvement in working capital from September 30, 1995 primarily results from the following transactions regarding the Company's debt: In March 1996, the Company's loan and security agreement with its senior secured lender, Foothill Capital Corporation ("Foothill"), was amended. Pursuant to the amendment, the Company's obligations were extended from November 1996 to November 1998 and defaults at December 31, 1995 and through the date of the amendment, were waived by Foothill. As a result, the Company's indebtedness to Foothill, which was reflected as a current liability of $26,500,000 at September 30, 1995, is treated as a long-term liability of $26,600,000 at December 31, 1995. In addition, as a result of a default under the interest payment provisions of the Company's 6% Subordinated Debentures due 2002 (the "Debentures"), the Company's obligations under the Debentures, which were reflected as a $32,000,000 current liability at September 30, 1995, would have also been reflected as a current liability at December 31, 1995. However, as a result of an exchange offer (the "Exchange Offer") which, as of March 22, 1996, had been accepted by the holders of approximately 80% of the outstanding Debentures, the Company issued its new zero coupon notes due January 2, 1998 (Note) and shares of common stock in exchange for Debentures. The Company is classifying as current liabilities at December 31, 1995, $6,600,000 of Debentures which have not been exchanged, and the $25,700,000 of Debentures exchanged as a long-term liability, consistent with the payment terms of the Notes. As a result of the Exchange Offer, as of March 22, 1996, the Company issued its new zero coupon notes in the aggregate principal amount of $22,000,000 and issued 2,800,000 shares of Common Stock in exchange for Debentures in the principal amount of $28,700,000. As of such date, the principal amount of Debentures outstanding was $6,600,000. The Company is in default on payment of interest on the Debentures which were not exchanged. The Company has no past or ongoing interest obligation with respect to either the new zero coupon notes or the Debentures which were exchanged. The aggregate annual interest obligation on the Debentures which had not been converted at March 22, 1996 is approximately $440,000, as compared with the $2,200,000 aggregate annual interest obligation with respect to the Debentures which were outstanding prior to the Exchange Offer. On March 13, 1996, the Company consummated an agreement pursuant to which it sold certain assets and the buyer assumed certain liabilities and severance obligations related to the operations of the Company's fiber optics management and component business. Accordingly, at December 31, 1995, the net assets of the fiber optics business are reflected as "assets held for sale, net" at net realizable value, based on the terms of the sale. The net assets of the fiber optics business were sold for a total purchase price of approximately $8,000,000, of which $1,100,000 is held in escrow, subject to certain conditions, plus the assumption of approximately $1,400,000 in liabilities. The proceeds were applied to reduce the Company's obligations to Foothill in accordance with the March 1996 amendment to the Foothill agreement. The sale of the fiber optics business benefited the Company in two ways. First the sale of this business enabled the Company to close two facilities, with a resultant decrease in personnel and overhead costs, the benefits of which are expected to be realized commencing with the second quarter of 1996. Second, 18 the sale enabled the Company to amend and extend its agreement with Foothill, as described above, and make a significant payment to Foothill, which reduces its ongoing interest costs. The Company's obligations to Foothill are secured by substantially all of the assets of the Company and its subsidiaries. The agreement with Foothill was extended for two years, and the Company is no longer in default under its agreement with Foothill. The agreement with Foothill requires the Company to continue to meet certain financial covenants. See Note 11 of Notes to Consolidated Financial Statements. Inventory was reduced from $20,100,000 at December 31, 1994 to $9,000,000 at December 31, 1995. This decrease resulted from an inventory reduction program during 1995 and a $1,800,000 increase in the reserve for slow-moving or obsolete inventory at December 31, 1995. In addition, as a result of its illiquid condition, certain vendors ceased shipping to the Company while others required cash before delivery or cash on delivery. In addition, the inventory relating to the Company's fiber optics business, amounting to $1,400,000, is included in "Assets held for sale" at December 31, 1995. Capital expenditures in 1995 were $1,479,000. The Company does not have any significant commitments at December 31, 1995 to acquire fixed assets. The Company's liquidity problems have resulted in increased cost of sales, resulting in lower gross profits. The gross margin for 1995 is 8%, and the gross profit of $4,700,000 is significantly less than either selling, general and administrative expenses of $16,600,000 and research and development expenses of $6,100,000. Accordingly, without a significant reduction of cost of goods sold, the Company will not be able to operate profitably. To address this situation, the Company has consummated the above transactions in 1996 to reduce costs and is reviewing options to reduce other costs and operating expenses. The Company continues to require cash for its operations. Foothill has provided the Company with funds to meet its immediate cash needs. However, unless the Company can reverse the negative trends in its operations, it may be unable to obtain cash from any sources, including Foothill. Although the Company has no plans to sell any of its remaining operations, no assurance can be given that it will not be necessary for the Company to do so. The failure of the Company to obtain cash when needed is likely to continue to have an adverse effect on its business. Results of Operations Years Ended December 31, 1995 and 1994 The Company's continued shortage of working capital has had a material adverse effect upon its operations during 1995. The effects of the working capital shortage were compounded by the Company's defaults during 1995 under its agreement with Foothill, which resulted in curtailment of certain advances and letter of credit facilities. Although the defaults were waived as a result of a March 1996 amendment to the agreement with Foothill, during most of 1995, the Company was in default under its agreement with Foothill. Although Foothill provided the Company with cash to meet its immediate needs, its failure to provide additional advances and letter of credit facilities adversely affected the Company's operations. In March 1996, the Company sold its fiber optics business. Substantially all of the proceeds from the sale were used to reduce the Company's obligations to Foothill. 19 The Company's sales for 1995 decreased by 11% from 1994 sales, as the Company experienced continuing liquidity problems which adversely affected the Company's operations. Sales of OSS products were $29,000,000, a 35% increase from OSS sales of $21,500,000 in 1994, principally as a result of increased sales to BT and sales in the Asian market. Sales of copper connection products decreased by $8,200,000, or 29%, from $28,600,000 in 1994 to $20,400,000 in 1995. The reduction in such sales reflects a reduction in sales to Telefonos de Mexico, which accounted for sales of $4,600,000 in 1994 and virtually no sales in 1995, a $1,600,000 reduction in sales of copper connection products to BT, as well as the effects of reduced production resulting from the Company's working capital problems. The Company believes that the significantly reduced sales to Telefonos de Mexico is due in part to the continuing Mexican financial crisis. However, no assurance can be given that any improvement in the Mexican economy will result in increased sales of the Company's products. Sales of fiber optics products declined by $5,700,000, or 47%, from $12,200,000 in 1994 to $6,500,000 in 1995. The decline reflects the Company's inability to produce fiber optics products as a result of its financial problems, as the Company allocated its resources principally to the OSS and copper connection businesses. This allocation of resources also reflected the Company's decision late in 1995 to sell the fiber optics business. Sales of fiber optics products in the fourth quarter of 1995 were less than $1,000,000. Sales from signal processing products, representing approximately 8% of 1995 sales, were also hampered by the Company's ongoing financial difficulties. Cost of sales in 1995, as a percentage of sales, increased slightly from 1994, from 90% of sales in 1994 to 92% of sales in 1995. As a result of the high cost of sales, the gross profit for 1995 was $4,700,000, which was significantly less than selling, general and administrative expenses and research and development expenses. The high cost of sales reflected (i) a lower volume of sales, (ii) the inability of the Company to purchase efficiently and to obtain materials from certain suppliers, (iii) the under-absorption of overhead costs, (iv) modification of inventory in order to fulfill customer orders, and (v) significant writedown of fiber optics inventory reflecting the value of such inventory in connection with the sale of the fiber optics business in March 1996. In addition, as part of the Company's ongoing evaluation of its inventory and based on its 1995 level of sales, the Company increased its inventory reserve by approximately $1,800,000 for slow-moving or obsolete inventory. Steps taken to reduce manufacturing labor costs by reductions in direct and indirect manufacturing personnel were not implemented until late in the second quarter of 1995 and are reflected in cost of sales in the third and fourth quarters. The reduction of facility, personnel and overhead costs from the sale of the fiber optics business will first be reflected in the second quarter of 1996. Selling, general and administrative expenses decreased by $3,400,000, or 17%, from $20,000,000 in 1994 to $16,600,000 in 1995. The expense decrease reflects the Company's efforts to reduce personnel costs, as well as a reduced level of sales and marketing activities. To some extent, the effects of the personnel reduction were offset by severance costs incurred during 1995. Research and development expenses increased by $2,100,000, from $4,000,000 in 1994 to $6,100,000 in 1995, or 53%. The increase reflected a reduction in the amount of software development costs which qualified for capitalization. In 1995, the Company incurred expenses of $1,100,000, reflecting the value of the Company's common stock to be issued as a result of the settlement of 20 class actions. See "Item 3. Legal Proceedings." In addition, in 1995, the Company wrote down the net assets of its fiber optics business to net realizable value to reflect the price at which the assets were sold in March 1996. As a result of the foregoing, the Company sustained an operating loss of $19,900,000, an increase of 14% from the operating loss of $17,500,000 in 1994. Interest expense increased $2,900,000, or 52%, from $5,600,000 in 1994 to $8,500,000 in 1995. The increase in interest expense reflects substantially higher average interest rates and increased borrowings under the Company's agreement with Foothill as compared with the interest rate and borrowings under the Company's prior agreement with Chemical Bank. Although most of the increased borrowings reflect additional borrowings for operations, $2,500,000 of the additional borrowings result from the purchase by the Company of Debentures which were purchased from Foothill in connection with the March 1995 amendment to the Foothill agreement. Other expenses of approximately $900,000 include costs associated with the modification of the Company's agreement with Foothill in March 1995. Other expenses in 1994 related to the restructuring of the Company's secured debt when Foothill took over Chemical Bank's note from the Company and the terms of the financing were modified. Income tax expense for 1995 was nominal, reflecting primarily offshore and Delaware corporate taxes. The $14,900,000 tax expense in 1994 results from providing a valuation allowance for deferred income taxes. The $3,500,000 loss from the sale of discontinued operations reflects a reduction in the amount of the expected recovery from the sale by the Company in 1993 of its Israeli subsidiaries which were engaged in the manufacture of data communications connecting equipment. As a result of a receivership and liquidation proceedings involving the purchaser of the subsidiaries, the estimated recovery from the sale of such operations was reduced from $4,500,000, which was the estimated recovery at December 31, 1994, to $1,000,000, which is the estimated recovery at December 31, 1995. In connection with the February 1995 amendment to the Company's agreement with Foothill, the Company repurchased from Foothill and retired $3,900,000 principal amount of Debentures for approximately $2,500,000 through an increase of $3,000,000 in the term loan to Foothill and the repricing of certain warrants granted to Foothill. The Company recorded an extraordinary item, a gain of $1,800,000 million on early extinguishment of this debt, representing the difference between the book value of the debt and the approximate market value of the debt on the date of the transaction. As a result of the foregoing, the Company sustained a loss from continuing operations in 1995 of $29,300,000, or $4.01 per share, as compared with a loss from continuing operations in 1994 of $40,000,000, or $5.61 per share. After giving effect to the loss on sale of discontinued operations and the gain on early extinguishment of debt, the Company sustained a net loss of $31,000,000, or $4.25 per share, for 1995, as compared with a net loss of $40,000,000, or $5.61 per share, in 1994. In March 1996, the Company sold the net assets of its fiber optics business, amended its agreement with Foothill and reduced its indebtedness to Foothill. In addition, through March 22, 1996, the Company issued its zero coupon notes in the principal amount of $22,000,000 and issued 2,800,000 shares of Common Stock in exchange for $28,800,000 principal amount of Debentures and accrued interest of $1,600,000 at December 31, 1995, pursuant to the Exchange Offer. These transactions enabled the Company to reduce its facilities and 21 personnel expenses, reduce the indebtedness to Foothill and reduce ongoing interest costs. The effects of these transactions will not be realized until the second quarter of 1996. However, the benefits to the Company from the reduction in operating costs, including reductions resulting from the sale of the fiber optics business, and the reduced interest expense will not enable the Company to operate profitably unless it is able to significantly reduce its cost of goods sold or increase its sales margins and reduce its general overhead, as to which no assurance can be given. Years Ending December 31, 1994 and 1993 Sales from continuing operations for the full year ended December 31, 1994 compared to 1993 were up 1% primarily due to increased sales in each of the first three quarters of 1994 compared to the similar periods of 1993. The Company's sales from continuing operations for the fourth quarter of 1994 were substantially below expectations, notwithstanding adequate backlog, due to the continuation of the shipment delays caused by persistent and worsening parts shortages associated with the reductions in borrowing availability under the Company's borrowing agreement with its Senior Lender, and a product mix which resulted in shipment of lower priced and margined products. In addition, the Company's fourth quarter 1994 OSS sales were generally and adversely impacted by the intercreditor disagreement which resulted in the Company allocating working capital toward product manufacture in connection with the contract in order to fulfill its agreement with its customer and slowing performance on other contracts in the field due to resulting scarce working capital resources. Sales of OSS equipment during the year ended December 31, 1994 were $21,500,000 compared to $17,700,000 in 1993, an increase of 21%, due primarily to increased sales during 1994 by the Company's Korean joint venture subsidiary. While sales of fiber optic connection/protection products for the year ended December 31, 1994 increased to $12,151,000 compared to $8,854,000 in 1993, sales of fiber optic connection/protection products during the fourth quarter of 1994 were adversely affected by the reductions in working capital availability discussed above. Sales of copper connection/protection products decreased 16% during the year ended December 31, 1994 compared to 1993 due in part to shipment delays caused by persistent parts shortages during the three months ended September 30, 1994 (which accelerated in the three months ended December 31, 1994) resulting from the reductions in working capital availability under the Restated Credit Agreement, as well as the inability of a supplier to ship parts meeting quality standards required by the Company. While shipments to British Telecommunications plc had fallen during the three months ended September 30, 1994, the Company was able to increase its shipments to this customer during the fourth quarter of 1994. The Company's backlog for copper products significantly increased during this period due to increased orders for these products. Also, the Company's sales to Telefonos de Mexico, which were denominated in Mexican pesos and which were expected to be approximately the same in 1994 as in 1993 but more evenly distributed over all four quarters of the year, were adversely affected in early December 1994 by the Mexican economic crisis which caused the Company to temporarily halt shipments to Telefonos de Mexico pending negotiations with Telefonos de Mexico to determine the increased pricing consequences of such economic crisis. Sales of other products, primarily Signal Processing products, in the year ended December 31, 1994 were slightly higher than sales during 1993 although sales of other products in the third and fourth quarters of 1994 were also somewhat affected by the operational inefficiencies resulting from the reductions in working capital availability. The dollar amount of cost of sales for the year ended December 31, 1994 increased approximately $13,000,000 or 26% compared to 1993. Cost of sales as a percentage of sales for the year ended December 31, 1994 compared to 1993 22 increased to 91% from 73%. The dollar amount of cost of sales for the third and fourth quarters of 1994 compared to the similar periods of 1993 and to the Company's historical cost of sales experience were particularly high and negatively impacted the entire year's results due to the unfavorable impact on the Company's operational costs of the reductions in working capital availability under the Restated Credit Agreement, the effect of the Company's concentrated effort to reduce inventories and the sale of lower margin products in order to generate cash internally to address such reductions in externally available working capital. In addition, the substantial contribution of the Company's joint venture in Korea, which sells lower margin OSS products, to OSS equipment sales tended to increase cost of sales as a percentage of sales. The Company's operational costs were additionally affected by manufacturing inefficiencies resulting from materials shortages, smaller productions runs, higher per unit purchasing and freight costs as well as increased numbers of employees and idle labor manufacturing time and maintenance of a fixed level of expenses associated with the support of a higher level of OSS equipment sales than actually resulted in 1994. While the Company's effort to reduce inventories resulted in increased cash flow in the third and fourth quarters of 1994, the consequences of this effort was higher labor costs related to rework of inventory and reduced margins associated with the sale of certain slow moving inventory at unfavorable prices. Also, the Company's aggressive inventory reduction program caused it to conclude, after sales of such inventory, that no easily accessible and significant market remained for certain of its copper products in the markets traditionally accessed by the Company or which the Company would reasonably be able to access in the near term given the restructuring and cost cutting moves described elsewhere. Accordingly, the Company determined to make a $2,000,000 provision for such products. In addition, the Company has made a provision for approximately $2,000,000 of high density frames which it has in stock due to its discovery that such high density frames contain defective parts sold to it by a vendor. The Company is presently considering taking action against such vendor to recoup its losses resulting from such defective parts. The dollar amount of selling, general and administrative expenses in the year ended December 31, 1994, increased by 22% compared to 1993, while selling, general and administrative expenses as a percentage of sales increased by 20% during the year ended December 31, 1994 compared to 1993. Selling, general and administrative expenses were significantly higher during the last quarter of 1994 compared to 1993 due to the costs of servicing its Asia/Pacific marketplace and selling associated with the European market and commission costs. In addition, the impact of certain one time costs associated with the pursuit of substitute financing, the costs of defense of certain lawsuits which the Company was defending during these periods and the costs of settlement of one of these lawsuits increased selling, general and administrative expenses during the year ended December 31, 1994. Research and development expenses for the year ended December 31, 1994 compared to 1993 decreased significantly, both as a dollar amount and as a percentage of sales, in part because of a reduction in staff and related costs due primarily to the consolidation of research and development activities previously conducted separately by companies acquired in prior periods and in part because of lower research and development requirements for the Company's more mature products. The Company's operating loss for the year ended December 31, 1994 is primarily attributable to a number of factors, including a shortfall in the volume of sales, a cost structuring for a much larger level of sales, an inability to adjust the organization to deal with the sales shortfall, the reductions in availability of working capital, inventory reduction program, and transaction costs related to both the Restated Credit Agreement and the New Credit Agreement. 23 The Company's operating loss for the year ended December 31, 1993 was $3,916,000 and reflected an improving operational trend during the last six months of the year. A substantial portion of this operating loss was due to low volumes of production in comparison to manufacturing capacity, as well as, costs associated with strategic investments in OSS and fiber optic areas being made by the Company. In addition, and consistent with the Company's cost of sales, the mix of product sales contributed to the extent of the loss. Interest expense for the year ended December 31, 1994 compared to 1993 increased due to higher average interest rates although such higher average rates were offset by a slightly lower borrowing level during most of 1994 compared to 1993. Interest expenses increased substantially during 1993 compared to 1992 due to substantially increased debt used to finance the Company's operating losses and a full year's interest on the 6% Convertible Subordinated Debentures. As reported, other expenses for the year ended December 31, 1994 compared to 1993 decreased. However, such 1994 expenses included various advisory fees required as a result of the Company's relationship with its lending banks and fees related to the costs of the Company's financing with both its lending banks and its new senior lender, which were partially offset by a $ 313,000 gain from the satisfaction of the bank obligations. Other expenses for the year ended December 31, 1993 are predominantly comprised of various advisory fees relating to the negotiation and finalization of the Restated Credit Agreement as well as fees related to the Company's unsuccessful efforts to acquire a telecommunications manufacturing business of another company. The Company adopted Financial Accounting Standard No. 109 effective January 1, 1992 and, as of December 31, 1993, had recognized a deferred tax asset of $13,955,000, principally relating to the Company's net operating loss carryforwards. In the third quarter of 1994, the Company, after reviewing the deferred tax asset in the context of its results of operations for such third quarter, recorded a valuation allowance in the entire amount of such deferred tax asset, which is included in 1994 income tax expense. As a result, the Company recorded income tax expense of $14,920,000 for the year ended December 31, 1994 compared to income tax benefit of $3,885,000 in 1993, principally relating to operating losses for United States income tax purposes. The decision to record such valuation allowance in 1994 was based on the criteria contained in Financial Accounting Standard No. 109, generally requiring a valuation allowance when cumulative losses have been experienced and there is a lack of sufficient objective offsetting evidence to conclude that it is more likely than not that the deferred tax asset will be utilized. New Accounting Standards In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation", which must be adopted by the Company in 1996. The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose, commencing in 1996, the pro-forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in the Statement. In March 1995, The FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which must also be adopted by the Company in 1996. The effect of adopting this standard will be insignificant. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) By Warren H. Esanu --------------- Warren H. Esanu Chairman of the Board Date: April 1, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date ---- Warren H. Esanu April 1, 1996 - ---------------- Warren H. Esanu Chairman of the Board and Director Edward R. Olson April 1, 1996 - --------------- Edward R. Olson President Edward B. Kornfeld April 1, 1996 - ------------------ Edward B. Kornfeld Vice President and Chief Financial and Accounting Officer Howard D. Brous April 1, 1996 - --------------- Howard D. Brous Director William V. Carney April 1, 1996 - ----------------- William V. Carney Director 25 Date ---- Herbert H. Feldman April 1, 1996 - ------------------ Herbert H. Feldman Director Stanley Kreitman April 1, 1996 - ---------------- Stanley Kreitman Director Michael A. Tancredi April 1, 1996 - ------------------- Michael A. Tancredi Director 26 Item 8. Financial Statements and Supplement Data Index Page Independent Auditor's Report ............................................ F-1 Consolidated Financial Statements and Notes: Consolidated Balance Sheets, December 31, 1995 and 1994 ....................................... F-2 Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994 and 1993 ................................. F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 ..................... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 ................................. F-5 Notes to Consolidated Financial Statements ......................... F-6 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 27 PART III Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Documents filed as part of this Annual Report on Form 10-K: (i) Financial Statements. See Index to Consolidated Financial Statements under Item 8 hereof. (ii) Financial Statement Schedules. None Schedules not listed above have been omitted for the reasons that they were inapplicable or not required or the information is given elsewhere in the financial statements. Separate financial statements of the registrant have been omitted since restricted net assets of consolidated subsidiaries do not exceed 25% of consolidated net assets. (b) Reports on Form 8-K. A current report on Form 8-K dated November 30, 1994 was filed. 28 (c) Exhibits Exhibit No. Description of Exhibit 3.1 Certificate of Incorporation of the Company, as amended to date, incorporated by reference to Exhibit 4(a) of the Company's Annual Report on Form 10-K for the year ended December 31, 1991. 3.2 Certificate of Designation of Series B Participating Convertible Preferred Stock. 3.3 By-laws of the Company, as amended to date. 4.1 Amendment dated as of December 16, 1993 to the Warrant Agreement among the Company, Aster Corporation and Chemical Bank as successor to Manufacturers Hanover Trust Company as Warrant Agent, incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1993. 4.2 Form of Rights Agreement, dated as of March 22, 1989 between the Company and Manufacturers Hanover Trust Company, as Rights Agent, incorporated by reference to the Company's Registration Statement on Form 8-A dated April 3, 1989. 4.2.1 Amendment No. 1 to Rights Agreement, dated July 28, 1993 between the Company and Chemical Bank (as successor by merger to Manufacturers Hanover Trust Company), as Rights Agent, incorporated by reference to the Company's Registration Statement on Form 8-A/A filed August 4, 1993. 4.3 Warrant issued to Aspen Grove Financial Corporation to Purchase 87,500 Shares of Common Stock dated as of June 13, 1994, incorporated by reference to Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 4.4 Warrant issued to Banque Scandinave en Suisse to Purchase 100,000 shares of Common Stock dated as of June 13, 1994, incorporated by reference to Exhibit 4(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. 4.5 Stock Option Agreement dated as of May 15, 1994 between the Company and Stanley Kreitman, incorporated by reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the 29 quarter ended September 30, 1994. 4.6 Amended and Restated Loan and Security Agreement dated as of November 28, 1994, between the Company and Foothill Capital Corporation, incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.7 Amendment Number One dated February 13, 1995 to the Amended and Restated Loan and Security Agreement dated as of November 28, 1994 between the Company and Foothill Capital Corporation. 4.7.1 Letter Agreement dated as of February 13, 1995. 4.7.2 Amendment Number Two dated March 30, 1995 to the Amended and Restated Loan and Security Agreement dated as of November 28, 1994 between the Company and Foothill Capital Corporation. 4.7.3 Waiver of Default dated March 30, 1995. 4.8 Secured Promissory Note dated November 28, 1994 made by the Company in favor of Foothill Capital Corporation, incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.9 Amended and Restated Secured Promissory Note dated February 13, 1995. 4.10 Deferred Funding Fee Note dated November 28, 1994 made by the Company in favor of Foothill Capital Corporation, incorporated by reference to Exhibit 5 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.11 Amendment Number Three to Amended and Restated Loan and Security Agreement dated March 12, 1996, between the Company and Foothill Capital Corporation. 4.12 Warrant to Purchase Common Stock of the Company dated November 28, 1994 executed by the Company in favor of Foothill Capital Corporation, incorporated by reference to Exhibit 6 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.12.1 Amendment Number One to Warrant to Purchase Common Stock of the Company dated as of February 13, 1995 executed by the Company in 30 favor of Foothill Capital Corporation. 4.13 Assignment of Loans, Liens and Loan Documents dated November 28, 1994 between Chemical Bank, The Bank of New York, Foothill Capital Corporation, the Company and certain of the subsidiaries of the Company, incorporated by reference to Exhibit 3 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.14 Warrant to Purchase Common Stock of the Company dated November 28, 1994 executed by the Company in favor of Chemical Bank, incorporated by reference to Exhibit 12 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.15 Warrant to Purchase Common Stock of the Company dated November 28, 1994 executed by the Company in favor of The Bank of New York, incorporated by reference to Exhibit 13 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.16 Indenture dated as of July 1, 1992 between the Company and the Bank of New York as trustee, incorporated by reference to Exhibit 4(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. 4.17 Form of Warrant to Purchase Common Stock of the Company dated as of June 1, 1993 between the Company and Mallory Factor, incorporated by reference to Exhibit 4(f) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 4.18 Form of Warrant Agreement dated as of August 12, 1993 between the Company and Berenson Minella & Company, incorporated by reference to Exhibit 4(e) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 4.19 Lockbox Operating Procedural Agreement dated as of November 28, 1994 among Chemical Bank, the Company and Foothill Capital Corporation, incorporated by reference to Exhibit 7 to the Company's Current Report on Form 8-K dated November 30, 1994. 4.20 Security Agreement, dated as of July 16, 1993, made by Woo Shin Electro-Systems Company to 31 Chemical Bank, incorporated by reference to Exhibit 4(b) (iv) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993. 4.21 Indenture dated as of November 30, 1995, between the Company and American Stock Transfer & Trust Company. 10.1 Form of Split Dollar Agreement -- more than ten years, incorporated by reference to Exhibit l9(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985. 10.2 Form of Split Dollar Agreement -- less than ten years, incorporated by reference to Exhibit 19 (e) of The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985. 10.3 Form of Amendment No. 1 to Split Dollar Agreement -- less than ten years -- Acceleration upon change of control, incorporated by reference to Exhibit 10(i)(i) of the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 10.4 Form of Executive Salary Continuation Agreement, incorporated by reference to Exhibit l9(cc) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985. 10.5 Agreement dated as of January 1, 1990 between the Company and Alpha Risk Management, Inc., incorporated by reference to Exhibit 10(k) of the Company's Annual Report on Form 10-K for the year ended December 31, 1990. 10.6 Agreement dated May 25, 1988 between British Telecommunications plc and the Company, incorporated by reference to Exhibit l9(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988. Confidential Treatment granted document filed separately with the SEC. 10.7 Lease dated December 17, 1990 between the Company and LBA Properties, Inc., incorporated by reference to Exhibit 10 (d) of the Company's annual report on Form 10-K for the year ended December 31, 1990. 10.8 Asset Purchase Agreement dated as of March 6, 1996 by and among Augat Inc., Porta Systems Corp. and 32 certain of its Subsidiaries. 10.9 Form of Employment Contract dated October 2, 1995 between the Company and KPMG BayMark Strategies LLC's Crisis Management Group. 10.10 Form of Employment Contract dated October 16, 1995 between the Company and Edward B. Kornfeld. 10.11 Form of Employment Contract dated March 28, 1996 between the Company and Warren H. Esanu. 10.12 Form of Executive Salary Continuation Agreement dated October 16, 1995 between the Company and Edward B. Kornfeld. 22.1 Subsidiaries of the Company. 23 Consent of Independent Auditors 33 Independent Auditors' Report The Board of Directors and Stockholders of Porta Systems Corp.: We have audited the accompanying consolidated balance sheets of Porta Systems Corp. and subsidiaries as of December 31, 1995 and 1994, and the related statements of operations, stockholders' (deficit) equity, and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Porta Systems Corp. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG PEAT MARWICK LLP Jericho, New York March 22, 1996 F-1 PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1995 and 1994 (Dollars in thousands)
Assets 1995 1994 ------ ---- ---- Current assets: Cash and cash equivalents $ 1,109 2,332 Accounts receivable - trade, less allowance for doubtful accounts of $1,251 in 1995 and $585 in 1994 12,626 13,964 Inventories 8,979 20,146 Prepaid expenses 659 1,020 Receivable from sale of discontinued operations 1,000 -- -------- -------- Total current assets 24,373 37,462 -------- -------- Assets held for sale, net 7,893 -- Property, plant and equipment, net 6,911 11,139 Receivable from sale of discontinued operations -- 4,500 Deferred computer software, net 3,188 6,257 Goodwill, net of amortization of $2,265 in 1995 and $2,192 in 1994 11,793 19,032 Other assets 6,433 6,573 -------- -------- Total assets $ 60,591 84,963 ======== ======== Liabilities and Stockholders' (Deficit) Equity Current liabilities: Convertible subordinated debentures $ 6,564 -- Accounts payable 8,302 9,690 Accrued expenses 10,502 6,065 Accrued interest payable 3,534 1,414 Accrued commissions 2,016 2,180 Income taxes payable 780 478 Customer advances 504 2,525 Notes payable -- 1,237 Short-term loans 368 152 -------- -------- Total current liabilities 32,570 23,741 -------- -------- Long-term debt 26,645 21,000 Convertible subordinated debentures 25,660 35,073 Notes payable net of current maturities 3,084 1,237 Income taxes payable 811 1,330 Other long-term liabilities 385 400 Minority interest 759 657 -------- -------- Total long-term liabilities 57,344 59,697 -------- -------- Commitments and contingencies Stockholders' (deficit) equity: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 20,000,000 shares, issued 7,461,806 shares in 1995 and 1994 75 75 Additional paid-in capital 33,248 32,888 Foreign currency translation adjustment (4,199) (4,031) Accumulated deficit (56,074) (25,033) -------- -------- (26,950) 3,899 Treasury stock, at cost, 166,700 and 154,700 shares in 1995 and 1994, respectively (2,066) (1,938) Receivable for employee stock purchases (307) (436) -------- -------- Total stockholders' (deficit) equity (29,323) 1,525 -------- -------- Total liabilities and stockholders' (deficit) equity $ 60,591 84,963 ======== ========
See accompanying notes to consolidated financial statements. F-2 PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1995, 1994 and 1993 (in thousands, except per share amounts)
1995 1994 1993 ---- ---- ---- Sales $ 61,181 68,985 68,141 Cost of sales 56,444 62,530 49,539 -------- -------- -------- Gross profit 4,737 6,455 18,602 -------- -------- -------- Selling, general and administrative expenses 16,556 20,037 16,443 Research and development expenses 6,103 3,959 6,075 Litigation settlement 1,100 -- -- Write-down of net assets held for sale to net realizable value 862 -- -- -------- -------- -------- Total expenses 24,621 23,996 22,518 -------- -------- -------- Operating loss (19,884) (17,541) (3,916) Interest expense (8,484) (5,617) (4,813) Interest income 87 251 357 Other, net (884) (2,022) (2,985) -------- -------- -------- Loss from continuing operations before income taxes and minority interest (29,165) (24,929) (11,357) Income tax expense (benefit) 30 14,920 (3,885) Minority interest (102) (146) (21) -------- -------- -------- Loss before discontinued operations (29,297) (39,995) (7,493) Provision for loss on disposal of discontinued operations (3,500) -- (2,052) -------- -------- -------- Loss before extraordinary item (32,797) (39,995) (9,545) Extraordinary gain on early extinguishment of debt 1,756 -- -- -------- -------- -------- Net loss $(31,041) (39,995) (9,545) ======== ======== ======== Per share amounts: Continuing operations $ (4.01) (5.61) (1.08) Discontinued operations (.48) -- (.30) Extraordinary item .24 -- -- -------- -------- -------- Net loss per share $ (4.25) (5.61) (1.38) ======== ======== ======== Weighted average shares outstanding 7,307 7,133 6,909 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' (Deficit) Equity Years ended December 31, 1995, 1994 and 1993 (In thousands)
Receivable Total Foreign Retained for Stock- Common Stock Additional Currency Earnings Employee holders' No. of Par Value Paid-in Translation (Accumulated Treasury Stock (Deficit)/ Shares Amount Capital Adjustment Deficit) Stock Purchases Equity ------------------------------------------------------------------------------------------ Balance at December 31, 1992 7,054 $71 $29,457 $(2,102) $24,507 $(1,938) $(509) $49,486 Net loss 1993 - - - - (9,545) - - (9,545) Stock issued 28 - 92 - - - - 92 Repayments of receivable - - - - - - 11 11 Warrants issued - - 604 - - - - 604 Foreign currency translation adjustment - - - (807) - - - (807) ----------------------------------------------------------------------------------------- Balance at December 31, 1993 7,082 71 30,153 (2,909) 14,962 (1,938) (498) 39,841 Net loss 1994 - - - - (39,995) - - (39,995) Stock issued 380 4 2,135 - - - - 2,139 Warrants issued - - 600 - - - - 600 Write off of receivable for employee stock purchases - - - - - - 62 62 Foreign currency translation adjustment - - - (1,122) - - - (1,122) ----------------------------------------------------------------------------------------- Balance at December 31, 1994 7,462 75 32,888 (4,031) (25,033) (1,938) (436) 1,525 Net loss 1995 - - - - (31,041) - - (31,041) Warrants issued - - 360 - - - - 360 Write off of receivable for employee stock purchases - - - - - (128) 129 1 Foreign currency translation adjustment - - - (168) - - - (168) ----------------------------------------------------------------------------------------- Balance at December 31, 1995 7,462 $75 $33,248 $(4,199) $(56,074) $(2,066) $(307) $(29,323) =========================================================================================
See accompanying notes to consolidated financial statements F-4 PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net loss $(31,041) (39,995) (9,545) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Loss on disposal of discontinued operations 3,500 -- 2,052 Gain on extinguishment or refinancing of indebtedness (1,756) (913) -- Non-cash financing costs 2,698 600 202 Deferred income taxes -- 13,955 (4,841) Depreciation and amortization 7,015 5,580 5,416 Write off of employee notes receivable 1 62 -- Amortization of discount on convertible subordinated debentures 603 442 426 Minority interest 102 163 21 Changes in assets and liabilities: Accounts receivable 1,338 2,598 4,640 Inventories 9,700 8,047 1,613 Prepaid expenses (773) (328) 178 Other assets 1,916 (330) (1,857) Accounts payable, accrued expenses and other liabilities 4,167 10,414 (4,621) -------- -------- -------- Net cash (used in) provided by operating activities (2,530) 295 (6,316) -------- -------- -------- Cash flows from investing activities: Capital additions, net of minor disposals (1,749) (1,107) (1,559) Repayment of employee loans -- -- 11 -------- -------- -------- Net cash used in investing activities (1,749) (1,107) (1,548) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of debt 5,781 24,212 22,897 Repayments of debt (2,500) (22,299) (19,397) Proceeds from issuance of common stock -- 2,139 92 Repayments of notes payable/short-term loans -- (1,162) (9,942) -------- -------- -------- Net cash provided by (used in) financing activities 3,281 2,890 (6,350) -------- -------- -------- Effect of exchange rates on cash (225) (1,473) (807) (Decrease) increase in cash and cash equivalents (1,223) 605 (15,021) Cash and equivalents - beginning of year 2,332 1,727 16,748 -------- -------- -------- Cash and equivalents - end of year $ 1,109 2,332 1,727 ======== ======== ======== Supplemental cash flow information: Cash paid for interest $ 2,915 4,196 4,135 ======== ======== ======== Cash paid for income taxes $ 73 128 80 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1995 and 1994 (1) Summary of Significant Accounting Policies Nature of Operations and Principles of Consolidation Porta Systems Corp. (the "Company") designs, manufactures and markets systems for the connection, protection, testing and administration of public and private telecommunications lines and networks. The Company has various patents for copper and software based products and systems that support voice, data, image and video transmission. The Company's principal customers are the U.S. regional telephone operating companies and foreign telephone companies. The accompanying consolidated financial statements include the accounts of Porta Systems Corp. (the "Company") and its majority-owned or controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition Revenue, from other than contracts for specialized products, is recognized when a product is shipped. Revenues and earnings relating to long-term contracts for specialized products are recognized on the percentage-of-completion basis primarily measured by the attainment of milestones. Anticipated losses, if any, are recognized in the period determined. Cash Equivalents The Company considers investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash equivalents consist of commercial paper. Inventories Inventories are stated at the lower of cost (on the average or first-in, first-out methods) or market. Property, Plant and Equipment Property, plant and equipment are carried at cost. Leasehold improvements are amortized over the term of the lease. Depreciation is computed using the straight-line method over the related assets' estimated lives. Deferred Computer Software Software costs incurred for specific customer contracts are charged to cost of sales at the time revenues on such contracts are recognized. Software development costs relating to products the Company offers for sale are deferred in accordance with Statement of Financial Accounting Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". These costs are amortized to cost of sales over the periods that the related product will be sold, up to a maximum of four years. Amortization of computer software costs, which all relate to products the Company offers for sale, amounted to approximately $3,171,000, $1,847,000 and $1,414,000 in 1995, 1994, and 1993, respectively. (Continued) F-6 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Goodwill Goodwill represents the difference between the purchase price and the fair market value of net assets acquired in business combinations treated as purchases. Goodwill is amortized on a straight-line basis over 18 to 40 years. At December 31, 1995, $7,242,000 of the goodwill is being amortized over approximately 18 years and $4,551,000 is being amortized over 40 years. The Company assesses the recoverability of unamortized goodwill using the undiscounted projected future cash flows from the related businesses. Income Taxes Deferred income taxes are recognized based on the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Further, the effects of enacted tax law or rate changes are included in income as part of deferred tax expense or benefit for the period that includes the enactment date. Puerto Rico income taxes were accrued prior to September 30, 1993 on income earned by a subsidiary of the Company which had operated in Puerto Rico based on a ten year 90% industrial tax exemption effective for periods subsequent to May 28, 1987. The Company's subsidiary operating in Puerto Rico was liquidated by merger on September 30, 1993 (see note 9). Foreign Currency Translation Assets and liabilities of foreign subsidiaries are translated at year-end rates of exchange, and revenues and expenses are translated at the average rates of exchange for the year. Gains and losses resulting from translation are accumulated in a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the functional currency) are included in net income or loss. Earnings (Loss) Per Share Earnings per share are based on the weighted average number of shares outstanding and common equivalent shares arising from dilutive unexercised stock options. Loss per share is based on the weighted average number of shares outstanding. Fully diluted earnings per share information is not presented as it is anti-dilutive. Reclassifications Certain reclassifications have been made to conform prior years' consolidated financial statements to the 1995 presentation. (Continued) F-7 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these consolidated financial statements are the estimated allowance for doubtful accounts receivable, inventory reserves, and the deferred tax asset valuation allowance. Actual results could differ from those and other estimates. (2) Liquidity The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. In 1995 and 1994, the Company experienced a lack of liquidity. In addition, the Company's recurring losses from operations and working capital and net capital deficiencies raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might arise from the outcome of this uncertainty. The Company, to enhance its liquidity, sold the net assets related to its fiber optics business in March 1996 (note 4). This sale raised approximately $8 million of cash and the acquiring company assumed approximately $1,400,000 of liabilities. The sale of this business, which in 1995 and prior years sustained significant losses, eliminated a considerable operating cash drain. A majority of the proceeds from the sale were used to pay down a portion of the Company's debt, which in turn will reduce ongoing interest costs and provide the Company with working capital through the ability to then restructure its senior debt. In addition, through March 22, 1996, the Company exchanged approximately 80% of its 6% subordinated convertible debt for non-interest bearing notes. This will reduce interest expense by approximately $1,700,000 per year. In addition, the Company is reviewing various options in which it can streamline operations or further reduce operating expenses to enhance the Company's ability to attain profitable operations. (Continued) F-8 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Discontinued Operations In 1992, the Company recorded the sale of its network communications business, for which it received $3,750,000 in cash and cash equivalents plus promissory notes, which after an additional provision for loss on disposal of discontinued operations of $2,052,000 in 1993, had a balance of $4,500,000. As a result of liquidation and receivership proceedings involving the indirect parent of the buyer of the business, the estimated recovery from the sale of such operations was reduced in the second quarter of 1995 to $1,000,000 which resulted in an additional provision for loss on disposal of discontinued operations of $3,500,000 in 1995. The remaining receivable at December 31, 1995 is collateralized, at the option of the Company, by either a $750,000 standby letter of credit or approximately 54,000 shares of common stock of the entity which acquired the business from receivership. Such shares are held in escrow and have a fair value of $1,387,000 at December 31, 1995 based on quoted market prices. As part of an agreement with the Company's primary lender, the remaining proceeds from the sale of the network communications business must be applied to reduce the outstanding principal balance of the Company's term loan (note 11). (4) Assets Held for Sale On March 13, 1996, the Company consummated an agreement pursuant to which it sold certain assets and the buyer assumed certain liabilities and severance obligations related to the operations of the Company's fiber optics management and component business for $7,893,000, subject to certain adjustments. The Company continues to be liable for certain liabilities amounting to approximately $700,000, related to its fiber optics facilities in Ireland. The Company received $6,793,000 at closing and the remainder was placed into two escrow funds to be released over the next year, subject to certain conditions, including a final valuation of the net assets transferred. The proceeds were primarily used to repay long-term debt (note 11). As a result of the transaction, the Company recorded a charge to operations in 1995 of $862,000 to write down the net assets sold to net realizable value. Net sales of the fiber optics business approximated $6,513,000, $12,150,000, and $8,654,000 for 1995, 1994 and 1993, respectively. Net assets held for sale at net realizable value as of December 31, 1995 consists of the following: Inventory $ 1,467,000 Fixed assets 1,510,000 Deferred computer software 319,000 Goodwill 5,897,000 Other assets 115,000 Accounts payable and accrued liabilities (1,415,000) ---------- $ 7,893,000 ============ (Continued) F-9 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) Joint Venture The Company entered into a joint venture agreement as of April 24, 1986 with a Korean partner. Unless otherwise terminated in accordance with the joint venture agreement, the joint venture will terminate on December 31, 2010. In addition, the Company has entered into an agreement with its joint venture partner whereby the Company has obtained an option, exercisable for approximately $2,300, to purchase an additional 1% interest in Woo Shin Electro-Systems Co. (Woo Shin), which would increase the Company's ownership percentage to 51%. The Company consolidates the operations of Woo Shin since the Company can obtain a controlling interest at its election for a nominal sum and Woo Shin is entirely dependent on the Company for the products it sells as well as receiving management assistance from the Company. The interest in the joint venture not owned by the Company is shown as a minority interest. (6) Inventories Inventories consist of the following: December 31, ------------ 1995 1994 ---- ---- Parts and components $ 5,370,000 11,838,000 Work-in-process 849,000 1,854,000 Finished goods 2,760,000 6,454,000 ---------- ---------- $ 8,979,000 20,146,000 ========== ========== (7) Property, Plant and Equipment Property, plant and equipment consists of the following:
December 31 Estimated 1995 1994 useful lives ---- ---- ------------ Land $ 246,000 246,000 - Buildings 2,358,000 2,288,000 20 years Machinery and equipment 8,426,000 15,149,000 5-8 years Furniture and fixtures 3,379,000 5,057,000 5-10 years Transportation equipment 240,000 372,000 4 years Tools and molds 4,233,000 5,501,000 8 years Leasehold improvements 827,000 3,539,000 Term of lease Construction in progress - 35,000 -------------- --------------- 19,709,000 32,187,000 Less accumulated depreciation and amortization 12,798,000 21,048,000 -------------- --------------- $ 6,911,000 11,139,000 ============== ===============
Total depreciation and amortization expense for 1995, 1994 and 1993 amounted to approximately $3,610,000, $3,242,000 and $2,996,000, respectively. (Continued) F-10 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Accounts Receivable Accounts receivable included approximately $1,146,000 and $2,246,000 at December 31, 1995, and 1994, of revenues earned but not yet contractually billable relating to long-term contracts for specialized products. All such amounts at December 31, 1995, are expected to be billed in the subsequent year. The allowance for doubtful accounts receivable was $1,251,000 and $585,000 as of December 31, 1995 and 1994 respectively. The allowance for doubtful accounts was increased by provisions of $864,000, $318,000, and $434,000 and decreased by writeoffs of $198,000, $144,000, and $187,000 for the years ended December 31, 1995, 1994, and 1993, respectively. (9) Income Taxes Included in loss from continuing operations is income (loss) from foreign operations of $1,272,000, $(920,000) and $2,253,000, for 1995, 1994 and 1993, respectively. The provision for income taxes consists of the following:
1995 1994 1993 ---- ---- ---- Current Deferred Current Deferred Current Deferred Federal $ (98,000) - 800,000 12,670,000 - (4,598,000) State and foreign 128,000 - 165,000 1,285,000 956,000 (243,000) ---------- ---------- -------- ----------- ---------- ----------- Total $ 30,000 - 965,000 13,955,000 956,000 (4,841,000) ========== ========== ======== =========== ========== ===========
A reconciliation of the Company's income tax provision and the amount computed by applying the statutory U.S. federal income tax rate of 34% to loss before income taxes is as follows:
1995 1994 1993 ---- ---- ---- Tax benefit at statutory rate $ (10,554,000) (8,526,000) (3,861,000) Increase (decrease) in income tax benefit resulting from: Increase in valuation allowance 10,741,000 22,219,000 - Benefit of Puerto Rico industrial tax exemption - 813,000 (152,000) State and foreign taxes, less applicable federal benefits 132,000 147,000 645,000 Other (289,000) 267,000 (517,000) ------------- -------------- ------------- $ 30,000 14,920,000 (3,885,000) ============ ============== =============
(Continued) F-11 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The per common share effect of the income tax savings from the Puerto Rico industrial tax exemption for 1993 was $.02. The Company has unused United States tax net operating loss carryforwards of approximately $72,000,000 expiring at various dates between 2003 and 2010. In addition, the Company has net operating loss carryforwards arising from acquired companies of approximately $9,878,000. The carryforward amounts are subject to review by the Internal Revenue Service (IRS). As a result of the sale of the Company's fiber optics business (note 4) in March, 1996, the above net operating loss carryforwards and acquired net operating loss carryforwards will be reduced by $1,969,000 and $6,592,000, respectively. In addition, there are investment, research and development and job tax credit carryforwards of approximately $1,300,000 expiring at various dates between 1996 and 2001. The Company's net operating loss carryforwards expire in the following years: 2003 $ 187,000 2007 13,062,000 2008 17,291,000 2009 18,125,000 2010 23,335,000 ----------- $72,000,000 =========== The components of the deferred tax assets and liabilities as of December 31, 1995 and 1994 were as follows: 1995 1994 ---- ---- Deferred tax assets: Inventory allowances $ 4,157,000 3,508,000 Allowance for doubtful accounts receivable 359,000 102,000 Benefits of tax loss carryforwards 27,755,000 19,226,000 Benefit plans 1,593,000 968,000 Alternative minimum taxes 293,000 293,000 Depreciation 122,000 -- Other 30,000 458,000 Benefits of tax loss carryforwards of acquired businesses 3,479,000 3,479,000 Differences between tax basis and book basis of net assets of businesses acquired 3,165,000 3,165,000 ------------ ------------ 40,953,000 31,199,000 Valuation allowance (39,604,000) (28,863,000) ------------ ------------ 1,349,000 2,336,000 ------------ ------------ Deferred tax liabilities: Capitalized software costs (1,349,000) (1,821,000) Depreciation -- (515,000) (1,349,000) (2,336,000) $ -- $ -- =========== =========== (Continued) F-12 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In the third quarter of 1994, the Company, after reviewing the deferred tax asset in the context of its results of operations for such third quarter, recorded a valuation allowance in the entire amount of its then existing deferred tax asset, which is included in income tax expense. This decision was based on the criteria contained in SFAS No. 109, generally requiring a valuation allowance when cumulative losses have been experienced and there is a lack of sufficient objective offsetting evidence to conclude that it is more likely than not that the deferred tax asset will be utilized. During 1993, the Company repatriated all undistributed accumulated earnings of its subsidiary operating in Puerto Rico through a liquidation of such subsidiary by means of a merger into the Company. No United States income taxes were payable upon remittance of these earnings. Repatriated earnings accumulated prior to May 28, 1987 are not subject to tax by the Commonwealth of Puerto Rico; earnings accumulated subsequent to May 28, 1987 are subject to a maximum 10% tax at repatriation. In 1993 as part of the liquidation, the Company repatriated $24,279,000 in earnings accumulated prior to May 28, 1987 and $2,482,000 of earnings accumulated subsequent to May 28, 1987. The income tax returns of the Company and its subsidiary operating in Puerto Rico were examined by the IRS for the tax years ended December 31, 1989 and 1988. As a result of this examination, the IRS increased the Puerto Rico subsidiary's taxable income resulting from intercompany transactions, with a corresponding increase in the Company's net operating losses. The settlement amounted to approximately $953,000. The Company has entered into a structured settlement with the IRS whereby monthly payments will be made along with certain scheduled balloon payments through February 1997. Aggregate annual amounts payable by the Company, including interest on the unpaid amounts at a current rate of 7%, is $514,000 in 1996 and $223,000 in 1997. As of December 31, 1995, the Company has not made all the required payments under the settlement. The income tax returns of the Company and its subsidiary operating in Puerto Rico were examined by the IRS for the tax years ended December 31, 1991 and 1990. As a result of this examination, the IRS increased the Puerto Rico subsidiary's taxable income resulting from intercompany transactions, with a corresponding increase in the Company's net operating losses. In settlement of this examination, the Company revoked its Section 936 election and included its subsidiary in the Company's tax return. Accordingly, the adjustments were offset resulting in no deficiency. (10) Notes Payable and Short-Term Loans The Company has outstanding $3,084,000 and $2,474,000 of non-interest bearing deferred funding fee notes payable with its senior lender, included in notes payable at December 31, 1995 and 1994, respectively. As of December 31, 1995 these deferred funding fees are due on November 30, 1998 (note 11). The Company's Korean subsidiary also has short-term borrowings with banks at December 31, 1995 and 1994 of $368,000 and $152,000, respectively, bearing interest at 11% (Continued) F-13 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Long-Term Debt On December 31, 1995 and 1994, the Company's long-term debt consisted of senior debt under its credit facility in the amount of $26,645,000 and $21,000,000, respectively. On November 28, 1994, and as amended on February 13, 1995, the Company consummated a financing arrangement with a senior lender whereby the senior lender provided the Company advances under a revolving line of credit up to the lesser of $10 million or a borrowing base equal to 80% of eligible accounts receivable and 50% of eligible inventory, less the amount of letters of credit and letter of credit guarantees outstanding, and a $13,502,188 term loan. If the Company sells its Glen Cove real property, the first $1 million of proceeds must be used to reduce the term loan. In addition, on February 13, 1995 the senior lender provided the Company with an advance under a net worth enhancement (NWE) line of credit of $3 million. The senior lender agreed to issue standby letters of credit or guarantees of payment in an amount not to exceed the lesser of $8 million or the borrowing base less the amount outstanding on the revolving line of credit. If the senior lender must make an advance under a letter of credit or letter of credit guarantee, such amount will be deemed outstanding under the revolving line of credit. 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 will bear interest at 12%. The Company will incur a fee of 2% on the average balance of undrawn letters of credit and letter of credit guarantees outstanding. As of December 31, 1995, the Company violated certain financial covenants and was in default of its agreement with its senior lender. On March 13, 1996, the Company entered into an agreement to extend its Loan and Security Agreement with its senior lender from November 30, 1996 to November 30, 1998, which also provided for a waiver of all previous events of default. The agreement provides for loan principal payments of $250,000 on each of June 30, 1997, September 30, 1997 and December 31, 1997, and $325,000 commencing March 31, 1998 and on the last day of each quarter thereafter during the term of the agreement. Commencing June 30, 1997, the agreement requires the Company to pay additional principal payments if certain "adjusted cash flow amounts", as defined, are attained. The March, 1996 amendment also requires that certain proceeds from the Company's sale of its fiber optics business (note 4), including $6,793,000 received at closing, the first $100,000 disbursed from escrow to the Company and 50% of any additional amounts disbursed to the Company, must be paid directly to the senior lender. The $6,793,000 received at closing was used to pay accrued interest through March 31, 1996, repay the $3,000,000 NWE line of credit and the remainder partially repaid the principal balance of the term loan. Upon the payment on March 13, 1996, the lender made available to the Company a $2,000,000 revolving line of credit. Simultaneously, and in accordance with the amended agreement, the revolving line of credit maximum amount was reduced from $10,000,000 to $2,000,000 and the maximum available for letters of credit or guarantees was reduced from $8,000,000 to $7,000,000. The outstanding balance of the term loan and revolving line of credit was approximately $20 million and approximately $900,000, respectively, after all the above transactions. (Continued) F-14 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Through March 22, 1996, the Company incurred the following fees, in connection with this credit facility: In 1994, a one-time $2,474,000 deferred funding fee for the revolving line and term loan evidenced by a non-interest bearing promissory note due and payable on November 30, 1998, (as of December 31, 1994, $1,237,000 was due in 1995 before the March, 1996 amendment to the agreement). The Company incurred a $300,000 NWE fee on February 13, 1995, evidenced by a non-interest bearing note due November 30, 1998 and a $310,000 facility fee on November 30, 1995, which amount has been added to the outstanding principal balance of the deferred funding fee note and is also due November 30, 1998. In consideration of the extension of the facility term to November 30, 1998, the agreement requires a monthly facility fee payment of $50,000, commencing November 30, 1996, and continuing to the end of the agreement. In addition to the fees, the Company incurred a $550,000 investment banking fee and attorney and filing fees amounting to $319,000 included in other nonoperating expenses in 1994. In connection with the credit facility, in November, 1994 the Company issued warrants to its senior lender to purchase 275,000 shares of common stock, immediately exercisable at $3.44 per share and expiring in November 1999, together with warrants to purchase 137,500 shares of the Company's common stock on the same economic terms that became exercisable on March 13, 1996. In connection with the extended agreement in March 1996, the Company granted additional warrants to the lender to purchase 1,000,000 shares of common stock at $1 per share that expire in March 2001. All such warrants provide the senior lender demand and "piggyback" registration rights. Financial debt covenants include an interest coverage ratio measured quarterly commencing with the quarter ending June 30, 1996, 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. In connection with the amendment to the agreement on February 13, 1995, the Company purchased from the senior lender $3.9 million principal amount of its 6% Subordinated Debentures for approximately $2.5 million, including accrued interest. Such payment was financed with funds received from the increase in the term loan. The Company recorded an extraordinary gain on the early extinguishment of the debt of $1,756,000. Such gain represented the excess of the book value over the market value of the debt with the premium paid in excess of the market value of the debt of $782,000 reflected as additional borrowing costs over the remaining term of the facility. Maturities of the Company's long-term debt, including convertible subordinated debentures (exclusive of $6,564,000 which are in default and have not been exchanged as described in note 12 and are classified as a current liability) and notes payable net of current maturities, are as follows: 1997 $ 750,000 1998 54,639,000 ---------- $55,389,000 =========== Of the amount due in 1998, $6,793,000 was repaid on March 13, 1996. (Continued) F-15 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) 6% Convertible Subordinated Debentures As of December 31, 1995 and 1994 the Company had outstanding $32,224,000 and $35,073,000 of its 6% convertible Subordinated Debentures due July 1, 2002 (the Debentures), net of original issue discounts amortized to principal over the term of the debt using the effective interest rate method, of $3,851,000 and $4,927,000, respectively. The face amount of the outstanding Debentures was $36,075,000 and $40,000,000 at December 31, 1995 and 1994, respectively. The Debentures are convertible at any time prior to maturity, unless previously redeemed, into Common Stock of the Company at a conversion rate of 41.667 shares for each $1,000 principal amount at maturity of Debentures, subject to adjustment under certain circumstances. The Debentures are redeemable at the option of the Company, (a) in whole or in part, at redemption prices ranging from 89.626% of principal amount at maturity beginning July 1, 1995 to 100% of principal amount at maturity beginning July 1, 2001 and thereafter, together with accrued and unpaid interest to the Redemption Date, and (b) in whole at any time, at a redemption price equal to the issue price plus interest and that portion of the original issue discount and interest accrued to the redemption date, in the event of certain changes in United States taxation or the imposition of certain certification, information or other reporting requirements. Interest on the Debentures is payable on July 1 of each year. The interest accrued as of December 31, 1995 and 1994 amounted to $3,244,000 and $1,200,000, respectively. As of December 31, 1995 the Company is in default under the interest payment provisions of the Debentures. On November 30, 1995, the Company offered the holders of its Debentures an exchange of such debt for common stock and zero coupon senior subordinated convertible notes (the Notes) due January 2, 1998. The exchange ratio is 97 shares of common stock and $767.22 of principal of Notes in exchange for $1,000 principal amount of Debentures. Accrued interest on the Debentures would also be eliminated. The Company may be required to file a registration statement for the common stock and Notes issued in the exchange. In addition, the Board of Directors of the Company, subject to shareholder approval, approved an amendment to the Company's certificate of incorporation increasing the authorized common stock from 20 million to 40 million shares. (Continued) F-16 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The unsecured Notes will not bear interest and there are no sinking fund requirements. Each Note is convertible into common stock at a conversion price of $1.85 per share until May 1, 1996 and then at decreasing prices to $1.31 per share on November 1, 1996 and thereafter. Accordingly, in addition to the 3,499,275 maximum common shares issuable from the exchange of the Debentures, the maximum number of common shares that could be issued upon conversion, if all Debentures are exchanged, is 21,128,000. In the event that the number of outstanding common shares will exceed 19,000,000, in lieu of issuing common stock for converted Notes, the Company will issue one share of Series B Participating Convertible Preferred Stock for each 50 shares of common stock otherwise issuable upon conversion of the Notes. Such preferred stock will have 50 votes per share and, upon the filing of a certificate of amendment to increase the number of authorized common shares to 40,000,000, each share will automatically be converted into 50 shares of common stock. The Notes are redeemable at the option of the Company at 79.48% of the principal balance increasing periodically to 100% of the principal balance on November 1, 1997. Subsequent to December 31, 1995 and through March 22, 1996, the Company exchanged approximately $28,725,000 principal amount of the Debentures, net of unamortized discount of $3,065,000, for 2,786,325 shares of the Company's common stock and $22,038,000 principal amount of Notes pursuant to the Exchange Offer. Accordingly, the Debentures exchanged, which were outstanding at December 31, 1995, have been classified as a long-term liability, consistent with the payment terms of the Notes. Since the remaining principal amount of $7,350,000 with a carrying value of $6,564,000 of Debentures not exchanged are in default, such debt has been classified as a current liability at December 31, 1995. The exchange of the Debentures for the Notes and common stock will be 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 will be recorded for the amount of the future cash payments, and not discounted, and an extraordinary gain on restructuring of approximately $3 million will be recorded. Accordingly, no future interest expense will be recorded on the Notes. (13) Leases At December 31, 1995, the Company and its subsidiaries leased manufacturing and administrative facilities, equipment and automobiles under a number of operating leases. The Company is required to pay increases in real estate taxes on the facilities in addition to minimum rents. Total rent expense for 1995, 1994, and 1993 amounted to approximately $1,277,000, $1,397,000 and $1,468,000, respectively. Minimum rental commitments, exclusive of future escalation charges, for each of the next five years are as follows: 1996 $ 547,000 1997 399,000 1998 328,000 1999 312,000 2000 273,000 (Continued) F-17 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (14) Incentive Plans Under the Company's 1984 Employee Incentive Plan, the Company provided an opportunity to acquire subordinated convertible debentures to certain employees of the Company and its subsidiaries. The debentures bore interest at 1% over the prime rate. These debentures on issuance were convertible into a specified number of shares of Common Stock. The conversion price was the fair market value on the date of purchase of the debentures. Under the 1984 Plan, if requested, the Company loaned a purchaser of a debenture all or part of the cash necessary to make such a purchase. Any such loan was evidenced by a full recourse interest-bearing promissory note payable to the Company for the amount borrowed. This plan was suspended when the Company's stockholders approved the Company's 1986 Stock Option Plan. As of December 31, 1995, there is $307,000 of employee promissory notes receivable outstanding related to debentures that were converted to common stock. The maturity date of the notes was extended to April 1996. At December 31, 1995, the majority of such notes receivable have had the payment of interest forgiven. During 1993, $48,600 principal amount of debentures was converted into 5,400 shares of Common Stock and $378,000 principal amount of debentures and $378,000 of loans incurred therewith matured in accordance with their terms and were repaid by the Company and employees, respectively. During 1995, the Company wrote off $128,000 of notes receivable and took possession of the related shares held as collateral. Accordingly, the balance of the note has been recorded as an addition to treasury stock. In 1986, the stockholders of the Company approved the Company's 1986 Stock Incentive Plan (1986 Plan), subsequently amending it to permit the granting of options to purchase up to 850,000 shares of Common Stock to employees of the Company and its 50% or more owned subsidiaries whom the Company's Compensation Committee (Committee) determines are eligible for such grants. Options granted under the 1986 Plan may be incentive stock options, as defined in the Internal Revenue Code, or options which are not incentive stock options. If options granted are incentive stock options, the option price payable upon exercise is determined by the Committee at the time the option is granted but will not be less than 100% of the fair market value of the Common Stock on the date of grant and will be 110% of such fair market value on the date of grant if the individual who receives such option is the owner of 10% or more of the Company's Common Stock. Incentive stock options are not exercisable more than ten years from the date of grant, except that, in the case of an incentive stock option granted to an individual who owns 10% or more of the Company's Common Stock, such option must be exercised within 5 years of the date of grant. If options which are not incentive stock options are granted, the option price at the time of exercise may not be less than 50% of the fair market value at the time the option is granted. Options under the 1986 Plan may be subject to exercise in such installments as determined by the Committee. The exercise price for all options granted was equal to the fair market value at the date of grant. (Continued) F-18 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Information regarding the 1986 Plan is as follows: Shares Option under option price Balance, December 31, 1992 615,910 7.5625 - 22.00 Exercised (2,500) 7.5625 - 10.875 Canceled (211,760) 7.5625 - 22.00 -------- --------------- Balance, December 31, 1993 401,650 7.5625 - 17.50 Granted 10,000 9.875 Exercised (1,000) 7.5625 Canceled (6,775) 13.125 - 17.25 ------- --------------- Balance, December 31, 1994 403,875 7.5625 - 17.50 Granted 30,000 1.00 Canceled (152,075) 7.5625-17.50 -------- ------ ----- Balance, December 31, 1995 281,800 1.00-17.50 ======= ============ At December 31, 1995, options to purchase 251,800 shares were exercisable and there were 525,575 options available for grant under the 1986 plan. (15) Employee Benefit Plans The Company has deferred compensation agreements with certain officers and employees, with benefits commencing at retirement equal to 50% of the employee's base salary, as defined. Payments under the agreements will be made only after a participant's employment with the Company terminates and then for a period of fifteen years following the earlier of attainment of age 65 or death. During 1995, 1994 and 1993, the Company accrued approximately $203,000, $191,000 and $162,000, respectively, under these agreements. In 1986, the Company established the Porta Systems Corp. 401(k) Savings Plan (Savings Plan) for the benefit of eligible employees, as defined in the Savings Plan. Participants contribute a specified percentage of their base salary up to a maximum of 15%. The Company will match a participant's contribution by an amount equal to 75% (subsequently changed to 25% as of January 1, 1996) of the first six percent contributed by the participant. A participant is 100% vested in the balance to his credit. For the years ended December 31, 1995, 1994 and 1993, the Company's contribution amounted to $379,000, $417,000 and $475,000, respectively. The Company does not provide any other post-retirement benefits to any of its employees. (Continued) F-19 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (16) Stockholders' Equity During 1993, the Company issued warrants to purchase 155,000 shares of Common Stock to certain consultants as partial remuneration for services provided. Warrants to purchase 135,000 shares were issued at an exercise price approximating the fair market value at the date of grant and warrants to purchase the remaining 20,000 shares of Common Stock were issued at an exercise price of $1.00 per share. In connection with the issuance of these warrants, the Company recorded an expense of $202,000. Also, during 1993, warrants to purchase 20,000 shares of Common Stock at $1.00 per share were exercised. During 1994, the Company issued warrants to purchase 412,500 shares of common stock at an exercise price of $3.44 per share to its senior lender that expire in November, 1999, and warrants to purchase 265,000 shares of common stock at an exercise price of $3.50 per share to its former lenders in return for a discount with respect to the repayment of its debt. In connection with the issuance of these warrants, the Company recorded deferred financing costs of $360,000 and an expense of $600,000, respectively. In March 1996, the Company, in connection with an agreement to amend and extend certain long-term debt, issued warrants to purchase 1,000,000 shares of common stock at an exercise price of $1.00 per share that expire March, 2001 (note 11). As of March 22, 1996, all warrants issued to lenders are exercisable. In June 1994, pursuant to a private placement to certain offshore investors, the Company sold an aggregate of 375,000 shares of unregistered common stock and two-year warrants to acquire 187,500 shares of common stock at an exercise price of $11 per share. The Company received proceeds of $2,131,750 net of expenses. (17) Shareholder Rights Plan The Company has adopted a Shareholder Rights Plan in which preferred stock purchase rights were distributed to stockholders as a dividend at the rate of one right for each common share. Each right entitles the holder to buy from the Company one one-hundredth of a newly issued share of Series A junior participating preferred stock at an exercise price of $35.00 per right. The rights will be exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the Company's Common Stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 20 percent or more of the Common Stock. If any person becomes the beneficial owner of 20 percent or more of the Company's Common Stock other than pursuant to an offer for all shares which is fair to and otherwise in the best interests of the Company and its stockholders, each right not owned by such person or related parties will enable its holders to purchase, at the right's then current exercise price, shares of Common Stock of the Company (or, in certain circumstances as determined by the Board of Directors, a combination of cash, property, common stock or other securities) having a value of twice the right's exercise price. In addition, if the Company is involved in a merger or other business combination transaction with another person in which its shares are changed or converted, or sells more than 50 percent of its assets to another person or persons, each right that has not previously been exercised will entitle its holder to purchase, at the right's then current exercise price, common shares of such other person having a value of twice the right's exercise price. (Continued) F-20 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The Company will generally be entitled to redeem the rights, by action of a majority of the continuing directors of the Company, at $.01 per right at any time until the tenth business day following public announcement that a 20 percent position has been acquired. (18) Fair Values of Financial Instruments Cash equivalents, accounts receivable, accounts and notes payable, accrued expenses and short-term loans are reflected in the consolidated financial statements at fair value because of the short term maturity of these instruments. The carrying amount of the Company's long-term debt approximates fair value as the extension of the Loan and Security Agreement was renegotiated on March 13, 1995 with similar terms to those that existed at December 31, 1995. The carrying amount and estimated fair value of the Company's additional financial instruments are summarized as follows: December 31, 1995 Carrying Estimated amount fair value ------ ---------- Receivable from sale of discontinued operations$ 1,000,000 1,370,000 ========== ========= Convertible subordinated debentures $ 32,224,000 12,626,000 ========== ========== The estimated fair value of the receivable from the sale of discontinued operations is based upon the quoted market price of the shares of common stock collateralizing the receivable. Management's estimated fair value of the convertible subordinated debentures is based on market prices obtained from dealers of such debt. (19) Major Customers Consolidated sales made to a Korean telephone company amounted to $7,651,000, $9,599,000 and $3,330,000 in 1995, 1994 and 1993, respectively. Sales made to a United Kingdom telephone company in 1995, 1994 and 1993 amounted to $17,252,000, $11,566,000 and $12,713,000, respectively. Sales made to a Mexican telephone company in 1995, 1994 and 1993 amounted to $41,000, $4,987,000 and $7,257,000, respectively. (20) Contingencies At December 31, 1995, the Company was contingently liable for outstanding letters of credit aggregating approximately $5,323,000 as security for the performance of certain long-term contracts and the borrowing from a bank of its Korean subsidiary. The Company is a party to various lawsuits arising out of the ordinary conduct of its business. Management believes that the settlement of these matters will not have a materially adverse effect on the financial position of the Company. (Continued) F-21 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (21) Legal Matters The Company and certain of its present and former officers and directors are defendants in eight alleged class actions which have been consolidated and are pending in the United States District Court for the Eastern District of New York. The actions allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 under such Act. The plaintiffs seek, among other remedies, unspecified monetary damages. In March 1996, the Company executed a Stipulation of Settlement to settle the class actions, and an order of preliminary approval of settlement was approved by the Court. The agreement is subject to certain conditions precedent, including the maintenance by the Company's common stock of a certain minimum market value. The settlement, if consummated, will include a cash payment by the Company's insurers and issuance by the Company of 1,100,000 shares of its common stock, to be distributed in accordance with a plan to be approved by the Court. Under the agreement, the Company is not required to contribute any cash towards the proposed settlement. In connection with the settlement, the Company recorded a charge to income of $1,100,000 in the fourth quarter of 1995, based upon the market value of the shares to be issued. The Companydenies the material allegations and admits no liability of any sort in connection with the settlement and dismissal of the action. Notice of the court hearing on the settlement has been sent to class members, and the hearing is scheduled for June 7, 1996. The settlement is subject to the final approval of the court. (22) Segment Disclosure The Company operates exclusively in the telecommunications industry. Customers include telephone operating companies and others within and outside the United States and its possessions. In the following table, intercompany sales are accounted for at cost plus a reasonable profit. Identifiable assets for the geographic areas are those assets identified with the operations in each area. Corporate assets consist principally of cash and cash equivalents, debt issuance costs, employee loans for debentures and patents. The Company does not allocate costs for product development, marketing or management to each segment. Thus, the information may not be indicative of the extent to which geographic areas contributed to the Company's consolidated results of operations. (Continued) F-22 PORTA SYSTEMS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Geographic area data for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 ---- ---- ---- Sales made from: United States and Puerto Rico to: U.S. customers $ 16,445,000 23,831,000 24,718,000 Foreign customers 12,875,000 11,069,000 5,828,000 Intercompany 14,849,000 25,102,000 27,068,000 ------------ ------------ ------------ 44,169,000 60,002,000 57,614,000 ------------ ------------ ------------ Korea-to customers 7,651,000 9,599,000 3,330,000 ------------ ------------ ------------ Europe-to customers 24,174,000 19,847,000 27,264,000 Intercompany 3,735,000 690,000 1,299,000 ------------ ------------ ------------ 27,909,000 20,537,000 28,563,000 Other-to customers 36,000 4,639,000 7,001,000 Intercompany 2,410,000 3,796,000 2,716,000 ------------ ------------ ------------ 2,446,000 8,435,000 9,717,000 ------------ ------------ ------------ Intercompany eliminations (20,994,000) (29,588,000) (31,083,000) ------------ ------------ ------------ Consolidated sales $ 61,181,000 68,985,000 68,141,000 ============ ============ ============ Operating income loss United States and Puerto Rico (22,549,000) (16,621,000) (6,383,000) Europe 2,279,000 (1,465,000) 2,341,000 Korea 288,000 387,000 (113,000) Other 98,000 158,000 239,000 ------------ ------------ ------------ Consolidated operating (loss) $(19,884,000) (17,541,000) (3,916,000) ============ ============ ============ Identifiable assets: United States and Puerto Rico 39,600,000 63,200,000 91,915,000 Europe 11,414,000 10,505,000 8,578,000 Korea 2,540,000 2,491,000 2,459,000 Other 623,000 1,248,000 1,112,000 ------------ ------------ ------------ Consolidated identifiable assets 54,177,000 77,444,000 104,064,000 Corporate assets 6,414,000 7,519,000 5,884,000 ------------ ------------ ------------ Consolidated total assets $ 60,591,000 84,963,000 109,948,000 ============ ============ ============
F-23 EX-3 2 EXHIBIT 3.2 CERTIFICATE OF DESIGNATION OF PORTA SYSTEMS CORP. Series B Participating Convertible Preferred Stock Pursuant to Section 151(g) of the Delaware General Corporation Law, Porta Systems Corp., a Delaware corporation (the "Corporation"), does hereby certify as follows: 1. The following resolution was duly adopted by the Board of Directors of the Corporation on November 9, 1995: RESOLVED, that pursuant to Article 4 of the Certificate of Incorporation of this Corporation, there be created a series of the no par value Preferred Stock ("Preferred Stock"), of this Corporation consisting of four hundred thousand (400,000) shares, to be designated as the Series B Participating Convertible Preferred Stock ("Series B Preferred Stock"), and that the holders of such shares shall have the rights, preferences and privileges set forth in Exhibit A to this Resolution; and it was further RESOLVED, that the officers of this Corporation be, and they hereby are, authorized and empowered to execute and file with the Secretary of State of the State of Delaware, a certificate of designation setting forth the rights, preferences and privileges of the holders of the Series B Preferred Stock. 2. Set forth as Exhibit A to this Certificate of Designation is a true and correct copy of the rights, preferences and privileges of the holders of the Series B Preferred Stock. IN WITNESS WHEREOF, Porta Systems Corp. has caused this certificate to be signed by the chairman of the board and chief executive officer and attested by its assistant secretary this 8th day of December, 1995. By: /s/ Vincent F. Santulli ------------------------------------------ ATTEST: Vincent F. Santulli, Chairman of the Board and Chief Executive Officer /s/ William V. Carney - ------------------------------ William V. Carney, Secretary Exhibit A The designation of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, the Series B Participating Convertible Preferred Stock are as follows: 1. Designation and Number of Shares. The designation of this series of four hundred thousand (400,000) shares of the Corporation's no par value preferred stock ("Preferred Stock"), created by the Board of Directors of the Corporation pursuant to the authority granted to it by the certificate of incorporation of the Corporation is "Series B Participating Convertible Preferred Stock," which is hereinafter referred to as the "Series B Preferred Stock." In the event that the Corporation does not issue the maximum number of shares of Series B Preferred Stock or in the event of the conversion of shares of Series B Preferred Stock into this Corporation's common stock, par value $.01 per share ("Common Stock"), pursuant to Paragraph 4 of this Certificate of Designations, or in the event that the Corporation shall acquire and cancel any shares of Series B Preferred Stock, the Corporation may, from time to time, by resolution of the Board of Directors, reduce the number of shares of Series B Preferred Stock authorized, provided, that no such reduction shall reduce the number of authorized shares to a number which is less than the number of shares of Series B Preferred Stock then issued or reserved for issuance. The number of shares by which the Series B Preferred Stock is reduced shall have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such stock is once more designated as part of a particular series by the Corporation's Board of Directors. The Series B Preferred Stock shall be senior to the Corporation's Series A Junior Participating Preferred Stock as to dividends and upon voluntary or involuntary dissolution, liquidation or winding up. 2. Dividend Rights. (a) (i) The holders of the Series B Preferred Stock shall participate with the holders of the Corporation's Common Stock in any dividends declared, set aside or paid which are payable by the Corporation in cash, instruments of indebtedness of the Corporation or property on a share for share basis as if the Series B Preferred Stock and the Common Stock were shares of a single class, except that there shall be paid with respect to the Series B Preferred Stock an amount per share equal to the dividend payable per share of Common Stock multiplied by the number of shares of Common Stock into which one share of Series B Preferred Stock is convertible pursuant to Paragraph 4 of this Certificate of Designations. (ii) In the event that, at the time of the declaration of a dividend as provided in Paragraph 2(a)(i) of this Certificate of Designations, there are outstanding other series of Preferred Stock or other classes of capital stock the holders of which participate with the holders of the Common Stock in such dividend, the holders of the Series B Preferred Stock shall participate with the holders of such other class or series of capital stock and the holders of the Common Stock; provided, however, the terms of participation between the holders of the Series B Preferred Stock and the Common Stock shall be as set forth in said Paragraph 2(a)(i). (iii) No dividends shall be declared, set aside or paid with respect to the Common Stock of this Corporation except as provided in Paragraph 2(a)(i) of this Certificate of Designations. (b) As long as any shares of Series B Preferred Stock are outstanding, no dividends (other than a dividend payable in any series or class of capital stock ranking junior to Series B Preferred Stock as to both dividends and payments in the event of voluntary or involuntary dissolution, liquidation or winding up), shall be declared or paid or set aside for payment and no other distribution shall be declared or made upon any such junior series or class of capital stock, and no such junior series or class of capital stock or any series of Preferred Stock on a parity with Series B Preferred Stock as to both dividends and payments in the event of voluntary or involuntary dissolution, liquidation or winding up shall be redeemed, purchased or otherwise acquired for any consideration by the Corporation or by any subsidiary (which shall mean any corporation or entity, the majority of voting power to elect directors of which is held directly or indirectly by the Corporation), except by conversion into or exchange for any such junior series or class of capital stock; unless, in each case, the holders of a majority of the Series B Preferred Stock then outstanding shall consent thereto. (c) In the event that any holder of Series B Preferred Stock shall surrender his shares for conversion pursuant to the provisions of Paragraph 4 of this Certificate of Designations, the holder shall be entitled to dividends to the extent provided for in Paragraph 4(c) of this Certificate of Designations. 3. Voting Rights. (a) Except as otherwise required by law, holders of shares of Series B Preferred Stock shall vote together with the Common Stock, as if the Common Stock and the Series B Preferred Stock were a single class; provided, that in all matters the holders of the Series B Preferred Stock shall have the right to cast such number of votes per share of Series B Preferred Stock as are issuable, on the record date for determining holders entitled to vote, upon conversion of one share of Series B Preferred Stock pursuant to Paragraph 4 of this Certificate of Designations. (b) In the event that, pursuant to applicable law, the holders of the Series B Preferred Stock are required to vote as a single class, separate and apart from the Common Stock, each holder of Series B Preferred Stock shall be entitled to one vote per share of Series B Preferred Stock on such matters. (c) The Corporation is not restricted from creating other series of Preferred Stock which may be senior or junior to or on a parity with the Series B Preferred Stock as to dividends and/or on voluntary or involuntary dissolution, liquidation or winding up without the consent of the holders of the Series B Preferred Stock. 4. Automatic Conversation into Common Stock. (a) Each share of Series B Preferred Stock will, without any action on the part of the holder thereof, automatically become and be converted into shares of Common Stock at the conversion rate hereinafter defined (the "Conversion Rate") upon the filing of a Certificate of Amendment to the Certificate of Incorporation of the Corporation increasing the number of authorized shares of Common Stock to at least forty million (40,000,000) shares (the "Certificate of Amendment"). The date on which the shares of Series B Preferred Stock are converted is referred to as the "conversion date." (b) The Conversion Rate shall mean the number of shares of Common Stock issuable upon conversion of one (1) share of Series B Preferred Stock. The Conversion Rate shall be fifty (50) shares of Common Stock, subject to adjustment as provided in Paragraph 4(e) of this Certificate of Designation. (c) Upon conversion of the Series B Preferred Stock pursuant to Paragraph 4(a) of this Certificate of Designations, the certificate representing shares of Series B Preferred Stock shall automatically, and without any action on the part of the holder, become and be converted into shares of Common Stock, and the Corporation shall so advise each holder of Series B Preferred Stock, provided, that the failure to so advise the holders shall not have any effect upon the automatic conversion of the Series B Preferred Stock. As promptly as practicable on or after the conversion date, the Corporation or its transfer agent shall issue and shall deliver a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with a cash payment in lieu of any fraction of any share, as hereinafter provided, to the person or persons entitled to receive the same; provided, that delivery of a certificate shall be deferred until receipt by the Corporation of the certificate for the shares of Series B Preferred Stock being converted. If, on the conversion date, there shall be declared but unpaid dividends on the Series B Preferred Stock, the Corporation shall, at the time of payment of such dividends, pay to the converting holder of Series B Preferred Stock the amount of such unpaid dividends. The Corporation may retain, and not distribute to the holders of Series B Preferred Stock which shall have been converted into Common - 2 - Stock, any dividends or distributions payable to the holders of Common Stock of record on a date subsequent to the date of such conversion until the Corporation shall have received the certificates representing the shares of Series B Preferred Stock so converted. (d) No payment or adjustment shall be made upon any conversion or on account of any accrued dividends on the Series B Preferred Stock or the Common Stock issued upon such conversion. (e) The Conversion Rate shall be subject to adjustment with respect to the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock as follows: (i) In case the Corporation shall after the date this Certificate of Designations is filed (the "Filing Date"), (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 Conversion Rate in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the holder of the shares of Series B Preferred Stock converted after such date shall be entitled to receive the aggregate number and kind of shares which, if such shares had been converted immediately prior to such time, he would have owned upon such conversion and been entitled to receive upon such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed in this Paragraph 4(e)(i) shall occur. (ii) In case the Corporation shall, subsequent to the Filing Date, issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (or having a conversion price per share) less than the current market price of the Common Stock (as defined in Paragraph 4(e)(iv) of this Certificate of Designations) on the record date mentioned below, the Conversion Rate shall be adjusted by multiplying the Conversion Rate in effect immediately prior to the date of such issuance by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered for subscription or purchased (or into which the convertible securities so offered are convertible) and of which the denominator shall be the number of shares of Common Stock outstanding on the record date mentioned below plus the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock. Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock or securities convertible into Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Rate shall be readjusted to the Conversion Rate which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (iii) In case the Corporation shall, subsequent to the Filing Date, distribute to all holders of Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions paid out of current earnings and dividends or distributions referred to in Paragraph 4(e)(i) of this Certificate of Designations) or subscription rights or warrants (excluding those referred to in Paragraph 4(e)(ii) of this Certificate of Designations), then in each such case the Conversion Rate in effect thereafter shall be determined by multiplying the Conversion Rate in effect immediately prior thereto by a fraction, of which the numerator shall be the total number of shares of Common Stock outstanding multiplied by the current market price per share of Common Stock (as defined in Paragraph 4(e)(iv) of this Certificate of Designations), and of which the denominator shall be the total number of shares of Common Stock outstanding multiplied by such current market price per share of Common Stock, less the fair market value (as determined by the Corporation's Board of Directors) of - 3 - said assets or evidences of indebtedness so distributed or of such rights or warrants. Such adjustment shall be made successively whenever such a record date is fixed. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (iv) For the purpose of any computation under Paragraphs 4(e)(ii) and (iii) of this Certificate of Designations, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for ten (10) consecutive business days commencing fifteen (15) business days before such date. The closing price for each day shall be the reported last sale price regular way or, in case no such reported sale takes place on such day, the average of the reported last bid and asked prices regular way, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed or The Nasdaq Stock Market, or if not listed or admitted to trading on such exchange or system, the average of the reported highest bid and lowest asked prices as reported by National Association of Securities Dealers, Inc. or the National Quotation Bureau, Inc. or similar reporting service selected by the Board of Directors, or if no such prices are available, the current market value shall be determined in good faith by the Board of Directors. (v) No increase or decrease in the Conversion Rate pursuant to Paragraph 4(e)(ii) or (iii) of this Certificate of Designations shall be required unless such adjustment would require an increase or decrease of at least one percent (1%); provided, however, that any adjustments which by reason of this Paragraph 4(e)(v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Paragraph 4(e) shall be made to the nearest one-hundredth (1/100) of a share. (vi) The Corporation may retain a firm of independent public accountants of recognized standing selected by the Board of Directors (who may be the regular accountants employed by the Corporation) to make any computation required by Paragraph 4(a) of this Certificate of Designations or this Paragraph 4(e), and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (vii) In the event that at any time, as a result of an adjustment made pursuant this Paragraph 4(e), the holder of shares of Series B Preferred Stock thereafter shall become entitled to receive any shares of the Corporation, other than Common Stock, thereafter the number of such other shares so receivable upon conversion of shares of Series B Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Paragraph 4. (viii) In addition to the adjustments provided for in this Paragraph 4(e), the Corporation may modify the Conversion Rate in a manner which will increase the number of shares of Common Stock issuable upon conversion of the Series B Preferred Stock if the Corporation believes that such adjustment is necessary or desirable in order to avoid adverse Federal income tax consequences to the holders of the Common Stock. (f) Whenever the Conversion Rate shall be adjusted as required by the provisions of Paragraph 4(e) of this Certificate of Designations, the Corporation shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Conversion Rate, setting forth in reasonable detail the facts requiring such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by any holder of shares of Series B Preferred Stock, and the Corporation shall, forthwith after each such adjustment, mail a copy of such certificate by first class mail to the holder of Series B Preferred Stock at such holders' addresses set forth in the Corporation's books and records. - 4 - (g) In case: (i) the Corporation shall pay any dividend or make any distribution upon Common Stock (other than a regular cash dividend payable out of retained earnings or cash surplus); or (ii) the Corporation shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights, or (iii) any reclassification of the capital stock of the Corporation, consolidation or merger of the Corporation with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Corporation to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall be effected; then in any such case, the Corporation shall cause to be mailed by first class mail to the record holders of Series B Preferred Stock at least ten (10) days prior to the date specified in (A) and (B) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (A) a record is to be taken for the purpose of such dividend, distribution or rights, or (B) such reclassification, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (h) In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Corporation, or in case of any consolidation or merger of the Corporation into another corporation (other than a merger with a subsidiary in which merger the Corporation is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock or the class issuable upon conversion of Series B Preferred Stock) or in case of any sale, lease or conveyance to another corporation of the property of the Corporation as an entirety, the Corporation shall, as a condition precedent to such transaction, cause effective provisions to be made so that each holder of the Series B Preferred Stock shall have the right thereafter by converting the Series B Preferred Stock, to receive the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been received upon conversion of the Series B Preferred Stock immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Certificate of Designations. The foregoing provisions of this Paragraph 4(h) shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (i) No fractional shares or script representing fractional shares shall be issued upon the conversion of shares of Series B Preferred Stock. If, upon conversion of all shares of Series B Preferred Stock held, the holder would, except for the provisions of this Paragraph 4(i), be entitled to receive a fractional share of Common Stock, then an amount equal to such fractional share multiplied by the fair market value per share of the Corporation's Common Stock on the last business day prior to the conversion date, as determined in good faith by the Corporation's Board of Directors, shall be paid by the Corporation in cash to such holder. Such determination shall be made in the manner set forth in Paragraph 4(e)(iv) of this Certificate of Designations, except that the business day prior to the conversion date shall be used in making the determination of fair market value. (j) The Corporation shall at all times, upon and after the filing of the Certificate of Amendment, reserve and keep available, free from preemptive - 5 - rights, out of its authorized but unissued Common Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series B Preferred Stock then outstanding. (k) The Common Stock issuable upon conversion of the Series B Preferred Stock shall, when so issued, be duly and validly authorized and issued, fully paid and nonassessable. (l) Any shares of Series B Preferred Stock which shall at any time have been cancelled or acquired by the Corporation or which shall have been converted into Common Stock pursuant to this Paragraph 4, shall, after such acquisition or conversion, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such stock is once more designated as part of a particular series by the Corporation's Board of Directors. 5. No Right of Redemption. The Corporation shall have no right to redeem any shares of Series B Preferred Stock. 6. Liquidation Rights. (a) (i) In the event of the liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, holders of the Series B Preferred Stock shall be entitled to receive out of the assets of the Corporation an amount per share equal to one cent ($.01) per share plus a sum equal to all unpaid dividends theretofore declared before any payment or distribution upon dissolution, liquidation or winding up shall be made on any series or class of capital stock ranking junior to Series B Preferred Stock as to such payment or distribution, and after all such payments or distributions have been made on any series or class of capital stock ranking senior to the Series B Preferred Stock as to such payment or distribution. (ii) After payment of the preference set forth in Paragraph 6(a)(i) of this Certificate of Designations and the payment of the liquidation preference due to the holders of any class or series of capital stock of the Corporation which is senior to the Series B Preferred Stock in the event of liquidation, dissolution or winding up, the holders of the Series B Preferred Stock and the Common Stock shall participate in such distributions as if they were a single class of stock, with each share of Series B Preferred Stock being entitled to a distribution to which he or she would have been entitled it the Series B Preferred Stock had been converted immediately prior to the distribution. (iii) In the event that, at the time of such liquidation, dissolution or winding up, there are outstanding other series of Preferred Stock or other classes of capital stock the holders of which participate with the holders of the Common Stock in such event, the holders of the Series B Preferred Stock shall participate with the holders of such other class or series of capital stock and the holders of the Common Stock; however, the terms of participation between the holders of the Series B Preferred Stock and the Common Stock shall be as set forth in Paragraph 6(a)(i) of this Certificate of Designations. (b) The sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation shall be deemed a voluntary dissolution, liquidation or winding up of the Corporation for purposes of this Paragraph 6. The merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall not be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Paragraph 6; provided, however, that the merger or consolidation of the Corporation into another corporation shall be deemed to be a voluntary dissolution, liquidation or winding up of the Corporation for the purposes of this Paragraph 6, unless either (i) the holders of all shares of Series B Preferred Stock outstanding upon the effectiveness of such merger or consolidation shall have the right, upon such effectiveness, to receive for each share of Series B Preferred Stock held by them upon such effectiveness, one share of preferred stock of the resulting or surviving corporation, which share shall have, to the extent - 6 - practicable, dividend and voting rights and rights upon dissolution, liquidation or winding up reasonably equivalent to those of such share of Series B Preferred Stock, and shall have the right to convert such share of preferred stock into the number of shares of stock or other securities or property receivable upon such merger or consolidation, as the case may be, by a holder of the number of shares of Common Stock into which such share of Series B Preferred Stock was convertible immediately prior to such merger or consolidation, subject to adjustment as provided in Paragraph 4 of this Certificate of Designations, or (ii) the merger or consolidation was approved by the holders of a majority of the shares of Series B Preferred Stock then outstanding either at a meeting of such stockholders or by a written consent in lieu of a meeting. The provisions of this Paragraph 6(b) shall not be construed to limit the obligations of the Corporation pursuant to Paragraph 4(h) of this Certificate of Designations. (c) In the event the assets of the Corporation available for distribution to the holders of shares of Series B Preferred Stock upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to Paragraph 6(a)(i) of this Certificate of Designations, no such distribution shall be made on account of any shares of any other class or series of capital stock of the Corporation ranking on a parity with the shares of Series B Preferred Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of Series B Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (d) Upon the dissolution, liquidation or winding up of the Corporation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders all amounts to which such holders are entitled pursuant to Paragraph 6(a)(i) of this Certificate of Designations before any payment shall be made to the holders of any class of capital stock of the Corporation ranking junior upon liquidation to Series B Preferred Stock. 7. Rank of Series. For purposes of this Certificate of Designations, any stock of any series or class of the Corporation shall be deemed to rank: (a) prior to the shares of Series B Preferred Stock, as to dividends or upon liquidation, dissolution or winding up, as the case may be, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of Series B Preferred Stock; (b) on a parity with shares of Series B Preferred Stock, as to dividends or upon liquidation, dissolution or winding up, as the case may be, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of Series B Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of Series B Preferred Stock; (c) junior to shares of Series B Preferred Stock as to dividends or upon liquidation, dissolution or winding up, as the case may be, if such class shall be Common Stock or if the holders of shares of Series B Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, as the case may be, in preference or priority to the holders of shares of such class or classes. 8. No Preemptive Rights. No holder of the Series B Preferred Stock shall, as such holder, be entitled as of right to purchase or subscribe for any shares of stock of the Corporation of any class or any series now or hereafter authorized or any securities convertible into or exchangeable for any shares, or any warrants, options, rights or other instruments evidencing rights to - 7 - subscribe for or purchase any such shares, whether such shares, securities, warrants, options, rights or other instruments be unissued or issued and thereafter acquired by the Corporation. 9. Transfer Agent and Registrar. The Corporation may appoint a transfer agent and registrar for the issuance, transfer and conversion of the Series B Preferred Stock and for the payment of dividends to the holders of the Series B Preferred Stock. - 8 - EX-4 3 EXHIBIT 4.11 AMENDMENT NUMBER THREE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This Amendment Number Three to Amended and Restated Loan and Security Agreement ("Amendment") is entered into as of March 12, 1996, by and between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and PORTA SYSTEMS CORP., a Delaware corporation ("Borrower"), in light of the following: FACT ONE: Borrower and Foothill have previously entered into that certain Amended and Restated Loan and Security Agreement, dated as of November 28, 1994, as amended by Amendment Number One to Amended and Restated Loan and Security Agreement, dated as of February 13, 1995, and as amended by Amendment Number Two to Amended and Restated Loan and Security Agreement, dated as of March 30, 1995 (collectively, the "Agreement"). FACT TWO: Borrower and Foothill desire to amend and supplement the Loan Documents as provided for and on the conditions herein. NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the Loan Documents as follows: 1. DEFINITIONS. All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein. 2. AMENDMENTS AND SUPPLEMENTS. 2.1. Renewal and Extension of Term of Agreement. The term of the Agreement expires on November 30, 1996. Borrower and Foothill desire to renew the term of the Agreement and extend the expiration date of the term of the Agreement to November 30, 1998. The Agreement is amended as follows to reflect such renewal and extension: A. The definition of "Renewal Date" in Section 1.1 of the Agreement is hereby amended by deleting such definition in its entirety and replacing it with the following definition: "'Renewal Date' means November 30, 1996." B. Section 3.4 of the Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following language: "3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on November 30, 1998. The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default." 2.2. Extend Warrants. Borrower and Foothill acknowledge and agree that as a result of the renewal and extension of the term of the Agreement pursuant to Section 2.1 above, the Extend Warrants have become exercisable. 2.3. Registration Rights. Borrower acknowledges and agrees that pursuant to Section 10 of the Funding Warrants, the Extend Warrants and the Renewal Warrants (as hereinafter defined), Borrower can be required by Foothill to file a registration statement with respect to the shares of Borrower's stock issuable upon exercise of such Warrants before any of such Warrants are actually exercised and that Borrower's failure to do so within ninety (90) days after receipt of written notice shall constitute an Event of Default. 2.4. Interest Rate. Section 2.5(a) of the Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following language: "(a) Interest Rate. All Obligations, except for undrawn L/Cs and L/C Guarantees, and the Deferred Fee Notes, shall bear interest, on the average Daily Balance, at a per annum rate of twelve percent (12%). The Deferred Fee Notes shall not bear interest prior to an Event of Default." 2.5. Change in Amount and Payment Terms of Facility Fee. Section 2.8(c) of the Agreement requires Borrower to pay Foothill a Facility Fee in the amount of Three Hundred Ten Thousand Dollars ($310,000) on November 30 of each year during the term of the Agreement. Borrower did not make the Facility Fee payment in the amount of Three Hundred Ten Thousand Dollars ($310,000) which was originally due on November 30, 1995. Borrower and Foothill agree that said amount shall be added to the outstanding principal balance of the Deferred Funding Fee Note. In consideration of the renewal and extension of the term of the Agreement, effective with the Facility Fee payment which is due on November 30, 1996, the amount of the Facility Fee shall be increased from Three Hundred Ten Thousand Dollars ($310,000) to Six Hundred Thousand Dollars ($600,000). However, instead of being payable in a lump sum on November 30 of each year, the Facility Fee shall be payable in monthly installments of Fifty Thousand Dollars ($50,000) each commencing on November 30, 1996 and continuing on the last day of each month thereafter during the term of the Agreement. The Facility Fee monthly installment payments of Fifty Thousand Dollars ($50,000) shall be deemed to be fully-earned and non-refundable effective as of the last day of each month during the term of the Agreement commencing November 30, 1996. Section 2.8(c) of the Agreement shall be deemed to be amended to reflect the changes in the amount and payment terms of the Facility Fee as provided in this Section 2.5 of this Amendment. 2.6. Other Fees. Section 2.8 of the Agreement is amended by deleting Section 2.8(a), Section 2.8(b) and Section 2.8(g) in their entirety. 2.7. Loan Amortization. Section 2 of the Agreement is hereby amended by adding the following new Section 2.9 at the end thereof: 2 "2.9 Loan Amortization. In addition to all other payments required to be made by Borrower, Borrower shall make payments to Foothill in the following amounts on the last day of each calendar quarter commencing on June 30, 1997: (a) Two Hundred Fifty Thousand Dollars ($250,000) each on June 30, 1997, September 30, 1997, and on December 31, 1997, and (b) Three Hundred Twenty Five Thousand Dollars ($325,000) each on March 31, 1998 and on the last day of each calendar quarter thereafter during the term of the Agreement. In addition to the foregoing payments, in the event that Borrower's "Adjusted Cash Flow Amount" for any of the above-referenced calendar quarters exceeds the amount of the above-referenced payment to be made on the last day of such calendar quarter, Borrower shall pay to Foothill fifty percent (50%) of such excess amount by not later than 45 days after each such calendar quarter except that such excess amount shall be paid by not later than 90 days after each calendar quarter ending on December 31. For purposes hereof, the "Adjusted Cash Flow Amount" for each calendar quarter shall be calculated in accordance with the following formula: operating income plus depreciation plus amortization plus any other one time accounting adjustments that are non-cash items minus all interest minus all fees paid to Foothill and minus Six Hundred Twenty Five Thousand Dollars ($625,000). Borrower shall deliver to Foothill by not later than 45 days after each calendar quarter (commencing with the calendar quarter ending on June 30, 1997), a certificate signed by Borrower's chief financial officer setting forth the calculation of Borrower's Adjusted Cash Flow Amount for such calendar quarter except that such certificate may be delivered to Foothill by not later than 90 days after each calendar quarter ending on December 31." 2.8. Augat, Inc. Sale. Borrower has entered into a Letter of Intent and is negotiating a purchase and sale agreement with Augat, Inc. regarding the sale (the "Sale Transaction") of Borrower's assets identified on Exhibit A attached hereto (the "Subject Assets"). The Sale Transaction will occur on or before April 15, 1996 (the date of the occurrence of the Sale Transaction being referred to herein as the "Sale Date"). The purchase price payable to Borrower in the Sale Transaction is Seven Million Eight Hundred Ninety Three Thousand Dollars ($7,893,000), payable as follows: (a) Six Million Seven Hundred Ninety Three Thousand Dollars ($6,793,000) in cash on the Sale Date (the "Sale Date Payment"), and (b) One Million One Hundred Thousand Dollars ($1,100,000) in cash to be deposited into two escrow accounts on the Sale Date (the "Escrow"). Borrower shall make arrangements in form and substance satisfactory to Foothill for the Sale Date Payment, the first One Hundred Thousand Dollars ($100,000) to be disbursed to Borrower from Escrow and fifty percent (50%) of any additional amounts to be disbursed to Borrower from Escrow to be paid directly to Foothill. Amounts paid to Borrower in respect of employee severance obligations shall not be considered to be part of the proceeds from the Sale Transaction. The Sale Date Payment will be applied as follows: (x) first, to pay Two Hundred Eighty Nine Thousand Six Hundred Nineteen Dollars and Ninety One Cents ($289,619.91) in unpaid interest and fees owed by Borrower to Foothill together with interest thereon at the rate of twelve percent (12%) per annum from January 1, 1996 to the date of receipt of the Sale Date Payment, (y) second, to pay in full the Three Million Dollar ($3,000,000) outstanding principal balance of the NWE Line, and (z) third, to partially pay the outstanding principal balance of the Term 3 Loan. Foothill agrees to release its security interest in the Subject Assets effective as of Foothill's receipt of the Sale Date Payment. 2.9. Advance Under Revolving Line of Credit. Upon receipt of the Sale Date Payment and application thereof in accordance with Section 2.8 above, Foothill will make available for advance to Borrower under the Revolving Line an amount equal to Two Million One Hundred Forty Three Thousand Dollars ($2,143,000) minus the amount of interest and fees (and accrued interest thereon) paid pursuant to Section 2.8(x) above. 2.10. Restructure of Revolving Line of Credit; Letters of Credit and Letter of Credit Guaranty; and Term Loan. Effective upon receipt of the Sale Date Payment and application thereof in accordance with Section 2.8 above, Borrower and Foothill desire to restructure the Revolving Line of Credit, the Letters of Credit and Letter of Credit Guaranty facility (the "L/C Facility"), and the Term Loan by: (a) reducing the Revolving Line Maximum Amount from Ten Million Dollars ($10,000,000) to Two Million Dollars ($2,000,000), (b) reducing the maximum amount available to Borrower under the Letters of Credit and Letter of Credit Guaranty facility from Eight Million Dollars ($8,000,000) to Seven Million Dollars ($7,000,000), and (c) increasing the outstanding principal balance of the Term Loan by an amount equal to the amount by which the outstanding Obligations under the Revolving Line of Credit exceed Two Million Dollars ($2,000,000) after giving effect to the advance provided for in Section 2.9 above. The Agreement is amended as follows to reflect such restructuring: A. The definition of "Combined Maximum Amount" in Section 1.1 of the Agreement is hereby amended by deleting such definition in its entirety and replacing it with the following definition: "'Combined Maximum Amount' means Nine Million Dollars ($9,000,000)" B. Section 2.1(a) of the Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following language: "2.1 Revolving Line of Credit. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make revolving advances (each a "Revolving Advance") to Borrower under a revolving line of credit (the "Revolving Line") in an aggregate amount outstanding at any one time not to exceed the lesser of: (i) Two Million Dollars ($2,000,000) (the "Revolving Line Maximum Amount"), and (ii) the Borrowing Base less the amount of L/Cs and L/C Guarantees outstanding pursuant to Section 2.2(b). For purposes of this Agreement, "Borrowing Base" shall mean the sum of: (y) eighty percent (80%) of the amount of Eligible Accounts; plus (z) sixty percent (60%) of the amount of Eligible Inventory." C. Section 2.2 of the Agreement is amended by deleting Section 2.2(a) in its entirety. 4 D. Section 2.2(b) of the Agreement is amended by deleting the reference to "Eight Million Dollars ($8,000,000)" and replacing it with "Seven Million Dollars ($7,000,000)" 2.11. Lock Box. Section 2.6 of the Agreement is hereby amended by adding the following new sentence at the end thereof: "So long as no Event of Default has occurred, funds that are deposited in the Lock Box will only be applied by Foothill to provisionally reduce Obligations that are at the time due and payable and any excess funds will be refunded to Borrower. For example, so long as no Event of Default has occurred, funds that are deposited in the Lock Box will not be applied by Foothill to prepay Obligations under the Term Loan that are not at the time due and payable. After the occurrence of an Event of Default, all funds that are deposited in the Lock Box may be applied by Foothill to provisionally reduce any and all Obligations." 2.12. Financial Covenants. Section 6.13 of the Agreement is hereby amended by deleting such Section in its entirety and replacing it with the following language: "6.13 Interest Coverage Ratio. Borrower shall maintain a ratio of: (a) EBITDA, divided by (b) interest expense for such quarter of at least the "Stipulated Ratio," measured on a fiscal quarter-end basis. This ratio shall be measured initially for the quarter ending June 30, 1996. As used herein, the Stipulated Ratio shall mean one to one (1.0:1.0) for the quarter ended June 30, 1996 and one and one-tenth to one (1.1:1.0) for each quarter thereafter." 2.13. Sale of MRV Communications, Inc. Stock. In connection with the sale of its Israeli subsidiary, Borrower received 54,665 unregistered shares (the "Shares") of common stock of MRV Communications, Inc., a Delaware corporation ("MRV"), whose shares are traded on the Nasdaq Stock Market. The Shares are presently held in escrow pursuant to an order issued in an Israeli receivership proceeding. MRV has filed with the Securities and Exchange Commission a registration statement which includes the Shares. Upon registration of the Shares, Borrower will sell the Shares at market price as soon as is reasonably practical. Borrower shall make arrangements in form and substance satisfactory to Foothill for the proceeds from the sale of the Shares (less related expenses and escrowed funds not to exceed $225,000 in the aggregate) to be paid directly to Foothill. The proceeds from the sale of the Shares will be applied to partially pay the outstanding principal balance of the Term Loan. 3. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to Foothill that all of Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof. Borrower hereby represents and warrants to Foothill that all information provided to Foothill in connection with the Sale Transaction and the MRV Shares is true and correct in all material respects and does not omit any facts necessary to make such information not misleading in any material respect. 5 4. NO DEFAULTS. Borrower hereby affirms to Foothill that, except as set forth on Exhibit B attached hereto, no Event of Default has occurred and is continuing as of the date hereof. Foothill affirms to Borrower that, except as set forth on Exhibit B attached hereto, Foothill has no current actual knowledge that any Event of Default has occurred and is continuing as of the date hereof. 5. CONSENT AND WAIVER. Foothill hereby: (a) consents to Borrower entering into the Sale Transaction, (b) consents to the sale of the MRV Shares in accordance with Section 2.13 above, and (c) waives the Event of Default (and the Default Rate of interest applicable pursuant to Section 2.5(b) of the Agreement) as a result of the matters disclosed on Exhibit B attached hereto in respect of periods prior to the date of this Amendment. 6. CONDITIONS PRECEDENT. The effectiveness of this Amendment, including Foothill's consent and waiver in Section 5 above, is expressly conditioned upon the following: A. Foothill and Borrower will execute amendments to the Amended and Restated Term Note, the Deferred Funding Fee Note and the NWE Deferred Funding Fee Note in the forms attached hereto as Exhibit C: (a) extending the maturity date of such notes to November 30, 1998, and (b) reflecting the increases in the outstanding principal balance of the Amended and Restated Term Note and the Deferred Funding Fee Note in accordance with the terms of this Amendment. B. Concurrently with the execution of this Amendment, Borrower shall execute and issue to Foothill warrants to purchase one million (1,000,000) shares of Borrower's common stock in the form attached hereto as Exhibit D (the "Renewal Warrants"). Borrower also shall execute and deliver to Foothill a letter, in the form attached hereto as Exhibit D, confirming that the Exercise Price under the Funding Warrants and the Extend Warrants may be paid by the cancellation of indebtedness owed by the Borrower to the Warrantholders. C. The Sale Transaction shall have been consummated and Foothill shall have received the Sale Date Payment in accordance with Section 2.8 above by not later than on April 15, 1996. D. Receipt by Foothill of an executed copy of this Amendment. E. Receipt by Foothill of an opinion of Borrower's counsel in form and substance satisfactory to Foothill relating to this Amendment and the matters referred to herein. In the event the foregoing conditions have not been fulfilled by April 15, 1996, this Amendment shall be null and void ab initio. 7. COSTS AND EXPENSES. Borrower shall pay to Foothill all of Foothill's out-of-pocket costs and expenses (including, without limitation, the fees and 6 expenses of its counsel, which counsel may include any local counsel deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and all related documents. 8. LIMITED EFFECT. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended and supplemented hereby, shall remain in full force and effect. 9. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. FOOTHILL CAPITAL CORPORATION, a California corporation By: [ILLEGIBLE] ------------------------------------ Title: Vice President ------------------------------------ PORTA SYSTEMS CORP., a Delaware corporation By: ------------------------------------ Title: ------------------------------------ 7 Each of the undersigned affiliates of Porta Systems Corp. ("Porta") is aware of the terms of the above Amendment Number Three, and the prior Amendment Number Two and Amendment Number One, to Amended and Restated Loan and Security Agreement, dated as of November 28, 1994 (the "Loan Agreement"), and acknowledges that all of such affiliate's obligations under any of the Collateral Documents (as defined in the Assignment Agreement) is and shall continue in full force and effect in favor of Foothill Capital Corporation ("Foothill"), including the obligations to guarantee the obligations of Porta owing to Foothill and to secure such obligations pursuant to the terms of such Collateral Documents. "Assignment Agreement" shall have the meaning given to it in the Loan Agreement. ASTER CORPORATION By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ CPI HOLDING CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ CRITERION PLASTICS, INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ DISPLEX, INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 8 MIROR TELEPHONY SOFTWARE, INC. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ PORTA FOREIGN SALES CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS EXPORT CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS INTERNATIONAL CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS LEASING CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 9 PORTA SYSTEMS OVERSEAS CORP. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ LERO INDUSTRIES LTD. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS, LIMITED By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ VANDERHOFF BUSINESS SYSTEMS LTD. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ VANDERHOFF COMMUNICATIONS LTD. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 10 PORTA SYSTEMS S.A. de C.V. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 11 Attachment to Third Amendment to Amended and Restated Loan and Security Agreement by and between Porta Systems Corp. and Foothill Capital Corporation EXHIBIT "A" SUBJECT ASSETS All of the Debtors' right, title and interest in and to the assets compromising the Debtors' fiber optics business (the "Business"), including, without limitation, all Acquired Assets that are being sold by the Debtors to Augat Inc. pursuant to an Asset Purchase Agreement dated as of March 6, 1996 (the "Agreement"), including, without limitation: (i) Fixed Assets; (ii) Inventory; (iii) Intellectual Property; (iv) Contracts; (v) Claims; and (vi) Permits DEFINITIONS: For purposes of this Exhibit "A" the following additional definitions shall apply: (i) "Fixed Assets" means any and all fixed assets relating to the Business, including, without limitation, machinery, equipment, tools and tooling, furniture, fixtures, leasehold improvements and motor vehicles listed on Schedule l.l(a)(i) of the Agreement, as set forth on Schedule I attached hereto, and all rights of the Debtors to the possession or use of any equipment or assets owned by any governmental entity and any warranties relating to the foregoing, and such other fixed assets relating solely to the Business which are acquired by the Debtors prior to the date of closing (the "Closing Date") of the Agreement. (ii) "Inventory" means the Business's inventories of raw materials, work in process, finished goods, supplies, packaging materials, spare parts and similar items, wherever located, used solely in connection with the Business, including, without limitation, the Inventory listed on Schedule l.l(a)(ii) of the Agreement, as set forth on Schedule II attached hereto, except to the extent that they have not been sold prior to the Closing Date and all such Inventory acquired by the Business up to and including the Closing Date. (iii) "Intellectual Property" means all (A) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, re-examination, utility model, certificates of invention and design patents, patent applications, registrations and applications for registrations, which relate solely to the Business, including, without limitation, the patents listed on Schedule l.l(a)(iii) of the Agreement, as set forth on Schedule III attached hereto; (B) trademarks, service marks, tradedrafts, logos, tradenames and corporate names and registrations and applications for registration thereof, which relate to the Business, including, without limitation, the trademarks listed on Schedule l.l(a)(iii) of the Agreement, as set forth on Schedule III attached hereto; (C) copyrights and registrations and applications for registration thereof, which relate to the Business; (D) mask works and registrations and applications for registration thereof, which relate to the Business; (E) computer software, data and documentation, which relate to the Business, including, without limitation, the software and documentation listed on Schedule l.l(a)(iii) of the Agreement, as set forth on Schedule III attached hereto; (F) trade secrets and confidential business information, whether patentable or nonpatentable and whether or not reduced to practice, know-how, manufacturing and product processes and techniques, research and development information, copyrightable works, and confidential financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information, which relate solely to the Business; (G) other proprietary rights relating to any of the foregoing (including, without limitation, remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions); (H) all manufacturing and procedural manuals, advertising and promotional materials, studies, reports and other printed or written materials, which relate to the Business, and books, records, accounts, ledgers, files, documents, correspondence, lists, architectural drawings and specifications and employment records, which relate to the Business; and (I) copies and tangible embodiments of any and all of the foregoing. (iv) "Contracts" means all contracts, agreements and instruments (except accounts and notes receivable) relating to the Business, including, without limitation, the contracts, agreements and instruments listed on Schedule l.l(a)(iv) of the Agreement, as set forth on Schedule IV attached hereto. (v) "Claims" means all claims, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of setoff and rights of recoupment relating to any of the items included among Fixed Assets, Inventory, Intellectual Property and Contracts. (vi) "Permits" means all permits, licenses, registrations, certificates, orders, approvals, franchises, variances and similar rights issued by or obtained from any foreign, federal, state or local governmental, regulatory or administrative authority or agency, court or arbitrational tribunal, which relate to the Business, including, without limitation, those permits listed on Schedule l.l(a)(vi) of the Agreement, as set forth on Schedule V attached hereto. Attachment to Third Amendment to Amended and Restated Loan and Security Agreement by and between Porta System Corp. and Foothill Capital Corporation EXHIBIT "B" EVENTS OF DEFAULT Events of Default have occurred and are continuing as of the date hereof with respect to the following (Section references relate to Sections of the Agreement): 8.1 Borrower has failed to pay certain Obligations when due and payable. 8.2(a) Borrower has failed or neglected to perform, keep, or observe the covenants set forth in the following Sections of the Agreement: (i) in violation of Section 7.1, Borrower has guaranteed certain indebtedness of Aster Corporation and Aster Ireland Ltd. in favor of the Ireland Industrial Development Authority, the successor to Shannon Free Airport Development Company Limited; (ii) in violation of Section 7.2, Borrower is subject to a contract provision relating to prohibition against alienation of certain assets owned by Aster (Ireland) Limited acquired in connection with the Grant Aid Agreement among Shannon Free Airport Development Company Limited, Aster (Ireland) Limited and Aster Corporation dated as of January 6, 1989; (iii) Borrower is in violation of Section 6.13(a) through the date of the Amendment; (iv) Borrower is in violation of Section 6.13(b) through the date of the Amendment; (v) in violation of Section 7.6, Borrower has guaranteed certain indebtedness of Aster Corporation and Aster (Ireland) Ltd. in favor of the Ireland Industrial Development Authority; (vi) in violation of Section 7.7, Borrower has conducted an Exchange Offer, whereby Borrower has exchanged and is offering to exchange (A) 97 shares of Borrower's common stock and (B) Borrower's Zero Coupon Senior Subordinated Convertible Notes due January 2, 1998 (the "Notes") ln the principal amount of $767.22 for each $1,000 stated principal amount of Borrower's 6% Convertible Subordinated Debentures due July 1, 2002 (the "Outstanding Debentures") and related accrued interest which has resulted in the exchange of approximately 80% of the Outstanding Debentures to date, and Borrower has extended the Exchange Offer until May 15, 1996 and may further extend the Exchange Offer; and (vii) in violation of Section 7.9, a Change of Control may occur as a result of the common stock issued in connection with the Exchange Offer or issuable upon conversion of the Notes. 8.2(b) Borrower has failed or neglected to perform, keep, or observe the following terms, provisions, conditions, covenants, or agreements contained in Section 6 of the Agreement in violation of Section 6.4, Borrower's auditors may make certain qualifications in the audit of Borrower's Financial Statements with respect to Borrower's continuation as a "going concern," illiquidity or Attachment to Third Amendment to Amended and Restated Loan and Security Agreement by and between Porta System Corp. and Foothill Capital Corporation financial condition and ongoing losses, and losses are expected to continue at least through the date of the Amendment, which losses in the fourth quarter of l995 may significantly exceed the per quarter losses for the first three quarters of l995. 8.3 Borrower is in violation of Section 8.3 on account of ongoing losses, which losses are referenced in Borrower's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995 and which are expected to continue at least through the date of the Amendment. 8.10 In violation of Section 8.10, Borrower has failed to pay interest due and payable on the outstanding Debentures, which may result in the acceleration of the amounts due in respect of the remaining outstanding Debentures. AMENDMENT NUMBER ONE TO AMENDED AND RESTATED SECURED PROMISSORY NOTE This Amendment Number One to Amended and Restated Secured Promissory Note ("Amendment") is entered into as of March 12, 1996, by and between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and PORTA SYSTEMS CORP., a Delaware corporation ("Borrower"), in light of the following: FACT ONE: Borrower has executed and delivered to Foothill that certain Amended and Restated Secured Promissory Note, dated February 13, 1995, in the original principal amount of $13,502,187.50 (the "Note"). FACT TWO: Borrower and Foothill desire to amend the Note to increase the outstanding principal balance of the Note and to extend the maturity date of the Note as provided for and on the conditions herein. NOW, THEREFORE, Borrower and Foothill hereby amend the Note as follows: 1. The outstanding principal balance of the Note has increased by $_______________ from $13,502,187.50 to $_______________. Accordingly, all references in the Note to the sum of "$13,502,187.50" are hereby replaced with the sum of "_________________." 2. Section 2 of the Note is hereby amended by deleting such Section in its entirety and replacing it with the following language: "2. Schedule of Payments Principal and interest under this Note shall be due and payable according to the following schedule: (a) interest shall be due and payable on the first day of each month commencing March 1, 1995 and continuing thereafter until this Note has been paid in full; (b) principal shall be due and payable on November 30, 1998." 3. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS CORP., a Delaware corporation By: ------------------------------------ Title: ------------------------------------ AMENDMENT NUMBER ONE TO DEFERRED FUNDING FEE NOTE This Amendment Number One to Deferred Funding Fee Note ("Amendment") is entered into as of March 12, 1996, by and between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and PORTA SYSTEMS CORP., a Delaware corporation ("Borrower"), in light of the following: FACT ONE: Borrower has executed and delivered to Foothill that certain Deferred Funding Fee Note, dated November 28, 1994, in the original principal amount of $2,474,394.73 (the "Note"). FACT TWO: Borrower and Foothill desire to amend the Note to increase the outstanding principal balance of the Note and to extend the maturity date of the Note as provided for and on the conditions herein. NOW, THEREFORE, Borrower and Foothill hereby amend the Note as follows: 1. The outstanding principal balance of the Note has increased by $310,000 from $2,474,394.73 to $2,784,394.73. Accordingly, all references in the Note to the sum of "$2,474,394.73" are hereby replaced with the sum of "$2,784,394.73." 2. Section 2 of the Note is hereby amended by deleting such Section in its entirety and replacing it with the following language: "2. Schedule of Payments The outstanding principal balance of this Note shall be due in payable on November 30, 1998." 3. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS CORP., a Delaware corporation By: ------------------------------------ Title: ------------------------------------ AMENDMENT NUMBER ONE TO NWE DEFERRED FUNDING FEE NOTE This Amendment Number One to NWE Deferred Funding Fee Note ("Amendment") is entered into as of March 12, 1996, by and between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and PORTA SYSTEMS CORP., a Delaware corporation ("Borrower"), in light of the following: FACT ONE: Borrower has executed and delivered to Foothill that certain NWE Deferred Funding Fee Note, dated February 13, 1995, in the original principal amount of $300,000 (the "Note"). FACT TWO: Borrower and Foothill desire to amend the Note as provided for and on the conditions herein. NOW, THEREFORE, Borrower and Foothill hereby amend the Note as follows: 1. Section 2 of the Note is hereby amended by deleting such Section in its entirety and replacing it with the following language: "2. Schedule of Payments The outstanding principal balance of this Note shall be due in payable on November 30, 1998." 2. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------ Title: ------------------------------------ PORTA SYSTEMS CORP., a Delaware corporation By: ------------------------------------ Title: ------------------------------------ THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. WARRANT TO PURCHASE COMMON STOCK OF PORTA SYSTEMS CORP. ---------------------------- Void After March 11, 2001 PORTA SYSTEMS CORP., a Delaware corporation (the "Company"), hereby certifies that, for value received the adequacy and receipt of which are hereby acknowledged, FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), or its registered assigns (collectively, the "Warrantholders"), is entitled, subject to the terms and conditions set forth in this Warrant (said Warrant and any warrants issued in exchange herefor or transfer or replacements hereof are collectively referred to as the "Warrants"), to purchase from the Company one million (1,000,000) fully paid and nonassessable shares of Common Stock of the Company, par value $.01 per share (the "Common Stock," which term is further defined in Paragraph 4(i) hereof) in whole or in part, at any time or from time to time until 5 p.m. California local time on March 11, 2001 ("Exercise Period") at a purchase price of One Dollar ($1.00) per share (the "Exercise Price"), the number of such shares of Common Stock and the Exercise Price being subject to adjustment as provided herein. 1. Exercise of Warrant. The rights represented by this Warrant may be exercised by the Warrantholders, in whole or in part (but not as to a fractional share of Common Stock), during the Exercise Period by the presentation and surrender of this Warrant with written notice of Warrantholders' election to purchase, at the principal executive office of the Company, or at such other address as the Company may designate by notice in writing to the Warrantholders at the address of such Warrantholders appearing on the books of the Company, and upon payment to the Company of the Exercise Price for such shares of Common Stock. The Company agrees that the shares so purchased (the "Warrant Shares") shall be deemed to have been issued to the Warrantholders as the record owner of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered together with the aforementioned written notice of election to purchase, and payment for such Warrant Shares shall have been made as aforesaid. Certificates for the Warrant Shares so purchased shall be delivered to the Warrantholders within a reasonable time, not exceeding five (5) business days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Warrantholders within such time. 2. Exercise Price. Warrant Shares shall be purchased at the Exercise Price set forth above, subject to adjustment as provided herein. Anything contained herein to the contrary notwithstanding, at the option of the Warrantholders, the Exercise Price may be paid in any one or a combination of the following forms: (a) by wire transfer to the Company, (b) by certified or cashier's check to the order of the Company, and/or (c) by the cancellation of any indebtedness owed by the Company to the Warrantholders. 3. Warrantholders Not Deemed Stockholders. The Warrantholders shall not be entitled to vote or receive dividends or be deemed the holders of Common Stock, nor shall anything contained herein be construed to confer upon the Warrantholders, as holders of Warrants, any of the rights of a stockholder of the Company or any right to vote upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends, except as otherwise provided herein, until this Warrant shall have been exercised and the Warrant Shares receivable upon the exercise hereof shall have become deliverable as provided in Paragraph 1 above. 4. Adjustment of Number of Shares, Exercise Price and Nature of Securities Issuable Upon Exercise of Warrants. (a) Exercise Price: Adjustment of Number of Shares. The Exercise Price shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price, the Warrantholders shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, a number of shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment and dividing the 2 product thereof by the Exercise Price resulting from such adjustment. (b) Adjustment of Exercise Price Upon Issuance of Common Stock. If and whenever after the date hereof the Company shall issue or sell Additional Shares of Common Stock (as defined below) without consideration or for a consideration per share less than the Current Market Price or the Exercise Price then in effect immediately prior to the issuance or sale of such shares, then the Exercise Price in effect immediately prior to such issuance or sale of such shares shall be reduced to a number which shall be calculated by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price plus (2) the aggregate consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale. No adjustment of the Exercise Price, however, shall be made in an amount less than $.01 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to $.01 per share or more. The provisions of this Paragraph 4(b) shall not apply to any Additional Shares of Common Stock which are (i) distributed to holders of Common Stock pursuant to a stock split for which an adjustment is provided for under Paragraph 4(f). As used in this Warrant, the following terms shall have the following meanings: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued or issuable by the Company after March 12, 1996 which have not previously been authorized for issuance prior to such date. "Fair Value" means the Fair Value of the appropriate security, property, assets, business or entity as determined in accordance with the following procedure: The Company and the holders of the Warrants and Warrant Shares, as applicable, shall use their best efforts to mutually agree to a determination of Fair Value within ten (10) days of the date of the event requiring that such a determination be made. If the Company and such holders are unable to reach agreement within said ten (10) day period, the Company shall within ten (10) days of the expiration of the ten (10) day period above referred to retain an independent nationally recognized investment banking or appraisal firm approved by a majority of 3 the holders of Warrants and Warrant Shares (which appraisal firm shall not be the investment banking firm regularly retained by the Company or any of such holders). Such firm shall determine (within thirty (30) days of their being retained) the Fair Value of the security, property, assets, business or entity, as the case may be, in question and deliver their opinion in writing to the Company and to such holders, which determination shall be conclusive and binding on the Company and such holders. The fees and expenses of any such determination made by any such independent investment banking or appraisal firm shall be paid by the Company. "Current Market Price" of a share of Common Stock or of any other security on any date specified herein means the average of the daily closing prices for the thirty (30) trading days before such date. The closing price for each day shall be (i) the last sale price of shares of Common Stock or such other security, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which the same are then listed or admitted to trading, or (ii) if no shares of Common Stock or if no securities of the same class as such other security are then listed or admitted to trading on any national securities exchange, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the National Association of Securities Dealers automated quotation system or, if no shares of Common Stock or if no securities of the same class as such other security are then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, then in either case as reported by any member firm of the New York Stock Exchange selected by the Company. (c) Further Provisions for Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock and Convertible Securities. For purposes of Paragraph 4(b), the following provisions shall also be applicable: (i) In case at any time on or after the date hereof, the Company shall declare any dividend, or order any other distribution, upon any stock of the Company of any class, payable in Additional Shares of Common Stock or by the issuance of evidence of indebtedness, shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock (all such indebtedness and securities are referred to as "Convertible Securities") then the Exercise Price shall be adjusted to that price determined by multiplying the Exercise Price per share of Common Stock in effect immediately prior to such event by a fraction (A) the 4 numerator of which shall be the total number of outstanding shares of Common Stock of the Company immediately prior to such event, and (B) the denominator of which shall be the total number of outstanding shares of Common Stock of the Company immediately after such event, treating as outstanding all shares of Common Stock issuable upon conversions or exchanges of such Convertible Securities. (ii) (A) In case at any time on or after the date hereof, the Company shall in any manner issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities for such minimum aggregate amount of additional consideration; and such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b) hereof. (B) If such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, payable to the Company, or in the rate of exchange upon the conversion or exchange thereof, the adjusted Exercise Price shall, upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such Convertible Securities been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such Convertible Securities, (b) the issuance of all Common Stock, all Convertible Securities and all rights and options to purchase Common Stock issued after the issuance of such Convertible Securities, and (c) the Convertible Securities originally issued which at the time of such change are then still outstanding taking into account the new exercise price; provided, however, that any such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the Convertible Securities. 5 (C) If any rights of conversion or exchange evidenced by such Convertible Securities shall expire without having been exercised, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment with respect to such Convertible Securities been made on the basis that the only Additional Shares of Common Stock issued or sold were those issued upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of such Convertible Securities. (iii) (A) In case at any time on or after the date hereof, the Company shall in any manner grant or issue any rights or options to subscribe for, purchase or otherwise acquire Additional Shares of Common Stock, whether or not such rights or options are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Additional Shares were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, by (b) the maximum number of Additional Shares of Common Stock of the Company issuable upon the exercise of all such rights or options for such minimum aggregate amount of additional consideration; and the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b) hereof. (B) If such rights or options shall by their terms provide for an increase or increases, with passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Exercise Price shall, upon any such increases becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such rights or options been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such rights or options, (b) the issuance of all Common Stock, all rights and options and all Convertible Securities issued after the issuance of such rights and options, and (c) the Convertible Securities 6 originally issued which at the time of such change are still outstanding taking into account the new exercise price; provided, however, that any such increase or increases in the Exercise Price shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options. (C) If any such rights or options shall expire without having been exercised, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment with respect to such rights or options been made on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of such rights or options. (iv) (A) In case at any time on or after the date hereof, the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Convertible Securities, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exchange or conversion of such Convertible Securities if such rights or options were exercised, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the issuance of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Convertible Securities were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exchange or conversion of such Convertible Securities if the maximum number of Additional Shares were issued pursuant to such Convertible Securities for such minimum aggregate amount of additional consideration, by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon the exchange or conversion of the Convertible Securities for such minimum aggregate amount of additional consideration; and the issue or sale of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and thereby shall cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b). (B) If such rights or options to subscribe for or otherwise acquire Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional 7 consideration payable to the Company upon the exercise, exchange or conversion thereof, the adjusted Exercise Price shall, forthwith upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuances of such rights or options been made upon the basis of (and the total consideration received therefor) (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exchange or conversion of such Convertible Securities (b) the issuances of all Common Stock and all rights, options and Convertible Securities issued after the issuance of such rights and options and (c) the Convertible Securities originally issued which at the time of such change are then still outstanding taking into account the new exercise price; provided, however, that any such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options. (C) If any such rights, options or rights of conversion or exchange of such Convertible Securities shall expire without having been exercised, exchanged or converted, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment been made with respect to such rights, options or rights of conversion or exchange of such Convertible Securities on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and exchange or conversion of such Convertible Securities and that they were issued or sold for the consideration actually received by the Company upon exercise of such rights and options and exchange or conversion of such Convertible Securities, plus the consideration, if any, actually received by the Company for the granting of such rights, options or Convertible Securities. (v) In any case where an adjustment has been made in the Exercise Price upon the issuance of Convertible Securities or any rights or options to purchase Convertible Securities or Additional Shares of Common Stock pursuant to this Paragraph 4(c), no further adjustment shall be made at the time of the conversion of any such Convertible Securities or at the time of the exercise of any such rights or options. (vi) In case at any time on or after the issuance of this Warrant any shares of Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash payable to the Company shall be deemed to be the Fair Value of such consideration. Whether or not the consideration so received is cash, the amount thereof shall be 8 determined without deducting therefrom any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith. (vii) In case at any time the Company shall fix a record date of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or rights or options to purchase either thereof, or (b) to subscribe for or purchase Common Stock, Convertible Securities or rights or options to purchase either thereof, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed, pursuant to this Paragraph 4(c), to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be provided, however, that the Company may elect to defer until the occurrence of such event (i) issuing to the holder of any Warrant exercised after such record date the Warrant Shares and other securities of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other securities of the Company, if any, issuable upon such exercise on the basis of the Exercise Price prior to such adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share pursuant to Section 6 provided, however, that the Company deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional Warrant Shares, other securities and cash upon the occurrence of the event requiring such adjustment. (viii) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this Paragraph 4(c). (d) Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive cash, stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Warrantholders shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant upon exercise of this Warrant and in lieu of the shares of the Common Stock of the Company 9 immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such cash, shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, and in any such case appropriate provision shall be made with respect to the rights and interest of the Warrantholders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any consolidation, merger or sale of all or substantially all of the assets of the Company unless prior to or simultaneous with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation, merger or purchase of such assets shall assume, by written instrument executed and mailed or delivered to the Warrantholders, the obligation to deliver to such Warrantholders such cash (or cash equivalent), shares of stock, securities or assets as, in accordance with the foregoing provisions, the Warrantholders may be entitled to receive and containing the express assumption of such successor corporation of the due and punctual performance and observance of each provision of this Warrant to be performed and observed by the Company and of all liabilities and obligations of the Company hereunder; provided, however, in the case of any consolidation or merger of the Company with another corporation or the sale of all or substantially all of its assets to another corporation effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, at the election of each Warrantholder, in lieu of receiving such stock, securities or assets, such Warrantholder shall receive cash equal to the Fair Value of the Common Stock issuable upon exercise of the Warrant, less the Exercise Price payable upon exercise thereof. In case any Additional Shares of Common Stock or Convertible Securities or any rights or options to purchase any Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the Fair Value of such portion of the assets of such merged corporation as the Board of Directors of the Company shall in good faith determine to be attributable to such Additional Shares of Common Stock, Convertible Securities or rights or options, as 10 the case may be, and the Exercise Price shall be adjusted in accordance with this Paragraph 4(d). (e) Company to Prevent Dilution. In case at any time or from time to time conditions arise by reason of action taken by the Company which are not adequately covered by the provisions of this Section 4, and which would materially and adversely affect the exercise rights of the Warrantholders under any provision of this Warrant, unless the adjustment necessary shall be agreed upon by the Company and the Warrantholders, the Board of Directors of the Company shall appoint a firm of independent certified public accountants of recognized standing, acceptable to the Warrantholders, who at the Company's expense shall give their opinion upon the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Paragraph 4, necessary with respect to the Exercise Price and the number of shares purchasable upon exercise of the Warrants, so as to preserve, without dilution, the exercise rights of the Warrantholders. Upon receipt of such opinion, such Board of Directors shall forthwith make the adjustments described therein. (f) Stock Splits and Reverse Splits. In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of shares of Common Stock purchasable pursuant to this Warrant immediately prior to such subdivision shall be proportionately increased, and conversely, in case at any time the Company shall combine its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Common Stock purchasable upon the exercise of this Warrant immediately prior to such combination shall be proportionately reduced. (g) Dissolution, Liquidation and Wind-Up. In case the Company shall, at any time prior to the expiration of this Warrant and prior to the exercise thereof, dissolve, liquidate or wind up its affairs, the Warrantholders shall be entitled, upon the exercise of this Warrant, to receive, in lieu of the shares of Common Stock of the Company which such Warrantholders would have been entitled to receive, the same kind and amount of assets as would have been issued, distributed or paid to such Warrantholders upon any such dissolution, liquidation or winding up with respect to such shares of Common Stock of the Company, had such Warrantholders been the holders of record of the Warrant Shares receivable upon the exercise of this Warrant on the record date for the determination of those persons entitled to receive any such liquidating distribution. After any such dissolution, 11 liquidation or winding up which shall result in any cash distribution in excess of the Exercise Price provided for by this Warrant, the Warrantholders may, at each such Warrantholder's option, exercise the same without making payment of the Exercise Price, and in such case the Company shall, upon the distribution to said Warrantholders, consider that said Exercise Price has been paid in full to it and in making settlement to said Warrantholders, shall deduct from the amount payable to such Warrantholders an amount equal to such Exercise Price. (h) The Company's Chief Financial Officer Certificate. In each case of an adjustment in the number of shares of Common Stock or other stock, securities or property receivable on the exercise of the Warrants, the Company at its expense shall cause the Company, Chief Financial Officer, to compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock, rights, options or Convertible Securities issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock of each class outstanding or deemed to be outstanding, (c) the adjusted Exercise Price and (d) the number of shares issuable upon exercise of this Warrant. The Company will forthwith mail a copy of each such certificate to each Warrantholder. (i) Definition of Common Stock. As used herein, the term "Common Stock" shall mean and include the Company's authorized common stock of any class or classes, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company, and shall include any common stock of any class or classes resulting from any reclassification or reclassifications thereof. 5. Special Agreements of the Company. (a) Reservation of Shares. The Company covenants and agrees that all Warrant Shares will, upon issuance, be validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect to any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the 12 Company will at all times have authorized, and reserved, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. The Company hereby covenants and agrees to take all such action as may be necessary to assure that the par value per share of the Common Stock is at all times equal to or less than the Exercise Price. (b) Avoidance of Certain Actions. The Company will not, by amendment of its Certificates of Incorporation or through any reorganization, transfer of assets, consolidation, merger, issue or sale of securities or otherwise, avoid or take any action which would have the effect of avoiding the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all of the provisions of this Warrant and in taking all of such action as may be necessary or appropriate in order to protect the rights of the Warrantholders against dilution or other impairment of their rights hereunder. (c) Securing Governmental Approvals. If any shares of Common Stock required to be reserved for the purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal law (other than the Securities Act of 1933, as amended (the "Securities Act")) or under any state law before such shares may be issued upon exercise of this Warrant, the Company will, at its expense, as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. (d) Listing on Securities Exchanges; Registration. If, and so long as, any class of the Company's Common Stock shall be listed on any national securities exchange (as defined in the Securities Exchange Act of 1934 (the "Exchange Act")), the Company will, at its expense, obtain and maintain the approval for listing upon official notice of issuance of all Warrant Shares receivable upon the exercise of Warrants at the time outstanding and maintain the listing of Warrant Shares after their issuance; and the Company will so list on such national securities exchange, will register under the Exchange Act (or any similar statute then in effect), and will maintain such listing of, any other securities that at any time are issuable upon exercise of this Warrant if and at the time any securities of the same class shall be listed on such national securities exchange by the Company. (e) Communication to Shareholders. Any notice, document or other written communication given or made by the Company to all holders of Common Stock as such shall at the same time be provided to the Warrantholders. 13 (f) Restrictions on Public Sale by the Company. The Company will not effect any public or private sale or distribution of its convertible debt or equity securities, including a sale pursuant to Regulation D under the Securities Act, during the five (5) day period prior to, and during the fifteen (15) day period beginning on, the closing date of each underwritten offering by the Company made pursuant to a registration statement filed pursuant to Paragraphs 10(b) or 10(c); and, except as may be required under agreements entered into by the Company prior to the date hereof, the Company shall cause each holder of its privately placed convertible debt or equity securities issued by it at any time on or after the date of this Warrant to agree not to effect any public sale or distribution of any such securities during such period, including a sale pursuant to Rule 144 or Rule 144A under the Securities Act. (g) Compliance with Law. The Company shall comply with all material applicable laws, rules and regulations of the United States and of all states, municipalities and agencies and of any other jurisdiction applicable to the Company, the violation of which would have a material adverse effect on the Company and its subsidiaries taken as a whole, and shall do all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to continue its business. 6. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Warrantholder an amount in cash equal to such fraction multiplied by the Current Market Price of one share of Common Stock. 7. Notices of Stock Dividends, Subscriptions, Reclassifications, Consolidations, Mergers, etc. If at any time: (i) the Company shall declare a cash dividend (or an increase in the then existing dividend rate), or declare a dividend on Common Stock payable otherwise than in cash out of its net earnings after taxes for the prior fiscal year; or (ii) the Company shall authorize the granting to the holders of Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) there shall be any capital reorganization, or reclassification, or redemption of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or firm; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company shall give to the Warrantholders at the addresses of such Warrantholders as shown on the books of the Company, at least twenty (20) days prior to the applicable 14 record date hereinafter specified, a written notice summarizing such action or event and stating the record date for any such dividend or rights (or, if a record date is not to be selected, the date as of which the holders of Common Stock of record entitled to such dividend or rights are to be determined), the date on which any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected the holders of Common Stock of record shall be entitled to effect any exchange of their shares of Common Stock for cash (or cash equivalent) securities or other property deliverable upon any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up. The failure to give the notice required by this Section 7 or any defect therein shall not affect the legality or validity of any such action or event, or the vote upon any such action. 8. Registered Holder; Transfer of Warrants or Warrant Shares. (a) Maintenance of Registration Books; Ownership of this Warrant. The Company shall keep at its principal office a register in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration, transfer and exchange of this Warrant. The Company shall not at any time, except upon the dissolution, liquidation or winding-up of the Company, close such register so as to result in preventing or delaying the exercise or transfer of this Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration or transfer as provided in this Paragraph 8. (b) Exchange and Replacement. This Warrant is exchangeable upon surrender hereof by the registered holder to the Company at its principal office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by said registered holder at the time of surrender. Subject to compliance with the provisions of Paragraphs 8 and 9, this Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the registered holder hereof in person or by duly authorized attorney, and a new Warrant shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of the transferee, 15 upon surrender of this Warrant, duly endorsed, to said office of the Company. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant, without requiring the posting of any bond or the giving of any other security. This Warrant shall be promptly cancelled by the Company upon the surrender hereof in connection with any exchange, transfer or replacement. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of Warrants pursuant to this Paragraph 8. (c) Warrants and Warrant Shares Not Registered. The holder of this Warrant, by accepting this Warrant, represents and acknowledges that this Warrant and the Warrant Shares are not being registered under the Securities Act on the grounds that the issuance of this Warrant and the offering and sale of such Warrant Shares are exempt from registration under Section 4(2) of the Securities Act as not involving any public offering. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant and the Warrant Shares shall not be transferable except upon the conditions specified in Paragraphs 8 and 9, which conditions are intended, among other things, to insure compliance with the provisions of the Securities Act in respect of the transfer of this Warrant or of such Warrant Shares. 9. Restrictions on Transfer. (a) Each Warrant shall be stamped or otherwise imprinted with the legend set forth on the first page of this Warrant. (b) Each stock certificate representing Warrant Shares shall be stamped or otherwise imprinted with the following legend: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE HELD INDEFINITELY UNLESS SUBSEQUENTLY REGISTERED UNDER SAID ACT AND LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. (c) The Warrantholders agree that prior to any transfer of this Warrant each Warrantholder will give written notice to the Company of its intention to effect such a 16 transfer, describing such intended transfer, and that such Warrantholder will not sell or transfer any or all of this Warrant without first delivering to the Company (i) an opinion of counsel for the Company or an opinion, reasonably satisfactory to counsel for the Company, of Buchalter, Nemer, Fields & Younger, A Professional Corporation, or other counsel skilled in securities matters (selected by such Warrantholder and reasonably satisfactory to the Company), to the effect that such sale or transfer will be exempt from the registration and prospectus delivery requirements of the Securities Act and in compliance with applicable state securities laws, or (ii) an interpretative letter from the Securities and Exchange Commission (the "Commission") to the effect that the proposed transfer may be made without registration under the Securities Act; and (iii) an agreement by the transferee to be bound by the provisions of this Warrant, including, without limitation, this Section 9 relating to transfers, and restrictions on transfers, of the Warrants and Warrant Shares; provided, however, that the provisions of this Paragraph 9 shall not apply with respect to any Warrants as to which there is a registration statement in effect under the Securities Act at the time of the proposed transfer. 10. Registration. (a) Registrable Stock. As used in this Paragraph 10, the term "Registrable Stock" shall mean all Warrant Shares acquired by the Warrantholders upon exercise of the Warrants. For purposes of this Paragraph 10, Warrant Shares shall include shares of Common Stock, whether or not such securities have in fact been issued, and stock or other securities of the Company issued upon conversion of, in a stock split or reclassification of, or a stock dividend or other distribution on, or in substitution or exchange for, or otherwise in connection with, such Warrant Shares or in a merger or consolidation involving the Company's assets. For the purpose of this Paragraph 10, a Warrantholder of record shall be treated as the record holder of the related Warrant Shares then issuable upon the conversion or exercise thereof. The only class of securities which the Company is obligated to register under this Paragraph 10 is Common Stock issuable upon exercise of the Warrants. (b) Required Registration. Whenever the Company shall receive a written request therefor from any holder or holders of at least forty percent (40%) of the shares of Registrable Stock, the Company shall promptly prepare and file a registration statement under the Securities Act covering the Registrable Stock which is the subject of such request and shall use its best efforts to cause such registration statement to become effective as expeditiously as possible. Upon the receipt of such request, the Company shall promptly give written notice to all holders of Registrable 17 Stock that such registration is to be effected. The Company shall include in such registration statement such Registrable Stock for which it has received written requests to register such shares by the holders thereof within thirty (30) days after the effectiveness of the Company's written notice to such other holders. The Company shall be obligated to prepare, file and cause to become effective only two (2) registration statements pursuant to this Section (excluding therefrom any registration statement which is withdrawn prior to effectiveness or otherwise or abandoned at the request of the holders of a majority of the Registrable Stock sought to be registered in such registration statement, provided, however, that such holders have elected to pay and have paid to the Company in full the registration expenses theretofore incurred by the Company and otherwise payable by the Company pursuant to paragraph (e) of this Section 10). Except as hereinafter expressly provided or as provided in the agreements identified on Schedule A, without the written consent of the holders of a majority of the shares of Registrable Stock for which registration has been requested pursuant to this Paragraph, neither the Company nor any other holder of securities of the Company may include securities in such registration. If, in the good faith judgment of the managing underwriter, if any, of such public offering, the inclusion of all of the Registrable Stock covered by requests for registration pursuant to this Paragraph 10(b) would materially and adversely affect the successful marketing of a lesser amount of Registrable Stock, after giving priority to the shares of Registrable Stock over all other persons who may participate in such registration (except to the extent such priority would be inconsistent with or breach the agreements identified on Schedule A), the number of shares of Registrable Stock otherwise to be included in the underwritten public offering shall be reduced to the required level with the participation in such offering to be pro rata among the holders of Registrable Stock requesting such registration, based upon the number of shares of Registrable Stock owned by such holders; and those shares which are excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed ninety (90) days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. The managing underwriter or underwriters of any underwritten public offering requested pursuant to this Paragraph 10(b) shall be selected by the Company. Notwithstanding anything to the contrary herein, the Company shall have the right, from time to time, by written notice to any holder of Registrable Stock who has made a registration demand pursuant to this Section 10 or had Registrable Stock included in an effective registration statement, as applicable, (i) to delay the filing of a registration statement pursuant to this Section 10 or (ii) to request that any selling holder of Registrable Stock under an effective registration statement discontinue 18 dispositions of Registrable Stock pursuant to the registration statement covering such Registrable Stock until further notice, in writing, from the Company (and each such selling holder hereby agrees to discontinue any distributions forthwith), if in the good faith judgment of the Company's Board of Directors it would be adverse to the Company for such registration statement to be filed, or for an effective registration statement to be amended (by incorporation by reference to other documents or otherwise) in order to continue to permit dispositions of Registrable Stock in compliance with applicable securities laws, because such filing or amendment would interfere with any bona fide financing, acquisition, corporate reorganization or other material transaction involving the Company or any of its subsidiaries or would compel premature disclosure thereof or of any other significant corporate development; provided, however, that the Company shall not have the right to defer such filing or to require discontinuance of such dispositions of Registrable Stock for a period or periods exceeding 120 days in the aggregate in any one calendar year during which the registration rights provided in this Section 10 are in effect. (c) Incidental Registration. Each time the Company shall determine to file a registration statement under the Securities Act (other than on Form S-8 or Form S-4) in connection with the proposed offer and sale for money of any of its securities by it or, pursuant to registration rights granted after the date hereof, by any of its security holders the Company will give written notice of its determination to all holders of Registrable Stock. Upon the written request of a holder of any Registrable Stock, the Company will cause all such Registrable Stock, the holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Stock to be so registered in accordance with the terms of the proposed offering. If the registration statement is to cover an underwritten distribution, the Company shall use its best efforts to cause the Registrable Stock requested for inclusion pursuant to this Paragraph 10(c) to be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. If, in the good faith judgment of the managing underwriter of such public offering, the inclusion of all of the Registrable Stock requested to be registered would be reasonably likely to adversely affect the successful marketing of the other shares proposed to be offered, then the amount of the Registrable Stock to be included in the offering shall be reduced to such number of shares of Registrable Stock that, in the opinion of such underwriter or underwriters, can be sold without an adverse effect on the price, timing or distribution of the securities to be included, selected pro rata among the holders 19 of Registrable Stock which have requested to be included in such registration, based on the fully diluted ownership of Registrable Stock of such holders. (d) Registration Procedures. If and whenever the Company is required by the provisions of Paragraph 10(b) or 10(c) to effect the registration of Registrable Stock under the Securities Act, the Company will, at its expense, as expeditiously as possible: (i) In accordance with the Securities Act and the rules and regulations of the Commission, prepare and file with the Commission a registration statement on the form of registration statement appropriate with respect to such securities and use its reasonable best efforts to cause such registration statement to become and remain effective for a period of not less than ninety (90) days or such shorter period necessary for the securities covered by such registration statement to be sold, and prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective and such registration statement and prospectus accurate and complete; (ii) If the offering is to be underwritten, in whole or in part, enter into a written underwriting agreement on customary terms with the holders of the Registrable Stock participating in such offering and the underwriter in form and substance reasonably satisfactory to the managing underwriter of the public offering and the holders of a majority of the Registrable Stock participating in such offering; (iii) Furnish to the holders of securities participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters and holders may reasonably request in order to facilitate the public offering of such securities; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders and underwriters may reasonably request provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to taxation or general service of process in any such jurisdiction where it is not then so subject; 20 (v) Notify the holders participating in such registration, promptly after it shall receive notice thereof, of the date and time when such registration statement and each post-effective amendment thereto has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) Notify such holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (vii) Prepare and file with the Commission, promptly upon the request of the holders holding a majority of the Registrable Stock, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders, is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Stock by such holders; (viii) Prepare and promptly file with the Commission, and promptly notify such holders of the filing of, such amendments or supplements to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event has occurred as the result of which any such prospectus or any other prospectus as then in effect may include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (ix) In case any of such holders or any underwriter for any such holders is required to deliver a prospectus at a time when the prospectus then in circulation is not in compliance with the Securities Act or the rules and regulations of the Commission, prepare promptly upon request such amendments or supplements to such registration statement and such prospectus as may be necessary in order for such prospectus to comply with the requirements of the Securities Act and such rules and regulations; (x) Advise such holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (xi) If requested by the managing underwriter or underwriters or a holder of Registrable Stock 21 being sold in connection with an underwritten offering, promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority of the Registrable Stock being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Stock, including information with respect to the Registrable Stock being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Stock to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as practicable after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (xii) Cooperate with the selling holders of Registrable Stock and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Stock to be sold and not bearing any restrictive legends; and enable such Registrable Stock to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (xiii) Prepare a prospectus supplement or post-effective amendment to the registration statement or the related prospectus or any document incorporated therein by reference or file any other required documents so that, as thereafter delivered to the purchasers of the Registrable Stock, the prospectus will not contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading; (xiv) Enter into such customary agreements (including an underwriting agreement) and take all such other actions in connection therewith as the holders of a majority of the Registrable Stock being sold or the managing underwriter, if any, deem necessary in order to expedite or facilitate the disposition of such Registrable Securities and in such connection, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (A) make such representations and warranties to the holders of such Registrable Stock and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings; 22 (B) If an underwriting agreement is entered into, the same shall set forth in full the indemnification provisions and procedures of Paragraph 10(f) hereof with respect to all parties to be indemnified pursuant to said Paragraph; and (C) The Company shall deliver such documents and certificates as may be requested by the holders of the majority of the Registrable Stock being sold and the managing underwriters, if any, to evidence compliance with the terms of this Paragraph 10(d) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder; (xv) Make available for inspection by a representative of the holders of the Registrable Stock to be included in the registration statement, any underwriter participating in any disposition pursuant to a registration statement, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the preparation of the registration statement; provided, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order, in which event such persons shall provide the Company with prompt prior written notice of such requirement and shall cooperate with the Company so that the Company may seek a protective order or other appropriate remedy ("Protective Action") provided further, that if Foothill assigns this warrant and such assignee is determined in good faith by the Company to be a competitor of the Company, the Company shall not be required to provide any such confidential information to such assignee pursuant to this paragraph (xv). In the event the Company fails to seek Protective Action, or such Protective Action is not obtained, such persons shall exercise reasonable best efforts to obtain assurance that confidential treatment will be accorded those records, information or documents which they are required to disclose by such court or administrative order; (xvi) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to the Company's security holders, earning statements satisfying the provisions 23 of Section 11(a) of the Securities Act, no later than forty-five (45) days after the end of any twelve (12) month period (or ninety (90) days, if such a period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Stock is sold to underwriters in an underwritten offering, or, if not sold to underwriters in such an offering, (ii) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of a registration statement; (xvii) Not file any amendment or supplement to such registration statement or prospectus to which a majority in interest of such holders has objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least three (3) business days prior to the filing thereof; provided, however, that the failure of such holders or their counsel to review or object to any amendment or supplement to such registration statement or prospectus shall not affect the rights of such holders or any controlling person or persons thereof or any underwriter or underwriters therefor under Paragraph 10(f) hereof; and (xviii) At the request of any such holder (i) furnish to such holder on the effective date of the registration statement or, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters with respect to the registration statement, the prospectus and each amendment or supplement thereto, proceedings under state and federal securities laws, other matters relating to the Company, the securities being registered and the offer and sale of such securities as are customarily the subject of opinions of issuer's counsel provided to underwriters in underwritten public offerings, and (ii) use its best effort to furnish to such holder letters in customary form dated each such effective date and such closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request, stating that they are independent certified public accountants within the meaning of the Securities Act and dealing with such matters of the type customarily covered by such "cold comfort letters" as the underwriters may reasonably request, or, if the offering is not underwritten, as such requesting holder or holders may reasonably request. 24 (e) Expenses of Registration. All expenses incident to the Company's performance of or compliance with this Warrant, including without limitation: (i) All registration and filing fees (including those with respect to filings required to be made with the National Association of Securities Dealers, Inc.); (ii) Subject to Section 2(d)(iv), fees and expenses of compliance with all securities or blue sky laws (including reasonable fees and disbursements of counsel for the underwriters or selling holders in connection with blue sky qualifications of the Registrable Stock in determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority of the Registrable Stock being sold may designate); (iii) Printing, messenger, telephone and delivery expenses; (iv) Fees and disbursements of counsel for the Company and for the sellers of the Registrable Stock as hereinafter provided; (v) Fees and disbursements of all independent certified public accountants of the Company (including the expenses of any special audit and "comfort" letters required by or incident to such performance); (vi) Fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Stock or legal expenses of any person other than the Company and the selling holders); and (vii) Fees and expenses of other persons retained by the Company; will be borne by the Company, regardless of whether the registration statement becomes effective, except as provided in paragraph (b) of this Section 10. The Company will, in any event, pay its internal expenses (including without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any person, including special experts, retained by the Company. 25 In connection with the registration statement required hereunder, the Company will reimburse the holders of Registrable Stock being registered pursuant to the registration statement for the reasonable fees and disbursements of not more than one counsel (or more than one counsel if a conflict exists among such selling holders in the exercise of the reasonable judgment of counsel for the selling holders and counsel for the Company) chosen by the holders of a majority of such Registrable Stock. (f) Indemnification. (i) The Company hereby agrees to indemnify each of the Warrantholders in connection with a registration of any of the securities purchased upon exercise of the Warrants against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, preliminary or final prospectus, or other document incident to any such registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and to reimburse the Warrantholders (including officers and directors of the same and controlling persons) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by a Warrantholder on their behalf for use in such prospectus, or document (or related registration statement, notification or the like) or any amendment or supplement thereto. (ii) Each Warrantholder agrees to indemnify the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement or alleged untrue statement of a material fact contained in any prospectus, offering circular or other document incident to any registration, qualification or compliance relating to securities purchased pursuant to the Warrants (or in any related registration statement, 26 notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and will reimburse the Company and each other person indemnified pursuant to this subparagraph (ii) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that this subparagraph (ii) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon information (including, without limitation, written negative responses to inquiries) furnished to the Company by a Warrantholder or on its behalf for use in such prospectus, or other document (or related registration statement, notification or the like) or any amendment or supplement thereto. (iii) Each party entitled to indemnification hereunder (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party (at such Indemnifying Party's expense) to assume the defense of any claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be satisfactory to the Indemnified Party, and the Indemnified Party may participate in such defense at such party's expense, and provided, further, that the omission by any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Paragraph 10(f) except to the extent that the omission results in a failure of actual notice to the Indemnifying Party and such Indemnifying Party is materially damaged solely as a result of the failure to give notice. Neither the Indemnifying Party nor the Indemnified Party, in the defense of any such claim or litigation, shall, except with the consent of the other, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnifying Party, whichever is the case, of a release from all liability in respect to such claim or litigation. (iv) If the indemnification provided for in this Paragraph 10(f) is unavailable or insufficient to hold harmless an Indemnified Party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to herein, then the Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is 27 appropriate to reflect the relative fault of the Indemnifying Party on the one hand, and the Indemnified Party on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault of the Indemnifying Party and the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Warrantholders agree that it would not be just and equitable if contributions pursuant to this Paragraph 10(f) were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable to an Indemnified Party as a result of the losses, claims, damages, liabilities or actions in respect thereof, referred to above, shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the contribution provisions of this Paragraph 10(f), in no event shall the amount contributed by any seller of Registrable Stock exceed the aggregate net offering proceeds received by such seller from the sale of Registrable Stock to which such contribution or indemnification claim relates. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (v) The indemnification required by this Paragraph 10(f) shall be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. (g) Reporting Requirements Under Exchange Act. The Company shall maintain the registration of its Common Stock under Section 12 of the Exchange Act and shall keep effective such registration and shall timely file such information, documents and reports as the Commission may require or prescribe under Section 13 of the Exchange Act, or otherwise. The Company shall (whether or not it shall then be required to do so) timely file such information, documents and reports as the Commission may require or prescribe under Section 13 or 15(d) (whichever is applicable) of the Exchange Act. The Company shall forthwith upon request furnish any holder of Registrable Stock (i) a written statement by the Company that it has complied with such reporting requirements, (ii) a copy of the most recent annual or quarterly report of 28 the Company, and (iii) such other reports and documents filed by the Company with the Commission as such holder may reasonably request in availing itself of an exemption for the sale of Registrable Stock without registration under the Securities Act. The Company acknowledges and agrees that the purpose of the requirements contained in this Paragraph 10(g) is to enable any such holder to comply with the current public information requirement contained in paragraph (c) of Rule 144 under the Securities Act should such holder ever wish to dispose of any of the securities of the Company acquired by it without registration under the Securities Act in reliance upon Rules 144 or 144A, as such rules may be amended from time to time (or any other similar rule or regulation hereafter adopted by the Commission). In addition, the Company shall take such other measures and file such other information, documents and reports as shall hereafter be required by the Commission as a condition to the availability of Rule 144 and Rule 144A under the Securities Act (or any similar rule or regulation hereafter adopted by the Commission). (h) Stockholder Information. The Company may require each holder of Registrable Stock as to which any registration is to be effected pursuant to this Paragraph 10 to furnish the Company such information with respect to such holder and the distribution of such Registrable Stock as the Company may from time to time reasonably request in writing and as shall be required by law or by the Commission in connection therewith. 11. Representation and Warranties. The Company hereby represents and warrants to and covenants with each Warrantholder, and each holder of Warrant Shares that: (a) Organization and Capitalization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. As of the date hereof, the authorized capital of the Company consists of twenty million (20,000,000) shares of Common Stock and one million (1,000,000) shares of Preferred Stock. No unissued shares of Common Stock are reserved for any purpose other than for issuance upon the exercise of the Warrants, except as indicated on Schedule A hereto. As of the date hereof, the Company has not issued or agreed to issue any stock purchase rights or convertible securities other than the Warrants, except as indicated on Schedule A hereto, and there are no preemptive rights in effect with respect to the issuance of any shares of Common Stock. All the outstanding shares of Common Stock and Preferred Stock have been validly issued without violation of any preemptive or similar rights, are fully paid and nonassessable and have been issued in compliance with all federal and applicable state securities laws. 29 (b) Authority. The Company has full corporate power and authority to execute and deliver this Warrant, to issue the shares of Common Stock issuable upon exercise of this Warrant, and to perform all of its obligations hereunder, and the execution, delivery and performance hereof has been duly authorized by all necessary corporate action on its part. This Warrant has been duly executed on behalf of the Company and constitutes the legal, valid and binding obligation of the Company enforceable in accordance with its terms. (c) No Legal Bar. Neither the execution, delivery or performance of this Warrant nor the issuance of the shares of Common Stock issuable upon exercise of this Warrant will (a) conflict with or result in a violation of the Certificate of Incorporation or By-Laws of the Company, (b) conflict with or result in a violation of any law, statute, regulation, order or decree applicable to the Company or any affiliate which violation would have a material adverse effect on the Company and its subsidiaries, taken as a whole, or the Company's ability to complete the transactions contemplated hereby, (c) require any consent or authorization or filing with, or other act by or in respect of any governmental authority or (d) result in a breach of, constitute a default under or constitute an event creating rights of acceleration, termination or cancellation under any mortgage, lease, contract, franchise, instrument or other agreement to which the Company is a party or by which it is bound the effect of which would have a material adverse effect on the Company and its subsidiaries taken as a whole. (d) Validity of Shares. When issued upon the exercise of this Warrant as contemplated herein, the shares of Common Stock so issued will have been validly issued and will be fully paid and nonassessable. On the date hereof, the par value of the Common Stock is less than the Exercise Price per share of Common Stock. 12. Continuing Validity. A holder of Warrant Shares shall continue to be entitled to all rights to which a Warrantholder is entitled pursuant to the provisions of this Warrant except such rights as by their terms apply solely to a Warrantholder, notwithstanding the fact that this Warrant has been exercised or the period of exercisability has expired. The Company will, at the time of any exercise of this Warrant, upon the request of the holder of the Warrant Shares issued upon exercise hereof, acknowledge in writing, in form reasonably satisfactory to such holder, the Company's continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing 30 obligation of the Company to afford to such holder all such rights. 13. Miscellaneous Provisions. (a) Governing Law and Venue. This Warrant shall be deemed to have been made in the State of California and the validity of this Warrant, the construction, interpretation, and enforcement thereof, and the rights of the parties thereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of California, without regard to principles of conflicts of law. The parties agree that any action or proceeding arising in connection with this Warrant shall be tried and litigated in the state or federal courts located in the County of Los Angeles, State of California. The Warrantholders and the Company each waive the right to a trial by jury and any right each may have to assert the doctrine of forum non conveniens or to object to venue to the extent any proceeding is brought in accordance with the preceding sentence. Service of process, sufficient for personal jurisdiction in any action against the Company, may be made by registered or certified mail, return receipt requested, to its address indicated in Paragraph 13(b). (b) Notices. All notices hereunder shall be in writing and shall be deemed to have been given by courier or facsimile at the time received, or five (5) days after being mailed by certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice: To the Company: Porta Systems Corp. 575 Underhill Boulevard Syosset, New York 11791 Attn: Vicent F. Santulli Chief Executive Officer Facsimile No.: (516) 682-4640 To the At the addresses of such holders as Warrantholders they appear on the records of the or holder of Company Warrant Shares With a copy to: Buchalter, Nemer, Fields, & Younger 601 S. Figueroa Street, Ste. 2400 Los Angeles, California 90017-5704 Attn: Robert C. Colton Facsimile No.: (213) 896-0400 provided, however, that any notice of change of address shall be effective only upon receipt. 31 (c) Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the Company, the Warrantholders and the holders of Warrant Shares and the successors, assigns and transferees of the Company, the Warrantholders and the holders of Warrant Shares. (d) Attorneys' Fees. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover such reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled, as may be ordered in connection with such proceeding. (e) Entire Agreement; Amendments and Waivers. This Warrant sets forth the entire understanding of the parties with respect to the transactions contemplated hereby. The failure of any party to seek redress for the violation or to insist upon the strict performance of any term of this Warrant shall not constitute a waiver of such term and such party shall be entitled to enforce such term without regard to such forbearance. This Warrant may be amended, the Company may take any action herein prohibited or omit to take action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only if the Company has obtained the written consent or written waiver of the majority in interest of the Warrantholders, and then such consent or waiver shall be effective only in the specific instance and for the specific purpose for which given. (f) Severability. If any term of this Warrant as applied to any person or to any circumstance is prohibited, void, invalid or unenforceable in any jurisdiction, such term shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without in any way affecting any other term of this Warrant or affecting the validity or enforceability of this Warrant or of such provision in any other jurisdiction. 32 (g) Headings. The headings in this Warrant are inserted only for convenience of reference and shall not be used in the construction of any of its terms. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers on this 12th day of March, 1996. PORTA SYSTEMS CORP., a Delaware Corporation By -------------------------------- Name: ------------------------- Title: ------------------------- Attest: - ---------------------------- Secretary Accepted: FOOTHILL CAPITAL CORPORATION By -------------------------------- Name: ------------------------- Title: ------------------------- 33 SCHEDULE A Warrant to Purchase Common Stock, dated November 28, 1994, as amended, issued to Foothill Capital Corporation. 34 Porta Systems Corp. 575 Underhill Blvd. Syosset, N.Y. 11791 March 12, 1996 Foothill Capital Corporation 11111 Santa Monica Blvd., Suite 1500 Los Angeles, California 90025-3333 Re: Amendment Number Two to Warrant Gentlemen: Reference is made to that certain Warrant dated as of November 28, 1994, as amended by Amendment Number One to Warrant dated as of February 13, 1995, issued by Porta Systems Corp. to Foothill Capital Corporation (the "Warrant"). This will confirm that Section 2 of the Warrant is hereby amended and supplemented by adding the following sentence at the end thereof: "Anything contained herein to the contrary notwithstanding, at the option of the Warrantholders, the Exercise Price may be paid in any one or a combination of the following forms: (a) by wire transfer to the Company, (b) by certified or cashier's check to the order of the Company, and/or (c) by the cancellation of any indebtedness owed by the Company to the Warrantholders." Very truly yours, PORTA SYSTEMS CORP. ----------------------------- Accepted: Foothill Capital Corporation - ---------------------------------- EX-4 4 EXHIBIT 4.21 PORTA SYSTEMS CORP. Issuer TO AMERICAN STOCK TRANSFER & TRUST COMPANY Trustee INDENTURE Dated as of November 1, 1995 $30,000,000 ZERO COUPON SENIOR SUBORDINATED CONVERTIBLE NOTES DUE JANUARY 2, 1998 TIE-SHEET of provisions of Trust Indenture Act of 1939 with Indenture dated as of November 1, 1995, between Porta Systems Corp. and American Stock Transfer & Trust Company, Trustee: Section of Act Section of Indenture 310(a) (1) and (2).........................................................8.09 310(a) (3) and (4)...............................................Not applicable 310(a) (5).................................................................8.09 310(b).............................................................8.08 and 8.10 310(c)............................................................Not applicable 311(a) and (b)..............................................................8.13 311(c)............................................................Not applicable 312(a)..........................................................6.01 and 6.02(a) 312(b) and (c)...................................................6.02(b) and (c) 313(a)...................................................................6.04(a) 313(b) (1).......................................................Not applicable 313(b) (2)..............................................................6.04(b) 313(c)...................................................................6.04(c) 313(d)...................................................................6.04(d) 314(a)......................................................................6.03 314(b)............................................................Not applicable 314(c) (1) and (2)........................................................16.05 314(c) (3).......................................................Not applicable 314(d)............................................................Not applicable 314(e).....................................................................16.05 314(f)............................................................Not applicable 315(a), (c) and (d).........................................................8.01 315(b)......................................................................7.08 315(e)......................................................................7.09 316(a) (1)........................................................7.01 and 7.07 316(a) (2).................................................................7.01 316(a) last sentence.......................................................9.04 316(b)......................................................................7.04 317(a)......................................................................7.02 317(b)...................................................................5.04(a) 318(a).....................................................................16.07 - ------ This tie-sheet is not part of the Indenture as executed. - 1 - 26012 TABLE OF CONTENTS Page ---- PARTIES........................................................................1 RECITALS.......................................................................1 Purpose of Indenture.......................................................1 Form of Face of Note.......................................................1 Form of Certificate of Authentication......................................2 Form of Reverse of Note....................................................3 Form of Conversion Notice..................................................6 Form of Assignment.........................................................6 Compliance with Legal Requirements.........................................7 ARTICLE ONE. Definitions. SECTION 1.01. Definitions............................................ 7 Board of Directors.............................................. 7 Business Day.................................................... 7 Common Stock.................................................... 7 Company ....................................................... 8 Conversion Price................................................ 8 Event of Default................................................ 8 Exchange Offer.................................................. 8 Excluded Debt................................................... 8 Indenture....................................................... 8 Loan and Security Agreement..................................... 8 Note or Notes; Outstanding...................................... 8 Noteholder...................................................... 9 Obligor ....................................................... 9 Officers' Certificate........................................... 9 Opinion of Counsel.............................................. 9 Outstanding Debentures.......................................... 9 Person ....................................................... 9 Predecessor Note................................................ 10 Principal Office of the Trustee................................. 10 Responsible Officer............................................. 10 Senior Debt..................................................... 10 Series B Preferred Stock........................................ 10 Subsidiary...................................................... 11 Trigger Date.................................................... 11 Trustee ....................................................... 11 Trust Indenture Act of 1939..................................... 11 (i) TABLE OF CONTENTS
Page ---- ARTICLE TWO. ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES. SECTION 2.01. Designation, Amount and Issue of Notes....................................................... 11 SECTION 2.02. Form of Notes................................................................................ 11 SECTION 2.03. Date and Denomination of Notes............................................................... 11 SECTION 2.04. Execution of Notes........................................................................... 12 SECTION 2.05. Exchange and Registration of Transfer of Notes............................................... 12 SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes................................................... 13 SECTION 2.07. Temporary Notes.............................................................................. 13 SECTION 2.08. Cancellation of Notes Paid, etc.............................................................. 14 ARTICLE THREE. REDEMPTION OF NOTES. SECTION 3.01. Redemption Prices............................................................................ 14 SECTION 3.02. Notice of Redemption; Selection of Notes..................................................... 14 SECTION 3.03. Payment of Notes Called for Redemption....................................................... 15 ARTICLE FOUR. SUBORDINATION OF NOTES. SECTION 4.01. Agreement of Noteholders that Notes Subordinated to Extent Provided.......................... 15 SECTION 4.02. Company not to Make Payments with Respect to Notes in Certain Circumstances......................................................................................... 15 SECTION 4.03. Notes Subordinated to Prior Payment of all Senior Debt on Dissolution, Liquidation or Reorganization of Company.............................................................. 16 SECTION 4.04. Noteholders to be Subrogated to Right of Holders of Senior Debt.............................. 17 SECTION 4.05. Obligation of the Company Unconditional...................................................... 17 SECTION 4.06. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice...................... 17 SECTION 4.07. Application by Trustee of Monies Deposited with It........................................... 18 SECTION 4.08. Subordination Rights Not Impaired by Acts or Omissions of Company or Holders of Senior Debt........................................................................................ 18 SECTION 4.09. Noteholders Authorize Trustee to effectuate Subordination of Notes........................... 18 SECTION 4.10. Right of Trustee to Hold Senior Debt......................................................... 18 SECTION 4.11. Article Four not to Prevent Events of Default................................................ 18
(ii)
TABLE OF CONTENTS Page ---- ARTICLE FIVE. PARTICULAR COVENANTS OF THE COMPANY. SECTION 5.01. Payment of Principal......................................................................... 18 SECTION 5.02. Offices for Notices and Payments, etc........................................................ 19 SECTION 5.03. Appointments to Fill Vacancies in the Trustee's Office....................................... 19 SECTION 5.04. Provision as to Paying Agent................................................................. 19 SECTION 5.05. Corporate Existence.......................................................................... 19 SECTION 5.06. Payment of Taxes and Other Claims............................................................ 20 SECTION 5.07. Statement as to Compliance................................................................... 20 ARTICLE SIX. NOTEHOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 6.01. Noteholders Lists............................................................................ 20 SECTION 6.02. Preservation and Disclosure of Lists......................................................... 21 SECTION 6.03. Reports by the Company....................................................................... 22 SECTION 6.04. Reports by the Trustee....................................................................... 22 ARTICLE SEVEN. REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON EVENT OF DEFAULT. SECTION 7.01. Events of Default............................................................................ 23 SECTION 7.02. Payment of Notes on Default; Suit Therefor................................................... 25 SECTION 7.03. Application of Monies Collected by Trustee................................................... 26 SECTION 7.04. Proceedings by Noteholders................................................................... 26 SECTION 7.05. Proceedings by Trustee....................................................................... 27 SECTION 7.06. Remedies Cumulative and Continuing........................................................... 27 SECTION 7.07. Direction of Proceedings and Waiver of Defaults by Majority of Noteholders................... 27 SECTION 7.08. Notice of Defaults........................................................................... 28 SECTION 7.09. Undertaking to Pay Costs..................................................................... 28 ARTICLE EIGHT. CONCERNING THE TRUSTEE. SECTION 8.01. Duties and Responsibilities of Trustee....................................................... 28
(iii)
TABLE OF CONTENTS Page ---- SECTION 8.02. Reliance on Documents, Opinions, etc......................................................... 29 SECTION 8.03. No Responsibility for Recitals, etc.......................................................... 30 SECTION 8.04. Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes......................... 30 SECTION 8.05. Monies to be held in Trust................................................................... 30 SECTION 8.06. Compensation and Expenses of Trustee......................................................... 30 SECTION 8.07. Officers' Certificate as Evidence............................................................ 30 SECTION 8.08. Conflicting Interest of Trustee.............................................................. 31 SECTION 8.09. Eligibility of Trustee....................................................................... 35 SECTION 8.10. Resignation or Removal of Trustee............................................................ 35 SECTION 8.11. Acceptance by Successor Trustee.............................................................. 36 SECTION 8.12. Succession by Merger, etc.................................................................... 36 SECTION 8.13. Limitation of Rights of Trustee as a Creditor................................................ 37 ARTICLE NINE. CONCERNING THE NOTEHOLDERS. SECTION 9.01. Action by Noteholders........................................................................ 40 SECTION 9.02. Proof of Execution by Noteholders............................................................ 40 SECTION 9.03. Who Are Deemed Absolute Owners............................................................... 40 SECTION 9.04. Company Owned Notes Disregarded.............................................................. 40 SECTION 9.05. Revocation of Consents; Future Holders Bound................................................. 40 ARTICLE TEN. NOTEHOLDERS' MEETINGS. SECTION 10.01. Purposes of Meetings......................................................................... 41 SECTION 10.02. Call of Meetings by Trustee.................................................................. 41 SECTION 10.03. Call of Meetings by Company or Noteholders................................................... 41 SECTION 10.04. Qualifications for Voting.................................................................... 42 SECTION 10.05. Regulations.................................................................................. 42 SECTION 10.06. Voting....................................................................................... 42 SECTION 10.07. No Delay of Rights by Meeting................................................................ 42 ARTICLE ELEVEN. SUPPLEMENTAL INDENTURES. SECTION 11.01. Supplemental Indentures without Consent of Noteholders....................................... 43 SECTION 11.02. Supplemental Indentures with Consent of Noteholders.......................................... 43
(iv)
TABLE OF CONTENTS Page ---- SECTION 11.03. Compliance with Trust Indenture Act of 1939; Effect of Supplemental Indentures............................................................................................ 44 SECTION 11.04. Notation on Notes............................................................................ 44 SECTION 11.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee............................................................................................... 44 ARTICLE TWELVE. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE. SECTION 12.01. Company May Consolidate, etc., on Certain Terms.............................................. 44 SECTION 12.02. Successor Corporation to be Substituted...................................................... 45 SECTION 12.03. Opinion of Counsel to be Given Trustee....................................................... 45 ARTICLE THIRTEEN. SATISFACTION AND DISCHARGE OF INDENTURE. SECTION 13.01. Discharge of Indenture....................................................................... 45 SECTION 13.02. Deposited Monies to be Held in Trust by Trustee.............................................. 46 SECTION 13.03. Paying Agent to Repay Monies Held............................................................ 46 SECTION 13.04. Return of Unclaimed Monies................................................................... 46 ARTICLE FOURTEEN. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 14.01. Indenture and Notes Solely Corporate Obligations............................................. 46 ARTICLE FIFTEEN. CONVERSION OF NOTES. SECTION 15.01. Right to Convert............................................................................. 47 SECTION 15.02. Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Dividends............................................................... 47 SECTION 15.03. Cash Payments in Lieu of Fractional Shares................................................... 48 SECTION 15.04. Conversion Price............................................................................. 48 SECTION 15.05. Adjustment of Conversion Price............................................................... 48 SECTION 15.06. Effect of Reclassification, Consolidation, Merger or Sale.................................... 50 SECTION 15.07. Taxes on Shares Issued....................................................................... 50
(v)
TABLE OF CONTENTS Page ---- SECTION 15.08. Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock.................................................... 50 SECTION 15.09. Limitation on Responsibility of Trustee...................................................... 51 SECTION 15.10. Notice to Holders Prior to Certain Actions................................................... 51 SECTION 15.11. Possible Issuance of Series B Preferred Stock................................................ 52 ARTICLE SIXTEEN. MISCELLANEOUS PROVISIONS. SECTION 16.01. Provisions Binding on Company's Successors................................................... 52 SECTION 16.02. Official Acts by Successor Corporation....................................................... 52 SECTION 16.03. Addresses for Notices, etc................................................................... 52 SECTION 16.04. Governing Law................................................................................ 52 SECTION 16.05. Evidence of Compliance with Conditions Precedent............................................. 53 SECTION 16.06. Legal Holidays............................................................................... 53 SECTION 16.07. Trust Indenture of 1939 to Control........................................................... 53 SECTION 16.08. No Security Interest Created................................................................. 53 SECTION 16.09. Benefits of Indenture........................................................................ 53 SECTION 16.10. Entire Agreement............................................................................. 53 SECTION 16.11. Gender and Number............................................................................ 53 SECTION 16.12. Table of Contents, Headings, etc............................................................. 53 SECTION 16.13. Execution in Counterparts.................................................................... 54 SECTION 16.14. No Sinking Fund.............................................................................. 54 SECTION 16.15. No Interest.................................................................................. 54
(vi) THIS INDENTURE, dated as of November 1, 1995 between Porta Systems Corp., a Delaware corporation (hereinafter sometimes called the "Company"), and American Stock Transfer & Trust Company, a limited purpose trust company duly organized and existing under the laws of the State of New York (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its Zero Coupon Senior Subordinated Convertible Notes due January 2, 1998 (hereinafter sometimes called the "Notes"), in an aggregate principal amount of $30,000,000, and to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; and WHEREAS, the Notes, the certificate of authentication to be borne by the Notes and a form of conversion notice are to be substantially in the following forms, respectively: [FORM OF FACE OF NOTE] REGISTERED REGISTERED NUMBER $ PORTA SYSTEMS CORP. ZERO COUPON SENIOR SUBORDINATED CONVERTIBLE NOTE DUE JANUARY 2, 1998 PORTA SYSTEMS CORP., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), for value received, hereby promises to pay to , or registered assigns, the principal sum of Dollars on January 2, 1998, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, on the Notes to the prior payment in full of all Senior Debt, as defined in the Indenture referred to on the reverse of this Note, and provisions giving the holder of this Note the right to convert this Note into Common Stock of the Company on the terms and subject to the limitations referred to on the reverse of this Note and as more fully specified in said Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall be deemed to be a contract made under the laws of the State of New York applicable to contracts executed and to be performed wholly within such State, and for all purposes shall be construed in accordance with and governed by the laws of said State. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been duly signed by the Trustee under the Indenture. (1) IN WITNESS WHEREOF, Porta Systems Corp. has caused this instrument to be duly executed under its corporate seal. Dated: ........................, PORTA SYSTEMS CORP. [SEAL] By............................... Attest: . . . . . . . . . . . . . . . . . . . . [FORM OF CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. AMERICAN STOCK TRANSFER & TRUST COMPANY As Trustee By................................ Authorized Officer (2) [FORM OF REVERSE OF NOTE] PORTA SYSTEMS CORP. ZERO COUPON SENIOR SUBORDINATED CONVERTIBLE NOTE DUE JANUARY 2, 1998 This Note is one of a duly authorized issue of Notes of the Company, designated as its Zero Coupon Senior Subordinated Convertible Notes due January 2, 1998 (herein called the "Notes"), in the aggregate principal amount of up to Thirty Million Dollars ($30,000,000), all issued or to be issued under and pursuant to an indenture dated as of November 1, 1995 (herein called the "Indenture"), duly executed and delivered in the Borough of Manhattan, The City of New York, by the Company to American Stock Transfer & Trust Company, as Trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. The payment of principal of and premium, if any, on this Note is expressly subordinated and subject in right of payment, as provided in the Indenture, to the prior payment of any and all Senior Debt of the Company, as defined in the Indenture, and this Note is issued subject to such provisions, and each holder of this Note, by accepting the same, agrees, expressly for the benefit of the present and future holders of Senior Debt, whether now or hereafter outstanding, to and shall be bound by such provisions. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become due and payable, in the manner, with the effect, and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than sixty-six and two-thirds percent (66-2/3%) in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to modify the Indenture or any supplemental indenture or the rights of the holders of the Notes; provided, however, that no such modification shall (i) extend the fixed maturity of any Notes, reduce the principal amount thereof or change the currency in which the Notes are payable, or impair the right to convert the Notes into Common Stock on the terms set forth in the Indenture, without the consent of each Noteholder so affected; or (ii) reduce the aforesaid percentage of principal amount of Notes, the consent of the holders of which is required for any such modification, without the consent of the holders of all of the Notes then outstanding. It is also provided in the Indenture that, prior to any declaration accelerating the maturity of the Notes, the holder of not less than a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except a default in the payment of any premium on or the principal of any of the Notes or a failure by the Company to effect any conversion of this Note as provided in the Indenture. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitution herefor irrespective of whether or not any notation thereof is made upon this Note or such other Notes. The Indenture also permits certain amendments without the consent of the holders of the Notes. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of this Note at the place, at the respective times, and in the coin or currency herein prescribed. The Notes are issuable in fully registered form in denominations of one thousand dollars ($1,000), any multiple of one thousand dollars ($1,000), and in such other amounts as is provided in the Indenture. At the office or agency of (3) the Company in the Borough of Manhattan, The City of New York and in the manner and subject to the limitations provided in the Indenture, but without payment of any service charge, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes may, with certain limitations set forth in the Indenture, be redeemed at the option of the Company, as a whole at any time or in part, or from time to time, prior to maturity, upon mailing a notice of such redemption not less than thirty (30) nor more than sixty (60) days prior to the date fixed for redemption to the holders of Notes to be redeemed at their last registered addresses, all as provided in the Indenture, at the following percentage of the principal amount if the Notes are called for redemption during the following periods: Three months ended Percent of Principal Amount ------------------ --------------------------- February 1, 1996 75.87% May 1, 1996 79.48% August 1, 1996 83.10% November 1, 1996 86.71% February 1, 1997 90.32% May 1, 1997 93.93% August 1, 1997 97.55% November 1, 1997 and thereafter 100% Subject to the provisions of the Indenture, the holder hereof has the right, at his option, at any time prior to the close of business on December 31, 1997, or, as to all or any portion hereof called for redemption, the close of business on the second business day prior to the date fixed for redemption, to convert the principal hereof, or, if the principal amount hereof is greater than one thousand dollars ($1,000), any portion of such principal which is one thousand dollars ($1,000), or a multiple thereof, into that number of fully paid and nonassessable shares of the Company's Common Stock obtained by dividing the principal amount of this Note or portion thereof to be converted by the applicable conversion price set forth below, or such conversion price as adjusted from time to time as provided in the Indenture, upon surrender of this Note, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney: Note presented for conversion during three months ended Conversion Price ------------------------- ---------------- February 1, 1996 $2.22 May 1, 1996 1.85 August 1, 1996 1.58 November 1, 1996 and thereafter 1.31 No adjustments in respect of dividends will be made upon any conversion. No fractional shares will be issued upon any conversion, but an adjustment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Note or Notes for conversion. The Indenture also includes provisions pursuant to which, under certain circumstances, the Company may issue shares of its Series B Participating Preferred Stock, with no par value ("Series B Preferred Stock") in lieu of shares of Common Stock upon conversion of the Notes. (4) Upon due presentment for registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, The City of New York, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange herefor, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. Prior to due presentment for registration (of transfer) of this Note, the Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon made by anyone other than the Company or any Note registrar), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Note registrar shall be affected by any notice to the contrary. All payments made to, and all shares of Common Stock and/or Series B Preferred Stock issued upon conversion of this Note to, or upon the order of, such registered holder shall, to the extent of the sum or sums paid or principal amount of this Note so converted, satisfy and discharge liability for monies payable on this Note. No recourse for the payment of the principal of this Note, or for any claim on any Note or otherwise in respect of any Note, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Note, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. (5) [FORM OF CONVERSION NOTICE] TO PORTA SYSTEMS CORP.: The undersigned owner of this Note hereby irrevocably exercises the option to convert this Note, or portion hereof (which is $1,000 or a multiple thereof) below designated, into shares of Common Stock (or, under certain circumstances set forth in the Indenture, Series B Preferred Stock) of Porta Systems Corp. in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Dated: ......................................... Signature (to be medallion guaranteed by an eligible guarantor institution (bank, stockbroker, savings and loan association, or credit union with membership in an approved signature guaranty medallion program), pursuant to Rule 17 Ad- 15 promulgated under the Securities Exchange Act of 1934, if the shares are to be issued in the name of a person other than the registered owner) Fill in for registration of shares: .......................................... .......................................... .......................................... Please print name and address (including zip code number) Principal amount to be converted (if less than all): $ 000 ........................................ Social Security or Other Taxpayer Identification Number [FORM OF ASSIGNMENT] FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto - -------------------------------------------------------------------------------- (Please print name and address of transferee) this Note, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________________, as Attorney, to transfer the within Note on the books kept for registration thereof, with full power of substitution. Dated: Signature: ------------------ ------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Note) Social Security or Other Identifying Number of Transferee: ------------------------- Signature Guaranteed: (6) AND WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee, as in this Indenture provided, and issued, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises, of the purchase and acceptance of the Notes by the holders thereof and of the sum of one dollar duly paid to it by the Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Company covenants and agrees with the Trustee, for the equal and proportionate benefit of the respective holders from time to time of the Notes, as follows: ARTICLE ONE. DEFINITIONS. SECTION 1.01. Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended, or which are by reference therein defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. Board of Directors: The term "Board of Directors" shall mean the Board of Directors of the Company or the Executive Committee of such Board. Business Day: The term "Business Day" shall mean any day other than a Saturday or Sunday or a day on which banking institutions in The City of New York are authorized or obligated to close. Common Stock: The term "Common Stock" shall mean, when used with reference to the capital stock of the Company, the class of stock which, at the date of execution of this Indenture, is designated as common stock of the Company, being its common stock, par value $.01 per share, and stock of any class or classes into which such common stock or any such other class may thereafter be changed or reclassified. In case by reason of the operation of Article Fifteen of this Indenture, the Notes shall be convertible into any other shares or other securities or property of the Company or any other corporation, any reference in this Indenture to the conversion of Notes pursuant to Article Fifteen of this Indenture shall be deemed to refer to and include conversion of Notes into such other shares or other securities or property. (7) Company: The term "Company" shall mean Porta Systems Corp., a Delaware corporation, and subject to the provisions of Article Twelve of this Indenture shall include its successors and assigns. Conversion Price: The term "Conversion Price" shall have the meaning specified in Article Fifteen of this Indenture. Event of Default: The term "Event of Default" shall mean any event specified in Section 7.01 of this Indenture, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. Exchange Offer: The term "Exchange Offer" shall mean the offer made by the Company to the holders of the Outstanding Debentures pursuant to a Notice of Exchange Offer dated November 30, 1995, and as more fully described in a Disclosure Statement dated November 30, 1995, pursuant to which the Company offered to issue, in exchange for each $1,000 stated principal amount of Outstanding Debentures, (i) 97 shares of Common Stock, and (ii) Notes in the principal amount of $767.22. Excluded Debt: The term "Excluded Debt" shall mean the Company's obligations pursuant to the Loan and Security Agreement and the Outstanding Debentures. Indenture: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. Loan and Security Agreement: The term "Loan and Security Agreement" shall mean a certain Amended and Restated Loan and Security Agreement by and between the Company and Foothill Capital Corporation dated as of November 28, 1994, as the same shall be amended and supplemented, and including any agreements with other or subsequent lenders who are or become assignees or participants in the loan or loans made pursuant to such agreement. Note or Notes; Outstanding: The terms "Note" or "Notes" shall mean any Note or Notes, as the case may be, authenticated and delivered under this Indenture. The term "outstanding," when used with reference to Notes, shall, subject to the provisions of Section 9.04 of this Indenture, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (8) (b) Notes, or portions thereof, for the payment or redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent), provided that if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Article Three of this Indenture, or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.06 of this Indenture unless proof satisfactory to the Trustee is presented that any such Notes are held by bona fide holders in due course; and (d) Notes surrendered for conversion into Common Stock pursuant to Article Fifteen of this Indenture or redeemed pursuant to Article Three of this Indenture. Noteholder: The terms "Noteholder," "holder of Notes," or other similar terms, shall mean any person in whose name at the time a particular Note is registered on the books of the Company kept for that purpose in accordance with the terms of this Indenture. Obligor: The term "Obligor," when used with respect to the Notes, means every person who is liable thereon. Officers' Certificate: The term "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by the President or any Vice President and by the Vice President--Finance (if such officer shall not also sign the same certificate as a Vice President), the Controller, any Assistant Controller, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Company. Each such certificate shall include the statements provided for in Section 16.05 of this Indenture if and to the extent required by the provisions of such Section. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing, reasonably acceptable to the Trustee, signed by legal counsel, who may be an employee of or counsel to the Company. Each such opinion shall include the statements provided for in Section 16.05 of this Indenture, if and to the extent required by the provisions of such Section. Outstanding Debentures: The term "Outstanding Debentures" shall mean the Company's 6% Convertible Subordinated Debentures due July 1, 2002, which were issued pursuant to an indenture dated as of July 1, 1992, between the Company, as issuer, and The Bank of New York, as trustee. Person: The term "Person" shall mean a corporation, an association, a partnership, a limited liability company, an organization, a trust, an individual, a government or a political subdivision thereof or a governmental agency. (9) Predecessor Note: The term "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note, and for the purposes of this definition, any Note authenticated and delivered under Section 2.06 of this Indenture in lieu of a mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Note. Principal Office of the Trustee: The term "principal office of the Trustee," or other similar term shall mean the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office is, at the date of this Indenture, located at 40 Wall Street, 46th Floor, New York, New York 10005. Responsible Officer: The term "Responsible Officer," when used with respect to the Trustee, shall mean the chairman or vice chairman of the board of directors, the chairman or vice chairman of the executive committee of the board of directors, the president, any executive vice president, any senior vice president, any vice president, any assistant vice president, the cashier, any assistant cashier, any senior trust officer, any trust officer, any assistant trust officer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Senior Debt: The term "Senior Debt" shall mean the principal of and premium, if any, and interest on the following: (a) the Loan and Security Agreement (including all interest accruing after the commencement of any bankruptcy or similar proceeding of which the Company is the subject, whether or not a claim for post-petition interest is allowed as a claim in any such proceeding, and including all fees and other similar amounts payable in connection therewith), (b) all other indebtedness of the Company (including indebtedness of others assumed or guaranteed by the Company) other than the Securities, whether outstanding on the date of the Indenture or thereafter created, incurred or assumed, which is (i) for money borrowed (which for all purposes herein includes obligations of the Company to repay amounts owing in respect of letters of credit, overdrafts, foreign exchange contracts, bankers' acceptances and loans or advances from banks, whether or not evidenced by notes or similar instruments) or (ii) evidenced by a note or similar instrument given in connection with an acquisition of any businesses, properties or assets of any kind (other than any such acquisition in the ordinary course of business), (c) obligations of the Company as lessee under leases required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles and (d) amendments, renewals, extensions, modifications, refinancings and refundings of any such indebtedness or obligation, including the Notes, unless in any case in the instrument creating or evidencing any such indebtedness or obligation or pursuant to which the same is outstanding it is provided that such indebtedness or obligation is not superior in right of payment to the Securities. All of the Company's obligations under the Notes shall be senior to the Company's obligations under the Outstanding Debentures. Neither the Notes nor the Outstanding Debentures are included in the definition of Senior Debt. Series B Preferred Stock: The term "Series B Preferred Stock" shall mean the Company's Series B Participating Convertible Preferred Stock, with the holders having substantially the rights, preferences and privileges set forth in a Certificate of Designation filed with the Secretary of State of Delaware on or about the date of execution of this Indenture. (10) Subsidiary: The term "Subsidiary" shall mean any corporation of which at least a majority of the outstanding stock having voting power under ordinary circumstances to elect a majority of the board of directors of said corporation shall at the time be owned by the Company or by the Company and one or more Subsidiaries or by one or more Subsidiaries. Trigger Date: The term "Trigger Date" shall mean the date on which the number of the Company's issued and outstanding Common Stock, including any shares of Common Stock issuable pursuant to Article Fifteen of this Indenture (without regard to the application of Section 15.11 of this Indenture), shall be at least nineteen million (19,000,000) shares, inclusive of shares of Common Stock issuable upon conversion of Notes presented for conversion at such date. Trustee: The term "Trustee" shall mean American Stock Transfer & Trust Company and, subject to the provisions of Article Eight of this Indenture, shall also include its successors and assigns as Trustee hereunder. Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" shall mean the Trust Indenture Act of 1939 as it was in force at the date of execution of this Indenture, except as provided in Sections 11.03 and 15.06 of this Indenture. ARTICLE TWO. ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES. SECTION 2.01. Designation, Amount and Issue of Notes. The Notes shall be designated as set forth in the title of the form of Note hereinabove set forth. Upon execution of this Indenture, or from time to time hereafter, pursuant to the Exchange Offer to the holders of the Outstanding Debentures, or otherwise, the Company may execute and deliver to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Company, signed by its President or any of its Vice Presidents and its Treasurer ar any of its Assistant Treasures, without any further action by the Company hereunder, Notes in the aggregate principal amount of thirty million dollars ($30,000,000). SECTION 2.02. Form of Notes. The Notes, the Trustee's certificate of authentication and the conversion notice to be borne by the Notes shall be substantially in the form as in this Indenture above recited. Any of the Notes may have imprinted thereon such legends or endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Notes may be listed, or to conform to usage. SECTION 2.03. Date and Denomination of Notes. The Notes shall be issuable in fully registered form in denominations of one thousand dollars ($1,000) and any multiple of one thousand dollars ($1,000). However, if a holder of Outstanding Debentures accepts the Exchange Offer with respect to all of his Outstanding Debentures, a separate Note may be issued to such holder in a principal amount less than one thousand dollars ($1,000). If the total principal amount of Notes to be issued to such holder exceeds one thousand dollars ($1,000) or a multiple (11) thereof, such separate Note shall be issued in the amount by which such principal amount exceeds such multiple. If the total principal amount of Notes to be issued to such holder is less than one thousand dollars ($1,000), a single Note shall be issued for such total principal amount. Notes shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plan as the officers of the Company executing the same may determine with the approval of the Trustee and each Note shall be dated the date of its authentication. No Note in a principal amount other than one thousand dollars ($1,000) or a multiple of one thousand dollars ($1,000) may be transferred or converted or redeemed except in whole. SECTION 2.04. Execution of Notes. The Notes shall be signed in the name and on behalf to the Company by the facsimile signature of its President or, in lieu thereof, of any of its Vice Presidents or its Treasurer and attested by its Secretary or an Assistant Secretary, under its corporate seal (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). For that purpose the Company may adopt and use the facsimile signature of any person who has been or is or shall be such officer. Only such Notes as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee, shall be entitled to the benefits of the Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. SECTION 2.05. Exchange and Registration of Transfer of Notes. Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. Notes to be exchanged shall be surrendered at the office or agency to be maintained by the Company in the Borough of Manhattan, The City of New York, and the Company shall execute and register and the Trustee shall authenticate and deliver in exchange therefor the Note or Notes which the Noteholder making the exchange shall be entitled to receive. The Company shall keep, at said office or agency in The City of New York, a Note register in which, subject to such reasonable regulations as it may prescribe, the Company shall register Notes and shall register the transfer of Notes as provided in this Article Two. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. At all reasonable times such register shall be open for inspection by the Trustee. So long as any of the Notes remain outstanding, the Company shall also at all times maintain an office or agency in the Borough of Manhattan, The City of New York at which Notes may be presented for conversion, transfer and exchange. Upon due presentment for registration of transfer of any Notes at any such office or agency, the Company shall execute and register and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Note or Notes for an equal aggregate principal amount. All Notes presented for registration of transfer or for exchange, redemption, conversion or payment shall (if so required by the Company or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee duly executed by, the holder or his attorney duly authorized in writing. If presented for transfer, the registered holder's signature shall be medallion guaranteed by a New York bank or trust company or a member of the New York Stock Exchange. No service charge shall be made for any exchange or registration of transfer of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (12) The Company shall not be required to exchange or register a transfer of (a) any Notes for a period of fifteen (15) days next preceding any selection of Notes to be redeemed, or (b) any Notes selected, called, or being called for redemption except, in the case of any Notes to be redeemed in part, the portion thereof not so to be redeemed, or (c) any Notes surrendered for conversion. Nothing in this Section 2.05 shall be construed to prohibit the conversion of Notes during the period when the Notes may be converted pursuant to Article Fifteen of this Indenture. SECTION 2.06. Mutilated, Destroyed, Lost or Stolen Notes. In case any temporary or definitive Notes shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its request the Trustee shall authenticate and deliver, a new Note, bearing a number not contemporaneously outstanding, in exchange and in substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company and to the Trustee such security and indemnity as may be required by them to effectively save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee may authenticate any such substituted Note and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith and in addition a further sum not exceeding $2 for each Note so issued in substitution. In case any Note which has matured or is about to mature or is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note) if the applicant for such payment shall furnish to the Company and to the Trustee such security and indemnity as may be required by them to effectively save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and the Trustee of the destruction, loss or theft of such Note and of the ownership thereof. Every substituted Note issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. All Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. SECTION 2.07. Temporary Notes. Pending the preparation of definitive Notes, the Company may execute and the Trustee shall authenticate and deliver temporary Notes (printed or lithographed). Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the definitive Note but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unreasonable delay the Company shall execute and deliver to the Trustee definitive Notes and thereupon any or all temporary Notes may be surrendered in exchange therefor, at the principal office of the Trustee in the Borough of Manhattan, The City of New York, and the Trustee shall authenticate and deliver definitive Notes in exchange for such temporary Notes. The Company shall bear any and all reasonable costs associated with such exchange. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes authenticated and delivered hereunder. (13) SECTION 2.08. Cancellation of Notes Paid, etc. All Notes surrendered for the purpose of payment, redemption, conversion, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent or any Note registrar or any conversion agent, be surrendered to the Trustee and promptly cancelled by it, or, if surrendered to the Trustee, shall be promptly cancelled by it, and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee may destroy cancelled Notes and deliver a certificate of such destruction to the Company. If the Company shall acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation. ARTICLE THREE. REDEMPTION OF NOTES. SECTION 3.01. Redemption Prices. The Company may, at its option, redeem all or from time to time any part of the Notes, on notice as set forth in Section 3.02 of this Indenture, and at the redemption prices set forth in the form of Note hereinabove recited. SECTION 3.02. Notice of Redemption; Selection of Notes. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Notes of this Indenture, it shall fix a date for redemption and it, or, at its request, the Trustee in the name of and at the risk and expense of the Company, shall mail or cause to be mailed a notice of such redemption at least thirty (30), and not more than sixty (60), days prior to the date fixed for redemption to the holders of Notes so to be redeemed as a whole or in part at their last addresses as the same appear on the Notes register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Each such notice of redemption shall be given in the name of the Company and specify the date fixed for redemption, the redemption price at which Notes are to be redeemed, the place of payment, and that payment will be made upon presentation and surrender of such Notes at the place of payment. Such notice shall also state the current conversion price and the date on which the right to convert such Notes or portions thereof into Common Stock will expire. If fewer than all the Notes are to be redeemed, the notice of redemption shall identify the Notes to be redeemed. In case any Note is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued. Prior to the redemption date specified in the notice of redemption given as provided in this Section 3.02, the Company shall deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Notes so called for redemption at the appropriate redemption price. If fewer than all the Notes are to be redeemed, it shall give the Trustee notice not less than forty-five (45) days prior to the redemption date as to the aggregate principal amount of Notes to be redeemed. If fewer than all the Notes are to be redeemed or if any Notes are to be redeemed in part only, the Trustee shall select, pro rata or by lot, as the Trustee shall deem appropriate and fair, the Notes or portions thereof to be redeemed and shall as promptly as practicable notify the Company of the Notes or portions thereof so selected. No Note of the denomination of one thousand dollars ($1,000) or less shall be redeemed in part and Notes may be redeemed in part only in multiples of one thousand dollars ($1,000). If any Note selected for partial redemption is converted in part after such selection, the converted portion of such Note shall be deemed (so far (14) as may be) to be the portion to be selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Note is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all the Notes, the Company and the Trustee may treat as outstanding Notes surrendered for conversion during the period of fifteen (15) days next preceding the mailing of a notice of redemption and need not treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted in part during such period. SECTION 3.03. Payment of Notes Called for Redemption. If notice of redemption has been given as above provided, the Notes with respect to which such notice has been given shall, unless theretofore converted into Common Stock pursuant to the terms of this Indenture, become due and payable on the date and at the place or places stated in such notice at the applicable redemption price. On presentation and surrender of such Notes at a place of payment in said notice specified, the said Notes or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price. Upon presentation and surrender of any Note redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented and surrendered. ARTICLE FOUR. SUBORDINATION OF NOTES. SECTION 4.01. Agreement of Noteholders that Notes Subordinated to Extent Provided. The Company, for itself, its successors and assigns, covenants and agrees and each holder of the Notes by his acceptance thereof likewise covenants and agrees that the payment of the principal of each and all of the Notes is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, to the prior payment in full of all Senior Debt, whether outstanding on the date hereof or incurred or created in the future. The provisions of this Article Four shall constitute a continuing offer to all persons who, in reliance upon such provisions, become holders of, or continue to hold, Senior Debt, and such provisions are made for the benefit of the holders of Senior Debt, and such holders are hereby made obligees hereunder the same as if their names were written herein as such, and they and/or each of them may proceed to enforce such provisions. SECTION 4.02. Company not to Make Payments with Respect to Notes in Certain Circumstances. (a) Upon the maturity of any Senior Debt by lapse of time, acceleration or otherwise, all principal thereof and premium, if any, and interest thereon shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to the holder or holders of such Senior Debt, before any payment is made on account of the principal of the Notes or to acquire any of the Notes by the Company. (b) Upon the happening of an event of default with respect to any Senior Debt, as such event of default is defined therein or in the instrument under which it is outstanding, permitting the holders to accelerate the maturity thereof, and, if the default is other than default in payment of the principal of or premium, if any, or interest on such Senior Debt, upon written notice thereof given to the Company and the Trustee by the holder or holders of such Senior Debt or their representative or representatives, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, no payment shall be made by the Company with respect to the principal of the Notes or to acquire any of the Notes. (15) (c) In the event that, notwithstanding the provisions of this Section 4.02, the Company shall make any payment to the Trustee on account of the principal of the Notes, after the happening of a default in payment of the principal of or premium, if any, or interest on Senior Debt, or after receipt by the Company and the Trustee of written notice as provided in Section 4.06 of this Indenture of an event of default with respect to any Senior Debt, then, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, such payment (subject to the provisions of Sections 4.06 and 4.07 of this Indenture) shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Debt (pro rata as to each of such holders on the basis of the respective amounts of Senior Debt held by them) or their representative or the trustee under the indenture or other agreement (if any) pursuant to which any instruments evidencing any Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Senior Debt remaining unpaid to the extent necessary to pay all Senior Debt in full in accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. (d) It is understood and agreed that the Trustee shall be under no obligation to enforce the Company's agreement, pursuant to Paragraphs 4.02(a) and (b) of this Indenture, not to make payments to acquire any of the Notes or to take any action upon the breach of such agreement. SECTION 4.03. Notes Subordinated to Prior Payment of all Senior Debt on Dissolution, Liquidation or Reorganization of Company. Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise), (a) The holders of all Senior Debt shall first be entitled to receive payment in full of the principal thereof, premium, if any, and interest due thereon before the holders of the Notes are entitled to receive any payment on account of the principal of the Notes (other than payment in shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which stock and securities are subordinated to the payment of all Senior Debt and securities received in lieu thereof which may at the time be outstanding); and (b) Any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which stock and securities are subordinated to the payment of all Senior Debt and securities received in lieu thereof which may at the time be outstanding), to which the holders of the Notes or the Trustee would be entitled except for the provisions of this Article Four, shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or other trustee or agent, directly to the holders of Senior Debt or their representative or representatives, or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Debt may have been issued, to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Debt. (c) In the event that notwithstanding the foregoing provisions of this Section 4.03, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, which stock and securities are subordinated to the payment of all Senior Debt and securities received in lieu thereof which may at the time be outstanding), shall be received by the Trustee or the holders of the Notes on account of principal or premium, if any, on the Notes before all Senior Debt is paid in full, or effective provision made for its payment, such payment or distribution (subject to the provisions of Section 4.06 and 4.07 of this Indenture) shall be received and held in trust for and shall be paid over to the holders of the Senior Debt remaining unpaid or unprovided for or their (16) representative or representatives, or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Debt may have been issued, for application to the payment of such Senior Debt until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Debt. SECTION 4.04. Noteholders to be Subrogated to Right of Holders of Senior Debt. Subject to the payment in full of all Senior Debt, the holders of the Notes shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of assets of the Company applicable to the Senior Debt until all amounts owing on the Notes shall be paid in full, and for the purpose of such subrogation, no payments or distributions to the holders of the Senior Debt by or on behalf of the Company or by or on behalf of the holders of the Notes by virtue of this Article Four which otherwise would have been made to the holders of the Notes shall, as between the Company and the holders of the Notes, be deemed to be payment by the Company to or on account of the Senior Debt, it being understood that the provisions of this Article Four are and are intended solely for the purpose of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Debt, on the other hand. SECTION 4.05. Obligation of the Company Unconditional. Nothing contained in this Article Four or elsewhere in this Indenture or in the Notes is intended to or shall impair as between the Company and the holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Notes the principal of Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Debt, nor shall anything herein or therein prevent the Trustee or the holder of any Note from exercising all rights and remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article Four of the holders of Senior Debt in respect of cash, property, or securities of the Company received upon the exercise of any such remedy. Upon any distribution of assets of the Company referred to in this Article Four, the Trustee, subject to the provisions of Section 8.01 of this Indenture, and the holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or to the holders of the Notes, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Four. SECTION 4.06. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Company shall give prompt written notice to the Trustee of any default under any Senior Debt or under any agreement pursuant to which Senior Debt may have been issued. Notwithstanding the provisions of Section 4.01 of this Indenture or any other provision of this Indenture, the Trustee shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment of monies to or by the Trustee, unless and until the Trustee shall have received at the principal office of the Trustee, Attention: President, written notice thereof from the Company or from one or more holders of Senior Debt or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.01 of this Indenture, shall be entitled to assume conclusively that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Debt (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Debt or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article Four, the Trustee may, at its discretion, request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such (17) payment or distribution and any other facts pertinent to the rights of such Person under this Article Four, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment, but the Trustee shall not be obligated to institute a judicial proceeding for such purpose; nor shall the Trustee be charged with knowledge of the curing or waiver of any event of default of the character referred to in Paragraph 4.02(b) of this Indenture or that any event or any condition preventing any payment in respect of the Notes shall have ceased to exist, unless and until the Trustee shall have received an Officers' Certificate to such effect. SECTION 4.07. Application by Trustee of Monies Deposited with It. Anything in this Indenture to the contrary notwithstanding, any deposit of monies by the Company with the Trustee or any paying agent (whether or not in trust) for the payment of the principal of or premium, if any, on any Notes shall be subject to the provisions of Sections 4.01, 4.02, 4.03 and 4.04 of this Indenture except that, if not less than three (3) Business Days prior to the date on which by the terms of this Indenture any such monies may become payable for any purpose (including, without limitation, the payment of either the principal of or premium, if any, on any Note and any amount immediately due and payable upon the execution of any instrument acknowledging satisfaction and discharge of this Indenture, as provided in Article Thirteen of this Indenture) the Trustee shall not have received with respect to such monies the notice provided for in Section 4.06 of this Indenture, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. SECTION 4.08. Subordination Rights Not Impaired by Acts or Omissions of Company or Holders of Senior Debt. No right of any present or future holders of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. SECTION 4.09. Noteholders Authorize Trustee to effectuate Subordination of Notes. Each holder of the Notes by his acceptance thereof authorizes and expressly directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article Four and irrevocably appoints the Trustee his attorney-in-fact for such purpose. SECTION 4.10. Right of Trustee to Hold Senior Debt. The Trustee shall be entitled to all of the rights set forth in this Article Four in respect of any Senior Debt at any time held by it to the same extent as any other holder of Senior Debt, and nothing in Section 8.13 of this Indenture or elsewhere in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. SECTION 4.11. Article Four not to Prevent Events of Default. The failure to make a payment on account of principal or premium, if any, by reason of any provision in this Article Four shall not be construed as preventing the occurrence of an Event of Default under Section 7.01 of this Indenture. ARTICLE FIVE. PARTICULAR COVENANTS OF THE COMPANY. SECTION 5.01. Payment of Principal. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. (18) SECTION 5.02. Offices for Notices and Payments, etc. So long as any of the Notes remain outstanding, the Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where the Notes may be presented for payment, an office or agency where the Notes may be presented for registration of transfer and for exchange and conversion as provided in this Indenture and an office or agency where notices and demands to or upon the Company in respect of the Notes or of this Indenture may be served. The Company shall give to the Trustee written notice of the location of each such office or agency and of any change of location thereof. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal office of the Trustee in the Borough of Manhattan, The City of New York. The Company hereby appoints the Trustee at the principal office of the Trustee in the Borough of Manhattan, The City of New York, its agent to receive all such presentations and demands. SECTION 5.03. Appointments to Fill Vacancies in the Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10 of this Indenture, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 5.04. Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, it shall cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.04, (1) that it shall hold all sums held by it as such agent for the payment of the principal of the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes; (2) that it shall give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of and premium, if any, on the Notes when the same shall be due and payable; and (3) that it shall at any time during the continuance of an Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held by it as such agent. (b) If the Company shall act as its own paying agent, it shall on or before each due date of the principal of the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or by any other obligor under the Notes) to make any payment of the principal of the Notes when the same shall become due and payable. (c) Anything in this Section 5.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or any paying agent hereunder, as required by this Section 5.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 5.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.04 is subject to Sections 13.03 and 13.04 of this Indenture. SECTION 5.05. Corporate Existence. Subject to Article Twelve of this Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, and all material rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Chief Executive Officer and Chief Financial Officer of the Company jointly (19) determine that the preservation thereof is no longer necessary or desirable in the conduct of the business of the Company or that the abandonment thereof is in the best interest of the Company. SECTION 5.06. Payment of Taxes and Other Claims. The Company will use its best efforts to pay or discharge, or cause to be paid or discharged, (a) before the same may become a lien on the general assets of the Company, all material Federal and/or state taxes and assessments charges levied or imposed upon the Company or upon the income, profits or property, real or personal, or upon any part thereof, of the Company, and (b) not later than thirty (30) days after it becomes a lien on the particular assets, all material claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any material property of the Company; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and if the Company shall have set aside on its books reserves deemed by it adequate with respect thereto. SECTION 5.07. Statement as to Compliance. (a) The Company shall deliver to the Trustee, within one hundred twenty (120) days after the end of each fiscal year, an Officer's Certificate of the Company, stating, as to each signer thereof, that (1) a review of the activities of the Company during such year and of performance under this Indenture has been made under his supervision, and (2) to the best of his knowledge, based on such review, the Company has fulfilled all its obligations under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him and the nature and status thereof. (b) The Company shall promptly notify the Trustee if the Company's fiscal year is changed so that the end thereof is on any date other than the then current fiscal year end date. (c) The Company will deliver to the Trustee, forthwith upon a senior executive officer becoming aware that the Company is in a material default in the performance or observance of any material covenant, agreement or condition contained in this Indenture or that any Event of Default has occurred, an Officers' Certificate specifying with particularity such default or Event of Default and further stating what action the Company has taken, is taking or proposes to take with respect thereto. ARTICLE SIX. NOTEHOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. SECTION 6.01. Noteholders Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semi-annually and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request, a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Notes as of a date not more than fifteen (15) days prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Note registrar. (20) SECTION 6.02. Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 6.01 of this Indenture. The Trustee may destroy any list furnished to it as provided in Section 6.01 of this Indenture upon receipt of a new list so furnished. (b) In case three (3) or more holders of Notes (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each such applicant has owned a Note for a period of at least six (6) months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five (5) Business Days after the receipt of such application, at its election, either, (1) afford such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of Paragraph 6.02(a) of this Indenture, or (2) inform such applicants as to the approximate number of holders of Notes whose names and addresses appear in the information preserved at the time by the Trustee in accordance with the provisions of Paragraph 6.02(a) of this Indenture, and as to the approximate cost of mailing to such Noteholders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Noteholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of Paragraph 6.02(a) of this Indenture a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five (5) days after such tender, the Trustee shall mail to such applicants and file within the Securities and Exchange Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Notes or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Noteholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of the Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent nor the Note registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Notes in accordance with the provisions of Paragraph 6.02(b) of this Indenture, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Paragraph 6.02(b). (21) SECTION 6.03. Reports by the Company. (a) The Company covenants and agrees to file with the Trustee, within fifteen (15) days after the Company is required to file the same with the Securities and Exchange Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as said Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with said Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents, or reports pursuant to either of such sections, then to file with the Trustee and said Commission, in accordance with rules and regulations prescribed from time to time by said Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Securities and Exchange Commission, in accordance with the rules and regulations prescribed from time to time by said Commission, such additional information, documents, and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture, as may be required from time to time by such rules and regulation, including, in the case of annual reports, if required by such rules and regulations, certificates or opinions of independent public accountants, conforming to the requirements of Section 16.05 of this Indenture, as to compliance with conditions or covenants, compliance with which is subject to verification by accountants. (c) The Company covenants and agrees to transmit by mail to all holders of Notes as the names and addresses of such holders appear upon the Note register within thirty (30) days after the filing thereof with the Trustee, such summaries of any information, documents, and reports required to be filed by the Company pursuant to Paragraphs 6.03(a) and (b) of this Indenture as may be required by rules and regulations prescribed from time to time by the Securities and Exchange Commission; and (d) The Company covenants and agrees to furnish to the Trustee, not less often than annually, an Officers' Certificate as to such officers' knowledge of such obligor's compliance with all conditions and covenants under this Indenture. For purposes of this Paragraph 6.03(d), such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. SECTION 6.04. Reports by the Trustee. (a) On or before the date the registration statement covering the Notes is declared effective by the Securities and Exchange Commission, and in every year thereafter on or before the anniversary thereof, so long as any Notes are outstanding, the Trustee shall transmit to the Noteholders, as hereinafter in this Section 6.04 provided, a brief report dated as of 30 days prior to such anniversary with respect to any of the following events which may have occurred within the previous twelve (12) months (but if no such event has occurred within such period no report need be transmitted): (1) any change to its eligibility under Section 8.09 of this Indenture or its qualification under Section 8.08 of this Indenture; (2) the creation of or any material change to a relationship specified in Paragraphs 6.04(a)(1) through (10) of this Indenture; (3) the character and amount of advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to (22) state such advances if such advances so remaining unpaid aggregate not more than one-half of one percent (1/2 of 1%) of the principal amount of the Notes outstanding on the date of such report; (4) the amount, interest rate, and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Notes) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Paragraphs 8.13(b)(2), (3), (4) or (6) of this Indenture; (5) any change to the property and funds, if any, physically in the possession of the Trustee, as such, on the date of such report; (6) any additional issue of Notes which the Trustee has not previously reported; and (7) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Notes, except action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 7.08 of this Indenture. (b) The Trustee shall transmit to the Noteholders, as hereinafter provided, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such), since the date of the last report transmitted pursuant to the provisions of Paragraph 6.04(a) of this Indenture (or, if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Notes on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this Paragraph 6.04(b), except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate ten percent (10%) or less of the principal amount of Notes outstanding at such time, such report to be transmitted within ninety (90) days after such time. (c) Reports pursuant to this Section 6.04 shall be transmitted by mail to all holders of Notes as the names and addresses of such holders appear on the Note register, with copies sent to the Company. (d) A copy of each such report shall, at the time of such transmission to Noteholders, be filed by the Trustee with each stock exchange upon which the Notes are listed and also with the Securities and Exchange Commission. The Company shall notify the Trustee when and as the Notes become listed on any stock exchange. ARTICLE SEVEN. REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON EVENT OF DEFAULT. SECTION 7.01. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Four of this Indenture or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of the principal of any Note when due and payable, as therein or herein provided, whether at the stated maturity or by declaration of acceleration, call for redemption, exercise of the repurchase right or otherwise; or (23) (b) either (i) failure by the Company to make any payment at final maturity in respect of any outstanding Indebtedness (other than Excluded Debt) in an amount in excess of one million U.S. dollars (U.S.$1,000,000) or the equivalent thereof in any other currency or composite currency and the continuance of such failure for a period of sixty (60) days after written notice thereof by any trustee or other representative of the holders thereof to the Company, or to the Company by or on behalf of the holders of not less than twenty five percent (25%) in principal amount of such Indebtedness, or (ii) declaration of any default, beyond any period of grace, with respect to any Indebtedness (other than Excluded Debt), which default results in the acceleration by the holder(s) thereof of Indebtedness in an amount in excess of five million U.S. dollars (U.S.$5,000,000) or the equivalent thereof in any other currency or composite currency without such Indebtedness having been discharged or such acceleration having been cured, waived, rescinded or annulled within a period of sixty (60) days after written notice thereof by any trustee or other representative of the holders thereof to the Company, or to the Company by or on behalf of the holders of not less than twenty five percent (25%) in principal amount of such Indebtedness; provided, however, that if, prior to the entry of judgment in favor of any trustee with respect to any Indebtedness or in favor of any holder of any Indebtedness or other representative of the holders thereof, such failure or default under such indenture or instrument shall be remedied or cured by the Company, or waived by the holders of such Indebtedness, and such acceleration shall be rescinded, then the Event of Default under the this Paragraph 7.01(b) shall be deemed likewise to have been remedied, cured or waived; "Indebtedness" being defined to mean obligations of, or guaranteed or assumed by, the Company for borrowed money, including obligations evidenced by bonds, debentures, notes or other similar instruments (it being understood that "Indebtedness" does not include obligations to pay the purchase price of goods if such goods are acquired, and such obligations are incurred, in the ordinary course of the Company's business or other obligations to trade creditors); or (c) a default by the Company in the performance or observance in any material respect of any term, covenant, warranty or agreement in the Notes or this Indenture and the continuance thereof for a period of ninety (90) days after receipt by the Company of notice thereof from the Trustee or the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes issued pursuant to this Indenture, such percentage to be determined without giving effect to any reduction in outstanding principal amount as a result of the conversion or redemption of Notes, purchases of Notes by the Company or any other events or transactions which have the effect of reducing the principal amount of Notes outstanding, such notice to state that it is a Notice of Default and to set forth in reasonable detail the nature of the default; or (d) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under Federal bankruptcy law or any other applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or (e) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under Federal bankruptcy law or any other applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. In case one or more Events of Default shall have occurred and be continuing, unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the holders of not less than twenty-five (24) percent (25%) in aggregate principal amount of the Notes issued pursuant to this Indenture, such percentage to be determined without giving effect to any reduction in outstanding principal amount as a result of the conversion or redemption of Notes, purchases of Notes by the Company or any other events or transactions which have the effect of reducing the principal amount of Notes outstanding, by notice in writing to the Company (and to the Trustee if given by Noteholders), may declare the principal of all the Notes to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. This provision, however, is subject to the condition that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgement or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay the principal of any and all of the Notes which shall have become due otherwise than by acceleration and all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any and all defaults under this Indenture, other than the nonpayment of principal of Notes which shall have become due by acceleration, shall have been remedied; then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceeding had been taken. SECTION 7.02. Payment of Notes on Default; Suit Therefor. The Company covenants that in case default shall be made in the payment of the principal of any of the Notes as and when the same shall have become due and payable whether at maturity of the Notes or in connection with any redemption, by declaration or otherwise, then, upon demand of the Trustee, the Company shall pay to the Trustee, for the benefit of the holders of the Notes, the whole amount of the principal of the Note that then shall have become due and, in addition thereto, such further amount as shall be sufficient to cover the reasonable costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code or any other applicable law, or in case a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) shall have been appointed for the property of the Company or such other Obligor or in the case of any other similar judicial proceedings relative to the Company or other Obligor upon the Notes, or to the creditors or property of the Company or such other Obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal owing and unpaid in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Noteholders allowed in such judicial (25) proceedings relative to the Company or any other Obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Noteholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any amounts due the Trustee under Section 8.06 of this Indenture. To the extent that such payment of reasonable compensation, expenses, disbursements and advances and counsel fees out of the trust estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or adopt on behalf of any Noteholder any plan of reorganization or arrangement, affecting the Notes or the rights of any Noteholders, or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding. All rights or action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof in any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Notes. SECTION 7.03. Application of Monies Collected by Trustee. Subject to the provisions of Article Four of this Indenture, any monies collected by the Trustee pursuant to Section 7.02 of this Indenture shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and reasonable compensation to and expenses and disbursements of the Trustee, its agents, attorneys and counsel, and of all other expenses and liabilities incurred, and all advances made, by the Trustee except as a result of its negligence or bad faith; SECOND: In case the principal of the outstanding Notes shall have become due, by declaration or otherwise, to the payment of the whole amount then owing and unpaid upon the Notes for principal and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal without preference or priority of any Note over any other Note, ratably to the aggregate of such principal. SECTION 7.04. Proceedings by Noteholders. No holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than twenty-five percent (25%) in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee under this Indenture and shall have offered to the Trustee such reasonable indemnity and security as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity and security, shall have neglected or refused to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right (26) in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of such Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes. Notwithstanding any other provisions in this Section 7.02 or any other section of this Indenture, the right of any holder of any Note to receive payment of the principal of such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, in his own behalf and for his own benefit may enforce, and may institute and maintain any proceeding suitable to enforce, his rights of conversion as provided in this Indenture. SECTION 7.05. Proceedings by Trustee. In case of an Event of Default, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceedings in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 7.06. Remedies Cumulative and Continuing. All powers and remedies given by this Article Seven to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 7.04 of this Indenture, every power and remedy given by this Article Seven or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. SECTION 7.07. Direction of Proceedings and Waiver of Defaults by Majority of Noteholders. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.04 of this Indenture shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee; provided, however, that (subject to the provisions of Section 8.01 of this Indenture) the Trustee shall have the right to decline to follow any such direction if the Trustee shall be advised by its counsel that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed could involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Notes, the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default hereunder and its consequences except a default in the payment of the principal of the Notes or a failure by the Company to convert any Notes into Common Stock. Upon any such waiver, the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.07, said default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing. (27) SECTION 7.08. Notice of Defaults. The Trustee shall, within ninety (90) days after the occurrence of a default, mail to all Noteholders as the names and addresses of such holders appear upon the registry books of the Company, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 7.08 being hereby defined to be the events specified in Section 7.01 of this Indenture, not including periods of grace, if any, provided for therein); and provided that, except in the case of default in the payment of the principal of any of the Notes, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Noteholders. SECTION 7.09. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court of competent jurisdiction may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, that the provisions of this Section 7.09 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder, or group of Noteholders, holding in the aggregate more than ten percent (10%) in principal amount of the Notes outstanding, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of any Note on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article Fifteen of this Indenture. ARTICLE EIGHT. CONCERNING THE TRUSTEE. SECTION 8.01. Duties and Responsibilities of Trustee. The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provisions of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee (28) shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding determined as provided in Section 9.04 of this Indenture relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 8.02. Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 8.01 of this Indenture, (a) the Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the Trustee may consult with its or the Company's counsel, and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders, pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note, coupon or other paper or document unless requested in writing to do so by the holders of not less than a majority in principal amount of the Notes then outstanding; provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require additional security and reasonable indemnity against such expense or lability as a condition to so proceeding; and (29) (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder. SECTION 8.03. No Responsibility for Recitals, etc. The recitals contained in this Indenture and in the Notes (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness or completeness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes or of their authorization by the Company. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. SECTION 8.04. Trustee, Paying Agents, Conversion Agents or Registrar May Own Notes. The Trustee or any paying agent or any conversion agent or Note registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Note registrar. SECTION 8.05. Monies to be held in Trust. Subject to the provisions of Sections 13.03 and 13.04 of this Indenture, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. SECTION 8.06. Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses, disbursements and advances of its agents and counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. The obligations of the Company under this Section 8.06 to compensate the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes. Any expenses incurred or compensation for services rendered by the Trustee after an Event of Default are intended to constitute expenses of administration under any applicable bankruptcy law. SECTION 8.07. Officers' Certificate as Evidence. Except as otherwise provided in Section 8.01 of this Indenture, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such Certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. (30) SECTION 8.08. Conflicting Interest of Trustee. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section 8.08, then, within ninety (90) days after ascertaining that it has such conflicting interest, and if the default, as defined in this Section 8.08, to which such conflicting interest relates has not been cured or duly waived or otherwise eliminated before the end of such ninety (90) day period, the Trustee shall either eliminate such conflicting interest or, except as otherwise provided in this Section 8.08, resign, and the Company shall take prompt steps to have a successor appointed in the manner and with the effect specified in Section 8.10 of this Indenture. (b) In the event that the Trustee shall fail to comply with the provisions of Paragraph 8.08(a) of this Indenture, the Trustee shall, within ten (10) days after the expiration of such ninety (90) day period, transmit notice of such failure to all holders of Notes, as the names and addresses of such holders appear upon the registry books of the Company. (c) For the purpose of this Section 8.08, the Trustee shall be deemed to have a conflicting interest if an Event of Default, exclusive of any period of grace or requirement of notice, shall have occurred and be continuing, and: (1) the Trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company, are outstanding, or is trustee for more than one outstanding series of securities, as defined in this Section 8.08, under a single indenture of the Company, unless such other indenture is a collateral trust indenture under which the only collateral consists of Notes issued under this Indenture; provided that there shall be excluded from the operation of this Paragraph 8.08(c)(1) any other series under such indenture, and any other indenture or indentures under which other securities, or certificates of interest or participation in other securities of the Company, are outstanding if (i) this Indenture and such other indenture or indentures (and all series of securities issuable thereunder) are wholly unsecured and rank equally, and such other indenture or indentures (and such series) are hereafter qualified under the Trust Indenture Act of 1939, unless the Securities and Exchange Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of the Trust Indenture Act of 1939 that differences exist between the provisions of this Indenture (or such series) and the provisions of such other indenture or indentures (or such series) which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture and such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Securities and Exchange Commission and after opportunity for hearing thereon, that the trusteeship under this Indenture and such other indenture or under more than one outstanding series under a single indenture is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under one of such indentures; (2) the Trustee or any of its directors or executive officers is an underwriter for an obligor upon the Notes issued under this Indenture; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee, or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (A) one (1) individual may be a director and/or an executive officer of the Company, but may not be at the same time an executive officer of both the Trustee and the Company; (B) if and so long as the number of directors of the Trustee in office is more than nine (9), one (1) additional individual may be a director and/or an executive officer of the Trustee and a director of the Company; and (C) the Trustee may be designated by the Company or by an underwriter for the Company to act in (31) the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depositary, or in any other similar capacity, or, subject to the provisions of Paragraph 8.8(c)(1) of this Indenture, to act as trustee whether under an indenture or otherwise; (5) ten percent (10%) or more of the voting securities of the Trustee is beneficially owned by the Company or by any director, partner, or executive officer thereof, or twenty percent (20%) or more of such voting securities is beneficially owned, collectively, by any two (2) or more of such persons; or ten percent (10%) or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner, or executive officer thereof, or is beneficially owned, collectively, by any two (2) or more such persons; (6) the Trustee is the beneficial owner of, or holds a collateral security for an obligation which is in default, (A) five percent (5%) or more of the voting securities, or ten percent (10%) or more of any other class of security, of the Company, not including the Notes issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (B) ten percent (10%) or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, five percent (5%) or more of the voting securities of any person who, to the knowledge of the Trustee, owns ten percent (10%) or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default, ten percent (10%) or more of any class of security of any person who, to the knowledge of the Trustee, owns fifty percent (50%) or more of the voting securities of the Company; or (9) the Trustee owns, on the date of an Event of Default (exclusive of any period of grace or requirement of notice) or any anniversary of such Event of Default while such Event of Default remains outstanding, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of twenty-five percent (25%) or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under Paragraphs 8.08(c)(6), (7), or (8) of this Indenture. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of not more than two (2) years from the date of such acquisition, to the extent that such securities included in such estate do not exceed twenty-five percent (25%) of such voting securities or twenty-five percent (25%) of any such class of security. Promptly after the dates of any such Events of Default and annually in each succeeding year that the Notes remain in default, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such dates. If the Company fails to make payment in full of principal of any of the Notes when and as the same becomes due and payable, and such failure continues for thirty (30) days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such thirty (30) day period and, after such date, notwithstanding the foregoing provisions of this Paragraph 8.08(c)(9), all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of Paragraphs 8.08(c)(6), (7) and (8) of this Indenture; or (10) except under the circumstances described in Paragraphs 8.13(b)(1), (2), (3), (4), (5), or (6) of this Indenture, the Trustee shall be or shall become a creditor of the Company. (32) The specifications of percentages in Paragraphs 8.08(c)(5) to (9), inclusive, shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of Paragraph 8.08(c)(3) or (7) of this Indenture. For the purposes of Paragraph 8.08(c)(1) only, the term "series of securities" or "series" means a series, class or group of securities issuable under an indenture pursuant to whose terms holders of one such series may vote to direct the Trustee, or otherwise take action pursuant to a note of such holders, separately from holders of another such series; provided that "series of securities" or "series" shall not include any series of securities issuable under an indenture if all such series rank equally and are wholly unsecured. For the purposes of Paragraphs 8.08(c)(6), (7), (8) and (9) only, (A) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay monies lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (B) an obligation shall be deemed to be in default when a default in payment of principal shall have continued for thirty (30) days or more and shall not have been cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i) any security which it holds as collateral security (as trustee or otherwise) for an obligation which is not in default as defined in clause (B) above, or (ii) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (iii) any security which it holds as an agent for collection, or as custodian, escrow agent, or depositary, or in any similar respective capacity. Except as provided in the next preceding paragraph of this Paragraph 8.08(c), the word "security" or "securities" as used in this Indenture shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a "security" or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For the purposes of this Section 8.08: (1) the term "underwriter" when used with reference to the Company shall mean every person who, within one (1) year prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" shall mean any director of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated. (3) The term "person" shall mean an individual, a corporation, a partnership, a limited liability company, an association, a joint-stock company, a trust, an unincorporated organization, or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or (33) pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "Company" shall mean any obligor upon the Notes. (6) The term "executive officer" shall mean the president, every vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. The percentages of voting securities and other securities specified in this Section 8.08 shall be calculated in accordance with the following provisions: (A) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section 8.08 (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (B) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (C) The term "amount," when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares, and the number of units if relating to any other kind of security. (D) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) Securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) Securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) Securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; (iv) Securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (E) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes; and provided further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. (34) SECTION 8.09. Eligibility of Trustee. The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States or any State or Territory thereof or the District of Columbia or a corporation or other person permitted to act as "institutional trustee" by the Securities and Exchange Commission, which is authorized under the applicable laws to exercise corporate trust powers, having a combined capital and surplus of at least ten million dollars ($10,000,000) subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority and having its principal office and place of business in The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 8.09 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Neither the Company, nor any person directly or indirectly controlling, controlled by, or under common control with the Company may serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 8.09, the Trustee shall resign immediately in the manner and with the effect specified in Section 8.10 of this Indenture. SECTION 8.10. Resignation or Removal of Trustee. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the holders of Notes at their addresses as they shall appear on the registry books of the Company. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within sixty (60) days after the mailing of such notice of resignation to the Noteholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months may, subject to the provisions of Section 7.09 of this Indenture, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur -- (1) the Trustee shall fail to comply with the provisions of Paragraph 8.08(a) of this Indenture after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months, or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.09 of this Indenture and shall fail to resign after written request therefor by the Company or by any such Noteholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one (1) copy of which instrument shall be delivered to the Trustee so removed and one (1) copy to the successor trustee, or, subject to the provisions of Section 7.09 of this Indenture, any Noteholder who has been a bona fide holder of a Note or Notes for at least six (6) months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee; provided, however, that, except in the case of a default in the payment of principal of the Notes, the Trustee shall not be required to resign as provided by this Section 8.10 if the Trustee shall have sustained the burden of proving, on application to the Securities and Exchange Commission and opportunity for (35) hearing thereon, that (i) the Event of Default may be cured or waived during a reasonable period and under the procedures described in such application, and (ii) a stay of the Trustee's duty to resign will not be inconsistent with the interests of any Noteholder. The filing of such an application shall automatically stay the performance of the duty to resign until the Securities and Exchange Commission orders otherwise. (c) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless within ten (10) days after such nomination the Company objects thereto, in which case the Trustee so removed or any Noteholders, upon the terms and conditions and otherwise as provided in Paragraph 8.10(a) of this Indenture, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11 of this Indenture. SECTION 8.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 8.10 of this Indenture shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed of conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.06 of this Indenture, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 8.06 of this Indenture. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.08 of this Indenture and eligible under the provisions of Section 8.09 of this Indenture. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, the Company shall mail notice of the succession of such trustee hereunder to the holders of Notes at their addresses as they shall appear on the registry books of the Company. If the Company fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company. SECTION 8.12. Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the trust business of the Trustee, shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which (36) it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by mergers, conversion or consolidation. SECTION 8.13. Limitation of Rights of Trustee as a Creditor. (a) Subject to the provisions of Paragraph 8.13(b), if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within three (3) months prior to a default, as defined Paragraph 8.13(c) of this Indenture, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the holders of the Notes and the holders of other indenture securities (as defined in Paragraph 8.13(c)(2) of this Indenture): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal, effected after the beginning of such three (3) month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in Paragraph 8.13(a)(2) of this Indenture, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three (3) month period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of Trustee (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or any other applicable law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three (3) month period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such three (3) month period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Paragraph 8.13(c) of this Indenture, would occur within three (3) months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of Paragraphs 8.13(a)(2)(B), (C) and (D), property substituted after the beginning of such three (3) month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or (37) refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the Trustee, the Noteholders and the holders of other indenture securities in such manner that the Trustee, the Noteholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or any other applicable law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee, the Noteholders, and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or any other applicable law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to Title 11 of the United States Code or any other applicable law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership, or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, the Noteholders, and the holder of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, the Noteholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee who has resigned or been removed after the beginning of such three (3) month period shall be subject to the provisions of this Paragraph 8.13(a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such three (3) month period, it shall be subject to the provisions of this Paragraph 8.13(a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account if such Trustee had continued as trustee, occurred after the beginning of such three (3) month period; and (ii) such receipt of property or reduction of claim occurred within three (3) months after such resignation or removal. (b) There shall be excluded from the operation of Paragraph 8.13(a) of this Indenture a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one (1) year or more at the time of acquisition by the Trustee: (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Noteholders at the time and in the (38) manner provided in Section 6.04 of this Indenture with respect to reports pursuant to Paragraph 6.04(a) and (b) of this Indenture, respectively; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in Paragraph 8.13(c) of this Indenture; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper as defined in Paragraph 8.13(c) of this Indenture. (c) As used in this Section 8.13; (1) The term "default" shall mean any failure to make payment in full of (A) the principal of any of the Notes or (B) the principal of or interest upon any of the other indenture securities when and as such principal or interest becomes due and payable; (2) The term "other indenture securities" shall mean securities upon which the Company is an obligor (as defined in the Trust Indenture Act of 1939) outstanding under any other indenture (A) under which the Trustee is also trustee, (B) which contains provisions substantially similar to the provisions of Paragraph 8.13(a) of this Indenture, and (C) under which a default exists at the time of the apportionment of the funds and property held in said special account; (3) The term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) The term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security; provided that the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; (5) The term "Company" shall mean any obligor upon the Notes. (39) ARTICLE NINE. CONCERNING THE NOTEHOLDERS. SECTION 9.01. Action by Noteholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of this Article Nine, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. SECTION 9.02. Proof of Execution by Noteholders. Subject to the provisions of Sections 8.01, 8.02 and 10.05 of this Indenture, proof of the execution of any instrument by a Noteholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Notes shall be proved by the registers of such Notes or by a certificate of the Note registrar. The record of any Noteholders' meeting shall be proved in the manner provided in Section 10.06 of this Indenture. SECTION 9.03. Who Are Deemed Absolute Owners. The Company, the Trustee, any paying agent, any conversion agent and any Note registrar may deem the person in whose name any Note shall be registered upon the books of the Company to be, and may treat him as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the Trustee of receiving payment of or on account of the principal of and premium, if any, on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon any such Note. SECTION 9.04. Company Owned Notes Disregarded. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other Obligor on the Note or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other Obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes which the Trustee knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Notes and that the pledgee is not the Company or any other Obligor or a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other Obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. The Trustee may request and rely upon an Officers' Certificate with respect to whether a Noteholder controls, is controlled by, or is under common control with, the Company. SECTION 9.05. Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.01 of this Indenture, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note the serial number of which is shown by the evidence to be included in the Notes, the holders of (40) which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of holding as provided in Section 9.02 of this Indenture, revoke such action so far as concerns such Note. Except as aforesaid any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note, irrespective of whether or not any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor. ARTICLE TEN. NOTEHOLDERS' MEETINGS. SECTION 10.01. Purposes of Meetings. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article Ten for any of the following purposes: (1) to give any notice to the Company or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article Seven of this Indenture; (2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article Eight of this Indenture; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.02 of this Indenture; or (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law. SECTION 10.02. Call of Meetings by Trustee. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.01 of this Indenture, to be held at such time and at such place in the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Notes at their addresses as they shall appear on the registry books of the Company. Such notice shall be mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the meeting. Any meeting of Noteholders shall be valid without notice if the holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Notes outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. SECTION 10.03. Call of Meetings by Company or Noteholders. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent (10%) in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such Noteholders may determine the time and the place in the Borough of Manhattan for such meeting and may call such meeting to take any action authorized in Section 10.01 of this Indenture, by mailing notice thereof as provided in Section 10.02 of this Indenture. (41) SECTION 10.04. Qualifications for Voting. To be entitled to vote at any meeting of Noteholders a person shall (a) be a holder of one (1) or more Notes or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Notes. The only persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. SECTION 10.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Noteholders as provided in Section 10.03 of this Indenture, in which case the Company or the Noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote. Subject to the provisions of Section 9.04 of this Indenture, at any meeting each Noteholder or proxy shall be entitled to one vote for each one thousand dollars ($1,000) principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Noteholders. Any meeting of Noteholders duly called pursuant to the provisions of Sections 10.02 or 10.03 of this Indenture may be adjourned from time to time by a majority of those present and the meeting may be held as so adjourned without further notice. SECTION 10.06. Voting. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballots on which shall be subscribed the signatures of the holders of Notes or of their representatives by proxy and the principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two (2) inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes any vote by ballot taken thereat and affidavits by one (1) or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.02 of this Indenture. The record shall show the principal amount of the Notes voting in favor of or against or abstaining from any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one (1) of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee. Any record so signed and verified shall be conclusive evidence of the matters therein stated. SECTION 10.07. No Delay of Rights by Meeting. Nothing contained in this Article Ten shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. (42) ARTICLE ELEVEN. SUPPLEMENTAL INDENTURES. SECTION 11.01. Supplemental Indentures without Consent of Noteholders. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee, without consent of the Noteholders, may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Section 15.06 of this Indenture; (b) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article Twelve of this Indenture; (c) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of the Notes as the Board of Directors and the Trustee shall consider to be for the protection of the holders of Notes; and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; or (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not adversely affect the interests of the holders of the Notes. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 11.02 of this Indenture. SECTION 11.02. Supplemental Indentures with Consent of Noteholders. With the consent (evidence as provided in Section 9.01 of this Indenture) of the holders of not less than sixty-six and two-thirds percent (66 2/3%) in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; provided, however, that no such supplemental indenture shall (i) (43) extend the fixed maturity of any Note, or reduce the principal amount thereof or make the principal thereof payable in any coin or currency other than that provided in the Notes, or impair the right to convert the Notes into Common Stock and/or Series B Preferred Stock, as the case may be, on the terms set forth herein, without the consent of the holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplement indenture, without the consent of the holders of all Notes then outstanding. Upon the request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 11.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 11.03. Compliance with Trust Indenture Act of 1939; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article Eleven shall comply with the Trust Indenture Act of 1939, as then in effect. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Eleven, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 11.04. Notation on Notes. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article Eleven may bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding. SECTION 11.05. Evidence of Compliance of Supplemental Indenture to be Furnished Trustee. The Trustee, subject to the provisions of Sections 8.01 and 8.02 of this Indenture, may require, and shall be entitled to receive, and rely on, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article Eleven. ARTICLE TWELVE. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE. SECTION 12.01. Company May Consolidate, etc., on Certain Terms. Subject to the provisions of Section 12.02 of this Indenture, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or (44) leases) of all or substantially all of the property of the Company, to any other corporation (whether or not affiliated with the Company) authorized to acquire and operate the same; provided, however, and the Company hereby covenants and agrees, that upon any such consolidation, merger, sale, conveyance or lease, other than any such sale, conveyance or lease by the Company to a Subsidiary, the due and punctual payment of the principal of all of the Notes, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form and substance to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired or leased such property. SECTION 12.02. Successor Corporation to be Substituted. In case of any such consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form and substance to the Trustee, of the due and punctual payment of the principal of and premium, if any, on all of the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of Porta Systems Corp., any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Notes which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes which such successor corporation hereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such sale, conveyance or lease (other than any such sale, conveyance or lease by the Company to a Subsidiary), the person named as the "Company" in the first paragraph of this Indenture or any successor which shall thereafter have become such in the manner prescribed in this Article Twelve may be dissolved, wound up and liquidated at any time thereafter and such person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. SECTION 12.03. Opinion of Counsel to be Given Trustee. The Trustee, subject to Sections 8.01 and 8.02 of this Indenture, may require, and shall be entitled to receive, and rely on, an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, or lease and any such assumption complies with the provisions of this Article Twelve. ARTICLE THIRTEEN. SATISFACTION AND DISCHARGE OF INDENTURE. SECTION 13.01. Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated (other than any Notes which shall have been destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) and not theretofore cancelled, or (b) all the Notes not theretofore cancelled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense of the Company, and the Company shall deposit with the Trustee, in (45) trust, funds (which thereupon shall become immediately due and payable to the holders of Notes) sufficient to pay at maturity or upon redemption all of the Notes (other than any Notes which shall have been mutilated, destroyed, lost or stolen which have been replaced, paid or converted as provided in Section 2.06 of this Indenture) not theretofore cancelled or delivered to the Trustee for cancellation, including principal but excluding, however, the amount of any monies for the payment of principal of the Notes (1) theretofore deposited with the Trustee and repaid by the Trustee to the Company in accordance with the provisions of Section 13.04 of this Indenture, or (2) paid to any State or Territory or the District of Columbia pursuant to its unclaimed property or similar laws, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 16.05 of this Indenture and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. The obligations of the Company to the Trustee, and the Trustee's rights and remedies under Article Eight of this Indenture, including without limiting the generality of the foregoing, Section 8.06 of this Indenture shall survive termination of this Indenture. The Trustee shall notify the Noteholders, at the expense of the Company, of the immediate availability of the amount referred to in Paragraph 13.01(b) of this Indenture by mailing a notice, first class postage prepaid, to the holders of Notes at their addresses as they appear on the Note register. SECTION 13.02. Deposited Monies to be Held in Trust by Trustee. Subject to Article Four and to Section 13.04 of this Indenture, all monies deposited with the Trustee pursuant to Section 13.01 of this Indenture shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and premium, if any. SECTION 13.03. Paying Agent to Repay Monies Held. Upon the satisfaction and discharge of this Indenture all monies then held by any paying agent of the Notes (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. SECTION 13.04. Return of Unclaimed Monies. Any monies deposited with or paid to the Trustee for payment of the principal of or premium, if any, on Notes and not applied but remaining unclaimed by the holders of Notes for six (6) years after the date upon which the principal of or premium, if any, on such Notes, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on demand and all liability of the Trustee shall thereupon cease; and the holder of any of the Notes shall thereafter look only to the Company for any payment which such holder may be entitled to collect. ARTICLE FOURTEEN. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. SECTION 14.01. Indenture and Notes Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any Notes, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any (46) assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. ARTICLE FIFTEEN. CONVERSION OF NOTES. SECTION 15.01. Right to Convert. Subject to and upon compliance with the provisions of this Article Fifteen, the holder of any Note shall have the right, at his option, at any time prior to the close of business on December 31, 1997 (or if such Note is called for redemption, the conversion right with respect to such Note shall terminate at 5:00 PM New York City time on the second business day prior to the date such Note is to be redeemed pursuant to Article Three of this Indenture, unless the Company shall default in the payment due upon redemption thereof) to convert the principal amount of any such Note, or, in the case of any Note of a denomination greater than one thousand dollars ($1,000), any portion of such principal which is one thousand dollars ($1,000) or a multiple thereof, into that number of fully paid and nonassessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Note or portion thereof surrendered for conversion by the Conversion Price, by surrender of the Note so to be converted in whole or in part in the manner provided in Section 15.02 of this Indenture. Notes in denominations of one thousand dollars ($1,000) or less may be converted in whole, but not in part. SECTION 15.02. Exercise of Conversion Privilege; Issuance of Common Stock on Conversion; No Adjustment for Dividends. In order to exercise the conversion privilege, the holder of any Note to be converted in whole or in part shall surrender such Note at an office or agency maintained by the Company pursuant to Section 5.02 of this Indenture and shall give written notice of conversion in the form provided on the Note to the Company at such office or agency that the holder elects to convert such Note or the portion thereof specified in said notice. Such notice shall also state the name or names (with address) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 15.07 of this Indenture. Each Note surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Note, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. As promptly as practicable after the surrender of such Note and the receipt of such notice and funds, if any, as aforesaid, the Company shall issue and shall deliver at such office or agency to such holder, or on his written order, a certificate or certificates for the number of full shares issuable upon the conversion of such Note or portion thereof in accordance with the provisions of this Article Fifteen and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion as provided in Section 15.03 of this Indenture. In case any Note of a denomination greater than one thousand dollars ($1,000) shall be surrendered for partial conversion and subject to Section 2.03 of this Indenture, the Company shall execute and the Trustee shall authenticate and deliver to or upon the written order of the holder of the Note so surrendered, without charge to him, a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion shall be deemed to have been effected on the date on which such Note shall have been surrendered and such notice shall have been received by the Company, as aforesaid, and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the conversion price in effect (47) on the date upon which such Note shall have been surrendered. No adjustment shall be made for dividends on any shares issued upon the conversion of such Note as provided in this Article Fifteen. SECTION 15.03. Cash Payments in Lieu of Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional shares of stock would be issuable upon the conversion of any Note or Notes, the Company shall make an adjustment therefor in cash at the current market value thereof. The current market value of a share of Common Stock shall be the closing price on the date (which is not a legal holiday as defined in Section 16.06 of this Indenture) immediately preceding the day on which the Notes (or specified portions thereof) are deemed to have been converted and such closing price shall be determined as provided in Paragraph 15.05(d) of the Indenture. SECTION 15.04. Conversion Price. The Conversion Price shall be as specified in the form of Note set forth in the Recitals of this Indenture, subject to adjustment as provided in this Article Fifteen, based on the Conversion Price in effect on the date the Note is surrendered for conversion as provided in Section 15.02 of this Indenture. The Conversion Price shall not be affected by the date of issuance of any Note. SECTION 15.05. Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time as follows: (a) In case the Company shall on any one or more occasions after the date of this Indenture (i) effect a stock split or pay a dividend or make a distribution in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (ii) subdivide its outstanding Common Stock, or (iii) combine its outstanding Common Stock into a smaller number of shares or otherwise effect a reverse split, the Conversion Price in effect immediately prior thereto shall be adjusted so that the holder of any Note thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such Note been converted immediately prior to the happening of such event. An adjustment made pursuant to this subsection (a) shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision or combination. If, as a result of an adjustment made pursuant to this subsection (a), the holder of any Note thereafter surrendered for conversion shall become entitled to receive shares of two (2) or more classes of capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written statement filed with the Trustee and the conversion agent) shall determine the allocation of the adjusted Conversion Price between or among shares of such classes of capital stock. (b) In case the Company shall issue rights or warrants to all holders of its Common Stock entitling them (for a period expiring within forty-five (45) days after the record date mentioned below) to subscribe for or purchase Common Stock at a price per share less than the current market price per share of Common Stock (as defined in Paragraph 15.05(d) of this Indenture) at the record date for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be made successively whenever any such rights or warrants are issued, and shall become effective immediately after (48) such record date. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such current market price, and in determining the aggregate offering price of such shares, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case the Company shall distribute to all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions paid from retained earnings of the Company) or subscription rights or warrants (excluding those referred to in Paragraph 15.05(b) of this Indenture), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (as defined in Paragraph 15.05(d) of this Indenture) of the Common Stock on the record date maintained below less the then fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive, and described in a certificate filed with the Trustee) of the portion of the assets of evidences of indebtedness so distributed or of such rights or warrants applicable to one (1) share of Common Stock, and the denominator shall be the current market price per share (as defined in Paragraph 15.05(d)) of the Common Stock. Such adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive such distribution. (d) For the purpose of any computation under Paragraphs 15.05(b) and (c) of this Indenture, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for the thirty (30) consecutive trading days commencing forty-five (45) trading days before the day in question. The closing price for each day shall be (i) the last sale price of the Common Stock if the Common Stock shall be listed or admitted for trading on the New York or American Stock Exchange or any successor exchange or The NASDAQ Stock Market or any other automated quotation system, or if no sale occurred on such date, the closing bid price of the Common Stock on such exchange or market, or (ii) if the Common Stock shall not be included in any automated quotation system listed on any such exchange, the closing bid quotation for Common Stock as reported by the NASDAQ or the National Quotation Bureau Incorporation. If Common Stock is quoted on a national securities or central market system, in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (i) of this Paragraph 15.05(d) if bid and asked quotations are reported but actual transactions are not, and in the manner set forth in clause (ii) of this Paragraph 15.05(d) if actual transactions are reported. If none of the conditions set forth above is met, the closing price of Common Stock on any day or the average of such closing prices for any period shall be the fair market value of Common Stock as determined by a member firm of the New York Stock Exchange, Inc. selected by the Board of Directors of the Company. (e) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least two percent (2%) in such price; provided, however, that any adjustments which by reason of this Paragraph 15.05(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article Fifteen shall be made to the nearest cent or to the nearest one-hundredth (1/100th) of a share, as the case may be. Anything in this Section 15.05 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Conversion Price, in addition to those required by this Section 15.05, as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or distribution of securities convertible into or exchangeable for stock hereafter made by the Company to its stockholders shall not be taxable. (f) Whenever the Conversion Price is adjusted, as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date (49) on which such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Note at his last address appearing on the Note register provided for in Section 2.05 of this Indenture. (g) In any case in which this Section 15.05 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Note converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.03 of this Indenture. SECTION 15.06. Effect of Reclassification, Consolidation, Merger or Sale. If any of the following events occur, namely (i) any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Company is a party other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination) in, outstanding shares of Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation; then the Company or such successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall conform to the Trust Indenture Act of 1939 as in force at the date of execution of such supplemental indenture) providing that each Note shall be convertible into the kind and amount of shares of stock and other securities or property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock issuable upon conversion of such Notes immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article Fifteen. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at his address appearing on the Note register provided for in Section 2.05 of this Indenture. The above provisions of this Section 15.06 shall similarly apply to successive reclassifications, consolidations, mergers and sales. SECTION 15.07. Taxes on Shares Issued. The issue of stock certificates on conversions of Notes shall be made without charge to the converting Noteholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of any Note converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 15.08. Reservation of Shares; Shares to be Fully Paid; Compliance with Governmental Requirements; Listing of Common Stock. The Company shall provide, free from preemptive rights, out of its authorized but unissued shares, or out of shares held in its treasury, sufficient shares to provide for the conversion of the Notes from time to time as Notes are presented for conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. (50) The Company covenants that all shares of Common Stock which may be issued upon conversion of Notes will upon issue be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be issued upon conversion of Notes hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that in the event that the Common Stock shall be listed on any registered stock exchange or any other national securities exchange the Company will, if permitted by the rules of such exchange, list and keep listed and for sale so long as the Common Stock shall be so listed on such exchange, upon official notice of issuance, all Common Stock issuable upon conversion of the Notes. SECTION 15.09. Limitation on Responsibility of Trustee. Neither the Trustee nor any authenticating agent nor any conversion agent shall at any time be under any duty or responsibility to any holder of Notes to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any authenticating agent nor any conversion agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property, which may at any time be issued or delivered upon the conversion of any Note; and neither the Trustee nor any authenticating agent nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any authenticating agent nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the covenants of the Company contained in this Article Fifteen. SECTION 15.10. Notice to Holders Prior to Certain Actions. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock (other than in cash out of retained earnings); or (b) the Company shall authorize the granting to the holders of its Common Stock of right or warrant to subscribe for or purchase any share of any class or any other rights or warrants; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value) or, of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; the Company shall cause to be filed with the Trustee and conversion agent and to be mailed to each holder of Notes at his last address appearing on the Note register, provided for in Section 2.05 of this Indenture, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common (51) Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. SECTION 15.11. Possible Issuance of Series B Preferred Stock. (a) In the event that, at the time any Notes are presented for conversion pursuant to this Article Fifteen on or after the Trigger Date, the Trustee will issue, in respect of each Note presented for conversion on or after the Trigger Date, shares of a Series B Preferred Stock as follows: For each fifty (50) shares of Common Stock otherwise issuable (but for this Paragraph 15.11(a)) pursuant to this Article Fifteen, the Trustee will issue one share of Series B Preferred Stock; provided, however, that the Trustee shall issue shares of Common Stock to the extent that the number of shares of Common Stock otherwise issuable upon conversion of all Notes presented for conversion by any holder thereof pursuant to this Article Fifteen exceeds a multiple of fifty (50) shares. (b) The provisions of Paragraph 15.11(a) of this Indenture shall cease to apply at such time as the Company's certificate of incorporation is amended to increase the authorized Common Stock to at least forty million (40,000,000) shares. (c) The Trustee may rely on a certificate from the Company and/or the transfer agent for the Company's Common Stock as to the number of shares of Common Stock outstanding and the filing of a certificate of amendment to the Company's certificate of incorporation. ARTICLE SIXTEEN. MISCELLANEOUS PROVISIONS. SECTION 16.01. Provisions Binding on Company's Successors. All the covenants, stipulations, promises and agreements in this Indenture contained by the Company shall bind its successors and assigns whether so expressed or not. SECTION 16.02. Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 16.03. Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company may be given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Porta Systems Corp., 575 Underhill Blvd., Syosset, New York 11791, Attn.: President, with a copy to Warren H. Esanu, Esq., Esanu Katsky Korins & Siger, 605 Third Avenue, New York, New York 10158. Any notice, direction, request or demand by any Noteholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the principal office of the Trustee, Attention: Corporate Trust Department. SECTION 16.04. Governing Law. This Indenture and each Note shall be deemed to be a contract made under the laws of the State of New York applicable to contracts executed and to be performed wholly within such State, and for all purposes shall be construed in accordance with and governed by the laws of said State. (52) SECTION 16.05. Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take or omit any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenants compliance with which constitutes a condition precedent) relating to the proposed action or omission, as the case may be, have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (other than certificates provided pursuant to Section 6.03(d) of this Indenture, for which only clause (1) shall apply) shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinion contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 16.06. Legal Holidays. In any case where the date of maturity of the Notes or the date fixed for redemption of any Note will be in The City of New York, New York a legal holiday or a day on which banking institutions are authorized by law or executive order to close, then payment of such principal and premium, if any, of the Notes need not be made on such date but may be made on the next succeeding day not in such city a legal holiday or a day on which banking institutions are authorized by law or executive order to close with the same force and effect as if made on the date of maturity or the date fixed for redemption. SECTION 16.07. Trust Indenture of 1939 to Control. If and to the extent that any provision of this Indenture limits, qualifies, or conflicts with duties imposed by operation of any of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939, such imposed duties shall control. SECTION 16.08. No Security Interest Created. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its Subsidiaries is located. SECTION 16.09. Benefits of Indenture. Nothing in this Indenture or in the Notes, express or implied, shall give to any person, other than the parties hereto, any paying agent, any conversion agent, any Note registrar and their successors hereunder and the holders of Notes, and the holders of Senior Debt, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 16.10. Entire Agreement. This Indenture constitutes the entire agreement between the parties hereto, superseding all prior or contemporaneous oral and prior written agreements, understandings and letters of intent covering the same subject matter, and may not be modified or amended except as expressly permitted by this Indenture, and any such amendment shall be evidenced by a written instrument that expressly refers to this Indenture and is signed by both parties. No trade custom or usage and no course of conduct or dealing shall be construed to modify or amend this Indenture. SECTION 16.11. Gender and Number. All references to the masculine, feminine or neuter gender shall include the other genders, the plural shall include the singular and the singular shall include the plural. SECTION 16.12. Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. (53) SECTION 16.13. Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 16.14. No Sinking Fund. The Company is not required to provide for the retirement or redemption of any Notes through the operation of a sinking fund. SECTION 16.15. No Interest. The Notes do not bear interest. AMERICAN STOCK TRANSFER & TRUST COMPANY hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, PORTA SYSTEMS CORP. has caused this Indenture to be signed and acknowledged by its President or one of its Vice Presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or an Assistant Secretary, and AMERICAN STOCK TRANSFER & TRUST COMPANY has caused this Indenture to be signed and acknowledged by one of its Officers, and has caused its corporate seal to be affixed hereunto and the same to be attested by its Secretary or one of its Assistant Secretaries, as of the day and year first written above. PORTA SYSTEMS CORP. [SEAL] By /s/ Edward R. Olson ----------------------------- /s/ William V. Carney President Secretary AMERICAN STOCK TRANSFER & TRUST COMPANY [SEAL] By /s/ Herbert J. Lemmer ----------------------------- /s/ Susan Silber (Title) Assistant Secretary (54) STATE OF New York ss.: COUNTY OF On the 8th day of Dec., 1995, before me personally came Edward R. Olson, to me known, who, being by me duly sworn did depose and say that he resides at 11306 Harborside Cluster, Reston, VA 22091 that he is Pres. of PORTA SYSTEMS CORP., one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by the authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Susan Canale Notary Public SUSAN CANALE Notary Public, State of New York No. 4991019 Qualified in Suffolk County Certified in Nassau County Commission Expires January 21, 1996 STATE OF ss.: COUNTY OF On the 14 day of Dec., 1995, before me personally came Herb Lemmer, to me known, who, being by me duly sworn did depose and say that he resides at 318 Orenda Circle, Westfield NJ 07090 that he is Vice Pres. of AMERICAN STOCK TRANSFER & TRUST COMPANY, one of the entities described in and which executed the above instrument; that he knows the corporate seal of said entity; that the seal affixed to the said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. /s/ Robert Shiner Notary Public Commission expires 12/31/95 [Seal] (55) EX-10 5 EXHIBIT 10.8 ASSET PURCHASE AGREEMENT Between AUGAT INC. and PORTA SYSTEMS CORP. AND CERTAIN SUBSIDIARIES March 6, 1996 TABLE OF CONTENTS Page ---- 1.1 Purchase and Sale of Assets..................... 1 1.2 Assumption of Liabilities....................... 3 1.3 Purchase Price.................................. 7 1.4 The Closing..................................... 8 1.5 Allocation of Purchase Price.................... 9 1.6 Post-Closing Adjustments........................ 9 1.7 Further Assurances.............................. 11 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SELLER.............................. 12 2.1 Organization, Qualification and Corporate Power............................... 12 2.2 Authority....................................... 12 2.3 Noncontravention................................ 12 2.4 Subsidiaries.................................... 13 2.5 Actions......................................... 13 2.6 Tax Matters..................................... 13 2.7 Ownership and Condition of Assets............... 13 2.8 Intellectual Property........................... 14 2.9 Real Property; Leases........................... 16 2.10 Contracts....................................... 16 2.11 Powers of Attorney.............................. 18 2.12 Insurance....................................... 18 2.13 Litigation...................................... 18 2.14 Product Warranty................................ 18 2.15 Employees....................................... 18 2.16 Employee Benefits............................... 19 2.17 Environmental Matters........................... 20 2.18 Legal Compliance................................ 22 2.19 Permits......................................... 22 2.20 Certain Business Relationships With Affiliates.. 22 2.21 Brokers' Fees................................... 23 2.22 Customers and Suppliers......................... 23 2.23 Government Contracts............................ 23 2.24 Disclosure...................................... 23 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE BUYER 24 3.1 Organization.................................... 24 3.2 Authorization of Transaction.................... 24 3.3 Noncontravention................................ 24 3.4 Brokers' Fees................................... 24 ARTICLE IV - PRE-CLOSING COVENANTS........................ 25 -i- 4.1 Notices and Consents............................ 25 4.2 Operation of Business........................... 26 4.3 Full Access..................................... 27 4.4 Exclusivity..................................... 27 4.5 Bulk Transfers Law.............................. 27 ARTICLE V - CONDITIONS TO CLOSING......................... 27 5.1 Conditions to Obligations of the Buyer.......... 27 5.2 Conditions to Obligations of the Seller......... 29 ARTICLE VI - POST-CLOSING COVENANTS....................... 30 6.1 Proprietary Information......................... 30 6.2 No Solicitation................................. 30 6.3 Non-Competition; Referral of Customers.......... 30 6.4 Sharing of Data................................. 31 6.5 Use of Name..................................... 32 6.6 Cooperation in Litigation....................... 32 6.7 Accounts Receivable of the Seller............... 32 6.8 Business Employees.............................. 33 ARTICLE VII - INDEMNIFICATION............................. 34 7.1 Indemnification................................. 34 7.2 Claims for Indemnification...................... 34 7.3 Defense by the Indemnifying Party............... 35 7.4 Payment of Indemnification Obligation........... 36 7.5 Survival and Limitation of Liability............ 36 7.6 Subsidiaries.................................... 36 ARTICLE VIII - TERMINATION................................ 37 8.1 Termination of Agreement........................ 37 8.2 Effect of Termination........................... 37 ARTICLE IX - DEFINITIONS.................................. 37 ARTICLE X - DISPUTE RESOLUTION............................ 39 10.1 General......................................... 39 10.2 Arbitration..................................... 39 ARTICLE XI - MISCELLANEOUS................................ 40 11.1 Press Releases and Announcements............... 40 11.2 No Third Party Beneficiaries................... 40 11.3 Entire Agreement............................... 40 11.4 Succession and Assignment...................... 41 11.5 Counterparts................................... 41 -ii- 11.6 Headings....................................... 41 11.7 Notices........................................ 41 11.8 Governing Law.................................. 42 11.9 Best Knowledge................................. 42 11.10 Amendments and Waivers......................... 42 11.11 Severability................................... 42 11.12 Expenses....................................... 42 11.13 Specific Performance........................... 43 11.14 Construction................................... 43 11.15 Incorporation of Exhibits and Schedules........ 43 Exhibit A - Form of Escrow Agreement Exhibit A-1 - Form of Second Escrow Agreement Exhibit B - Form of Bill of Sale Exhibit C - Form of Instrument of Assumption of Liabilities Exhibit D - Form of Opinion of Counsel to the Seller Exhibit E - Form of Transitional Services Agreement Exhibit F - Form of Opinion of Counsel to the Buyer Schedules Disclosure Schedule -iii- ASSET PURCHASE AGREEMENT This Agreement is entered into as of March 6, 1996 by and between Augat Inc., a Massachusetts corporation (the "Buyer"), Porta Systems Corp., a Delaware corporation ("Porta"), and the subsidiaries of Porta set forth on Schedule 1 attached hereto (collectively, the "Subsidiaries"). All references in this Agreement to the "Seller" shall be deemed to include Porta and each and every one of the Subsidiaries. The Buyer and the Seller are referred to collectively herein as the "Parties." Preliminary Statement The Buyer desires to purchase, and the Seller desires to sell, the business and assets comprising the Seller's fiber optics business (including, without limitation, fiber management systems and fiber optic components) (the "Business"), for the consideration set forth in this Agreement and the assumption by the Buyer of certain of the Seller's liabilities relating to the Business set forth in this Agreement, all subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows. ARTICLE I THE PURCHASE 1.1 Purchase and Sale of Assets. (a) Upon and subject to the terms and conditions of this Agreement, the Buyer shall purchase from the Seller, and the Seller shall sell, transfer, convey, assign and deliver to the Buyer, at the Closing (as defined in Section 1.4(a)), for the consideration specified below in this Article I, all right, title and interest in and to the following (collectively, the "Acquired Assets"): (i) the Seller's fixed assets relating to the Business, including machinery, equipment, tools and tooling, furniture, fixtures, leasehold improvements and motor vehicles and all rights of the Seller to the possession or use of any equipment or assets owned by any Governmental Entity (as defined below) and any warranties relating to the foregoing, all of which is set forth on Schedule 1.1(a)(i) attached hereto and other fixed assets relating solely to the Business which are acquired by the Seller in the Ordinary Course of Business, as hereinafter defined, prior to the Closing Date (collectively "Fixed Assets"). (ii) the Business's inventories of raw materials, work in process, finished goods, supplies, packaging materials, spare parts and similar items (collectively "Inventory") used solely in connection with the Business as of November 29, 1995 and set forth on Schedule 1.1(a)(ii) attached hereto to the extent that they have not been sold prior to the Closing Date and all such Inventory acquired by the Business after November 29, 1995 to and including the Closing Date; (iii) all (A) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, re-examination, utility model, certificate of invention and design patents, patent applications, registrations and applications for registrations listed in Schedule 1.1(a)(iii), (B) trademarks, service marks, trade drafts, logos, tradenames and corporate names and registrations and applications for registration thereof listed in Schedule 1.1(a)(iii), (C) copyrights and registrations and applications for registration thereof listed in Schedule 1.1(a)(iii), (D) mask works and registrations and applications for registration thereof listed in Schedule 1.1(a)(iii), (E) computer software, data and documentation listed in Schedule 1.1(a)(iii), (F) trade secrets and confidential business information, whether patentable or nonpatentable and whether or not reduced to practice, know-how, manufacturing and product processes and techniques, research and development information, copyrightable works, and confidential financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information relating solely to the Business, (G) other proprietary rights relating to any of the foregoing (including without limitation remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions) and (H) copies and tangible embodiments thereof (the items referred to in this Section 1.1(a)(iii) being collectively referred to as the "Intellectual Property"); provided, however, notwithstanding anything contained in this Agreement and except as set forth in Section 6.5, the Buyer shall not be permitted to use and shall not possess any proprietary rights in the names "Porta" or "Criterion" or any combination thereof or words phonetically similar to such names; and provided, further, that (a) the Seller shall have the right, without payment of any royalty or other fee, to use any item of Intellectual Property in the conduct or administration of its businesses other than the Business in the same manner as such items were used in such other businesses or for administrative purposes prior to the Closing Date, and (b) the Buyer shall have the right, without payment of any royalty or other fee, to use any item of -2- intellectual property retained by the Seller to the extent necessary for the conduct of the Business as presently conducted by the Seller; (iv) the contracts, agreements and instruments set forth on Schedule 1.1(a)(iv) attached hereto (collectively, the "Assigned Contracts"), except accounts and notes receivable; (v) all claims, prepayments, refunds, causes of action, choses in action, rights of recovery, rights of setoff and rights of recoupment relating to the Acquired Assets described in subparagraph (i) through (iv); (vi) all permits, licenses, registrations, certificates, orders, approvals, franchises, variances and similar rights ("Permits") issued by or obtained from any foreign, federal, state or local governmental, regulatory or administrative authority or agency, court or arbitrational tribunal (a "Governmental Entity") relating to the Business as set forth on Schedule 1.1(a)(vi) attached hereto; (vii) all manufacturing and procedural manuals, advertising and promotional materials, studies, reports and other printed or written materials relating to the Business as well as copies of all books, records, accounts, ledgers, files, documents, correspondence, lists, architectural drawings or specifications, employment records relating to the Business; and (viii) all goodwill of the Business. (b) Notwithstanding the provisions of Section 1.1(a) (unless otherwise listed on Schedules 1.1(a)(i) through (iv) inclusive), the Acquired Assets shall not include any of the following (collectively, the "Excluded Assets"): (i) cash on hand or in transit, whether or not used in the Business, (ii) accounts and notes receivable to the Closing Date, (iii) the assets associated or used, wholly or partially, with the Seller's Operating Support Systems, Signal Processing or Copper Connection businesses or associated or used in any of the Seller's business activities other than the Business, including, administrative activities, (iv) books of original entry, (v) Seller's corporate franchises, (vi) assets listed on Schedule 1.1(b) attached hereto; and (vii) the names "Porta," "Criterion" or any name or combination of names using either or both of "Porta" and "Criterion" or words phonetically similar to such names. 1.2 Assumption of Liabilities. (a) Upon and subject to the terms and conditions of this Agreement, the Buyer shall assume and become responsible for, -3- from and after the Closing, all of the following liabilities of the Seller (collectively, the "Assumed Liabilities"); (i) the liabilities of the Seller incurred in connection with the Business as of October 27, 1995, as set forth in the Accounts Payable Aging dated November 30, 1995 (the "November 30, 1995 Statement") and attached hereto as Schedule 1.2(a)(i), which includes accounts payable, unearned progress payments, advances received by the Seller and other current liabilities, to the extent they have not been paid or discharged prior to the Closing; (ii) all liabilities of the Seller incurred in connection with the Business after October 27, 1995 and prior to the Closing Date in the ordinary course of business consistent with past custom and practice ("Ordinary Course of Business") and which are of the same type as those set forth on the November 30, 1995 Statement, which include accounts payable, unearned progress payments, advances received by the Seller and other current liabilities, to the extent that they have not been paid or discharged prior to the Closing; provided that this clause (ii) shall not encompass any such liabilities which relate to any breach of contract, breach of warranty (but excluding warranty costs assumed by the Buyer pursuant to Section 1.2(a)(v)), tort, infringement or violation of law or which arose out of any charge, complaint, action, suit, proceeding, hearing, investigation, claim or demand; (iii) all obligations of the Seller relating to periods after the Closing under the Assigned Contracts, together with obligations of the Seller under the Assigned Contracts that were not by the terms of such Assigned Contracts required to be performed until after the Closing; (iv) severance obligations set forth on Schedule 1.2(a)(iv) (which have been determined in accordance with the Seller's existing severance policy set forth in Section 2.16(d) of the Disclosure Schedule), with respect to the "Business Employees" of the Seller as provided in Section 6.8 of this Agreement, and certain other obligations specified in Section 6.8. As used herein, the term "Business Employees" shall mean all employees who are employed by the Seller in connection with the Business and listed on Schedule 1.2(a)(iv) as well as all employees who, on and subsequent to the date of this Agreement and prior to the Closing Date, are employed by the Seller in connection with the Business, who shall be listed on a supplement to Schedule 1.2(a)(iv) to be delivered to the Buyer on the second day prior to the scheduled Closing Date; and -4- (v) during the period ending 180 days after the Closing Date, up to a maximum of $100,000 in actual out-of-pocket cost to the Buyer, obligations of the Seller to its customers for the repair, replacement or return of Business products shipped prior to the Closing Date. If a claim for repair and replacement shall be made during such 180-day period, so long as the Buyer's maximum $100,000 obligation hereunder shall not have been reached, the Buyer shall continue to be obligated to make repairs and replacements of such products, including subsequent repairs on products repaired or replaced during such period. To the extent that the Seller shall be obligated for the repair and replacement of products sold prior to the Closing Date, the Buyer shall give the Seller prompt notice, shall certify to the Seller that the claim for repair or replacement of the product is bona fide and under warranty, shall assist the Seller in resolving any questions concerning the claims and shall complete the repair or replacement at the Seller's expense but at the Buyer's actual cost. (b) The Buyer shall not assume or become responsible for, and the Seller shall remain liable for, any and all liabilities or obligations (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, whether due or to become due, and whether claims with respect thereto are asserted before or after the Closing) of the Seller which are not Assumed Liabilities (collectively, the "Retained Liabilities"). The Retained Liabilities shall include, without limitation, the following: (i) all liabilities of the Seller for costs and expenses incurred in connection with this Agreement or the consummation of the transactions contemplated by this Agreement; (ii) all liabilities or obligations of the Seller under this Agreement or any agreement or instrument attached as an exhibit hereto or contemplated to be entered into hereby, all as listed on Schedule 1.2(b)(ii) (collectively, the "Ancillary Agreements"); (iii) all liabilities of the Seller for any Taxes relating to periods preceding the Closing Date; (iv) all liabilities and obligations of the Seller under any contracts, agreements or instruments which are not Assigned Contracts unless assumed pursuant to Section 1.2(a)(i) or (ii); (v) all obligations of the Seller incurred or arising prior to the Closing under the Assigned Contracts and required to be satisfied prior to the Closing, and all liabilities for any breach or default by the Seller prior to the Closing under -5- any Assigned Contract, which obligations shall remain with the Seller even if their existence does not become known until after the Closing; (vi) all obligations of the Seller for repair, replacement or return of products shipped prior to the Closing, except as set forth in Section 1.2(a)(v); (vii) all liabilities of the Seller for any product liability claim relating to products shipped prior to the Closing (other than certain product warranty claims under Section 1.2)(a)(v)); (viii) all liabilities and obligations of the Seller arising out of events, conduct or conditions existing or occurring prior to the Closing Date that constitute a violation of or noncompliance with any law, rule or regulation, any judgment, decree or order of any Governmental Entity or any Permit; (ix) all liabilities resulting from (A) any releases of any Materials of Environmental Concern (as defined in Section 2.17(b)) into the environment in connection with the operation of the Business by the Seller or any predecessor business or company prior to the Closing Date; (B) the existence of any Materials of Environmental Concern at any site on which the business or operations of the Business or any predecessor business or company was conducted prior to the Closing Date; (C) any release of any Materials of Environmental Concern at any location if such release, under any Environmental Law, results in liability on the part of the Seller or any predecessor business or company; or (D) any violation of any Environmental Law by the Seller or any predecessor business or company which occurred prior to the Closing Date; (x) all liabilities of the Seller for injury to or death of persons or damage to or destruction of property occurring prior to the Closing (including, without limitation, any workers compensation claim); (xi) except as otherwise provided in any of the Assigned Contracts, Sections 1.2(a)(iv) and 6.8, all liabilities and obligations of the Seller for all compensation and benefits accrued by employees of the Seller employed in the Business prior to the Closing, including without limitation, accrued vacation time and sick leave, premiums or benefits under any Employee Benefit Plan (as defined in Section 2.16(a)) and severance pay. Without limiting the foregoing, the Buyer shall not assume any liabilities of the Seller for medical, dental and disability (both long-term and short-term) benefits (other than sick pay, to the extent set forth in Section 6.8), whether insured or self-insured, -6- owed to employees or former employees of the Seller based upon (A) exposure to conditions in existence prior to the Closing or (B) disabilities existing prior to the Closing (including any such disabilities which may have been aggravated following the Closing); and (xii) all liability of the Seller arising out of any claim, suit, action, arbitration, proceeding, investigation or other similar matter which commenced or relates to the ownership of the Acquired Assets or the operation of the Business on or prior to the Closing. (c) The Buyer hereby agrees that all obligations and liabilities assumed pursuant to Section 1.2(a) shall be paid promptly by the Buyer in accordance with their respective terms in the Ordinary Course of Business. 1.3 Purchase Price. (a) Subject to adjustment pursuant to Section 1.6, the purchase price to be paid by the Buyer for the Acquired Assets shall be $7,893,000, payable, at the Seller's option, by wire transfer or other delivery of immediately available funds which shall be disbursed as set forth in Section 1.3(b). Such amount, as it may be adjusted pursuant to Section 1.6, is referred to as the "Purchase Price." (b) At the Closing, the Buyer shall pay (i) to the Seller the sum of $6,793,000 of the Purchase Price, (ii) to State Street Bank & Trust Company, as escrow agent (the "Escrow Agent"), the sum of $1,000,000 of the Purchase Price, which, together with interest thereon, is referred to as the "Escrow Fund" and (iii) to the Escrow Agent the sum of $100,000, which, together with interest thereon, is referred to as the "Second Escrow Fund." The Escrow Fund shall be maintained by the Escrow Agent in an interest-bearing escrow account and held in escrow pursuant to the terms of an escrow agreement substantially in the form attached hereto as Exhibit A. The Escrow Fund shall be disbursed as follows: Payment shall be made to the Buyer to the extent of any final determination of either (A) an adjustment to the Purchase Price determined in accordance with Section 1.6 of this Agreement or (B) any obligation of the Seller to the Buyer pursuant to Article VII of this Agreement. Six months from the Closing Date, the Escrow Agent shall pay to the Seller an amount equal to $500,000 minus all amounts payable by the Escrow Agent to the Buyer as a result of a final determination pursuant to Section 1.6 or any bona fide unresolved claims pursuant to Article VII of this Agreement. Twelve months from the Closing Date, the Escrow Agent shall pay to the Seller the entire remaining Escrow Fund less the -7- amount of any bona fide unresolved claims. In the event that all of the Escrow Fund is not paid to the Seller twelve months from the Closing Date as a result of a bona fide unresolved claim, the Escrow Agent shall, within five (5) days after a final determination of all bona fide unresolved claims made by the Buyer pursuant to Article VII, pay to the Seller the balance of the Escrow Fund after satisfying any obligations to the Buyer as a result of a final determination of such bona fide unresolved claims. (c) The Second Escrow Fund shall be maintained by the Escrow Agent in an interest-bearing account and held in escrow pursuant to the terms of an escrow agreement substantially in the form of Exhibit A-1 to this Agreement. The Second Escrow Fund shall be disbursed as set forth in this Section 1.3(c). Attached to this Agreement as Schedule 1.3(c) is a list of fixed assets (the "Grant Assets") which are in the possession of Aster (Ireland) Ltd., a Bermuda corporation ("Aster Ireland"), and which are subject to a 1989 grant from the Industrial Development Agency of Ireland (the "IDA"). Pursuant to an agreement between Aster Ireland and the IDA, Aster Ireland is prohibited from transferring title to the Grant Assets to the Buyer without the written approval of the IDA. Although the Grant Assets are a part of the Acquired Assets, title to the Grant Assets will not be transferred to Buyer at Closing. In the event that the Seller shall not have received approval of the IDA and transferred the Grant Assets to the Buyer not later than six months after the Closing Date, then, in such event, the Second Escrow Fund shall be paid over to the Buyer and the Seller shall continue to own the Grant Assets and such assets will not be a part of the Acquired Assets. In the event that title to the Grant Assets is transferred to Buyer prior to the expiration of such six month period, the Second Escrow Fund shall be immediately paid to the Seller. On the Closing Date, the Buyer may, at its option, have a representative present at the premises of Aster Ireland to confirm the presence of the Grant Assets on the Closing Date. 1.4 The Closing. (a) The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, commencing at 9:00 a.m. on March 15, 1996, or on such later date as the parties shall mutually agree (the "Closing Date"). (b) At the Closing: (i) the Seller shall deliver to the Buyer the certificates, instruments and documents referred to in Section 5.1; -8- (ii) the Buyer shall deliver to the Seller the certificates, instruments and documents referred to in Section 5.2; (iii) the Seller shall execute and deliver to the Buyer a bill of sale substantially in the form attached hereto as Exhibit B and execute and deliver or obtain, as appropriate, such other instruments of conveyance (e.g., trademark assignments, patent assignments, copyright and other intellectual property licenses) as the Buyer may reasonably request in order to effect the sale, transfer, conveyance and assignment to the Buyer of valid ownership of the Acquired Assets; (iv) the Buyer shall execute and deliver to the Seller an instrument of assumption of liabilities substantially in the form attached hereto as Exhibit C and such other instruments as the Seller may reasonably request in order to effect the assumption by the Buyer of the Assumed Liabilities; (v) the Buyer shall pay to the Seller the Purchase Price by payments to the Seller and the Escrow Agent as specified in Section 1.3; (vi) subject to the provisions of Section 2.7(b), the tangible assets being purchased by the Buyer shall be purchased on a "where is" basis, and, on the Closing Date, the Buyer shall have the right to possession and control of such assets; and (vii) the Buyer and the Seller shall execute and deliver to each other a cross-receipt evidencing the transactions referred to above. 1.5 Allocation of Purchase Price. The Buyer and the Seller agree to allocate the Purchase Price among the Acquired Assets and the noncompetition agreement set forth in Section 6.3 hereof for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Schedule 1.5. The parties acknowledge that such allocation has been made in the manner required by 1060 of the Code (as defined in Section 2.7). 1.6 Post-Closing Adjustments. The Purchase Price set forth in Section 1.3 shall be subject to adjustment after the Closing Date as follows: (a) Within 120 days after the Closing Date, the Buyer shall prepare and deliver to the Seller a statement (the "Initial Closing Statement") setting forth (i) the Inventory and Accounts Payable transferred to or assumed by the Buyer at the Closing, -9- (ii) Fixed Assets which were included on Schedule 1.1(a)(i) but were not delivered to the Buyer at the Closing and (iii) Fixed Assets which were not listed on Schedule 1.1(a)(i) but were delivered to the Seller at the Closing. The Initial Closing Statement shall set forth the aggregate value of the Inventory attaching supporting documentation, and the value of each Fixed Asset listed therein. Such assets shall be valued as follows: (i) Inventory shall be valued as set forth on Schedule 1.1(a)(ii) of this Agreement, with any Inventory not included on such schedule being valued at the Seller's book value, without any reduction for reserves, with the book value of any work in process being the value set forth on the Seller's general ledger in the Ordinary Course of Business, as of the close of business on the business day immediately preceding the Closing Date, the method of determining the value of such work in process to be determined in the same manner as the value of work in process set forth in Schedule 1.1(a)(ii) of this Agreement, which was $193,000. (ii) Fixed Assets shall be valued at the Seller's net book value or, to the extent Seller's net book value is not specifically set forth on Schedule 1.1(a)(i) as of the date of this Agreement, the Parties shall use their best efforts to agree upon the fair market value of each such Fixed Asset, which fair market value will be determined after a deduction for ordinary wear and tear. (b) The Seller shall deliver to the Buyer within 30 days after receiving the Initial Closing Statement a detailed statement describing its objections (if any) thereto. Failure of the Seller to so object to the Initial Closing Statement shall constitute acceptance thereof, whereupon the Initial Closing Statement shall be deemed to be the Closing Statement. The Buyer and the Seller shall use reasonable efforts to resolve any such objections, but if they do not reach a final resolution within 15 days after the Buyer has received the statement of objections, the Buyer and the Seller shall select a "Big Six" accounting firm which is not engaged by either party (the "Neutral Accountants") mutually acceptable to them to resolve any remaining objections. If the Buyer and the Seller are unable to agree on the choice of the Neutral Accountants, the selection of such Big Six accounting firm shall be made in accordance with the rules then obtaining of the American Arbitration Association in Boston, Massachusetts. The Neutral Accountants promptly shall determine the computation of the Net Asset Difference (as hereinafter defined) in the manner set forth in this Section 1.6. The determination of Net Asset Difference by the Neutral Accountants shall be conclusive and binding upon the Buyer and the Seller; provided, however, that the Neutral Accountants shall have no power or authority to modify or -10- amend the provisions of this Agreement. The provisions of Articles VII and X shall not apply to this Section 1.6. (c) The Buyer and the Seller shall share equally the fees and expenses of the Neutral Accountants in connection with the resolution of any dispute pursuant to Section 1.6(b) of this Agreement. (d) The "Net Asset Difference" shall mean the value of the Inventory transferred to the Buyer on the Closing Date, minus (i) the Accounts Payable assumed by the Buyer on the Closing Date, minus (ii) the value of any Fixed Assets listed on Schedule 1.1(a)(i) which were not delivered to the Buyer, plus (iii) the value of any Fixed Assets which are not listed on Schedule 1.1(a)(i) but were delivered to the Buyer, all valued in the manner set forth in Section 1.6(a). If the Net Asset Difference is either greater or less than $2,116,000 by more than $100,000, then, if there is an excess, the Buyer shall pay the Seller the amount of the excess, or, if there is a deficiency, the Escrow Agent shall pay to the Buyer from the Escrow Fund the amount of such deficiency. Payments pursuant to this Section 1.6(d) shall bear interest from the Closing Date at the rate of interest announced by Citibank N.A. on the Closing Date as its prime rate. The Seller's obligation to the Buyer, and the Buyer's obligation to the Seller, pursuant to this Section 1.6(d) shall not exceed $1,000,000. Any payment pursuant to this Section 1.6(d) shall be made by wire transfer or other transfer of immediately available funds, as the payee may request. For example, if the Net Asset Difference is $3,000,000, then the Buyer shall pay the Seller $784,000 ($3,000,000 - $100,000 - $2,116,000 = $784,000). If the Net Asset Difference is $1,600,000, then the Escrow Agent shall pay to the Buyer $416,000 ($2,116,000 - $100,000 - $1,600,000 = $416,000). (e) If the Purchase Price is adjusted pursuant to this Section 1.6, the allocation of the Purchase Price among the Acquired Assets as set forth in Schedule 1.5 attached hereto shall be modified to reflect increases or decreases in the various asset categories which give rise to such adjustments. 1.7 Further Assurances. At any time and from time to time after the Closing, at the request of either Party, the other Party shall, without further consideration, execute and deliver such other instruments of sale, transfer, conveyance, assignment and assumption, and take such action as the requesting Party may reasonably request, in order to effectuate the terms of this Agreement. -11- ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to Buyer that the statements contained in this Article II are true and correct, except as set forth in the disclosure schedule attached hereto (the "Disclosure Schedule"). For the purposes of this Article II, all representations and warranties of the Seller shall be deemed to have been made by Porta and, to the extent applicable, each and every Subsidiary, jointly and severally. 2.1 Organization, Qualification and Corporate Power. The Seller is a corporation duly organized, validly existing and in corporate standing under the laws of the state of its incorporation. The Seller is duly qualified to conduct business and is in corporate and tax good standing under the laws of each jurisdiction where the failure to so qualify or be in good standing would have a material adverse effect on the Business. The Seller has all requisite corporate power and authority to carry on the Business and to own and use the properties owned and used by it in the Business. 2.2 Authority. The Seller has all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Ancillary Agreements and the performance by the Seller of this Agreement and the Ancillary Agreements and the consummation by the Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Seller. This Agreement has been duly and validly executed and delivered by the Seller and constitutes a valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms. 2.3 Noncontravention. Neither the execution and delivery of this Agreement or the Ancillary Agreements by the Seller, nor the consummation by the Seller of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the certificate of incorporation or by-laws of the Seller, (b) except as set forth in Section 2.3 of the Disclosure Schedule, require on the part of the Seller any filing with, or any permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, any material contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or -12- mortgage for borrowed money, instrument of indebtedness, Security Interest (as defined below) or other arrangement to which the Seller is a party or by which the Seller is bound or to which any of its assets is subject relating to the Business, (d) result in the imposition of any Security Interest upon any of the Acquired Assets except those imposed upon or resulting from the Buyer's actions, conduct or agreements or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Seller or any of its properties or assets. For purposes of this Agreement, "Security Interest" means any mortgage, pledge, security interest, encumbrance, charge, judgment, order, decree, stipulation, injunction or other lien (whether arising by contract or by operation of law). 2.4 Subsidiaries. The Subsidiaries are the only corporations, partnerships, joint ventures or other entities owned by Porta that are engaged in the Business and that own any of the Acquired Assets. 2.5 Actions. Since December 1, 1995, the Seller has not taken any of the actions set forth in paragraphs (a) through (g) of Section 4.2. 2.6 Tax Matters. The Seller has filed all federal, state and local tax returns which are required to be filed and has paid all taxes, interest, penalties, assessments and deficiencies which have become due or which had been claimed to be due and which relate to the Acquired Assets or the Business. There are no liens for taxes on the Acquired Assets. As used herein, "Taxes" means all income, franchise, real estate, sales, use and withholding taxes and other employee benefits, taxes or imposts relating to the Acquired Assets or the Business. None of the Acquired Assets is property that is required to be treated as being owned by any other person pursuant to the safe harbor lease provisions of former Section 168(f)(8) of the Internal Revenue Code of 1986, as amended (the "Code"). None of the Acquired Assets is "tax exempt use property" within the meaning of Section 168(h) of the Code. None of the Acquired Assets directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. The Seller is not a person other than a United States person within the meaning of the Code. The transactions contemplated herein are not subject to tax withholding under Section 3406 of the Code, under subchapter A of chapter 3 of the Code, or under any other provision of law. 2.7 Ownership and Condition of Assets. (a) The Seller is the true and lawful owner of, and has good title to, all of the Acquired Assets, free and clear of all Security Interests, except as set forth in Section 2.7(a) of the -13- Disclosure Schedule. Upon execution and delivery by the Seller to the Buyer of the instruments of conveyance referred to in Section 1.4(b)(iii), the Buyer will become the true and lawful owner of, and will receive good title to, the Acquired Assets, free and clear of all Security Interests other than those set forth in Section 2.7(a) of the Disclosure Schedule. (b) The Acquired Assets are suitable for the purpose for which they are intended for the conduct of the Business as presently conducted. The tangible Acquired Assets are generally, in the aggregate, free from material defects, have been maintained in accordance with normal industry practice, are in good operating condition and repair (subject to normal wear and tear) and are suitable for the purposes for which they presently are used. (c) To the best of Seller's knowledge, the Acquired Assets represent all of the assets of such kind of the Seller and its Affiliates that are used solely in the Business. 2.8 Intellectual Property. (a) Except as set forth in Schedule 2.8(a) of the Disclosure Schedule, (i) the Seller owns or has the right to use all Intellectual Property necessary for the operation of the Business as presently conducted, and, to the Seller's best knowledge, the Intellectual Property constitutes substantially all intellectual property used in the Business and (ii) upon execution and delivery by the Seller to the Buyer of the instruments of conveyance referred to in Section 1.4(b)(iii), the Intellectual Property will be owned or available for use by the Buyer. To the best knowledge of the Seller, (i) no other person or entity has any rights to any of the Intellectual Property used in the Business (except pursuant to agreements or licenses specified in Section 2.8(c) or 2.8(d) of the Disclosure Schedule) and (ii) no other person or entity is infringing, violating or misappropriating any of the Intellectual Property owned by the Seller and used in the Business. (b) To the best knowledge of the Seller, except as set forth on Schedule 2.8(a) of the Disclosure Schedule, the business, operations and activities of the Business as presently conducted have not infringed or violated, or constituted a misappropriation of, and do not now infringe or violate, or constitute a misappropriation of, any Intellectual Property rights of any other person or entity; and the Seller has not received any complaint, claim or notice alleging any such infringement, violation or misappropriation. (c) Section 2.8(c) of the Disclosure Schedule and Schedule 1.1(a)(iii) together identify (i) each patent or patent -14- registration which is being transferred by the Seller to the Buyer pursuant to this Agreement, (ii) each pending patent application or application for registration which the Seller has made with respect to any Intellectual Property, and (iii) each license or other agreement pursuant to which the Seller has granted any rights to any third party with respect to any such Intellectual Property. To the best of its knowledge, the Seller has delivered to the Buyer correct and complete copies of all such patents, registrations, applications, licenses and agreements (as amended to date) and has made available to the Buyer correct and complete copies of all other written documentation evidencing ownership of, and any claims or disputes relating to, each such item. Except as set forth in Section 2.8(c) of the Disclosure Schedule, with respect to each such item of Intellectual Property that the Seller owns, the Seller has not agreed to indemnify any person or entity for or against any infringement, misappropriation or other conflict with respect to such item. (d) Section 2.8(d) of the Disclosure Schedule identifies each item of Intellectual Property used exclusively in connection with the operation of the Business that is owned by a party other than the Seller, and the absence of which would have a material adverse effect on the continued operation of the Business as presently conducted. The Seller has supplied the Buyer with correct and complete copies of all licenses, sublicenses or other agreements (as amended to date) pursuant to which the Seller uses such Intellectual Property, all of which are listed on Section 2.8(d) of the Disclosure Schedule. Except as set forth in Section 2.8(d) of the Disclosure Schedule, with respect to each such item of Intellectual Property: (i) the license, sublicense or other agreement, covering such item is legal, valid, binding, enforceable and in full force and effect; (ii) such license, sublicense or other agreement, the absence of which would have a material adverse effect on the Business, is assignable by the Seller to the Buyer without the consent or approval of any party, and such license, sublicense or other agreement will continue to be in full force and effect without acceleration immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing; (iii) with regard to such license, sublicense or other agreement, the Seller is not in breach or default in any material respect, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder; -15- (iv) to the Seller's best knowledge, the underlying item of Intellectual Property is not subject to any outstanding judgment, order, decree, stipulation or injunction; and (v) the Seller has not agreed to indemnify any person or entity for or against any interference, infringement, misappropriation or other conflict with respect to such item. 2.9 Real Property; Leases. Section 2.9 of the Disclosure Schedule lists the Assigned Contracts that are real property leases or subleases. The Seller has delivered to the Buyer correct and complete copies of the leases and subleases (as amended to date) listed in Section 2.9 of the Disclosure Schedule. With respect to each lease and sublease listed in, and except as set forth in, Section 2.9 of the Disclosure Schedule: (a) to the best of its knowledge, the lease or sublease is legal, valid, binding, enforceable and in full force and effect; (b) the lease or sublease is assignable by the Seller to the Buyer without the consent or approval of any party; (c) with regard to the lease or sublease, the Seller is not in material breach or default, and no event has occurred which, with notice or lapse of time, would constitute a material breach or default or permit termination, modification, or acceleration thereunder; (d) there are no material disputes, oral agreements or forbearance programs in effect as to the lease or sublease; (e) the Seller has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; and (f) all facilities leased or subleased thereunder are supplied with utilities. 2.10 Contracts. (a) Section 2.10 of the Disclosure Schedule lists the following written arrangements and agreements of the Seller which relate to the Acquired Assets or the Business: (i) any written arrangement (or group of related written arrangements) for the lease of personal property from or to third parties providing for lease payments in excess of $25,000 per annum; -16- (ii) any written arrangement (or group of related written arrangements), in each case involving more than $25,000, for the purchase or sale of raw materials, commodities, supplies, products or other personal property or for the furnishing or receipt of services (A) which calls for performance over a period of more than one year or (B) in which the Seller has granted manufacturing rights, "most favored nation" pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a certain party; (iii) any written arrangement establishing a partnership or joint venture; (iv) any written arrangement (or group of related written arrangements) under which the Seller has created, incurred, assumed, or guaranteed (or may create, incur, assume, or guarantee) indebtedness (including capitalized lease obligations) involving more than $25,000 or under which it has imposed (or may impose) a Security Interest on any of the Acquired Assets, tangible or intangible; (v) any written arrangement concerning confidentiality or noncompetition; and (vi) any other written arrangement (or group thereof) not entered into in the Ordinary Course of Business under which the consequences of a default or termination would have a material adverse effect on the Business taken as a whole. (b) To the best of its knowledge, the Seller has delivered to the Buyer a correct and complete copy of each written arrangement (as amended to date) listed in Section 2.10 of the Disclosure Schedule. With respect to each written arrangement so listed, to the best of its knowledge: (i) the written arrangement is legal, valid, binding and enforceable and in full force and effect; (ii) the written arrangement is assignable by the Seller to the Buyer (or the Seller may enter into a subcontracting arrangement with the Buyer with regard to such written arrangement) without the consent or approval of any party (except as set forth in Section 2.10 of the Disclosure Schedule); and (iii) the Seller is not in material breach or default, and no event has occurred which with notice or lapse of time would constitute a material breach or default or permit termination or acceleration under the written arrangement. To the best of its knowledge, the Seller is not a party to any oral contract, agreement or other arrangement which, if reduced to written form, would be required to be listed in Section 2.10 of the Disclosure Schedule under the terms of this Section 2.10. -17- 2.11 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Seller relating to the Acquired Assets or the Business. 2.12 Insurance. Section 2.12 of the Disclosure Schedule sets forth a true, correct and complete list of all insurance policies insuring the Acquired Assets or the Business, specifying the type of coverage, the amount of coverage, the premium, the insurer and the expiration date of each such policy (collectively, the "Insurance Policies") and all claims made under such Insurance Policies relating to the Acquired Assets or the Business since January 1, 1995. True, correct and complete copies of all of the Insurance Policies have been previously delivered by the Seller to the Buyer. Except as set forth on Section 2.12 of the Disclosure Schedule, no cancellation, amendment or increase of deductibles, percentages or premiums is threatened with respect to the Insurance Policies that would have a material adverse effect on the Business or the Acquired Assets. 2.13 Litigation. Section 2.13 of the Disclosure Schedule identifies, and contains a brief description of, (a) any unsatisfied judgment, order, decree, stipulation or injunction and (b) any claim, complaint, action, suit, proceeding, hearing or investigation of or before any Governmental Entity or before any arbitrator, in each case, relating to or affecting the Acquired Assets or the Business which is currently pending or, to the best of Seller's knowledge, threatened (all of the foregoing in this clause (b) being collectively referred to as "Litigation"). Other than as set forth in Section 2.13 of the Disclosure Schedule, there is no such Litigation. None of the complaints, actions, suits, proceedings, hearings and investigations set forth in Section 2.13 of the Disclosure Schedule are likely to result in the imposition of any material liability on the Buyer or have a material adverse effect on the Business or the Acquired Assets. 2.14 Product Warranty. No product manufactured, sold, leased or delivered by the Seller in connection with the Business is subject to any guaranty, warranty, right of return or other indemnity beyond the standard terms and conditions of sale or lease, which are set forth in Section 2.14 of the Disclosure Schedule or in one or more of the Assigned Contracts. Section 2.14 of the Disclosure Schedule sets forth the aggregate expenses incurred by the Seller in fulfilling its obligations under its guaranty, warranty, right of return and indemnity provisions in connection with the Business during 1995. 2.15 Employees. Schedule 1.2(a)(iv) contains a list of all Business Employees, along with the position and the annual rate of compensation of each such person, the severance payment required under this Agreement and the timing of the payments (determined in -18- accordance with the Seller's severance policy set forth in Section 2.16(d) of the Disclosure Schedule), and sick and vacation pay due such employee. Except as set forth in Schedule 2.15 of the Disclosure Schedule, each Business Employee has entered into a confidentiality and assignment of inventions agreement with the Seller, a copy of which has previously been delivered to the Buyer and which is assignable by the Seller to the Buyer. Except as set forth in Section 2.15 of the Disclosure Schedule, the Seller is not a party to or bound by any collective bargaining agreement relating to the Business, nor, since January 1, 1995, has the Seller experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes, in connection with the Business. The Seller has no knowledge of any organizational effort made or threatened since January 1, 1995 by or on behalf of any labor union with respect to the Business Employees. 2.16 Employee Benefits. (a) Section 2.16(a) of the Disclosure Schedule contains a complete and accurate list of all Employee Benefit Plans (as defined below) maintained, or contributed to, by the Seller, or any ERISA Affiliate (as defined below). For purposes of this Agreement, "Employee Benefit Plan" means any "employee pension benefit plan" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), any "employee welfare benefit plan" (as defined in Section 3(1) of ERISA). For purposes of this Agreement, "ERISA Affiliate" means any entity which is a member of (i) a controlled group of corporations (as defined in Section 414(b) of the Code, (ii) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (iii) an affiliated service group (as defined under Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which include the Seller. Complete and accurate copies of all Employee Benefit Plans which have been reduced to writing have been provided to the Buyer, and the Seller has provided the Buyer with written summaries of any such plans which have not been reduced to writing. All Employee Benefit Plans are in compliance in all material respects with the currently applicable provisions of ERISA and the Code and the regulations thereunder. (b) Except as set forth in Section 2.16(b) of the Disclosure Schedule, all the Employee Benefit Plans that are intended to be qualified under Section 401(a) of the Code have received determination letters from the Internal Revenue Service to the effect that such Employee Benefit Plans are qualified and the plans and the trusts related thereto are exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, no such determination letter has been revoked and -19- revocation has not been threatened, and no such Employee Benefit Plan has been amended since the date of its most recent determination letter or application therefor in any respect, and no act or omission has occurred, that would adversely affect its qualification or materially increase its cost. (c) Section 2.16(c) of the Disclosure Schedule discloses each agreement or plan, including without limitation any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan, severance benefit plan, or any Employee Benefit Plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement. (d) Section 2.16(d) of the Disclosure Schedule sets forth the Seller's severance policy. (e) The Parties agree that the provisions of this Section 2.16 shall apply only to the United States Subsidiaries. 2.17 Environmental Matters. (a) Except as set forth in Section 2.17(a) of the Disclosure Schedule, the Seller has complied, and is as of the Closing Date in compliance, with all Environmental Laws (as defined below) applicable to the Acquired Assets or the Business, except for violations of Environmental Laws that do not, individually or in the aggregate, have a material adverse effect on the assets, business, financial condition or results of operations of the Business. On or about February 27, 1996, all hazardous waste at the Seller's Hopkinton, Massachusetts facility was removed by a hazardous waste transporter to an appropriate off-site facility. There is no pending or, to the best knowledge of the Seller, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or investigation, inquiry or information request by any Governmental Entity, relating to any Environmental Law applicable to the Acquired Assets or the Business, except for litigation, notices of violations, formal administrative proceedings or investigations, inquiries or information requests that will not, individually or in the aggregate, have a material adverse effect on the assets, business, financial condition or results of operations of the Seller and the Business as presently conducted. For purposes of this Agreement, "Environmental Law" means any federal, state, regional, county or local law, statute, rule or regulation relating to the environment or occupational health and safety, including without limitation any statute, regulation or order -20- pertaining to (i) treatment, storage, disposal, generation and transportation of industrial, toxic or hazardous substances or solid or hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release or threatened release into the environment of industrial, toxic or hazardous substances, or solid or hazardous waste, including without limitation emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals; (v) the protection of wild life, marine sanctuaries and wetlands, including without limitation all endangered and threatened species; (vi) storage tanks, vessels and containers; (vii) underground and other storage tanks or vessels, abandoned, disposed or discarded barrels, containers and other closed receptacles; (viii) health and safety of employees and other persons; and (ix) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste. As used above, the terms "release" and "environment" shall have the meaning set forth in the federal Comprehensive Environmental Compensation, Liability and Response Act of 1980 ("CERCLA"). (b) Except as set forth in Section 2.17(b) of the Disclosure Schedule, there have been no releases of any Materials of Environmental Concern (as defined below) into the environment at any parcel of real property or any facility formerly or currently owned, leased, operated or controlled by the Seller at which the business or operations of the Business have been or are currently conducted. With respect to any such releases of Materials of Environmental Concern, the Seller has given all required notices to Governmental Entities (copies of which have been provided to the Buyer). For purposes of this Agreement, "Materials of Environmental Concern" means any chemicals, pollutants or contaminants, hazardous substances (as such term is defined under CERCLA), solid wastes and hazardous wastes (as such terms are defined under the federal Resources Conservation and Recovery Act), toxic materials, oil or petroleum and petroleum products or any other material subject to regulation under any Environmental Law. (c) Set forth in Section 2.17(c) of the Disclosure Schedule is a list of all environmental reports, investigations and audits (conducted by or on behalf of the Seller, and whether done at the initiative of the Seller or directed by a Governmental Entity) relating to premises currently owned, leased or operated by the Seller at which the business or operations of the Business have been or are currently conducted. Complete and accurate copies of each such report, or the results of each such investigation or audit, have been provided to the Buyer. -21- (d) Set forth in Section 2.17(d) of the Disclosure Schedule is a list of all of the solid and hazardous waste transporters and treatment, storage and disposal facilities that have been utilized by the Seller in connection with the Business since January 1, 1995. 2.18 Legal Compliance. To the best of Seller's knowledge, the Seller is conducting the business and operations of the Business in compliance in all material respects with all applicable federal, state, local and foreign laws, regulations and orders. Except as set forth on Section 2.18 of the Disclosure Schedule, the Seller has not since January 1, 1995 received any notice or communication alleging a material violation affecting the Business from any foreign, federal, state or local Governmental Entity. 2.19 Permits. Section 2.19 of the Disclosure Schedule sets forth a list of all Permits (including without limitation those issued or required under Environmental Laws and those relating to the occupancy or use of leased real property) issued to or held by the Seller relating to the Acquired Assets or the Business. To the Seller's best knowledge, such listed Permits are the only Permits that are required for the Seller to conduct the Business as presently conducted, each such Permit is in full force and effect, and no suspension or cancellation of any such Permit is threatened or pending. Except as set forth in Section 2.19 of the Disclosure Schedule, each such Permit is assignable by the Seller to the Buyer without the consent or approval of any party. 2.20 Certain Business Relationships With Affiliates. Except for any Assumed Liabilities and except as set forth on Section 2.20 of the Disclosure Schedule or the other Disclosure Schedules hereto, neither the Seller (with respect to its operations other than the Business) nor any Affiliate of the Seller (a) has any claim or cause of action against the Seller in connection with the Business, except salaries or other compensation, reimbursement of expenses, accrued vacation time and severance obligations with respect to Business Employees as described herein and in the Schedules hereto, or (b) owes any money to the Seller in connection with the Business. Section 2.20 of the Disclosure Schedule describes any transaction or relationships between the Seller (with respect to its operations other than the Business) and its Affiliates, on the one hand, and the Business, on the other hand, which have occurred since January 1, 1995 other than transactions in the Ordinary Course of Business. For purposes of this Agreement, the term "Affiliates" shall have the meaning ascribed to such term in Rule 12b-2 promulgated under the Securities Exchange Act of 1934. -22- 2.21 Brokers' Fees. Except as set forth in Section 2.21 of the Disclosure Schedule, the Seller has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 2.22 Customers and Suppliers. Section 2.22 of the Disclosure Schedule sets forth a list of (a) each customer that accounted for more than 5% of the revenues of the Business during the period from January 1, 1995 through November 30, 1995 and the amount of revenues accounted for by such customer during each such period and (b) each supplier that is the sole supplier of any significant material, product, component or service used in the Business. 2.23 Government Contracts. To the best of Seller's knowledge, except as set forth in Schedule 2.23 to the Disclosure Schedule, the Seller has not received any notice that the Seller has been suspended or debarred or threatened therewith from bidding on contracts or subcontracts with any Governmental Entity in connection with its conduct of the Business; and the consummation of the transactions contemplated by this Agreement will not result in any such suspension or debarment of the Seller or the Buyer (excluding suspensions or debarments resulting from the identity, actions or conduct of the Buyer). In connection with its conduct of the Business, to the best of its knowledge, the Seller has not been and is not now being audited or investigated by the United States Government Accounting Office, the United States Department of Defense or any of its agencies, the Defense Contract Audit Agency, the contracting or auditing function of any Governmental Entity with which it is contracting, the United States Department of Justice, the Inspector General of any United States Governmental Entity, or any prime contractor with a Governmental Entity; nor, to the best of its knowledge, has any such audit or investigation been threatened. Except as set forth on Section 2.23 of the Disclosure Schedule, the Seller has no agreements, contracts or commitments relating to the Business which require it to obtain or maintain a security clearance with any Governmental Entity. 2.24 Disclosure. The representations and warranties by the Seller contained in this Article II, including the statements contained in the Disclosure Schedule or any other document, certificate or other instrument delivered to or to be delivered by or on behalf of the Seller pursuant to this Agreement, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make such statements, taken as a whole, not misleading. -23- ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Seller as follows: 3.1 Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. 3.2 Authorization of Transaction. The Buyer has all requisite power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Ancillary Agreements by the Buyer and the performance of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby by the Buyer have been duly and validly authorized by all necessary corporate action on the part of the Buyer. This Agreement has been duly and validly executed and delivered by the Buyer and constitutes a valid and binding obligation of the Buyer, enforceable against it in accordance with its terms. 3.3 Noncontravention. Neither the execution and delivery of this Agreement or the Ancillary Agreements by the Buyer, nor the consummation by the Buyer of the transactions contemplated hereby or thereby, will (a) conflict or violate any provision of the articles of organization or by-laws of the Buyer, (b) require on the part of the Buyer any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of, create in any party any right to accelerate, terminate, modify or cancel, or require any notice, consent or waiver under, any contract, lease, sublease, license, sublicense, franchise, permit, indenture, agreement or mortgage for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Buyer or any of its properties or assets. 3.4 Brokers' Fees. Except as set forth in Section 3.4 of the Disclosure Schedule, the Buyer has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. -24- ARTICLE IV PRE-CLOSING COVENANTS 4.1 Notices and Consents. (a) The Seller shall use its reasonable efforts to obtain, at its expense, all such material waivers, permits, consents, approvals or other authorizations from third parties and Governmental Entities, and to effect all such registrations, filings and notices with or to third parties and Governmental Entities, as may be necessary in connection with the transactions contemplated by this Agreement. (b) To the extent that the Seller's rights under any Assigned Contract or any Acquired Asset to be assigned to Buyer hereunder may not be assigned (as a result of either the provisions thereof, applicable law or the inability of the Seller to obtain consent for such assignment in accordance with Section 4.1(a)) without the consent of another party which has not been obtained at the time of the Closing (a "Non-Consented Assigned Asset"), this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful, and the Seller, at its expense, shall thereafter continue to use its reasonable efforts to obtain any such required consent(s) as promptly as possible. To the maximum extent permitted by law and the Non-Consented Assigned Asset, after the Closing and until such time, if any, as the requisite consent shall be obtained, the Seller shall act as the Buyer's agent in order to obtain for the Buyer the benefits under such Non-Consented Assigned Asset and shall cooperate, to the maximum extent permitted by law and the Non-Consented Assigned Asset, with the Buyer in any other reasonable arrangement (including, without limitation, a subcontracting arrangement) designed to provide such benefits to Buyer; and the Seller, at the Buyer's discretion, control and expense, shall bring suit in the Seller's name to protect all rights of the Parties under any such Non-Consented Assigned Asset (so long as the Buyer shall advance costs and indemnify the Seller for any liability of the Seller arising from such suit). The Buyer shall assume the Seller's liabilities and obligations with respect to any Non-Consented Assigned Assets only to the extent the Buyer obtains the benefit thereof under this Section 4.1(b). Nothing in this Section 4.1(b) shall (i) relieve the Seller of its obligation to obtain a consent to the assignment of an Assigned Contract as a condition to Closing as set forth in Section 5.1(a) or (ii) affect the Purchase Price. 4.2 Operation of Business. Except as contemplated by this Agreement, during the period from the date of this Agreement to -25- the Closing Date, the Seller shall use reasonable efforts to conduct the operations of the Business in the Ordinary Course of Business in substantial compliance with applicable laws and regulations and, to the extent consistent therewith, use reasonable efforts (i) to preserve intact its current business organization, keep its physical assets in current working condition, ordinary wear and tear excepted, and (ii) keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it. In furtherance of the foregoing, with respect to the Business, prior to the Closing, the Seller shall not, without the written consent of the Buyer: (a) acquire, sell, lease, encumber or dispose of any assets relating to the Business, other than purchases and sales of assets in the Ordinary Course of Business; (b) create, incur or assume any debt not currently outstanding (including obligations in respect of capital leases) in connection with the Business, other than in the Ordinary Course of Business; (c) hire new Business Employees, enter into, adopt or amend any Employee Benefit Plan or any employment or severance agreement or arrangement relating to the Business Employees of the type described in Section 2.16 or increase in any manner the compensation or fringe benefits of, or materially modify the employment terms of, the Business Employees, generally or individually, or pay any Business Employee any benefit not required by the terms of any existing Employee Benefit Plan in effect on the date hereof; (d) mortgage or pledge any of the property or assets of the Business or subject any such assets to any Security Interest (except for the existing Security Interest of Foothill Capital Corporation), other than in the Ordinary Course of Business; (e) sell, assign, transfer, license or sublicense any Intellectual Property used in the Business, other than in the Ordinary Course of Business; (f) enter into, amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any rights under, any material contract or agreement relating to the Business in excess of $25,000; or (g) make or commit to make any capital expenditure in excess of $25,000 per item, or total capital expenditures in excess of $50,000 in the aggregate, in connection with the Business. -26- 4.3 Full Access. The Seller shall permit representatives of the Buyer to have full access (upon reasonable notice, at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Seller) to all premises, properties, financial and accounting records, contracts, other records and documents, and personnel, of or pertaining to the Business. 4.4 Exclusivity. During the term of this Agreement, the Seller shall not, and the Seller shall use its best efforts to cause its Affiliates and each of its officers, directors, employees, representatives and agents (for so long as such persons or entities remain in such capacities) not to, directly or indirectly, encourage, solicit, initiate, engage or participate in discussions or negotiations with any person or entity (other than the Buyer) concerning any merger, consolidation, sale of material assets or other business combination involving the Business. The Seller may enter into negotiations or any agreement unrelated to the Business so long as such negotiations or agreements do not prevent consummation of the transaction contemplated herein, and the Seller may advise other parties of the terms of this Section 4.4. 4.5 Bulk Transfers Law. The Buyer and the Seller each hereby waive compliance with the provisions of the applicable bulk transfer statutes. ARTICLE V CONDITIONS TO CLOSING 5.1 Conditions to Obligations of the Buyer. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to the satisfaction, or waiver by the Buyer, of the following conditions: (a) subject to the provisions of Section 4.1, the Seller shall have obtained all waivers, permits, consents, approvals or other authorizations from Governmental Entities the absence of which would render the Buyer unable to operate the Business substantially in the manner operated prior to the Closing, and all approvals, consents, authorizations and waivers from other third parties as set forth on Schedule 5.1(a) (collectively, the "Critical Consents") required for the Buyer to consummate the transactions contemplated. (b) the representations and warranties of the Seller set forth in Article II shall be true and correct in all material respects as of the Closing Date as if made as of the Closing Date, -27- except for representations and warranties made as of a specific date, which shall be true and correct as of such specific date; (c) the Seller shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing Date; (d) no action, suit or proceeding shall be pending before any Governmental Entity wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent consummation of the transactions contemplated by this Agreement, (ii) cause the transactions contemplated by this Agreement to be rescinded following consummation, or (iii) materially adversely affect the right of the Buyer to own, operate or control any of the Acquired Assets or to conduct the Business as currently conducted, and no such judgment, order, decree, stipulation or injunction shall be in effect; (e) the Seller shall have delivered to the Buyer a certificate (without qualification) as to the compliance with each of the conditions specified in clauses (a), (b) and (c) of this Section 5.1; (f) the Buyer shall have received from counsel to the Seller an opinion addressed to the Buyer and dated as of the Closing Date substantially in the form of Exhibit D attached hereto; (g) the Seller shall have executed and delivered an agreement for the provision of transitional services (the "Transitional Services Agreement") substantially in the form of Exhibit E attached hereto; (h) the Acquired Assets shall be free and clear of all Security Interests and the Seller shall have obtained and delivered to the Buyer the full and complete release and discharge of the Security Interest of Foothill Capital Corporations in form and substance reasonably satisfactory to the Buyer; provided, however, that the Security Interest of the Industrial Development Agency of Ireland need not be discharged as long as $100,000 shall have been placed in the Escrow Fund pursuant to Section 1.3(c) of this Agreement; (i) Porta and each Subsidiary shall have executed and delivered to the Buyer a certificate as to incumbency and resolutions of the Board of Directors (and, if required, stockholders) approving this Agreement and the consummation of the transactions contemplated hereby; and -28- (j) all actions to be taken by the Seller in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to the Buyer. 5.2 Conditions to Obligations of the Seller. The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to the satisfaction, or waiver by the Seller, of the following conditions: (a) the representations and warranties of the Buyer set forth in Article III shall be true and correct in all material respects as of the Closing Date as if made as of the Closing Date, except for representations and warranties made as of a specific date, which shall be true and correct as of such date; (b) the Buyer shall have performed or complied in all material respects with its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing Date, including payment of the Purchase Price in accordance with Section 1.3; (c) no action, suit or proceeding shall be pending wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent consummation of any transaction contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation; (d) the Buyer shall have delivered to the Seller a certificate (without qualification as to knowledge, materially or otherwise) as to the compliance with each of the conditions specified in clauses (a) and (b) of this Section 5.2; (e) the Seller shall have received from counsel to the Buyer an opinion addressed to the Seller and dated as of the Closing Date, substantially in the form of Exhibit F attached hereto; (f) the Buyer shall have executed and delivered the Transitional Services Agreement; and (g) all actions to be taken by the Buyer in connection with the consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to the Seller. -29- ARTICLE VI POST-CLOSING COVENANTS 6.1 Proprietary Information. From and after the Closing, the Seller shall hold in confidence, and shall use its best efforts to cause all of its Affiliates (for so long as such persons or entities remain Affiliates) to hold in confidence, all knowledge, information and documents of a confidential nature or not generally known to the public with respect to the Business or the Buyer (including without limitation the financial information, confidential technical information or data relating to the materials, products or components sold, or the services offered, in connection with the Business and names of customers of the Business) and shall not disclose or make use of the same without the written consent of the Buyer, except to the extent that such knowledge, information or documentation (a) shall have become public knowledge other than through a breach of this Agreement by the Seller, (b) is presently used by the Seller in any of its businesses other than the Business, (c) is developed or obtained by the Seller without violation of any confidentiality obligation or without reference to such confidential information, (d) is independently developed by the Seller without reference to such confidential information, or (e) is delivered by the Seller pursuant to legal process, in which event the Seller shall promptly advise the Buyer of such legal process. 6.2 No Solicitation. For a period of 30 months after the Closing Date, the Seller shall not, and shall use its best efforts to cause its Affiliates (for so long as such persons and entities remain Affiliates) not to, either directly or indirectly as a director, officer or employee or otherwise, solicit or attempt to induce any Restricted Employee (as defined below) to terminate his or her employment with the Buyer. For purposes of this Agreement, a "Restricted Employee" shall mean any person who either (i) was an employee of the Buyer on either the date of this Agreement or the Closing Date or (ii) was a Business Employee on the Closing Date and received an employment offer from the Buyer on or before the Closing Date which offer was accepted by such employee. 6.3 Non-Competition; Referral of Customers. (a) For a period of 30 months after the Closing Date, the Seller shall not, and shall use its best efforts to cause its Affiliates (for so long as such persons and entities remain Affiliates) not to, either directly or indirectly, as a stockholder, investor, partner, director, officer, employee, consultant or otherwise, develop, manufacture, market, sell, perform or offer any material, product, component or service in -30- the fiber optic business as conducted as the Business by the Seller as of the Closing Date. (b) The Seller, for itself or on behalf of its employees and other Affiliates (for so long as such persons and entities remain Affiliates), agrees that the duration and geographic scope of the noncompetition provision set forth in this Section 6.3 are reasonable. In the event that any court or arbitrator determines that the duration or the geographic scope, or both, are unreasonable and that such provision is to that extent unenforceable, the Parties agree that the provision shall remain in full force and effect for the greatest time period and in the greatest area that would not render it unenforceable. The Parties intend that this noncompetition provision shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and every country or geopolitical subdivision of every country outside the United States of America where this provision is intended to be effective. (c) The Seller shall, and shall use its best efforts to cause its Affiliates (for so long as such persons and entities remain Affiliates) to, refer all inquiries regarding the Business and its products and services to the Buyer. The Seller shall notify its Affiliates in writing promptly after the Closing that the Business has been sold to the Buyer, and such notice shall inform such Affiliates of the Seller's obligations under this Section 6.3(c). Such notice shall be in form and substance reasonably satisfactory to the Buyer. 6.4 Sharing of Data. (a) The Buyer shall have the right, at its cost and expense, for a period of four years following the Closing Date to have reasonable access to such books, records and accounts, including financial and tax information, correspondence, production records, employment records and other records of the Seller for the limited purposes of enabling the Buyer to comply with its obligations under applicable securities, tax, environmental, employment or other laws and regulations. During such four year period, the Seller shall not destroy any such books, records or accounts retained by it without first providing the Buyer with the opportunity to obtain or copy such books, records or accounts. (b) Promptly upon request by the Buyer made at any time following the Closing Date, to the extent possible the Seller shall grant the Buyer the opportunity to copy any and all files pertaining to the Acquired Assets or the business or operations of -31- the Business held by any federal, state, county or local authorities, agencies or instrumentalities. 6.5 Use of Name. The Seller hereby authorizes the Buyer to use the names Aster, Aster Ireland and all variations or phonetically similar names, and agrees upon closing to discontinue using any such names and promptly to change the name of any Affiliates of the Seller currently using any of them. In addition, the Seller agrees that the Buyer may use the names "Criterion," "Porta" and variations or phonetically similar names only as follows: During a transition period after the Closing not to exceed six months, the Buyer may use such names to sell existing finished goods, finished goods completed pursuant to the Transitional Services Agreement by the Seller for the Buyer and finished goods contemplated from all work in process and raw materials of the Business as of the Closing Date and to make tooling changes. Thereafter, until two years from the Closing Date, the Buyer may use such names to liquidate such finished goods which already bear such names. 6.6 Cooperation in Litigation. From and after the Closing Date, each Party shall fully cooperate with the other in the defense or prosecution of any litigation or proceeding already instituted or which may be instituted hereafter against or by such other Party relating to or arising out of the conduct of the Business prior to or after the Closing Date (other than litigation arising out of the transactions contemplated by this Agreement). The Party requesting such cooperation shall pay the reasonable out-of-pocket expenses incurred in providing such cooperation (including legal fees and disbursements) by the Party providing such cooperation and by its officers, directors, employees and agents, but shall not be responsible for reimbursing such Party or its officers, directors, employees and agents, for their time spent in such cooperation. 6.7 Accounts Receivable of the Seller. With respect to the Seller's receivables shown on Schedule 6.7, and any others generated by the Business in the Ordinary Course of Business from the date shown on Schedule 6.7 through the Closing Date, that have not been paid or discharged on or before the Closing Date (collectively the "Accounts Receivable"), all such Accounts Receivable shall belong to the Seller and, to the extent the Buyer receives any payments on account of such Accounts Receivable, such payments shall be promptly forwarded to the Seller. Any receivables generated by the Business from and after the Closing Date shall belong to the Buyer and, to the extent the Seller receives any payments on account of such accounts receivable, such payments shall be promptly forwarded to the Buyer. -32- 6.8 Business Employees. The Buyer shall, at its election with respect to each Business Employee, either (i) offer employment to such Business Employee or (ii) not offer employment to such Business Employee, in which event (and with respect to any Business Employee who declines the Buyer's offer of employment) the Buyer shall (A) pay to the Seller, at the Closing, an amount equal to the aggregate severance payments due to such Business Employees as set forth on Schedule 1.2(a)(iv) (such severance payments to be paid by the Buyer to the Seller to exclude any related amounts owed or owing by the Seller to any governmental agency or authority by the Seller or its Affiliates with respect to FICA, medicare or otherwise), and (B) pay to such Business Employee an amount equal to his or her proportionate share, as determined by the Seller, of accrued vacation and sick pay for all such Business Employees; provided, however, that the Buyer's obligation shall not exceed in the aggregate the lesser of one-half of any such accrued vacation and sick pay for all such Business Employees or $37,500. The full amount of such severance payments paid by the Buyer to the Seller shall (less required withholding) be paid over by the Seller to the Business Employees as hereafter provided in accordance with Schedule 1.2(a)(iv), except with respect to Mr. Maiolo, whose severance obligations shall be paid out over a 12-month period after the Closing in accordance with Mr. Maiolo's severance arrangement with the Seller. Effective as of the Closing, or upon termination of the Transitional Services Agreement in the case of Business Employees performing services thereunder, the Seller shall terminate the employment of each Business Employee who is not offered employment by the Buyer or who is offered such employment but does not accept and shall make severance payments to said persons. No severance shall be paid or payable by the Buyer pursuant to this Agreement or the Seller's existing severance policy with respect to any Business Employee who accepts employment with the Buyer. If the Buyer offers employment, such employment shall be terminable by the Buyer at will, except as to Business Employees whose contracts are included in the Disclosure Schedule, as to whom the employment offer shall, unless other arrangements are accepted by the Business Employee, be for the unexpired term of the employment agreement, each of which shall be an Assumed Contract. The Buyer shall offer each Business Employee to whom an offer of employment is made, compensation not less than that currently earned and a benefit package substantially equivalent to that presently provided to such employee. The Buyer shall, subject to the terms of any Assumed Contract and the terms of this Agreement, including its obligation to pay severance, have complete discretion to change any of the terms or conditions of employment, compensation or benefits relating to any such employee at any time and shall not be obligated to pay severance benefits to any Business Employees who accept the Buyer's offer of employment. If any Business Employee of the Seller who is hired pursuant to this Section 6.8 by the Buyer becomes a participant in -33- any employee pension plan, such Business Employee shall be given credit under such plan for vesting purposes only, with respect to the service of such Business Employee with the Seller prior to becoming such a participant (and not with respect to the accrual of benefits). The Seller hereby consents to the hiring of such Business Employees by the Buyer and waives, with respect to the employment by the Buyer of Business Employees, any claims or rights the Seller may have against the Buyer or any such Business Employee under any noncompetition, confidentiality or employment agreement, but only with respect to the Business. ARTICLE VII INDEMNIFICATION 7.1 Indemnification. Each Party (in such capacity, the "Indemnifying Party") shall indemnify the other Party and their respective Affiliates (in such capacity, the "Indemnified Party") in respect of, and hold the Indemnified Party harmless against, any and all debts, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise, or whether known or unknown, or due or to become due or otherwise), monetary damages, fines, fees, penalties, interest obligations, deficiencies, losses and expenses (including, without limitation, amounts paid in settlement, interest, court costs, reasonable costs of investigators, fees and reasonable expenses of attorneys, accountants, financial advisors and other experts, and other expenses of litigation) (collectively, "Damages") incurred or suffered by the Indemnified Party resulting from, relating to or constituting: (a) a breach of any representation or warranty contained in this Agreement; (b) any failure to perform any covenant or agreement of the Indemnifying Party contained in this Agreement; or (c) any Retained Liabilities with respect to the Seller and any Assumed Liabilities with respect to the Buyer. 7.2 Claims for Indemnification. Whenever any claim shall arise for indemnification hereunder, the Indemnified Party shall promptly notify the Indemnifying Party of the claim and, when known, the facts constituting the basis for such claim; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any liability or obligation hereunder except to the extent of any damage or liability caused by or arising out of such failure. In the event of any such claim for indemnification hereunder resulting from or in connection with any claim made or legal proceedings commenced by a third party, the notice to the -34- Indemnifying Party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnified Party shall not settle or compromise any claim by a third party for which it is seeking indemnification hereunder without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld). 7.3 Defense by the Indemnifying Party. In connection with any claim for indemnification hereunder resulting from or arising out of any claim made or legal proceeding commenced by a third party, the Indemnifying Party, at its sole cost and expense, may, upon written notice to the Indemnified Party given within 20 days after the date of the notice of the claim from the Indemnified Party pursuant to Section 7.2, assume the defense of such claim or legal proceeding with counsel approved by the Indemnified Party, which approval shall not be unreasonably withheld, conditioned or delayed, if (i) the third party seeks monetary damage only and (ii) an adverse resolution of the third party's claim would not have a material adverse effect on the Indemnified Party. The Parties hereby agree that Esanu Katsky Korins & Siger and Hale and Dorr are deemed to be approved counsel hereunder. If the Indemnifying Party so assumes such a defense, the Indemnified Party shall be entitled to participate in (but not control) such defense, with its counsel and at its own expense (except that the Indemnified Party will be responsible for the reasonable fees and expenses of the separate counsel if the Indemnified Party concludes that the counsel the Indemnifying Party has selected has a conflict of interest). In addition, if the Indemnifying Party so assumes such defense, it shall take all steps necessary in the defense or settlement thereof; provided however, that the Indemnifying Party shall not consent to any settlement or to the entry of any judgment with respect to a claim or legal proceeding which does not include a complete release of the Indemnified Party from all liability with respect thereto or which imposes any liability on the Indemnified Party without the written consent of the Indemnified Party. If the Indemnifying Party does not assume the defense of any such claim or legal proceeding, (a) the Indemnified Party may defend against such claim or legal proceeding (with the Indemnifying Party responsible for the reasonable fees and expenses of counsel for the Indemnified Party) in such manner as it may deem appropriate, provided, however, the Indemnified Party shall not be permitted to settle such claim or legal proceeding without the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed and (b) the Indemnifying party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. The Indemnifying Party shall not be required to pay the fees and expenses of more than one counsel representing all Indemnified Parties in any jurisdiction. -35- 7.4 Payment of Indemnification Obligation. All indemnification by the Indemnifying Party hereunder shall be effected by payment of cash or delivery of a cashier's or certified check in the amount of the indemnification liability. 7.5 Survival and Limitation of Liability. (a) The representations, warranties, covenants and agreements of the Parties set forth in this Agreement (i) shall survive the Closing and the consummation of the transactions contemplated hereby and continue in full force and effect until two years after the Closing Date and (ii) shall not be affected by any examination made for or on behalf of the Buyer or the knowledge of any of the Buyer's officers, directors, stockholders, employees or agents. If a notice of a claim is given pursuant to Section 7.2 before expiration of the applicable survival period, then (notwithstanding the expiration of such time period) all representations and warranties applicable to such claim shall survive until, but only for purposes of, the resolution of such claim. (b) Notwithstanding anything contained in this Agreement, the Buyer and the Seller hereby acknowledge and agree that (i) other than a Purchase Price adjustment pursuant to Section 1.6, no claim, action or proceeding shall arise under this Agreement until Damages, in the aggregate, exceed $100,000, after which all indemnification obligations of either party shall be due and payable in full from the first dollar, and (ii) the aggregate maximum liability of each of the Parties pursuant to this Agreement for a Purchase Price adjustment pursuant to Section 1.6 shall be $1,000,000 and for any other actions, claims or proceedings brought in connection with this Agreement shall be $5,000,000 (such amount, the "Damages Limit"), and, accordingly, neither party shall be permitted to seek, obtain or collect any judgment, arbitration award, damages award or other remedy for breach of this Agreement or any of the terms, conditions, representations, warranties, agreements or undertakings set forth herein in excess of the Damages Limit (regardless of whether any claim, action, proceeding or suit with respect to any such breach is styled, without limitation, as a claim for indemnification, expectation damages, loss of profits, breach of representations, warranties or covenants, other contract damages or monetary loss). Notwithstanding the foregoing provisions of this Section 7.5(b), nothing herein shall limit the liability of the Seller with respect to the Retained Liabilities or the Buyer with respect to the Assumed Liabilities. 7.6 Subsidiaries. For the purposes of this Article VII, any indemnification obligation of the Seller shall be deemed to be a joint and several obligation of Porta and each Subsidiary. -36- ARTICLE VIII TERMINATION 8.1 Termination of Agreement. The Parties may terminate this Agreement prior to the Closing as provided below: (a) the Parties may terminate this Agreement by mutual written consent; (b) the Buyer may terminate this Agreement by giving written notice to the Seller in the event the Seller is in breach, and the Seller may terminate this Agreement by giving written notice to the Buyer in the event the Buyer is in breach, of any material representation, warranty, or covenant contained in this Agreement, which breach is not cured within 15 days of the receipt of notice by the breaching Party delivered in accordance with the provisions of Section 11.7 of this Agreement; (c) the Buyer may terminate this Agreement by giving written notice to the Seller if the Closing shall not have occurred on or before the March 15, 1996 by reason of the failure of any condition precedent under Section 5.1 hereof (unless the failure results primarily from prior breach by the Buyer of any representation, warranty or covenant contained in this Agreement); or (d) the Seller may terminate this Agreement by giving written notice to the Buyer if the Closing shall not have occurred on or before March 15, 1996 by reason of the failure of any condition precedent under Section 5.2 hereof (unless the failure results primarily from a prior breach by the Seller of any representation, warranty or covenant contained in this Agreement). 8.2 Effect of Termination. If either Party terminates this Agreement pursuant to Section 8.1, all obligations of the Parties hereunder shall terminate without any liability of either Party to the other Party (except for any liability of either Party for breaches of this Agreement occurring prior to such termination). ARTICLE IX DEFINITIONS For purposes of this Agreement, each of the following defined terms is defined in the Section of this Agreement indicated below. -37- Defined Term Section ------------ ------- Accounts Receivable 6.7 Acquired Assets 1.1(a) Affiliate 2.20 Ancillary Agreements 1.2(b)(ii) Assigned Contracts 1.1(a)(iv) Assumed Liabilities 1.2(a) Aster Ireland 1.3(c) Best Knowledge 11.9 Business Preliminary Statement Business Employees 1.2(a)(iv) Buyer Preliminary Statement CERCLA 2.20(a) Closing 1.4(a) Closing Statement 1.6(b) Closing Date 1.4(a) Code 2.6 Critical Consents 5.1(a) Damages 7.1 Damages Limit 7.5(b) Disclosure Schedule Article II Employee Benefit Plan 2.19(a) Environmental Law 2.20(a) ERISA 2.19(a) ERISA Affiliate 2.19(a) Escrow Agent 1.3(b) Escrow Fund 1.3(b) Excluded Assets 1.1(b) Fixed Assets 1.1(a)(i) Governmental Entity 1.1(a)(vii) Grant Assets 1.3(c) IDA 1.3(c) Initial Closing Statement 1.6(a) Intellectual Property 1.1(a)(iii) Inventory 1.1(a)(ii) Materials of Environmental Concern 2.20(b) Neutral Accountants 1.6(b) Non-Consented Assigned Asset 4.2(b) November 30, 1995 Statement 1.2(a)(i) Ordinary Course of Business 1.2(a)(ii) Parties Introduction Permits 1.1(a)(vi) Purchase Price 1.3 Restricted Employee 6.2 Retained Liabilities 1.2(b) Second Escrow Fund 1.3(c) Security Interest 2.3 Seller Introduction Taxes 2.7 Transitional Services Agreement 5.1(g) -38- ARTICLE X DISPUTE RESOLUTION 10.1 General. In the event that any dispute should arise between the Buyer and the Seller with respect to any matter covered by this Agreement, other than the calculation of the adjustment to the Purchase Price (as to which any dispute shall be resolved solely as provided in Section 1.6), the Buyer and the Seller shall resolve such dispute in accordance with the procedures set forth in this Article 10, subject to the Damage Limit. 10.2 Arbitration. (a) Either the Buyer or the Seller may submit any matter referred to in Section 10.1 to arbitration by notifying the other Party, in writing, of such dispute. Within 10 days after receipt of such notice, the Buyer and the Seller shall jointly designate in writing one arbitrator to resolve the dispute; provided, that if the Parties cannot agree on an arbitrator within such 10-day period, the arbitrator shall be selected in accordance with the procedures of the American Arbitration Association. The arbitrator so designated shall not be an employee, consultant, officer, director, stockholder, counsel or accountant of any Party or any Affiliate of any Party to this Agreement. (b) Within 15 days after the designation of the arbitrator, the arbitrator, the Buyer and the Seller shall meet, at which time the Buyer and the Seller shall be required to set forth in writing all disputed issues and a proposed ruling on each such issue. (c) The arbitrator shall set a date for a hearing, which shall be no later than 30 days after the submission of written proposals pursuant to Section 10.2(b), to discuss each of the issues identified by the Buyer and the Seller. Each such party shall have the right to be represented by counsel. The arbitration shall be governed by the Commercial Arbitration Rules of the American Arbitration Association; provided, that the arbitrator shall have sole discretion with regard to the admissibility of evidence, and the arbitration shall have no power to alter or amend any provisions of this Agreement. (d) The arbitrator shall use his or her best efforts to rule on each disputed issue within 30 days after the completion of the hearing described in Section 10.2(c). The determination of the arbitrator as to the resolution of any dispute shall be binding and conclusive upon all Parties. All rulings of the arbitrator shall be in writing and shall be delivered to the Parties. -39- (e) The attorneys' fees of the Parties in any arbitration shall be borne by them or as determined by the arbitrator, together with the fees of the arbitrator and the costs and expenses of the arbitration. (f) Any arbitration pursuant to this Section 10.2 shall be conducted in Boston, Massachusetts. Any arbitration award may be entered in and enforced by any court of competent jurisdiction and shall be final and binding upon the Parties. (g) Notwithstanding the foregoing, nothing in this Section 10.2 shall be construed as limiting in any way the right of a Party to seek injunctive relief, with respect to any actual or threatened breach of this Agreement, from a court of competent jurisdiction. ARTICLE XI MISCELLANEOUS 11.1 Press Releases and Announcements. Neither Party shall issue any press release or announcement relating to the subject matter of this Agreement without the prior written approval of the other Party; provided, however, that either Party may make any public disclosure it believes in good faith is required by law or regulation (in which case the disclosing Party shall advise the other Party and provide it with a copy of the proposed disclosure prior to making such disclosure). 11.2 No Third Party Beneficiaries. This Agreement (including, without limitation, Section 6.8 hereof) shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns. 11.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations and letters of intent (including the letter of intent dated December 22, 1995) by or between the Parties, written or oral, that may have related in any way to the subject matter hereof; provided, however, that the non-disclosure provisions of the letter of intent, dated December 22, 1995 by and between the Parties, and any other non-disclosure agreements executed by the Parties, shall survive until the Closing, whereupon they shall terminate, except that the Buyer's non-disclosure obligations shall survive the Closing and remain in full force and effect with respect to the businesses of the Seller other than the Business. -40- 11.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. Neither Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party; provided that the Buyer may assign its rights and interests but not its obligations hereunder to an Affiliate of the Buyer. 11.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 11.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 11.7 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly delivered upon receipt sent by U.S. registered or certified mail, return receipt requested, postage prepaid, or by a reputable nationwide overnight courier service, with receipt acknowledged in each case to the intended recipient as set forth below: If to the Seller: Copy to: ----------------- -------- Porta Systems Corp. Esanu Katsky Korins & Siger 575 Underhill Boulevard 605 Third Avenue Syosset, NY 11793 New York, NY 10158 Attention: Vincent F. Santulli Telecopy: (212) 953-6899 Edward Kornfeld Attention: Warren Esanu, Esq. If to the Buyer: Copy to: ---------------- -------- Augat Inc. Hale and Dorr 89 Forbes Boulevard 60 State Street Mansfield, MA 02048 Boston, MA 02109 Attention: Mr. Ronald Hoover Telecopy: (617)526-5000 John E. Lynch, Jr., Esq. Attention: Thomas E. Neely, Esq. Either Party may also give any notice, request, demand, claim, or other communication hereunder by personal delivery or telecopy, but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the individual for whom it is intended. -41- Any notice sent by telecopy shall be followed by a confirmation copy sent by reputable overnight business courier. Either Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. 11.8 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to any otherwise applicable conflict of laws principles. 11.9 Best Knowledge. For the purposes of this Agreement, the term "best of Seller's knowledge" or words of like import shall mean the best knowledge of the executive officers of the Seller and any other person listed on Schedule 11.9 hereto. 11.10 Amendments and Waivers. The Parties may mutually amend any provision of this Agreement at any time prior to the Closing with the prior authorization of their respective Boards of Directors. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each of the Parties. No waiver by either Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 11.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 11.12 Expenses. Except as set forth in Sections 1.6, 6.6, 7.3 and 10.2(e), each Party shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. -42- 11.13 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event any of the provisions of Sections 6.1, 6.2 and 6.3 are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each Party agrees that the other Party shall be entitled to an injunction or injunctions to prevent breaches of such provisions of this Agreement and to enforce specifically such provisions of this Agreement in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity. 11.14 Construction. The language used in this Agreement shall be deemed to be the language chosen by the Parties hereto to express their mutual intent, and no rule of strict construction shall be applied against either Party. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. 11.15 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. -43- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as an instrument under seal as of the date first above written. Buyer: AUGAT INC. By: /s/ [ILLEGIBLE] -------------------------------- Title: Vice President ----------------------------- Seller: PORTA SYSTEMS CORP. By: -------------------------------- Title: ----------------------------- Subsidiaries: ASTER CORPORATION By: -------------------------------- Title: ----------------------------- ASTER IRELAND LTD. By: -------------------------------- Title: ----------------------------- ASTER TECHNOLOGIES LIMITED By: -------------------------------- Title: ----------------------------- -44- CRITERION PLASTICS, INC. By: -------------------------------- Title: ----------------------------- PORTA SYSTEMS S.A. de C.V. By: -------------------------------- Title: ----------------------------- PORTA SYSTEMS LIMITED By: -------------------------------- Title: ----------------------------- -45- Exhibit A ESCROW AGREEMENT This Escrow Agreement is entered into as of March _ , 1996, by and among Augat Inc., a Massachusetts corporation (the "Buyer"), Porta Systems Corp., a Delaware corporation (the "Seller") and State Street Bank and Trust Company (the "Escrow Agent"). WHEREAS, the Buyer and the Seller have entered into an Asset Purchase Agreement dated as of March 6, 1996 (the "Agreement") pursuant to which the Buyer has acquired the Company's fiber optics business. WHEREAS, the Agreement provides that an escrow fund will be established to hold a portion of the Purchase Price. WHEREAS, the parties hereto desire to establish the terms and conditions pursuant to which such escrow fund will be established and maintained. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used in this Agreement and not otherwise defined, if any, shall have the meanings given them in the Agreement. 2. Escrow. Contemporaneously with the execution of this Agreement, the Buyer has delivered to the Escrow Agent, and the Escrow Agent acknowledges receipt of, a wire transfer from the Buyer's account at the State Street Bank and Trust Company, in the amount of $1,000,000. Such sum, together with any interest earned thereon, is referred to herein as the "Escrow Fund." The Escrow Fund shall be invested in accordance with Section 5. The Escrow Agent agrees to accept delivery of the Escrow Fund and to hold such Escrow Fund in escrow subject to the terms and conditions of this Agreement. 3. Administration of Escrow Fund. The Escrow Agent shall administer the Escrow Fund as follows: (a) If the Buyer believes that the Buyer has a claim against the Seller as a result of which the Buyer is entitled to a payment from the Escrow Fund, the Buyer shall give notice (the "Claim Notice") to the Escrow Agent and the Seller. The Claim Notice shall set forth the Buyer's claim in reasonable detail including the amount of claimed to be due (the "Claimed Amount"). (b) Within five days of receipt of the Claim Notice, the Escrow Agent shall transmit to the Seller a copy of the Claim Notice and all supporting documentation provided to the Escrow Agent by the Buyer. (c) If, by the close of business on the 20th business day following the date that the Escrow Agent transmits the Claim Notice and supporting documentation to the Seller, the Escrow Agent shall not have received written notice (the "Response Notice") from the Seller that the Seller disputes any or all of the claim, the Escrow Agent shall pay the Claimed Amount to the Buyer. If the Seller dispute a portion, but not all, of the Claimed Amount, the Escrow Agent shall pay to the Buyer the amount not in dispute. (d) With respect to any amount in dispute, the Escrow Agent shall not make any disposition until and unless the Escrow Agent shall have received either joint written instructions from the Buyer and the Seller or in accordance with Section 7(d) hereof. (e) On [six months from the date of this Agreement] (the "First Payment Date"), the Escrow Agent shall pay over to the Seller an amount equal to $500,000 minus the sum of (i) all payments theretofore made by the Escrow Agent to the Buyer pursuant to this Agreement and (ii) all Claimed Amounts with respect to which the Escrow Agent received a Claim Notice prior to 5:00 P.M. Boston, Massachusetts time on the business day before the First Payment Date. (f) On [twelve months from the date of this Agreement] (the "Second Payment Date"), the Escrow Agent shall pay over to the Seller an amount equal to the amount by which the Escrow Fund exceeds all Claimed Amounts with respect to which the Escrow Agent received a Claim Notice prior to 5:00 P.M. Boston, Massachusetts time on the business day before the Second Payment Date. (g) Any funds remaining in the Escrow Fund subsequent to the Second Payment Date shall be retained by the Escrow Agent and not disbursed until the Escrow Agent shall have received either joint written instructions of the Buyer and the Seller or in accordance with Section 7(d) hereof. 4. Right of Escrow Agent. Upon disbursement of the Escrow Fund in accordance with Section 3 hereof, the Escrow Agent may withhold from any payment due either the Buyer or the Seller an amount equal to such party's share of the Escrow Agent's fees. 5. Investment of Escrow Fund. Any monies held in the Escrow Fund shall be invested by the Escrow Agent, to the extent permitted by law and as directed by the Seller, in (i) obligations issued or guaranteed by the United States of -2- America or any agency or instrumentality thereof, (ii) obligations including certificates of deposit and bankers' acceptances) of banks which at the date of their last public reporting had total assets in excess of $500,000,000, (iii) commercial paper rated at least A-1 or P-1 or, if not rated, issued by companies having outstanding debt rated at least AA or Aa and (iv) money market mutual funds invested exclusively in some or all of the securities described in the foregoing clauses (i), (ii) and (iii). 6. Fees and Expenses. The Buyer and the Seller agree to pay the Escrow Agent compensation for its normal services hereunder as set forth on Schedule A hereto (the "Escrow Fee"). the Escrow Agent shall be entitled to reimbursement on demand for all expenses incurred in connection with the administration of the escrow created hereby which are in excess of its compensation for normal services hereunder, including without limitation, payment of any legal fees incurred by the Escrow Agent in connection with resolution of any claim by any party hereunder. The Buyer and the Seller shall each pay one-half of the fees and expenses of the Escrow Agent for the services to be rendered by the Escrow Agent hereunder. 7. Limitation of Escrow Agent's Liability. (a) The Buyer and the Seller acknowledge and agree that the Escrow Agent (i) shall not be responsible for any of the agreements referred to herein but shall be obligated only for the performance of such duties as are specifically set forth in this Escrow Agreement, (ii) shall not be obligated to take any legal or other action hereunder which might in its judgment involve any expense or liability unless it shall have been furnished with acceptable indemnification, (iii) may rely on and shall be protected in acting or refraining from acting upon any written notice, instruction, instrument, statement, request or document furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper person, and shall have no responsibility for determining the accuracy thereof, and (ii) may consult counsel satisfactory to it, including house counsel, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted be it hereunder in good faith and in accordance with the opinion of such counsel. (b) Neither the Escrow Agent nor any of its directors, officers or employees shall be liable to anyone for any action taken or omitted to be taken by it or any of its directors, officers or employees hereunder except in the case of gross negligence or willful misconduct. The Buyer and the Seller, jointly and severally, covenant and agree to indemnify the Escrow -3- Agent and hold it harmless without limitation from and against any loss, liability or expense of any nature incurred by the Escrow Agent arising out of or in connection with the Agreement or with the administration of its duties hereunder, including but not limited to legal fees and other costs and expenses of defending or preparing to defend against any claim or liability in the premises, unless such loss, liability or expense shall be caused by the Escrow Agent's willful misconduct or gross negligence. In no event shall the Escrow Agent be liable for indirect, punitive, special or consequential damages. (c) The Buyer and the Seller, jointly and severally, agree to assume any and all obligations imposed now or hereafter by any applicable tax law with respect to the payment of Escrow Funds under this Agreement, and to indemnify and hold the Escrow Agent harmless from and against any taxes, additions for late payment, interest, penalties and other expenses, that may be assessed against the Escrow Agent on any such payment or other activities under this Agreement. The Buyer and the Seller undertake to instruct the Escrow Agent in writing with respect to the Escrow Agent's responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting in connection with its acting as Escrow Agent under this Agreement. The Buyer and the Seller, jointly and severally, agree to indemnify and hold the Escrow Agent harmless from any liability on account of taxes, assessments or other governmental charges, including without limitation the withholding or deduction or the failure to withhold or deduct same, and any liability for failure to obtain proper certifications or to properly report to governmental authorities, to which the Escrow Agent may be or become subject in connection with or which arises out of this Agreement, including costs and expenses (including reasonable legal fees), interest and penalties. (d) Dispute Resolution. It is understood and agreed that should any dispute arise with respect to the delivery, ownership, right of possession, and/or disposition of the Escrow Fund, or should any claim be made upon the Escrow Fund by a third party, the Escrow Agent upon receipt of written notice of such dispute or claim by the parties hereto or by a third party, is authorized and directed to remain in its possession without liability to anyone, all or any of the Escrow Fund until such dispute shall have been settled either by the mutual agreement of the parties, of by a final order, decree or judgment of a court in the United States of America, the time for perfection of an appeal of such order, decree or judgment having expired. The Escrow Agent may, but shall be under no duty whatsoever to, institute or defend any legal proceedings which relate to the Escrow Fund. -4- (e) Consent to Jurisdiction and Service. The Buyer and the Seller hereby absolutely and irrevocably consent and submit to the jurisdiction of the Federal or state courts sitting in Boston, Massachusetts in connection with any actions or proceedings brought against the Buyer and/or the Seller by the Escrow Agent arising out of or relating to this Escrow Agreement. In any such action or proceeding, the Buyer and the Seller hereby absolutely and irrevocably waive personal service of any summons, complaint, declaration or other process and hereby absolutely and irrevocably agree that the service thereof may be made by certified or registered first-class mail directed to the Buyer and/or the Seller, as the case may be, at their respective addresses in accordance with Section 9 hereof. (f) Force Majeure. Neither the Buyer nor the Seller nor the Escrow Agent shall be responsible for delays or failures in performance resulting from actions beyond its control. Such acts shall include but not be limited to acts of God, strikes, lockouts, riots, acts of war, epidemics, governmental regulations superimposed after the fact, fire, communication line failures, computer viruses, power failures, earthquakes or other disasters. 8. Termination. This Agreement shall terminate upon the disbursement by the Escrow Agent of all of the Escrow Funds in accordance with this Agreement; provided that the provisions of Section 7 shall survive such termination. 9. Notices. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) via a reputable nationwide overnight courier service, in each case to the address set forth below. Any such notice, instrumentation or communication shall be deemed to have been delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. If to the Buyer: Copy to: ---------------- -------- Augat Inc. Hale and Dorr 89 Forbes Boulevard 60 State Street Mansfield, MA 02048 Boston, MA 02109 Attn: John E. Lynch, Jr., Esq. Attn.: Thomas E Neely, Esq. -5- If to the Seller: ----------------- Porta Systems Corp. Esanu Katsky Korins & Siger 575 Underhill Boulevard 605 Third Avenue Sagosset., NY 11793 New York, NY 10158 Attn.: Vincent F. Santulli Telecopy: 212-953-6899 Edward Kornfeld Attn.: Warren Esanu, Esq. If to the Escrow Agent: ----------------------- State Street Bank and Trust Co. 2 International Place 4th Floor - Corporate Trust Boston, Mass. 02110 Attn.: ____________ Any party may give any notice, instruction or communication in connection with this Agreement using any other means (including personal delivery, telecopy or ordinary mail), but no such notice, instruction or communication shall be deemed to have been delivered unless and until it is actually received by the party to whom it was sent. Any party may change the address to which notices, instructions or communications are to be delivered by giving the other parties to this Agreement notice thereof in the manner set forth in this Section 9. 10. Successor Escrow Agent. In the event the Escrow Agent becomes unavailable or unwilling to continue in its capacity herewith, the Escrow Agent may resign and be discharged from its duties or obligations hereunder by delivering a resignation to the parties to this Escrow Agreement, not less than 60 days' prior to the date when such resignation shall take effect. In such event, the Buyer may appoint a successor Escrow Agent without the consent of the Seller so long as such successor is a bank with assets of at least $500 million, and may appoint any other successor Escrow Agent with the consent of the Seller, which consent shall not be unreasonably withheld. If, following receipt by the Buyer and the Seller of the Escrow Agent's resignation, the Buyer provides to the Escrow Agent written instructions with respect to the appointment of a successor Escrow Agent and directions for the transfer of any Escrow Fund then held by the Escrow Agent to such successor, the Escrow Agent shall act in accordance with such instructions and promptly transfer such Escrow Fund to such designated successor. -6- 11. General. (a) Governing Law, Assigns. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts without regard to conflict-of-law principles and shall be binding upon and inure to the benefit of, the parties hereto and their respective successors and assigns. (b) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (c) Entire Agreement. Except as set forth in the Agreement, this Escrow Agreement constitutes the entire understanding and agreement of the parties with respect to the subject matter of this Agreement and supersedes all prior agreements or understandings, written or oral, between the parties with respect to the subject matter hereof. (d) Waivers. No waiver by any party hereto of any condition or of any breach of any provision of this Escrow Agreement shall be effective unless in writing. No waiver by any party of any such condition or breach, in any one instance, shall be deemed to be a further or continuing waiver of any such condition or breach or a waiver of any other condition or breach of any other provision contained herein. (e) Amendment. This Agreement may be amended only with the written consent of the Buyer, the Seller and the Escrow Agent. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. AUGAT INC. By: --------------------------- Name: Title: -7- PORTA SYSTEMS CORP. By: --------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY By: --------------------------- Name: Title: -8- Schedule A The fees to be paid to the Escrow Agent for the administration of the Escrow Fund hereunder are $ per annum. -9- Exhibit A-1 SECOND ESCROW AGREEMENT This Second Escrow Agreement is entered into as of March , 1996, by and among Augat, Inc., a Massachusetts corporation (the "Buyer"). Porta Systems Corp., a Delaware corporation (the "Seller") and State Street Bank and Trust Company (the "Escrow Agent"). WHEREAS, the Buyer and the Seller have entered into an Asset Purchase Agreement dated as of March 6, 1996 (the "Agreement") pursuant to which the Buyer has acquired the Company's fiber optics business. WHEREAS, the Agreement provides that the Second Escrow Fund will be established to hold a portion of the Purchase Price. WHEREAS, the parties hereto desire to establish the terms and conditions pursuant to which such escrow fund will be established and maintained. NOW, THEREFORE, the parties hereto hereby agree as follows: l. Defined Terms. Capitalized terms used in this Agreement and not otherwise defined, if any, shall have the meanings given them in the Agreement. 2. Escrow. Contemporaneously with the execution of this Agreement the Buyer has delivered to the Escrow Agent, and the Escrow Agent acknowledges receipt of, a wire transfer from the Buyer's account at the State Street Bank and Trust Company, in the amount of $100,000. Such sum, together with any interest earned thereon, is referred to herein as the "Second Escrow Fund." The Second Escrow Fund shall be invested in accordance with Section 5. The Escrow Agent agrees to accept delivery of the Second Escrow Fund and to hold such Second Escrow Fund in escrow subject to the terms and conditions of this Agreement. 3. Administration of Second Escrow Fund. The Escrow Agent shall administer the Second Escrow Fund as follows: (a) If the Buyer or the Seller (the "First Party") believes that it has a claim to payment from the Second Escrow Fund, it shall give notice (the "Claim Notice") to the Escrow Agent and the other party (the "Second Party"). The Claim Notice shall set forth the First Party's claim in reasonable detail including the amount of claimed to be due (the "Claimed Amount"). (b) Within five days of receipt of the Claim Notice, the Escrow Agent shall transmit to the Second Party a copy of the Claim Notice and all supporting documentation provided to the Escrow Agent. (c) If, by the close of business on the 20th business day following the date that the Escrow Agent transmits the Claim Notice and supporting documentation to the Second Party, the Escrow Agent shall not have received written notice (the "Response Notice" ) from the Second Party that it disputes any or all of the claim, the Escrow Agent shall pay the Claimed Amount to the First Party. If the other party disputes a portion, but not all, of the Claimed Amount, the Escrow Agent shall pay to the First Party the amount not in dispute. (d) With respect to any amount in dispute, the Escrow Agent shall not make any disposition until and unless the Escrow Agent shall have received either joint written instructions from the Buyer and the Seller or in accordance with Section 7(d) hereof. (e) On [six months from the date of this Agreement], the Escrow Agent shall pay over to the Seller the Second Escrow Fund minus the sum of all Claimed Amounts with respect to which the Escrow Agent received a Claim Notice from the Buyer prior to 5:00 P.M. Boston, Massachusetts time on the business day before the First Payment Date. (f) Any funds remaining in the Second Escrow Fund and not disbursed in accordance with this Section shall be retained by the Escrow Agent and not disbursed until the Escrow Agent shall have received either joint written instructions of the Buyer and the Seller or in accordance with Section 7(d) hereof. 4. Right of Escrow Agent. Upon disbursement of the Second Escrow Fund in accordance with Section 3 hereof, the Escrow Agent may withhold from any payment due either the Buyer or the Seller an amount equal to such party's share of the Escrow Agent's fees. 5. Investment of Second Escrow Fund. Any monies held in the Second Escrow Fund shall be invested by the Escrow Agent, to the extent permitted by law and as directed by the Seller, in (i) obligations issued or guaranteed by the United States of America or any agency or instrumentality thereof, (ii) obligations (including certificates of deposit and bankers' acceptances) of banks which at the date of their last public reporting had total assets in excess of $500,000,000, (iii) commercial paper rated at -2- least A-1 or P-1 or, if not rated, issued by companies having outstanding debt rated at least AA or Aa and (iv) money market mutual funds invested exclusively in some or all of the securities described in the foregoing clauses (i), (ii) and (iii). 6. Fees and Expenses. The Buyer and the Seller agree to pay the Escrow Agent compensation for its normal services hereunder as set forth on Schedule A hereto (the "Escrow Fee"). The Escrow Agent shall be entitled to reimbursement on demand for all expenses incurred in connection with the administration of the escrow created hereby which are in excess of it compensation for normal services hereunder including without limitation, payment of any legal fees incurred by the Escrow Agent in connection with resolution of any claim by any party hereunder. The Buyer and the Seller shall each pay one-half of the fees and expenses of the Escrow Agent for the services to be rendered by the Escrow Agent hereunder. 7. Limitation of Escrow Agent's Liability. (a) The Buyer and the Seller acknowledge and agree that the Escrow Agent (i) shall not be responsible for any of the agreements referred to herein but shall be obligated only for the performance of such duties as are specifically set forth in this Second Escrow Agreement, (ii) shall not be obligated to take any legal or other action hereunder which might in its judgment involve any expense or liability unless it shall have been furnished with acceptable indemnification, (iii) may rely on and shall be protected in acting or refraining from acting upon any written notice, instruction, instrument, statement, request or document furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper person, and shall have no responsibility for determining the accuracy thereof, and (iv) may consult counsel satisfactory to it, including house counsel, and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion of such counsel. (b) Neither the Escrow Agent nor any of its directors, officers or employees shall be liable to anyone for any action taken or omitted to be taken by it or any of its directors, officers or employees hereunder except in the case of gross negligence or willful misconduct. The Buyer and the Seller, jointly and severally, covenant and agree to indemnify the Escrow Agent and hold it harmless without limitation from and against any loss, liability or expense of any nature incurred by the Escrow Agent arising out of or in connection with the Agreement or with the administration of its duties hereunder, including but not limited to legal fees and other costs and expenses of defending or -3- preparing to defend against any claim or liability in the premises, unless such loss, liability or expense shall be caused by the Escrow Agent's willful misconduct or gross negligence. In no event shall the Escrow Agent be liable for indirect, punitive, special or consequential damages. (c) The Buyer and the Seller, jointly and severally, agree to assume any and all obligations imposed now or hereafter by any applicable tax law with respect to the payment of the Second Escrow Funds under this Agreement, and to indemnify and hold the Escrow Agent harmless from and against any taxes, additions for late payment, interest, penalties and other expenses, that may be assessed against the Escrow Agent on any such payment or other activities under this Agreement. The Buyer and the Seller undertake to instruct the Escrow Agent in writing with respect to the Escrow Agent's responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting in connection with its acting as Escrow Agent under this Agreement. The Buyer and the Seller, jointly and severally, agree to indemnify and hold the Escrow Agent harmless from any liability on account of taxes, assessments or other government charges, including without limitation the withholding or deduction or the failure to withhold or deduct same, and any liability for failure to obtain proper certifications or to properly report to governmental authorities, to which the Escrow Agent may be or become subject in connection with or which arises out of this Agreement, including costs and expenses (including reasonable legal fees), interest and penalties. ( d) Dispute Resolution . It is understood and agreed that should any dispute arise with respect to the delivery, ownership, right of possession, and/or disposition of the Second Escrow Fund, or should any claim be made upon the Second Escrow Fund by a third party, the Escrow Agent upon receipt of written notice of such dispute or claim by the parties hereto or by a third party, is authorized and directed to retain in its possession without liability to anyone, all or any of the Second Escrow Fund until such dispute shall have been settled either by the mutual agreement of the parties, or by a final order, decree or judgment of a court in the United States of America, the time for perfection of an appeal of such order, decree or judgment having expired. The Escrow Agent may, but shall be under no duty whatsoever to, institute or defend any legal proceedings which relate to the Second Escrow Fund. -4- (e) Consent to Jurisdiction and Service. The Buyer and the Seller hereby absolutely and irrevocably consent and submit to the jurisdiction of the Federal or state courts sitting in Boston, Massachusetts in connection with any actions or proceedings brought against the Buyer and/or the Seller by the Escrow Agent arising out of or relating to this Second Escrow Agreement. In any such action or proceeding, the Buyer and the Seller hereby absolutely and irrevocably waive personal service of any summons, complaint, declaration or other process and hereby absolutely and irrevocably agree that the service thereof may be made by certified or registered first-class mail directed to the Buyer and/or the Seller, as the case may be, at their respective addresses in accordance with Section 9 hereof. (f) Force Majeure. Neither the Buyer nor the Seller nor the Escrow Agent shall be responsible for delays or failures in performance resulting from actions beyond its control. Such acts shall include but not be limited to acts of God, strikes, lockouts, riots, acts of war, epidemics, governmental regulations superimposed after the fact, fire, communication line failures, computer viruses, power failures, earthquakes or other disasters. 8. Termination. This Agreement shall terminate upon the disbursement by the Escrow Agent of all of the Second Escrow Funds in accordance with this Agreement; provided that the provisions of Section 7 shall survive such termination. 9. Notices. All notices, instructions and other communications given hereunder or in connection herewith shall be in writing. Any such notice, instruction or communication shall be sent either (i) by registered or certified mail, return receipt requested, postage prepaid, or (ii) via a reputable nationwide overnight courier service, in each case to the address set forth below. Any such notice, instruction or communication shall be deemed to have been delivered two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, or one business day after it is sent via a reputable nationwide overnight courier service. If to the Buyer: Copy to: ---------------- -------- Augat Inc. Hale and Dorr 89 Forbes Boulevard 60 State Street Mansfield, MA 02048 Boston, MA 02109 Attn: John E. Lynch, Jr., Esq. Attn: Thomas E. Neely, Esq. -5- If to the Seller: ----------------- Porta Systems Corp. Esanu Katsky Korins & Siger 575 Underhill Boulevard 605 Third Avenue Sagosset, NY 11793 New York, NY 10158 Attn.: Vincent F. Santulli Telecopy: 212-953-6899 Edwaxd Kornfeld Attn: Warren Esanu, Esq. If to the Escrow Agent: ----------------------- State Street Bank and Trust Co. 2 International Place 4th Floor - Corporate Trust Boston, Mass. 02110 Attn.: -- Any party may give any notice, instruction or communication in connection with this Agreement using any other means (including personal delivery, telecopy or ordinary mail), but no such notice, instruction or communication shall be deemed to have been delivered unless and until it is actually received by the party to whom it was sent. Any party may change the address to which notices, instructions or communications are to be delivered by giving the other parties to this Agreement notice thereof in the manner set forth in this Section 9. 10. Successor Escrow Agent. In the event the Escrow Agent becomes unavailable or unwilling to continue in its capacity herewith, the Escrow Agent may resign and be discharged from its duties or obligations hereunder by delivering a resignation to the parties to this Second Escrow Agreement, not less than 60 days' prior to the date when such resignation shall take effect. In such event the Buyer may appoint a successor Escrow Agent without the consent of the Seller so long as such successor is a bank with assets of at least $500 million, and may appoint any other successor Escrow Agent with the consent of the Seller, which consent shall not be unreasonably withheld. If, following receipt by the Buyer and the Seller of the Escrow Agent's resignation, the Buyer provides to the Escrow Agent written instructions with respect to the appointment of a successor Escrow Agent and directions for the transfer of any Second Escrow Fund then held by the Escrow Agent to such successor, the Escrow Agent shall act in accordance with such instructions and promptly transfer such Second Escrow Fund to such designated successor. -6- 11. General. (a) Governing Law, Assigns. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts without regard to conflict-of-law principles and shall be binding upon, and inure to the benefit of the parties hereto and their respective successors and assigns. (b) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (c) Entire Agreement. Except as set forth in the Agreement, this Second Escrow Agreement constitutes the entire understanding and agreement of the parties with respect to the subject matter of this Agreement and supersedes all prior agreements or understandings, written or oral, between the parties with respect to the subject matter hereof. (d) Waivers. No waiver by any party hereto of any condition or of any breach of any provision of this Second Escrow Agreement shall be effective unless in writing. No waiver by any party of any such condition or breach, in any one instance, shall be deemed to be a further or continuing waiver of any such condition or breach of a waiver of any other condition or breach of any other provision contained herein. (e) Amendment, This Agreement may be amended only with the written consent of the Buyer, the Seller and the Escrow Agent. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. AUGAT INC. By: --------------------------- Name: Title: -7- PORTA SYSTEMS CORP. By: --------------------------- Name: Title: STATE STREET BANK AND TRUST COMPANY By: --------------------------- Name: Title: -8- Schedule A The fees to be paid to the Escrow Agent for the administration of the Escrow Fund hereunder are $ per annum. -9- Exhibit B BILL OF SALE This Bill of Sale dated this day of March, 1996, from Porta Systems Corp., a Delaware corporation ("Porta"), and the Subsidiaries, as hereinafter, which, together with Porta, are referred to collectively as the "Sellers" and each, individually, as a "Seller," to Augat Inc., a Massachusetts corporation (the "Buyer"). W I T N E S S E T H: WHEREAS, pursuant to a certain purchase agreement (the "Agreement") dated as of March 6, 1996, between the Sellers and the Buyer, Porta has agreed to sell, transfer, convey, assign and deliver the Acquired Assets, as defined in the Agreement, to the Buyer, and the Buyer has agreed to assume the Assumed Liabilities, as defined in the Agreement; and WHEREAS, certain of the Acquired Assets are owned by one of more of Porta's subsidiaries, namely, Aster Corporation, a Delaware corporation, Aster (Ireland) Ltd., a Burmuda corporation, Aster Technologies Limited, an Ireland corporation, Criterion Plastics, Inc., a Texas corporation, Porta Systems S.A. de C.V., a Mexican corporation, and Porta Systems Limited, a United Kingdom corporation (collectively, the "Subsidiaries"); WHEREFORE, for good and valuable consideration, the receipt and the sufficiency of which is hereby acknowledged, the Sellers hereby agree as follows: 1. The Sellers hereby sell, transfer, convey, assign and deliver to the Buyer, its successors and assigns, to have and to hold forever, all of the Acquired Assets, other than the Grant Assets, as defined in Section 1.3(c) of the Agreement. 2. The Sellers hereby covenant and agree that they and each of them will, at the request of the Buyer and without further consideration, execute and deliver, and will cause its employees to execute and deliver, such other instruments of sale, transfer, conveyance and assignment, and take such other action as may reasonably be necessary to more effectively sell, transfer, convey, assign and deliver to, and vest in, the Buyer, its successors and assigns, title to the Acquired Assets hereby sold, transferred, conveyed, assigned and delivered, all as set forth in the Agreement. 3. The Sellers do hereby irrevocably constitute and appoint the Buyer, its successors and assigns, its true and lawful attorney, with full power of substitution, in its name or otherwise, and on behalf of the Sellers, or for its own use, to claim, demand, collect and receive at any time and from time to time any and all assets, properties, claims, accounts and other rights, tangible or intangible, hereby sold, transferred, conveyed, assigned and delivered, and to prosecute the same at law or in equity and, upon discharge thereof, to complete, execute and deliver any and all necessary instruments of satisfaction and release. 4. This sale, transfer, conveyance and assignment has been executed and delivered by the Sellers in accordance with the Agreement and is expressly made subject to those liabilities, obligations and commitments which the Buyer has expressly assumed and agreed to pay, perform and discharge pursuant to the Agreement and a certain Instrument of Assumption executed by the Buyer of even date herewith. 5. Each of the Sellers, by its execution of this Bill of Sale, and the Buyer, by its acceptance of this Bill of Sale, hereby acknowledges and agrees that neither the representations and warranties nor the obligations, rights and remedies of any party under the Agreement shall be deemed to be enlarged, modified or altered in any way by this Bill of Sale. IN WITNESS WHEREOF, the Sellers and the Buyer have caused this instrument to be duly executed under seal as of and on the date first above written. SELLERS: PORTA SYSTEMS CORP. By: ------------------------------- Vincent F. Santulli, Chairman ASTER CORPORATION By: ------------------------------- Vincent F. Santulli, Chairman ASTER (IRELAND) LTD. By: ------------------------------- Vincent F. Santulli, Chairman ASTER TECHNOLOGIES LIMITED By: ------------------------------- Vincent F. Santulli, Chairman CRITERION PLASTICS, INC. By: ------------------------------- Vincent F. Santulli, Chairman -2- PORTA SYSTEMS S.A. de C.V. By: ------------------------------- Vincent F. Santulli, Chairman PORTA SYSTEMS LIMITED By: ------------------------------- John Terrill, Director ACCEPTED: BUYER: AUGAT INC. By: ---------------------------- Title: ------------------------- -3- Exhibit C INSTRUMENT OF ASSUMPTION OF LIABILITIES This Instrument of Assumption of Liabilities dated March , 1996, is made by Augat Inc., a Massachusetts corporation (the "Buyer"), in favor of Porta Systems Corp., a Delaware corporation, and the Subsidiaries, as hereinafter defined, which, together with Porta, are referred to collectively as the "Sellers" and each, individually, as a "Seller." All capitalized words and terms used in this Instrument of Assumption of Liabilities and not defined herein shall have the respective meanings ascribed to them in the Asset Purchase Agreement dated as of March 6, 1996 between the Seller and the Buyer (the "Agreement"). WHEREAS, pursuant to a certain asset purchase agreement (the "Agreement") dated as of March 6, 1996, between the Sellers and the Buyer, Porta has agreed to sell, transfer, convey, assign and deliver the Acquired Assets, as defined in the Agreement, to the Buyer, and the Buyer has agreed to assume the Assumed Liabilities, as defined in the Agreement; and WHEREAS, certain of the Acquired Assets are owned by one or more of Porta's subsidiaries, namely, Aster Corporation, a Delaware corporation, Aster (Ireland) Ltd., a Bermuda corporation, Aster Technologies Limited, an Ireland corporation, Criterion Plastics, Inc., a Texas corporation, Porta Systems S.A. de C.V., a Mexican corporation, and Porta Systems Limited, a United Kingdom corporation (collectively, the "Subsidiaries"); NOW, THEREFORE, for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Buyer hereby agrees as follows: 1. The Buyer hereby assumes and agrees to perform, pay and discharge the liabilities, obligations and commitments of the Seller referred to in the Agreement as the "Assumed Liabilities." 2. As provided in the Agreement, the Buyer does not hereby assume or agree to perform, pay or discharge, and the Seller shall remain unconditionally liable for, from and after the date hereof, all other liabilities, obligations and commitments, fixed or contingent, of the Seller, which are referred to in the Agreement as the "Retained Liabilities." 3. The Buyer, by its execution of this Instrument of Assumption of Liabilities, and the Seller, by its acceptance of this Instrument of Assumption of Liabilities, each hereby acknowledges and agrees that neither the representations and warranties nor the rights and remedies to either party under the Agreement shall be deemed to be enlarged, modified or altered in any way by such execution and acceptance of this instrument. IN WITNESS WHEREOF, the Buyer and the Seller have caused this instrument to be duly executed under seal as of and on the date first above written. BUYER: AUGAT INC. By: -------------------------------------- Title: ----------------------------------- ACCEPTED: SELLERS: PORTA SYSTEMS CORP. By: -------------------------- Title: ----------------------- ASTER CORPORATION By: ----------------------------- Vincent F. Santulli, Chairman ASTER (IRELAND) CORPORATION By: ----------------------------- Vincent F. Santulli, Chairman -2- ASTER TECHNOLOGIES LIMITED By: ------------------------------- Vincent F. Santulli, Chairman CRITERION PLASTICS, INC. By: ------------------------------- Vincent F. Santulli, Chairman PORTA SYSTEMS S.A. de C.V. By: ------------------------------- Vincent F. Santulli, Chairman PORTA SYSTEMS LIMITED By: ------------------------- John Terrill, Director -3- Exhibit D March , 1996 Augat Inc. 16450-15 89 Forbes Boulevard Mansfield, MA 02048 Rs: Porta Systems Corp. Ladies and Gentlemen: This opinion is being furnished by us, as counsel for Porta Systems Corp., a Delaware corporation ("Porta"), and certain of its subsidiaries, namely Aster Corporation, a Delaware corporation ("Aster"), Aster (Ireland) Ltd., a Bermuda corporation, Aster Technologies Limited, an Ireland corporation, Criterion Plastics, Inc., a Texas corporation ("Criterion"), Porta Systems S.A. de C.V., a Mexican corporation, and Porta Systems Limited, a United Kingdom corporation (collectively, the "Subsidiaries"), pursuant to Section 5.1 of the Asset Purchase Agreement dated as of March 6, 1996 (the "Agreement") by and between Augut Inc., a Massachusetts corporation (the "Buyer"), and the Porta and the Subsidiaries (collectively "Sellers"). Capitalized terms not otherwise defined in this Opinion have the respective meanings ascribed to them in the Agreement. In this connection we have examined and have relied upon the followings documents: (a) The certificate of incorporation of Porta, Aster and Criterion, certified by the Secretary of State of their respective states of incorporation; (b) The by-laws of Porta, Aster and Criterion, as in effect on the date of this Opinion, as certified by the Secretary of such corporation; (c) Certificates, dated as of a recent date, of the Secretary of State of the state of incorporation certifying to the legal existence and the good standing (including tax) of Porta, Aster and Criterion in the respective state of incorporation (the "Good Standing Certificates"); (d) Certified copies of resolutions of the Boards of Directors of Porta, Aster and Criterion approving the sale of the Acquired Assets and authorizing, among other things, the execution, delivery and performance by them of the Agreement, the Bill of Sale and the Augat Inc. March , 1996 Page 2 other Ancillary Agreements refereed to in the Agreement (collectively, the "Sellers' Documents"); (e) A lien search (the "Lien Search") by CT Corporation System covering Porta, Aster and Criterion dated on or about February 7, 1996, and attached to Schedule to the Disclosure Schedule. (f) UCC-3 or other instruments releasing liens executed by Foothill Capital Corporation ("Foothill") covering the Acquired Assets as set forth therein (collectively, the "Lien Releases"). (g) Such other documents, instruments and certificates (including, but not limited to, certificates of public official and officers of one or more of the Sellers) as we have considered necessary for purposes of this Opinion. In our examination, we have, with your consent, assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as certified, photocopies (including telecopies) or conformed copies, the authenticity of the originals of such copies, and the due execution and delivery of all documents where due executions is a prerequisite to the effectiveness thereof. We have been furnished with, and with your consent relied upon, certificates of, and/or other information provided by, the Company as to certain factual matters which have not independently verified. In addition, we have relied upon certificates from public officials as to the matters set forth in such certificates. We have assumed that the Agreement and the Ancillary Agreements accurately describe and contain the mutual understanding of the parties as to all matters contained therein, and that no other agreements or understanding exist between the parties with respect thereto. Insofar as this Opinion relates to factual matters, information with respect to which is in the possession of the Sellers, we have relied (without independent investigation) upon representations made to us by one or more officers or employees of the Sellers, including the representations of the Sellers contained in the Agreement. With respect to the opinion set forth in Paragraph 7 of this Opinion, we have relied, with your approval, entirely upon certificates of the Sellers as to the factual matters contained in said paragraphs which we have not independently verified. This Opinion is governed by and shall be interpreted in accordance with the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, and this Opinion should be read in conjunction therewith. The terms "knowledge of" or "known to" and words of like import, as used in this Opinion, shall mean "Actual Knowledge" as such term is used in the Accord, without us having made any independent inquiry. Furthermore, knowledge of any person gained in a capacity other than as counsel for the Company shall not be deemed to be knowledge of this firm. Augat Inc. March , 1996 Page 3 For purposes of this opinion, we have assumed that the Agreement and each Ancillary Agreement has been duly authorized, executed and delivered by all signatories thereto other than the Sellers, that all signatories thereto other than the Sellers have the legal capacity and all requisite power and authority to effect the transactions contemplated by the Agreement and the Ancillary Agreements, and that the Agreement and each Ancillary Agreement is the valid and binding obligation of all signatories thereto other than the Sellers, enforceable against them in accordance with its terms. We do not render any opinion as to the application of any federal or state law regulation to the power, authority or compliance of any party to the Agreement and the Ancillary Agreements other than the Sellers. We express no opinion herein as Buyer or Foothill, including, without limitation, whether the Agreement or any other instrument constitutes a valid and binding obligation of, or is enforceable against, the Buyer or Foothill. Our opinion expressed in Paragraph 1 insofar as it relates to the due organization, legal existence and corporate good standing of Porta and Aster, as corporations incorporated in the State of Delaware, and as to the existence and good standing of Criterion, as a corporation incorporated under the laws of the state of Texas, is based solely on the Good Standing Certificates, as rendered as of the respective dates of such certificates and is limited accordingly. We express no opinion as to the laws of any state or jurisdiction other than the General Corporation Law of the State of Delaware, the laws of the State of New York and the federal laws, of the United States. Accordingly, to the extent that any other laws govern any of the matters as to which we express an opinion below, we have assumed with your permission, without independent investigation, that the laws of such jurisdiction are identical to those of the State of New York, and we express no opinion as to whether such assumption is reasonable or correct; except that nothing in this opinion shall be construed to relate, directly or indirectly, to (i) any Subsidiary other than Aster (except to the extent expressly set forth in Paragraphs 1 and 7 of this Opinion), (ii) any Acquired Assets which are located outside the United States or (iii) the applicability of the laws of any jurisdiction outside the United States. On the basis of and subject to the foregoing, we are of the opinion that: 1. Porta and Aster are corporations dully organized, validly existing and in good standing under the laws of the State of Delaware. Criterion is an existing corporation which is in good standing under the laws of the State of Texas 2. Porta and Aster have all requisite power and authority to own their respective properties, to carry on their respective businesses as now being conducted, to execute and deliver the Sellers' Documents and to consummate the transactions contemplated thereby. 3. The execution and delivery of the Sellers' Documents and the consummation of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of the Porta and Aster. Augat Inc. March , 1996 Page 4 4. The Sellers' Documents have been duly executed and delivered by Porta and Aster, and constitute the valid and binding obligations of Porta and Aster, enforceable against them in accordance with their respective terms. 5. Porta and Aster have the right and power to sell, convey, assign, transfer and deliver the Acquired Assets as provided in the Agreement, and, to the best of our knowledge, based solely on our review of the Lien Search without independent investigation and assuming the proper and timely filing or recording of the Lien Releases, there is no mortgage, pledge, lease, lien, security interest, charge, title retention or other security arrangement or any other encumbrance upon or affecting the Acquired Assets located in the states covered by the Lien Search, except as set forth on the Disclosure Schedules. 6. The execution, delivery and performance by Porta and Aster of the Sellers' Documents and the consummation of the transactions contemplated thereby, will not result in any violation of the certificate of incorporation or bylaws of Porta or Aster, or any applicable statute, law, regulation, or, to the best of our knowledge, order or decree of any court or governmental authority which is known to us, or, to the best of our knowledge, conflict with, result in a breach or termination of, constitute a default under, or result in the creation of any lien, charge, encumbrance or restriction on any of the Acquired Assets under any agreement or other instrument known to us which Porta or Aster is a party, except as set forth on the Disclosure Schedules. 7. We know of no action, proceeding, suit or investigation pending or threatened against Porta, Aster or Criterion which may have an adverse effect on such corporation's ability to convey the Acquired Assets to the Buyer. This Opinions id qualified by the following. A. We are admitted to practice in the State of New York and are not opining as to the law of any other jurisdiction except for Porta's and Aster's organization and authority under the Delaware General Corporation Law. We express no opinion as the enforcement or interpretation by any court, administrative agency, arbitrator, or other authority of any other state with respect to the construction, interpretation, legality or validity of any agreements or as to matters involving choices or conflicts of law. In particular, we recognize that Criterion is incorporated in, and its facilities are located in, the State of Texas, and this Opinion is qualified in its entirety with respect to any matters which may be governed by Texas law. B. The enforceability of the rights and remedies of any party to any agreement against any other party thereto may be subject to customary principles governing equitable relief generally, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing, and to any applicable bankruptcy, insolvency, reorganization, Augat Inc. March , 1996 Page 5 moratorium, fraudulent conveyance, usury or other laws affecting creditor's rights and their enforcement generally. C. No opinion is expressed as to whether any particular provisions of any agreement will be enforceable by a decree of specific performance or other equitable relief, or that the enforcement thereof may not be limited by defenses such as estoppel, waiver and other equitable considerations. D. This Opinion is further qualified to the extent that it may be subject to or affected by statutory or decisional law concerning recourse by creditors to security in the absence of notice or hearing and duties and standards imposed on creditors and parties to contracts, including without limitation, requirements of good faith, reasonableness and fair dealing. This Opinion is based upon currently existing statutes, rules, regulations and judicial decisions and upon facts known to us on the date of this Opinion, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth as to any matters. Please note that we are opining only as to the matters expressly set forth in this Opinion, and no opinion should be inferred as to any other matters. This Opinion is furnished to you in your capacity as the Buyer pursuant to Section 5.1 of the Agreement, and may not be used or relied upon for any other purpose or by any other person or entity without our express prior written consent. This is to advise you that Warren H. Esanu, Esq., who is of counsel to this firm, is a director of the Company, a member of the executive committee and chairman of the audit committee of the board of directors Very truly yours, Esanu Katsky Korins & Siger [LETTERHEAD OF HALE AND DORR] March 6, 1996 VIA FACSIMILE John Lynch, Jr., Esquire Augat Inc. 89 Forbes Boulevard Mansfield, MA 02048 Warren Esanu, Esquire Esanu Ratsky Korins & Siger 605 Third Avenue, 16th Floor New York, NY 10158 Dear Jack and Warren: Transmitted herewith is the revised Transitional Services Agreement which replaces the version faxed earlier today. Please destroy the earlier version and append this version as Exhibit E to the Asset Purchase Agreement. Very truly yours, /s/ Sean A. Cote Sean A. Cote SAC/ped Attachment Exhibit E TRANSITIONAL SERVICES AGREEMENT This agreement is entered into in connection with the Asset Purchase Agreement of even date herewith (the "Agreement") by and among Porta Systems Corp. and certain of its subsidiaries (collectively, the "Seller") and Augat Inc. (the "Buyer"). Defined terms used below have the meanings given in the Agreement. In order to facilitate the consummation of the transactions contemplated by the Agreement, the Seller and the Buyer agree that the Seller shall render, for the consideration set forth below, certain production services and other services described below at the Seller's locations in Matamoros, Mexico and its Criterion Plant in Kingsville, Texas. Such production services will include the Seller's customary production support and direct labor activities as rendered prior to the Closing Date in the production and support of the Acquired Assets at the Matamoros and Kingsville locations. Illustrative of such production services are materials planning and control; purchasing; warehousing, shiping and receiving; material handling; production control; quality inspectors and quality control support services; machine and tool maintenance; support materials and supplies (non-inventory); heat, light and power; and payroll and related accounting support services. The Buyer will pay $34 per standard labor hour at the Matamoros facility, and $55 per standard labor hour at the Kingsville facility, for production services, and $34 per actual labor hour at the Matamoros facility, and $55 per actual labor hour at the Kingsville facility, for the Seller's services in providing inventory shipping, plant packing and closing out the Seller's fiber optics business. In addition to the hourly rates set forth above, the Buyer will pay the Seller, for contributions to overhead, $2,500 per week during the term hereof (or a lesser prorated amount should the term end during a week). The Seller will provide production services hereunder consistent with its provision thereof prior to the Closing Date and will maintain insurance coverages on the Matamoros and Kingsville properties. The Seller will invoice the Buyer on a weekly (Saturday through Friday end of day) basis, forwarding to the Buyer such charged standard and actual labor hours as reasonably approved by a representative of the Buyer and the Seller. The Buyer shall advance to the Seller S5,000 per week in order to finance provision of the services hereinabove described, against which approved invoices will be charged. The seller shall remit to the Buyer any unused balance of said advances upon termination of this agreement. --2-- All shipping, out-warehousing, customs duties, customs brokers, demurrage, trucking costs and other similar expenses directly related to the goods produced will be paid by the Buyer. This Transitional Services Agreement will expire not later than April 15, 1996, provided that it will expire earlier upon the runout of validated customer backlog in accordance with the attached list from the Matamoros and Kingsville facilities existing as of the Closing Date, with reasonable adjustments thereto to take into account customer changes and cancellations and adjustments occurring in the normal course of business. At the Closing, the Buyer shall deliver supplies and inventory in accordance with the attached list required to fulfill customer backlog. Executed as of , 1996. Augat Inc. By: ---------------------------- Name: -------------------------- Title: -------------------------- Porta Systems Corp. By: ---------------------------- Name: -------------------------- Title: -------------------------- --3-- [LETTERHEAD OF HALE AND DORR] _________________ , 1996 Porta Systems Corp. 575 Underhill Boulevard Syosset, NY 11793 Ladies and Gentlemen: This opinion is being furnished pursuant to Section 5.2 of the Asset Purchase Agreement dated as of March 6, 1996 (the "Agreement") by and between Augat Inc., a Massachusetts corporation (the "Buyer"), and Porta Systems Corp., a Delaware corporation (the "Seller"). Capitalized terms not otherwise defined herein have the respective meanings described to them in the Agreement. We have acted as counsel to the Buyer in connection which the Agreement, providing for the sale by the Seller to the Buyer of certain of the assets and business of the Seller as described in the Agreement, and the assumption by the Buyer of certain liabilities of the Seller as described in the Agreement. As such counsel, we have assisted in the preparation of the Agreement, the Bill of Sale, the Instrument of Assumption and the other Ancillary Agreements described in the Agreement. We have also examined and are familiar with and have relied upon the following documents: (a) The articles of organization and bylaws, as amended, of the Buyer; (b) A certificate, dated as of a recent date, of the Secretary of State of the Commonwealth of Massachusetts certifying to the legal existence and the good standing (including tax) of the Buyer in Massachusetts; (c) Resolutions of the Board of Directors of the Buyer approving the purchase of the Acquired Assets and authorizing, among other things, the execution, delivery and performance by the Buyer of the Agreement, the Instrument of Assumption and the other Ancillary _______________, 1996 Page 2 Agreements referred to in the Agreement (collectively, the "Buyer's Documents"); and (d) Such other documents, instruments and certificates "including, but not limited to, certificates of public officials and officers of the Buyer) as we have considered necessary for purposes of this opinion. In our examination of the documents described above, we have assumed the genuineness of all signatures. the legal capacity of each signatory to such documents, the authenticity of all documents submitted to us as originals, the conformity to original documents of documents submitted to us as certified, facsimile or photostatic copies and the authenticity of the originals of such latter documents. We have assumed that the Agreement and the Ancillary Agreements accurately describe and contain the mutual understanding of the parties as to all matters contained therein, and that no other agreements or understanding exist between the parties with respect thereto. Insofar as this opinion relates to factual matters, information with respect to which is in the possession of the Buyer, we have relied (without independent investigation) upon representations made to us by one or more officers or employees of the Buyer, including the representations of the Buyer contained in the Agreement, and nothing has come to our attention leading us to question the accuracy of such information. Any reference herein to "our best knowledge," "known to us," or to any matter "coming to our attention" or, "of which we are aware" or any variation of any of the foregoing, shall mean the conscious awareness of the attorneys in this firm who have rendered substantive attention to this transaction (including the preparation of the Agreement and the transactions contemplated thereby) of the existence or absence of any facts which would contradict our opinions set forth below. We have not undertaken any independent investigation to determine the existence or absence of such facts, and no inference as to our knowledge of the existence or absence of such facts should be drawn from the fact of our representation of the Buyer. For purposes of this opinion, we have assumed that the Agreement and each Ancillary Agreement has been duly authorized, executed and delivered by all signatories thereto other than the Buyer, that all signatories thereto other than the Buyer have the legal capacity and all requisite power and authority to effect the transactions contemplated by the Agreement and the Ancillary _____________, 1996 Page 3 Agreements, and that the Agreement and each Ancillary Agreement is the valid and binding obligation of all signatures thereto other than the Buyer, enforceable against them in accordance with its terms. We do not render any opinion as to the application of any federal or state law or regulation to the power, authority or compliance of any party to the Agreement and the Ancillary Agreements other than the Buyer. We express no opinion herein as to the Seller, including, without limitation, whether the Agreement constitutes a valid and binding obligation of, or is enforceable against, the Seller. Our opinion expressed in paragraph 1 below insofar as it relates to the due organization, legal existence and corporate good standing of the Buyer as a corporation incorporated in the Commonwealth of Massachusetts is based solely on the certificate referred to in paragraph (b) above, is rendered as of the date of such certificate and is limited accordingly. The opinions hereinafter expressed are qualified to the extent that they may be subject to or affected by (i) applicable bankruptcy, insolvency, reorganization, moratorium, usury, fraudulent transfer or other laws affecting the rights and remedies of creditors generally; (ii) statutory or decisional law concerning recourse by creditors to security in the absence of notice or hearing; and (iii) duties and standards imposed on creditors and parties to contracts, including without limitation, requirements of good faith, reasonableness and fair dealing. Furthermore, we express no opinion as to the availability of any equitable or specific remedy or defense upon any breach of any of the covenants, warranties or other provisions contained in any of such agreements, instruments or documents, insofar as the availability of such remedies or defenses may be subject to the discrection of a court. We express no opinion as to the laws of any state or jurisdiction other than the laws of the Commonwealth of Massachusetts and the federal laws of the United States. Accordingly, to the extent that any other laws govern any of the matters as to which we express an opinion below, we have assumed with your permission, without independent investigation, That the laws of such jurisdiction are identical to those of the Commonwealth of Massachusetts, and we express no opinion as to whether such assumption is reasonable or correct. ______________, 1996 Page 4 On the basis of and subject to the foregoing, we are o(pound) the opinion that: 1. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. The Buyer has all requisite power and authority to carry on its business as now being conducted, to execute and deliver the Buyer's Documents and to consummate the transactions contemplated thereby. 2. The execution and delivery of the Buyer's Documents, and the consummation of the transactions contemplated thereby, have been duly authorized by all requisite corporate action on the part of the Buyer. 3. The Buyer's Documents have been duly executed and delivered by the Buyer and constitute the valid and binding obligations of the Buyer, enforceable against it in accordance with their respective terms. 4. The execution, delivery and performance by the Buyer of the Buyer's Documents and the consummation of the transactions contemplated thereby, will not result in any violation of the Buyer's articles of organization or bylaws, or any applicable statute, law, regulation, or, to the best of our knowledge, order or decree of any court or governmental authority, or, to the best of our knowledge, conflict with, result in a breach or termination of, or constitute a default under, any agreement or other instrument known to us to which the Buyer is a party. 5. We know of no action, proceeding, suit or investigation pending or threatened against the Buyer which may have an adverse effect on the Buyer's ability to perform its obligations under the Agreement. This opinion is based upon currently existing statutes. rules, regulations and judicial decisions and upon facts known to us on the date hereof, and we disclaim any obligation to advise you of any change in any of these sources of law or subsequent legal or factual developments which might affect any matters or opinions set forth herein. ____________, 1996 Page 5 Please note that we are opinion only as to the matters expressly set forth herein, and no opinion should be inferred as to any other matters. This opinion is furnished to you in your capacity as the Seller pursuant to Section 5.2 of the Agreement, and may not be used or relied upon for any other purpose or by any other person or entity without our express prior written consent. Very truly yours, Hale and Dorr EX-10 6 EXHIBIT 10.9 Exhibit 10.9 [LETTERHEAD OF KMPG BAYMARK STRATEGIES] October 2, 1995 Mr. Vincent F. Santulli Chairman and Chief Executive Officer PORTA SYSTEMS CORP. 575 Underhill Boulevard Syosset, NY 11791 Dear Mr. Santulli: We are pleased to submit this letter agreement ("Agreement") which sets forth the terms and conditions under which KPMG BayMark Strategies LLC's Crisis Management Group ("KPMG BayMark") agrees to provide turnaround management and consulting services, including serving as interim management, to PORTA SYSTEMS CORP. ("Company".) In doing so, we will report directly to you. Background The Company manufactures fiber optic couplers, testing equipment, and connector products for the telecommunications industry. The Company has negative cash flow from operations and is unprofitable. Its sales have declined from $82 million in 1991 to $69 million in 1994, and it is extremely highly l everaged. The Company's shares are traded on the American Stock Exchange (ASE-PSI), although it is in danger of being de-listed due to not satisfying the required financial guidelines. The company's lender, Foothill Capital, has placed the Company in non-monetary default and has required it to susp end payments for 225 days on $36 million of 6% convertible subordinated debentures. We met with you August 15 and discussed the major issues you saw facing the Company and your desire to increase shareholder value. Qualifications KPMG BayMark Strategies LLC is an independent firm in a strategic alliance with KPMG Peat Marwick LLP, the world's largest professional services firm. Our principals have an average of twenty years experience in the process of turnaround management, and have conducted engagements in most major industries. The combination of our skills in turnaround management and KPMG's resources offers a highly qualified and reliable solution to troubled company situations. Management Team As Managing Principal of KPMG BayMark's Crisis Management Group, I will personally direct this engagement. I will assume the title of Chief Operating Officer of the Company, direct the turnaround effort, and report directly to you as Chief Executive Officer. During the course of this engagement, I will ensure that the appropriate resources are brought to this engagement. These resources may include KPMG BayMark Strategies' associates, as welt as retaining other professionals under a separate sub-contract. Approach We will take a hands-on approach in conducting this engagement. Specifically, we will assess the financial viability, operations, risks, and opportunities at PORTA SYSTEMS CORP. In this regard we will make inquiries, survey facilities, conduct interviews with key personnel, and perform analysis on information made available to us. Our evaluation will be directed towards those business activities and related financial data you have identified as being of concern to you. This work will be performed with a view toward the development of specific short term and long term business strategies for P ORTA SYSTEMS CORP. We will take whatever emergency actions are required to increase the chances that the Company can survive, diagnose the causes of failure, and assist you and the Board of Directors in deciding if the Company's performance can be improved, or if it would be better to sell or liquidate it. If the Boa rd and we agree that shareholder value can best be enhanced by improving the Company's performance, rather than selling it, we will restructure the business around a plan we develop, and manage the Company accordingly. We will use a three phase approach, as described below: Phase One: Assume Management Responsibility During Phase One, we will put in place a arrangement team that will lead the turnaround effort. As stated earlier in this Agreement, I will assume the title of Chief Operating Officer and report directly to you. Accordingly, you will include me as a named party on the Company's officers and directo rs, or similar, liability insurance policy. We will evaluate management, establish control of the Company's cash flow, and begin educating and motivating the management team for the effort that lies ahead. In addition, we will take whatever actions are necessary to enable the Company to survive. These may include establishing positive operating cash flow as soon as possible, raising sufficient cash to implement the chosen turnaround strategy, and protecting and developing the resources needed to susta in the turnaround effort. The Emergency Action Phase is a dynamic period. Many decisions are made as new facts are learned and circumstances unfold. Flexibility in decision-making is key to stabilizing the Company and developing a turnaround plan. Typically, the initial assessment will be completed within the first thirty (30) days of our engagement, and we anticipate completion of Phase One in two to three months. However, unforeseen events may require us to spend more time to accomplish this phase. Phase Two: Detailed Situation Analysis During Phase Two, we will conduct a detailed situation analysis to determine the causes of decline. From this analysis we will determine whether or not the Company's financial performance can be systematically improved, the type of strategy most appropriate for the situation, and the form of an action plan for implementing the chosen strategy to increase shareholder value. We will seek to determine if there is one or more core business around which a turnaround may be attempted; if adequate bridge financing is available; if adequate organizational resources are available; and if employees ca n be motivated to help improve the Company's performance. We will assess the strengths and weaknesses of the Company's financial, marketing, production, engineering, and organizational functions. We will assess the Company's strategic competitive position and develop a preliminary strategy that ref lects the circumstances. Typically, we can complete Phase Two in about three months, however unforeseen circumstances may require us to spend more time to complete this phase. Phase Three: Business Restructuring and Growth During Phase Three, we will seek to restructure the Company in cooperation with all parties at interest, to focus on increased profitability and return on assets and equity. Usually, this process includes improving the financial, marketing, and production functions in an orderly and systematic man ner, while restructuring the Company for competitive effectiveness. We will develop reward and compensation systems that reinforce the turnaround effort, and motivate people to think "profits and return on investment." In addition, we will seek to institutionalize the changes adopted thus far, with a strong emphasis on profitability, return on equity, and the enhancement of value-added processes. We will seek out opportunities for profitable growth and build the competitive strengths the Company will need to ex ploit such opportunities. As we enter Phase Three, we will have stopped the cash bleeding, lowered the break-even, restructured the Company to produce positive cash flow from operations, and begun the process of growing sales and profits to increase shareholder value. Typically, we can complete Phase Three in six months to a year. However, unforeseen circumstances may require us to spend additional time to accomplish this phase. As circumstances warrant, we will recruit managers who will oversee the day-to-day activities of the Company and report directly to me. At all times, I will be your direct contact for this engagement. Fees PORT SYSTEMS CORP. agrees to pay KPMG BayMark based on the value of our services. PORTA SYSTEMS CORP. agrees to pay KPMG BayMark a management fee of $250,000, payable at the rate of $20,000 on the first of each month for the first five months of the engagement and $15,000 on the first of each month for the remaining ten months of the engagement. This fee will be pro-rated to the date of acceptance for the current month. In addition, PORTA SYSTEMS CORP. agrees to pay KPMG BayMark "success fees" as follows: Five percent (5%) of the Company's quarterly Earning Before Interest Taxes (EBIT) at the end of each quarter during our engagement and for three (3) years immediately following the end of our engagement and termination of this agreement. One percent (1%) of the face amount of total excess inventory bartered, liquidated, or otherwise disposed of as approved by the CEO of PORTA SYSTEMS CORP. One-half percent (0.5%) of the face amount of total debt restructured or modified, excluding debentures. Additionally, PORTA SYSTEMS CORP. agrees to pay KPMG BayMark all mutually agreed, out-of-pocket expenses. A separate invoice for out-of pocket expenses will be submitted monthly and is due and payable on receipt. Indemnification PORTA SYSTEMS CORP. agrees to indemnify KPMG BayMark Strategies LLC from any and all risks inherent in projects of this nature. Specifically, you agree to indemnify and hold harmless KPMG BayMark Strategies LLC, its principals, directors, officers, employees, agents, and controlling persons against and from any and all losses, claims, damages, or liabilities asserted against us in connection with our conclusions, advice, decisions, or actions resulting from our involvement with PORTA SYSTEMS CORP. We are conducting this engagement on a best efforts basis, and no guarantee can be made as to its outcome. Moreover, we are independent contractors and are not employees of the Company. In addition, you agree that the Company will deposit its payroll taxes when due and furnish us a report bi-monthly demonstrating that all trust fund moneys have been deposited in accordance with Federal and State Tax requirements. The Company's failure to deposit trust fund moneys when due shall co nstitute a material breach of this Agreement. In such event, we will immediately withdraw from this engagement, and the termination terms listed below shall apply. Termination/Expiration The term of this Agreement is fifteen (15) months. Either party may terminate this Agreement at any time by giving the other party at least thirty (30) days written notice of such termination. If the Company terminates this agreement for any reason before the end of the ninth month, it shall pay t o KPMG BayMark the sum of $60,000 as an early termination fee. Notwithstanding the forgoing, the provisions concerning "success fees" shall survive any early termination by the sum of $60,000 as an early termination fee. Notwithstanding the forgoing, the provisions concerning "success fees" shall surv ive any termination by the Company for a period of one year from the date of termination, unless specifically stated otherwise under the "FEES" provisions of this agreement. Survivability All obligations resulting from the terms and conditions of this agreement shall remain in full force and effect and survive and convey in the event the company is sold, acquired, or otherwise experiences a change in ownership. Exclusivity PORTA SYSTEMS CORP. agrees that it has retained KPMG BayMark on an exclusive basis to provide it with turnaround management services. Accordingly, no other advisors, consultants, or intermediaries will be retained by the Company without the consent of KPMG BayMark. This provision does not apply to the Company's existing relationships with its attorneys, accountants, or investment bankers. If the foregoing terms meet with your approval, please indicate your acceptance by signing and returning to KPMG BayMark the enclosed copy of this letter, along with a check in the amount of $20,000, signifying your authorization to proceed. We retain the right to unilaterally terminate this Agreement at the end of the thirty (30) day initial assessment in which case, this entire agreement will become null and void effective the date of such determination. Very truly yours, KPMG BayMark Strategies LLC /s/ Edward R. Olson - ----------------------- Edward R. Olson Principal Agreed to and Accepted By: [ILLEGIBLE] - -------------------------- Authorized Signature Chairman, CEO - -------------------------- Title October 2, 1995 - -------------------------- Date 11-3-95 EX-10 7 EXHIBIT 10.10 Exhibit 10.10 EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of October 16, 1995, by and between Porta Systems Corp., a Delaware corporation (the "Company") and Edward B. Kornfeld (the "Executive"). WHEREAS, the Executive is being employed by the Company in a management position and the Company wishes to continue to employ the Executive upon the terms and conditions set forth in this Agreement; and WHEREAS, the Executive is willing to serve in the employ of the Company upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual promises and agreements hereinafter set forth, the Company and the Executive agree as follows: 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employees the Executive pursuant to this Agreement to render full-time exclusive services to the Company during the Term (as defined in Section 2 hereof) as a Vice President of the Company or in such other executive capacity as may be designated by the Chairman or the Chief Operating Officer of the Company from time to time. In performing such duties, the Executive shall be subject to the direction of such officers of the Company as may be designated by the Chairman or Chief Operating Officer of the Company from time to time. The Executive hereby accepts such employment and agrees to devote his full-time, attention and best efforts exclusively to performing the duties described above. (b) The Executive agrees to perform such duties as may be assigned or delegated to him by the Chairman or Chief Operating Officer of the Company and to be bound by the policies of the Company and its Affiliates as in effect from time to time. The Executive further agrees to accept election, and to serve, during all or part of a Term, as an employee, officer or director of an "Affiliate" as defined in Section (6) (f) hereof if assigned or elected to such position by the Board of Directors of the Company or by the board of directors or similar governing body of any Affiliate, and to per form such services for any such Affiliate as may be assigned, without additional compensation therefor other than that specified in this Agreement. 2. TERM. The Company shall employ the Executive pursuant to this Agreement for a period commending on the date hereof and ending on December 31, 1998, which period shall automatically be extended for an additional twelve-month period on December 31 of each year after the date hereof while the Agreement remains in effect unless the Company shall have given notice to the Executive, at least 90 days prior to s uch December 31, that it has elected to terminate this Agreement at the then expiration date of this Agreement, subject to the earlier termination at any time during the Executive's period of employment, as hereinafter provided (the "Term") 3. COMPENSATION. (a) The Company shall pay the Executive an annual salary for the services to be rendered by him from the date hereof at an annual rate to be reviewed by the Board of Directors of the Company ("Board") at least annually, but which amount shall in no event be fixed at an amount less than the Executive's annual salary rate last fixed by the Board, payable in periodic installments in accordance with the Company's regular payroll practices as in effect from time to time ("Salary"). Notwithstanding the foregoing, the Executive's Salary may be reduced if and to the ex tent that the salaries payable to all executive officers of the Company shall be reduced on a uniform or percentage basis. (b) The Executive shall be entitled to participate in and receive the benefits under any pension plans, bonus arrangements, health, life, accident and disability insurance plans or programs and any other employee benefit or fringe benefit plans, perquisites or arrangements which the Company m akes available generally to other employees of the Company to the extent that the Executive is otherwise eligible to participate in such plans or arrangements pursuant to the provisions of such plans or arrangements as they may be in effect from time to time. (c) During the period of his employment hereunder, the Executive shall be entitled to three (3) weeks paid non-cumulative vacation each year or such greater period of vacation consistent with the Company's policy with respect to vacation in effect from time to time. 4. TERMINATION OF EMPLOYMENT. (a) The Executive's employment hereunder shall terminate automatically as of the date of his death or upon the Executive's termination due to disability as determined by the Company's long-term disability carrier at that time. In the event of termination for death or long-term disability the Company shall pay to the Executive's estate or beneficiary or to the Executive, in full satisfaction of its liabilities hereunder, a payment equal to three months' salary. (b) The Company may at any time at its option, exercised by not less than 10 days written notice to the Executive, terminate his employment for "Cause" (as hereinafter defined). In the event of termination for Cause, the Company shall have no further obligations or liabilities to the Executi ve hereunder. -2- For purposes of this Agreement, the term Cause means any conviction (or plea of nolo contender) of the Executive of a felony or misdemeanor (other than for motor vehicle or similar minor offenses) under the laws of the United States of any state thereof; any material breach by the Executive of this Agr eement or any material failure of the Executive to perform his duties hereunder; intentional dishonesty or gross negligence by the Executive in the performance of this duties hereunder; the failure by the Executive to comply with any policies of the Company or any Affiliate for which he renders ser vices; or conduct on the part of the Executive which damages the reputation of the Company, which achieves general notoriety with respect to conduct or alleged conduct by the Executive which is scandalous, immoral or illegal or which is disruptive of the business and affairs of the Company and its Affiliates. (c) The Company may at any time at its option, exercised by not less than 10 days written notice to the Executive (or pay in lieu thereof), terminate his employment prior to the expiration of the Term other than for Cause, provided that, if the Company so terminates the Executive's employment other than for Cause, the Executive shall be entitled to continue to receive, as severance, payment of Salary at the most recent annual rate in effect prior to the date of such termination for a period of six months following the date of such termination of employment, plus one additional month of Salary at such rate for each full year of service with the Company prior to such termination; provided, however, that in no event shall the amount of severance payable under this Section 4(c) be less than twelve (12) months' Salary or exceed a maximum of [24] months' salary and provided further that the amount of severance payable under this Section 4(c) shall continue to be paid in the event of the Executive's death after termination of his employment. If the annual bonus payable to the Executive has already been determined by the Company a the time his employment is terminated other than for Cause, the Executive shall receive a bonus payment in such amount following his termination of employment. In all other circumstances, no bonus shall be payable to Executive under this Section 4(c) following his termination of employment. The Company shall continue to pay insurance premiums for the same medical and dental health care benefits to which the Executive was entitled prior to such termination for the period of time permitted under the relevant policy but no longer than the period of such salary continuance, provided that the Company's medical and dental health carrier or ca rriers are willing to continue to provide such coverage upon the payment of such premium or premiums. (d) The parties agree that the severance amount payable to the Executive pursuant to Section 4(c) shall constitute liquidated damages in the event of termination of this Agreement -3- by the Company other than for Cause. The parties agree that the damages payable to the Executive in the event of such termination would be difficult to estimate accurately, the severance amount bears a reasonable relationship to the amount of damages anticipated by the parties as of the date hereof and the severance amount is not a penalty. In reliance on the validity of this liquidated damages provision, the Company has waived any obligation of the Executive to mitigate damages by seeking other employment and the severance amount shall not be reduced by compensation earned in such other employment. (e) In the event of the Executive's termination of employment other than for Cause, the Company shall have no further obligations or liabilities to the Executive hereunder, other than to make such severance payments as provided in Section 4(c), to provide such medical and dental benefits as provided in Section 4(c) and to receive benefits under stock plans, life insurance arrangements and supplemental retirement arrangements in accordance with the terms of agreements with the Executive on these matters. Upon payment of the amounts provided in Section 4(c), the Company shall have no further liability of any kind or nature whatsoever to the Executive under law or this Agreement relating to his employment. The payment to the Executive under Section 4(c) shall be in lieu of and in discharge of any obligations of the Company to the Executive for Salary, bonus, or under any separation or severance pay plan or for other compensation or expectation of remuneration or benefit in connection with the Executive's employment or the termination thereof. In consideration for the payments hereunder, the Executive hereby irrevocably and unconditionally releases and discharges the Company and each of the Company's successors, shareholders, Affiliates, directors, officers, employees, representatives, agents, assigns, attorneys, divisions (and agents, directors, officers, employees, representatives and attorneys of such successors, shareholders, Affiliates and divisions) and all persons acting by, through or under or in concert with any of them from any and all charges, complaints, claims, liabilities, obligations, controversies, damages, causes of action, costs and expenses of any nature whatsoever, at law or at equity, whether known or unknown, arising now or in the future, including but not limited to rights under any federal, state or local laws respecting the terms and conditions of employment, in connection with the Executive's employment by the Company and the termination thereof under this Agreement. (f) The Executive agrees that he will provide at least 6 months written notice of his intent to terminate this Agreement prior to the expiration of the initial or any extended term. The Executive agrees that, without the prior written consent of the Company, he will not take any action, solicit any proposals, or engage in discussions or negotiations that could be expected to result in a breach of his agreement in this Section 4(f). -4- 5. COVENANTS. (a) In view of the fact that the Company is engaged in specialized businesses, which businesses are conducted throughout the world, and the information, research and marketing data developed by the Company are confidential, the Executive agrees that, during the Term and f or a period equal to the period during which payments are made pursuant to Section 4(c) hereof, he will not directly or indirectly engage in the business substantially conducted by the Company or any Affiliate at the date of such termination and for which the Executive performed material services d uring the period of his employment, either for himself or for any person, employer, business or other entity in competition with the Company or such Affiliate, engage in any such business on his own account, or become interested in any such business, directly or indirectly, as an individual, partner, shareholder, officer, director, principal, agent, employee, trustee, consultant or in any other relationship or capacity; provided, however, that nothing contained herein shall be deemed to prohibit the Executive from acquiring solely as an investment up to two (2) percent of the issued and o utstanding shares of capital stock of any public corporation engaged in any such competitive business. During the Term and for a period equal to the period during which the Executive receives payments pursuant to Section 4(c) hereof, the Executive and any entity controlled by him or by which he is employed shall not solicit, interfere with, hire, offer to hire or induce any person who is or was an officer, employee customer, supplier or agent of the Company or any Affiliate to discontinue his or her relationship with the Company or such Affiliate or to accept employment by any other entity or person. (c) The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Company or any Affiliate, including, without limitation, customer lists, trade secrets, pricing policies and other business affairs of the Company and any Aff iliate learned by him from the Company or any Affiliate or otherwise heretofore or hereafter, and not to disclose any such confidential matter to anyone outside the Company or any Affiliate, whether during or after his period of service with the Company, except in the course of performing his dutie s hereunder. Upon request by the Company, the Executive agrees to deliver promptly to the Company upon termination of his services for the Company, or at any time thereafter as the Company may request, all Company memoranda, notes, records, reports, manuals, drawings, designs, computer files in an y media and other documents (and all copies thereof) relating to the Company's or any Affiliate's business and all property of the Company or any Affiliate associated therewith, which he may then possess or have under his control. (d) The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, formats, packages, programs, systems, machines, compositions of matter manufactured, developments, applications and discoveries which are related in any manner to th e business -5- (commercial or experimental) of the Company or any of its Affiliates (collectively, "New Developments"), whether patentable or not, conceived, developed, invented or made by him or jointly with others during the period of his employment with the Company, shall belong to the Company and the Company shall be the sole owner of all the products and proceeds of the Executive's services, including intellectual or literary property in any form. The Executive shall further: promptly disclose such New Developments to the Company; assign to the Company, without additional compensation, all patent or other rights to such New Developments for the United States and foreign countries; sign all papers necessary to carry out the foregoing; and give a reasonable amount of testimony in support of his inventorship. (e) If the Executive commits a material breach of any of the provisions of this Section 5 or Section 4(f), the Company or any Affiliate shall have the right and remedy to have the provisions of this Agreement specifically enforced by any court of competent jurisdiction, it being acknowledged by the Executive and agreed that any such breach will cause irreparable injury to the Company or such Affiliate and that money damages will not provide an adequate remedy to the Company or such Affiliate. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company or any Affiliate at law or in equity. The provisions of this Section 5 shall survive the expiration or termination of this Agreement. 6. MISCELLANEOUS. (a) Neither of the parties hereto shall have the right to assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party; provided, however, that this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the Company's assets, or upon any merger or consolidation of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company. (b) The Agreement and the relationships of the parties in connection with the subject matter of this Agreement shall be construed and enforced according to the laws of the State of New York without giving effect to the conflict of laws rules thereof. (c) This Agreement contains the full and complete agreement of the parties relating to the employment of the Executive hereunder and supersedes all prior agreements, arrangements or understandings, whether written or oral, relating thereto. This Agreement may not be amended, modified or supplemented, and no provision or requirement hereof may be waived, except by written instrument signed by the party to be charged. Notwithstanding the foregoing, in the event the Executive is covered by an executive severance agreement which -6- provides benefits payable upon the termination of the Executive's employment following a change in control of the Company, the provisions of this Agreement which provide severance payments shall not be applicable if the Executive becomes entitled to receive payments under such executive severance agreement. (d) If any provision of this Agreement is held to be invalid or enforceable by any judgment of a tribunal of competent jurisdiction, the remainder of this Agreement shall not be affected by such judgment, and this Agreement shall be carried out as nearly as possible according to its original terms and intent. (e) Any dispute or question arising from this Agreement or its interpretation shall be settled exclusively by arbitration in New York, N.Y. accordance with the commercial rules then in effect of the American Arbitration Association. Judgment upon an award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction, including courts in the state of New York. Any award so rendered shall be final and binding upon the parties hereto. All costs and expenses of the arbitrator(s) shall be paid as determined by such arbitrator(s), and all costs and expenses of experts, witnesses and other persons retained by the parties shall be borne by them respectively. In the event that injunctive relief shall become necessary under this Agreement, either of the parties shall have the right to seek provisional remedies prior to an ultimate resolution by arbitration. (f) As used herein, the term "Affiliate" shall mean any corporation or business entity controlling, controlled by or under common control with the Company. (g) Any notice required or permitted to be given under this Agreement shall be sufficient if it is in writing, and if it is sent by registered mail ~o his residence, in the case of the Executive, and to the Secretary of the Company at its principal executive offices, in the case of the Company, or to such other person or address as either party shall designate in writing to the other. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. Porta Systems Corp. By: [ILLEGIBLE] ---------------- Name: Title: [ILLEGIBLE] ---------------- Executive -7- EX-10 8 EXHIBIT 10.11 Exhibit 10.11 [CONFORMED COPY] EMPLOYMENT AGREEMENT AGREEMENT dated as of the 28 day of March, 1996, by and between Porta Systems Corp., a Delaware corporation with its principal office at 575 Underhill Blvd., Syosset, New York 11791 (the "Company"), and Warren H. Esanu, residing at 20 East 84th Street, New York, NY 10028 (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to obtain the benefits of Executive's knowledge, skill and ability and to employ Executive on the terms and conditions hereinafter set forth; and WHEREAS, Executive desires to provide his services to the Company and to accept employment by the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises set forth in this Agreement, the parties agree as follows: 1. Employment and Duties. (a) Subject to the terms and conditions hereinafter set forth, the Company hereby employs Executive as the Chairman of the Board of the Company. Executive shall report to the Company's Board of Directors (the "Board"). Executive shall perform his duties and responsibilities customarily associated with such position, and he shall have such other duties and responsibilities consistent with such position as the Board may assign to him from time to time. Executive shall also serve as a member of the executive committee of the Board and of the boards of directors of each of its subsidiaries (other than foreign subsidiaries for which a U.S. citizen or resident may not serve as a directors). (b) In addition, Executive shall serve as a director of the Company, if elected, for which he shall receive such compensation as is provided from time to time to so-called "outside directors," and in such executive capacity or capacities with respect to any affiliate of the Company to which he may be elected or appointed, provided that such duties are not inconsistent with those of the Chairman of the Board of the Company. (c) This Agreement shall have an initial term commencing as of the date of this Agreement and expiring on March 31, 1999 and continuing thereafter on a year-to-year basis unless terminated by either party by written notice given no later than ninety (90) days prior to expiration of the initial term or any one-year extension. The Term of this Agreement shall include the initial term and all one-year extensions. 2. Acceptance of Employment. Executive hereby accepts the employment contemplated by this Agreement. During the Term, Executive shall devote such of his business time and attention to the performance of his duties under this Agreement as he shall, in his sole discretion, deem necessary, and shall perform his duties diligently, in good faith and in a manner consistent with the best interests of the Company. Executive may perform his duties at the Company's office or at his office in New York City, and will not be required to be present at the Company's offices more than one day per week. The Company understands and agrees Executive will continue his other business activities, including, but not limited to the practice of law and real estate investment and management. 3. Compensation and Other Benefits. (a) (i) For his services to the Company during the Term, the Company shall pay Executive a salary ("Salary") at the annual rate of two hundred thousand dollars ($200,000). Commencing April 1, 1997 and on each April 1 thereafter during the Term of this Agreement, Executive shall receive an increase in Salary equal to the lesser of (i) the increase in cost of living index or (ii) seven and one-half percent (7.5%) of the Salary then in effect. The Salary shall be payable in such installments as the Company regularly pays its executive officers, but not less frequently than semi-monthly. (ii) The cost of living increase shall be computed as follows: (A) The cost of living index, as hereinafter defined, for each March, commencing March 1997, shall be compared with the cost of living index for March of the previous year. The cost of living increase shall mean the percentage increase in the cost of living index from the previous March to the March as of which the computation is made. Such determination shall be made as soon as - 2 - possible after release of the cost of living index for the March as of which the computation is being made, and the Company shall, on the next payroll date, pay to Executive any additional Salary accrued but not paid pending determination of the cost of living increase. (B) The cost of living index shall mean the "Consumers Price Index for Urban Wage Earners and Clerical Workers (Revised Series) - New York Metropolitan Area", published by the Bureau of Labor Statistics of the United States Department of Labor. If the said cost of living index in its form as of the date of this Agreement or the calculation basis thereof shall be revised therefrom or discontinued, the parties shall attempt in good faith to adjust the provisions of this Paragraph 3(a). (b) Executive will be eligible for discretionary bonuses determined by the Board, and he will be eligible to participate in any executive officers bonus pool. (c) In addition to Salary and any Bonus payable pursuant to Paragraph 3(b) of this Agreement, Executive shall receive the following benefits: (i) health insurance, disability, accident and life insurance and officer's life insurance for Executive to the extent such benefits are currently in effect or will be put into effect for executive officers during the term of this Agreement and to the extent that Executive qualifies therefor; and (iii) vacation in accordance with Company policy for executive officers, all of which may be carried forward if not used. (d) The Company shall, contemporaneously with the execution of this Agreement, grant to Executive a non-qualified option (the "Option") to purchase five hundred thousand (500,000) shares of the Company's common stock, par value $.01 per share ("Common Stock") at an exercise price equal to the fair value per share, as hereinafter defined. The fair value per share shall mean the average of the closing prices of the Common Stock on the American Stock Exchange during the last ten (10) trading days in the month of March 1996; provided, that if there is no closing price on any such day, the average of the closing bid and - 3 - asked prices shall be used for such day. The Option shall be exercisable immediately and shall expire on March 31, 2006. 4. Reimbursement of Expenses. The Company shall pay or reimburse Executive, upon presentation of proper expense statements, for all authorized, ordinary and necessary out-of-pocket expenses reasonably incurred by Executive in connection with the performance of his services pursuant to this Agreement hereunder in accordance with the Company's expense reimbursement policy. 5. Termination of Employment. (a) Executive's employment hereunder shall terminate immediately upon the death of Executive. (b) Executive's employment may be terminated by the Company by not less than thirty (30) days' written notice in the event of Executive's Disability. The term "Disability" shall mean any illness, disability or incapacity of Executive which prevents him from substantially performing his regular duties for a period of three (3) consecutive months or four (4) months, even though not consecutive, in any twelve (12) month period. (c) The Company may terminate Executive's employment, immediately and without notice, for cause, in which event no further compensation shall be payable to Executive. The term "Cause" shall mean either (i) conviction of Executive of any felony or (ii) repeated failure to perform the duties of his position following written notice from the Board setting forth in reasonable detail the basis for the proposed termination and Executive being given an opportunity to meet with the Board and to dispute the claims raised in the notice. (d) In the event that the Company terminates Executive's employment other than as provided in Paragraphs 5(a) and (c), the Company shall pay to Executive as severance payments his Salary at the rate provided in this Agreement for (i) six (6) months if such termination occurs prior to April 1, 1997, (ii) nine (9) months if such termination occurs subsequent to March 31, 1997 and prior to April 1, 1998, and (iii) twelve (12) months if such termination occurs subsequent to March 31, 1998 or if the Company fails to renew this Agreement. - 4 - Such payments shall be paid at such times as the Company pays its executive officers. The period during which severance is being paid to Executive pursuant to this Paragraph 5(d) is referred to as a "Severance Payment Period." (e) In the event of any termination of Executive's employment, including termination for cause, Executive shall be entitled to all rights under the Company's benefit plans which had vested as of the date of termination of his employment. In addition, for a period of eighteen (18) months after such termination, the Company shall provide Executive with the hospitalization, life insurance, medical and major medical benefits which would have been provided to Executive if he had continued in the employ of the Company. (f) The Company shall, contemporaneously with the execution of this Agreement, enter into a Salary Continuation Agreement in substantially the form provided by the Company to its senior executive officers. 6. Trade Secrets and Proprietary Information. Executive agrees that he will not, during or after the Term of this Agreement or thereafter, use or disclose to any person, firm, corporation, partnership, business trust, individual or other business entity any trade secrets or proprietary information concerning the Company's or any of its subsidiaries' products, services, business, proposed products and services, marketing strategy and research and development activities; except that nothing in this Agreement shall be construed to prohibit him from using or disclosing such information if it shall become public knowledge other than by or as a result of disclosure by a person not having a right to make such disclosure and complying with legal process. 7. Covenant Not to Compete. Executive recognizes that the scope of the Company's business is international and is not limited to any single state or region. Executive covenants and agrees that during the Term of this Agreement and during the Severance Payment Period, he will not engage in any business in the United States whether as officer, director, consultant, partner, guarantor, principal, agent, employee, advisor or in any manner (other than as counsel), which directly competes with the business of the Company as it is engaged in at - 5 - the time of the termination of this Agreement, unless at the time of such termination or thereafter during the non-competition period the Company ceases to be engaged in such activity, provided, however, that nothing in this Paragraph 7(a) shall be construed to prohibit Executive from owning an interest of not more than five percent (5%) of any public company engaged in such activities, and nothing in this Paragraph 7(a) shall be construed to restrict or limit in any matter (i) the practice of law by Executive or any firm of which he is a partner, employee, of counsel or otherwise affiliated or (ii) the parties to which Executive or any entity in which he has an affiliation may rent, lease or sell real property. 8. Inventions and Discoveries. Executive agrees promptly to disclose in writing to the Company any invention or discovery made by him during the Term, in the capacity of an executive officer of the Company, in the any business in which the Company or any of its subsidiaries in then engaged, and such inventions and discoveries shall be the Company's sole property. Upon the Company's request, Executive shall execute and assign to the Company all applications for copyrights and patent letters of the United States and such foreign countries as the Company may designate, and Executive shall execute and deliver to the Company such other instruments as the Company deems necessary to vest in the Company the sole ownership of all exclusive rights in and to such inventions and discoveries, as well as the copyrights and/or patents. If services in connection with applications for copyrights and/or patents are performed by Executive at the Company's request after the termination of his employment, the Company shall pay him reasonable compensation for such services rendered after termination of this Agreement. 9. Injunctive Relief. Executive agrees that his violation or threatened violation of any of the provisions of Paragraphs 6, 7 and 8 of this Agreement shall cause immediate and irreparable harm to the Company. In the event or any breach or threatened breach of said provisions, Executive consents to the entry of preliminary and permanent injunctions by a court of competent jurisdiction prohibiting such party from any violation or threatened violation of these provisions and compelling Executive to comply with these provisions. This - 6 - Paragraph 9 shall not affect or limit, and the injunctive relief provided in this Paragraph 9 shall be in addition to, any other remedies available to the Company at law or in equity.In the event an injunction is issued against any such conduct by Executive, the period referred to in Paragraph 7 of this Agreement shall continue until the later of the expiration of the period set forth therein or one (1) month from the date a final judgment enforcing such provisions is entered and the time for appeal has lapsed. 10. Indemnification. The Company shall provide Executive with payment of legal fees and indemnification to the maximum extent permitted by the Delaware General Corporation Law. 11. Legal Services. The Company acknowledges that Executive will continue his legal practice. Any law firm of which Executive is a partner, an employee, of counsel or otherwise affiliated may perform services for the Company. Services rendered by Executive in his capacity as an attorney of counsel to Esanu Katsky Korins & Siger or as a partner, employee, of counsel or any other affiliation to or with any other law firm shall be in addition to his services as an executive officer of the Company, and the Company will pay the legal fees and disbursements of such firm. 12. Miscellaneous. (a) Executive represents, warrants, covenants and agrees that he has a right to enter into this Agreement, that he is not a party to any agreement or understanding, oral or written, which would prohibit performance of his obligations under this Agreement, and that he will not use in the performance of his obligations hereunder any proprietary information of any other party which he is legally prohibited from using. (b) Any notice under the provisions of this Agreement shall be given in writing and by hand, overnight courier or messenger service, against signed receipt or acknowledgment of receipt, registered or certified mail, return receipt requested, or telecopier or similar means of communication if receipt is acknowledged or if transmission is confirmed by mail as provided in this Paragraph 12(c), to the parties at their respective addresses set forth at the - 7 - beginning of this Agreement or by telecopier to the Company at (516) 682-4655 or to Executive at (212) 953-6899, with notice to the Company being sent to the attention of the individual who executed this Agreement on behalf of the Company. Either party may, by like notice, change the person, address or telecopier number to which notice should be sent. (c) If any term, covenant or condition of this Agreement or the application thereof to any party or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Agreement shall be valid and be enforced to the fullest extent permitted by law, and any court having jurisdiction may reduce the scope of any provision of this Agreement so that it complies with applicable law. (d) This Agreement constitutes the entire agreement of the Company and Executive as to the subject matter hereof, superseding all prior written or prior or contemporaneous oral understanding or agreements, including any previous employment agreements, or understandings with respect to the subject matter covered in this Agreement. This Agreement may not be modified or amended, nor may any right be waived, except by a writing which expressly refers to this Agreement, states that it is intended to be a modification, amendment or waiver and is signed by both parties in the case of a modification or amendment or by the party granting the waiver. No course of conduct or dealing between the parties and no custom or trade usage shall be relied upon to vary the terms of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (e) Neither party hereto shall have the right to assign or transfer any of its or his rights hereunder. (f) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, executors, administrators, and assigns. - 8 - (g) The headings in this Agreement are for convenience of reference only and shall not affect in any way the construction or interpretation of this Agreement. (h) This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed wholly within such State, except that the provisions of Paragraph 10 shall be governed by the Delaware General Corporation Law. Each of the parties hereby (i) irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought exclusively in any Federal or state court in the County of New York, State of New York, (ii) by execution and delivery of this Agreement, irrevocably submits to and accepts, with respect to its properties and assets, generally and unconditionally, the jurisdiction of the aforesaid court and (iii) agrees that any action against such party may be commenced by service of process by any method set forth in Paragraph 11(b) of this Agreement, other than by telecopier, to such party as provided in said Paragraph 11(b). IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PORTA SYSTEMS CORP. By:Michael A. Tancredi -------------------------------- Name: Title: Vice President-Treasurer William V. Carney -------------------------------- Vice Chairman Warren H. Esanu -------------------------------- Warren H. Esanu - 9 - EX-10 9 EXHIBIT 10.12 Exhibit 10.12 Executive Continuation Agreement This Agreement, made and entered into in the town of Syosset, New York, effective as of October 16, 1995, by and between Porta Systems Corp., a Delaware corporation with its principal executive offices at 575 Underhill Boulevard, Syosset, New York (the "Corporation"), and Edward B. Kornfeld, an individual residing at 3 Hampshire Court, Holbrook, New York 11741 (the "Executive"). WHEREAS, the Compensation Committee of the Board of Directors of the Corporation has recommended, and the Board of Directors of the Corporation has approved, the Corporation entering into agreements with certain key executives of the Corporation and its subsidiaries who are from time to time designated by the Board of Directors; and WHEREAS, the Executive is a key executive of the Corporation or one of its subsidiaries; NOW, THEREFORE, to induce the Executive to remain in his current position, and to compensate the Executive for his valuable services to the Corporation and its subsidiaries should his services be terminated under circumstances hereinafter described, and for other good and valuable consideration, the receipt and adequacy of which each party acknowledges, the Corporation and the Executive agree as follows: 1. Term. This Agreement shall commence on the date hereof and shall continue until December 31, 1995 and, unless the Corporation gives written notice to the Executive of its election not to extend or renew this Agreement at least sixty (60) days prior to January l of any year, effective January 1 of each year, commencing January l, 1996, the term of this Agreement shall be extended and renewed automatically for one (l) additional year; provided however, said notice not to extend or renew shall only be effective if similar notices not to extend or renew are given to other executives of the Corporation who are similarly subject to Executive Continuation Agreements. 2. Compensation Payable. No compensation shall be payable under this Agreement unless and until there shall have been a change in Control of the Corporation (as defined in paragraph 3 hereof) while the Executive is still an employee of the Corporation and the Executive's employment by the Corporation terminates in the manner which would entitle him to the benefit of the payments under paragraph 4 hereof. 3. Change in Control. For purposes of this Agreement, a "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, such a Change in Control shall also be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of the Directors of the Corporation cease for any reason to constitute at least a majority thereof unless the election of each new director was nominated or ratified by at least two-thirds of the directors then still in office who were directors at the beginning of such period. 4. Termination After Change of Control. If any of the events described in paragraph 3 hereof constituting a Change of Control shall have occurred, the Executive shall be entitled to the benefits provided in this paragraph 4 hereof upon the subsequent termination of his employment unless such termination is (a) because of the Executive's death, or (b) by the Corporation for Cause or Disability as provided in paragraph 5 or 6 hereof, or (c) by the Corporation and occurs more than eighteen (18) months subsequent to the date of the Change of Control or (d) by the Executive for Good Reason and occurs more than eighteen (18) months subsequent to the date of the Change of Control. In the event the Executive shall become entitled to receive benefits under this paragraph 4, the Corporation shall pay to the Executive as severance pay in one lump sum on the fifth day following the Date of Termination or, at the election of the Executive, in equal monthly installments the following amounts: (i) the Executive's full salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given; and (ii) In lieu of any further salary payments to the Executive for the periods subsequent to the Date of Termination, an amount equal to the product of (A) the sum of the Executive's monthly salary at the rate in effect as of the Date of Termination, or if higher, as in effect immediately prior to the Change in Control, plus the pro rata monthly amount of his most recent annual executive bonus or, if higher, his most recent annual bonus paid immediately prior to the Change of Control, multiplied by (B) 18. 5. Discharge for Cause. The Corporation, through action taken by a majority of its entire Board of Directors at a meeting held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board of Directors), may at 2 any time at its option, exercised by notice to the Executive, terminate his services for Cause (as hereinafter defined). In the event of termination for Cause, the Corporation shall have no further obligations or liabilities to the Executive thereunder. For purposes of this Agreement, the term "Cause" means (i) any conviction of the Executive of a felony under the laws of the United States or any state thereof; or (ii) the willful and continued failure by the Executive to substantially perform his duties with the Corporation (other than such failure resulting from his incapacity due to physical or mental illness), after a demand for substantial performance is delivered to the Executive by the Board of Directors which specifically identifies the manner in which the Board of Directors believes the Executive has not substantially performed his duties. For purpose of this paragraph 5, no act or failure to act on the Executive's part shall be considered "willful" unless done, or omitted to be done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Corporation. 6. Death or Incapacitv. In the event of the Executive's death during the term of this Agreement prior to his becoming entitled to benefits under paragraph 4, this Agreement shall terminate on the date of his death and no benefits shall be payable thereunder. In the event that, during the term of this Agreement prior to his becoming entitled to benefits under paragraph 4, the Executive shall become totally incapacitated by any physical or mental illness or disability for a period of one hundred eighty consecutive days and within thirty (30) days after written notice of termination is given the Executive shall not have returned to the full-time performance of his duties, the Corporation may terminate this Agreement for "Disability" and no benefits shall be payable hereunder. 7. Termination by Executive for Good Reason. The Executive may terminate his employment with the Corporation for "Good Reason" at any time within eighteen (18) months of a Change in Control and in such circumstances will be entitled to the benefits provided in paragraph 4 hereto. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any one of the following events without the Executive's express written consent: (i) the assignment of the Executive to any duties substantially inconsistent with his position, duties, responsibilities or status with the Corporation immediately prior to the Change in Control, or any removal of the Executive from, or any failure to reelect him to his then current position, except in connection with a termination of his employment for Cause or Disability; (ii) a reduction by the Corporation in the amount of the Executive's base salary or other employee perquisites as compared to that which was paid or made available to him immediately prior to the Change in Control; (iii) the failure by the Corporation to continue to provide the Executive with substantially similar bonus opportunities as enjoyed immediately prior to the Change in Control or benefits the 3 Executive enjoyed under the Corporation's benefit programs in which he was participating at the time of the Change in Control; (iv) the failure by the Corporation to provide the Executive with the number of paid vacation days to which he was entitled in accordance with the Corporation's normal vacation policy or arrangement with the Executive in effect at the time of the Change in Control; (v) the relocation of the Executive's principal office to a location more than twenty-five (25) miles from the location of such office immediately prior to the Change in Control; (vi) requiring travel on the Corporation's business to an extent substantially greater than the Executive's business travel obligations immediately prior to the Change in Control; (vii) any failure of the Corporation to obtain the express written assumption of the obligation to perform this Agreement by any successor; or (viii) any breach by the Corporation of any of the provisions of this Agreement or any failure by the Corporation to carry out any of its obligations hereunder. 8. Date of Termination. "Date of Termination" shall mean the date on which the Notice of Termination is given. 9. Notices. All notices required or permitted to be given hereunder shall be by registered or certified mail addressed to the respective parties at their addresses hereinabove set forth or at such other addresses as may hereafter be designated in writing by such party and all such notices shall be deemed to be given on the date when such notice was mailed. Notices sent to the Corporation shall be sent to the attention of the President of the Corporation. Any termination by the Corporation pursuant to paragraph 5 above shall be communicated by written notice of termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide the basis for termination of the Executive's employment under the provision so indicated. 10. Non-Competition. Solely in the event that the Executive terminates his employment for Good Reason pursuant to paragraph 7 hereof, then for the eighteen (18) month period thereafter, the Executive shall not directly or indirectly engage in, as a director, officer, employee or stockholder, in any business, association, or corporation (other than the Corporation, or any subsidiary or successor of it) that is engaged in whole or in part in a business that is in substantial and direct competition with the business of the Corporation or any of its subsidiaries, provided that the Executive may own not in excess of 5% of any class of securities of any such competitive entity that is registered under section 12 of the Securities Exchange Act of 1934, as amended, or is otherwise publicly traded. 11. Merger or Consolidation. In the event the Corporation shall merge into or consolidate with another corporation, or 4 appointed by the Executive, each such appointment to be made within ten (10) days after the expiration of the fifteen (15) day period referred to above, and the third arbitrator to be appointed by the first two arbitrators within twenty (20) days after the expiration of such ten (10) day period. If the first two arbitrators cannot reach agreement on the third arbitrator within said twenty (20) day period, the third arbitrator shall be an impartial arbitrator appointed by the President of the American Arbitration Association within thirty (30) days after the expiration of said twenty (20) day period. Hearings of the arbitrator(s) shall be held in New York, New York, unless the parties agree otherwise. Judgement upon an award rendered by the arbitrator(s) may be entered in any court of competent jurisdiction, including courts in the state of New York. Any award so rendered shall be final and binding upon the parties hereto. Subject to paragraph 15 hereof, all costs and expenses of the arbitrator(s) shall be paid as determined by such arbitrator(s), and all costs and expenses of experts, witnesses and other persons retained by the parties shall be borne by them respectively. 15. Indemnification for Expenses and Advancement of Expenses. (a) Upon the occurrence of a Change in Control, the Corporation shall pay, and indemnify the Executive against, all costs and expenses, including without limitation the fees and expenses of attorneys, arbitrators, experts and witnesses, incurred on or on behalf of the Executive in connection with any arbitration or legal claim or proceeding arising from this Agreement or the interpretation thereof, to the extent that the Executive is successful, on the merits or otherwise, in any such claim or proceeding. If the Executive is not wholly successful in such claim or proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such claim or proceeding, then the Corporation shall indemnify the Executive against all such costs and expenses incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For the purposes of this paragraph 15, and without limiting the foregoing, the termination of any claim, issue or matter in any such claim or proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. (b) The Corporation shall advance all such costs and expenses incurred by or on behalf of the Executive in connection with any such claim or proceeding within twenty (20) days after the receipt by the Corporation of a statement or statements from the Executive requesting such advance or advances from time to time, whether prior to or after final disposition of such claim or proceeding. Such statement or statements shall reasonably evidence the costs and expenses incurred by the Executive and shall include or be preceded or accompanies by an undertaking by or on behalf of the Executive to repay any costs and expenses 5 advanced if it shall ultimately be determined that the Executive is not entitled to be indemnified against such costs and expenses. 16. Tax Withholding. The Corporation shall have the right to withhold from any transfer or payment made to the Executive or to any other person hereunder, whether such payment is to be made in cash or other property all applicable Federal, state, city or other taxes or foreign taxes as they shall be required, in the determination of the Corporation, pursuant to any statue or governmental regulation or ruling. 17. Miscellaneous. In the event that the Executive shall die after becoming entitled to benefits hereunder but prior to the complete payment thereof, all such remaining amounts shall be paid to the Executive's estate or beneficiary. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board of Directors of the Corporation and such provision shall be modified, waived or discharged only to the extent set forth in such writing. This Agreement sets forth the entire agreement of the parties hereto and supersedes any prior expressions of intent or understanding, whether written or oral, with respect to the subject matter hereof. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the state of New York. The invalidity or unenforceability of any provision of this Agreement shall in no way effect the validity or enforceability of any other provision. For purposes of this Agreement, the term "subsidiary" shall mean any corporation or business entity controlled by the corporation in question, and the term "affiliate" shall mean and include any corporation or business entity controlling, controlled by, or under common control with the corporation in question. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above set forth. PORTA SYSTEMS CORP. By: [ILLEIGBLE] -------------------- Title: Dated: [ILLEIGBLE] [ILLEIGBLE] --------------------------- -------------------- Executive 7 EX-21 10 EXHIBIT 21 Exhibit 21 Subsidiaries of the Company The following table sets forth the name and state or other jurisdiction of incorporation of each of the Company's subsidiaries (excluding subsidiaries which taken individually or in the aggregate would not constitute significant subsidiaries as that term is defined in Rule 12b-2 of the Securities Exchange Act of 1934) as of December 31, 1993. Each subsidiary is wholly owned and its financial statements are included in the Consolidated Financial Statements of the Company. Porta Systems Leasing Corp. - Delaware Porta Systems Foreign Sales Corp. - U.S. Virgin Islands Porta Systems Limited - United Kingdom Vanderhoff Communications Limited - United Kingdom Vanderhoff Business Systems Limited - United Kingdom Lero Industries Limited - United Kingdom Porta Systems, S.A. de C.V. - Mexico Criterion Plastics, Inc. - Texas Miror Telephony Software, Inc. - North Carolina Aster Corporation - Delaware Aster (Ireland) Ltd. - Bermuda All corporations listed above do business under their respective corporate names. EX-23 11 EXHIBIT 23 [Letterhead of KPMG Peat Marwick LLP] Consent of Independent Auditors Board of Directors Porta Systems Corp.: We consent to the incorporation by reference in the registration statements; (Reg. No. 2-95117) on Form S-8, (Reg. No. 2-65375) on Form S-8, (Reg. No. 33-12146) on Form S-8 and (Reg. No. 33-41992) on Form S-8 of Porta Systems Corp. and subsidiaries of our report dated March 22, 1996, relating to the consolidated balance sheets of Porta Systems Corp. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, which report appears in the Porta Systems Corp. annual report on Form 10-K. Our report dated March 22, 1996, contains an explanatory paragraph that states that the Company's recurring losses from operations and working capital and net capital deficiencies raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP KPMG PEAT MARWICK LLP Jericho, New York March 29, 1996 EX-27 12 FDS -- ARTICLE 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1,109 0 13,877 1,251 8,979 24,373 19,709 12,798 60,591 32,570 25,660 0 0 75 29,398 60,591 61,181 61,181 56,444 24,621 884 666 8,397 (29,163) 30 (29,297) (3,500) 1,756 0 (31,041) (4.25) (4.25)
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