-----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, JzWyP+QB24LFgiMrll6TLFlrJF1NePFPkVL3fkNsYSrORcePRw7FhH4AAHNgFoPa fZgr/zO4i1yiRc3kHSiPKw== 0000891092-96-000080.txt : 19960513 0000891092-96-000080.hdr.sgml : 19960513 ACCESSION NUMBER: 0000891092-96-000080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960510 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTA SYSTEMS CORP CENTRAL INDEX KEY: 0000079564 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 112203988 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08191 FILM NUMBER: 96559984 BUSINESS ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 BUSINESS PHONE: 5163649300 MAIL ADDRESS: STREET 1: 575 UNDERHILL BLVD CITY: SYOSSET STATE: NY ZIP: 11791 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.................to................... Commission file number 1-8191 PORTA SYSTEMS CORP. (Exact name of registrant as specified in its charter) Delaware 11-2203988 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 575 Underhill Boulevard, Syosset, New York (Address of principal executive offices) 11791 (Zip Code) 516-364-9300 (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No ______ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 10,091,131 shares as of May 7, 1996 Page 1 of 16 pages PART I.- FINANCIAL INFORMATION Item 1 - Financial Statements PORTA SYSTEMS CORP. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) March 31, December 31, 1996 1995 -------- -------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,312 $ 1,109 Accounts receivable - trade, less allowance for doubtful accounts 12,985 12,626 Inventories 7,902 8,979 Prepaid expenses 830 659 Receivable from sale of discontinued operations 1,000 1,000 Other receivable 1,100 -- -------- -------- Total current assets 25,129 24,373 -------- -------- Assets held for sale, net -- 7,893 Property, plant and equipment, net 6,598 6,911 Deferred computer software, net 2,850 3,188 Goodwill, net 11,650 11,793 Other assets 5,022 6,433 -------- -------- Total assets $ 51,249 $ 60,591 ======== ======== Liabilities and Stockholders' Deficit Current liabilities: Convertible subordinated debentures $ 6,551 $ 6,564 Accounts payable 7,446 8,302 Accrued expenses 9,970 10,502 Accrued interest payable 1,044 3,534 Accrued commissions 2,112 2,016 Income taxes payable 780 780 Customer advances 453 504 Short-term loans 325 368 -------- -------- Total current liabilities 28,681 32,570 -------- -------- Long-term debt 21,436 26,645 Convertible subordinated debentures -- 25,660 Zero coupon senior subordinated convertible notes 22,077 -- Notes payable net of current maturities 3,084 3,084 Income taxes payable 811 811 Other long-term liabilities 370 385 Minority interest 649 759 -------- -------- Total long-term liabilities 48,427 57,344 Stockholders' deficit: Preferred stock, no par value; authorized 1,000,000 shares, none issued -- -- Common stock, par value $.01; authorized 20,000,000 shares, issued 10,252,981 and 7,461,806 shares at March 31, 1996 and December 31, 1995, respectively 103 75 Additional paid-in capital 35,959 32,248 Foreign currency translation adjustment (4,339) (4,199) Accumulated deficit (55,209) (56,074) -------- -------- (23,486) (26,950) Treasury stock, at cost (2,066) (2,066) Receivable for employee stock purchases (307) (307) -------- -------- Total stockholders' deficit (25,859) (29,323) -------- -------- Total liabilities and stockholders' deficit $ 51,249 $ 60,591 ======== ======== See accompanying notes to consolidated financial statements. Page 2 of 16 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unaudited Consolidated Statements of Operations (In thousands, except per share data) Three Months Ended March 31, March 31, 1996 1995 -------- -------- Sales $ 13,221 $ 15,943 Cost of sales 8,883 11,142 -------- -------- Gross profit 4,338 4,801 Selling, general and administrative expenses 3,412 5,015 Research and development expenses 871 1,273 -------- -------- Total expenses 4,283 6,288 -------- -------- Operating income (loss) 55 (1,487) Interest expense (2,178) (1,926) Interest income 9 22 Other (151) (385) -------- -------- Loss before income taxes, minority interest and extraordinary item (2,265) (3,776) Income tax expense (13) (10) Minority interest 110 55 -------- -------- Loss before extraordinary item (2,168) (3,731) Extraordinary Gain 3,033 1,871 -------- -------- Net income (loss) $ 865 $ (1,860) ======== ======== Per share data: Loss before extraordinary item $ (0.16) $ (0.52) Extraordinary item 0.23 0.26 -------- -------- Net income (loss) $ 0.07 $ (0.26) ======== ======== Weighted average shares outstanding 13,126 7,152 ======== ======== See accompanying notes to unaudited consolidated financial statements. Page 3 of 16 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES Unauditied Consolidated Statements of Cash Flows (In thousands) Three Months Ended March 31, March 31, 1996 1995 -------- -------- Cash flows from operating activities: Net income (loss) $ 865 $(1,860) Adjustments to reconcile net income (loss) to net cash used in operating activities: Extraordinary gain (3,033) (1,871) Non-cash financing expenses 1,109 125 Depreciation and amortization 1,005 1,214 Amortization of discount on convertible subordinated debentures 31 110 Minority interest (110) (55) Changes in assets and liabilities: Accounts receivable (359) (2,316) Inventories 1,077 (325) Prepaid expenses (171) (773) Deferred computer software (33) (197) Other assets (587) (12) Accounts payable (856) 629 Accrued expenses (532) 1,816 Other liabilities 127 (178) ------- ------- Net cash used in operating activities (1,467) (3,693) Cash flows from investing activities: Proceeds from disposal of assets held for sale, net 6,793 -- Capital expenditures (159) (341) ------- ------- Net cash provided by (used in) investing activities 6,634 (341) ------- ------- Cash flows from financing activities: Proceeds from long-term debt 1,250 5,550 Repayments of long-term debt (6,503) (2,502) (Repayments of) proceeds from notes payable and short term loans (43) 436 ------- ------- Net cash (used in) provided by financing activities (5,296) 3,484 ------- ------- Effect of exchange rates on cash 332 266 ------- ------- Increase (decrease) in cash and cash equivalents 203 (284) Cash and equivalents - beginning of the year 1,109 2,332 ------- ------- Cash and equivalents - end of the period $ 1,312 $ 2,048 ======= ======= Supplemental cash flow disclosure: Cash paid for interest expense $ 833 $ 663 ======= ======= Cash paid for income taxes $ 6 $ 22 ======= ======= See accompanying notes to unaudited consolidated financial statements. Page 4 of 16 pages PORTA SYSTEMS CORP. AND SUBSIDIARIES NOTES TO UNAUDITIED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Management's Responsibility For Interim Financial Statements Including All Adjustments Necessary For Fair Presentation Management acknowledges its responsibility for the preparation of the accompanying interim consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the results of its operations for the interim period presented. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's annual report to stockholders for the year ended December 31, 1995. Results for the first three months of 1996 are not necessarily indicative of results for the year. Note 2: Discontinued Operations The Company's receivable from discontinued operations is collateralized, at the option of the Company, by either a $750,000 standby letter of credit or approximately 81,000 shares of common stock (increased from 54,000 at December 31, 1995 based on a 3 for 2 stock split) of the entity which now owns the discontinued operations. Such shares are held in escrow and have a fair market value of $2,546,000 at March 31, 1996 based upon quoted market prices. As part of an agreement with the Company's primary lender, the remaining proceeds from the sale of the discontinued operation must be applied to reduce the outstanding principal balance of the Company's term loan. Note 3: Assets Held For Sale On March 13, 1996, the Company 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 remainder, $1,100,000, has been reported as an other receivable in the accompanying consolidated balance sheet as of March 31, 1996. The proceeds were primarily used to repay long-term debt. 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 $452,000 and $2,269,000 for the three months ended March 31, 1996 and 1995, respectively. Page 5 of 16 pages Note 4: Inventories Inventories at March 31, 1996 have been computed using a standard cost system. Inventories at December 31, 1995 resulted from a physical inventory conducted on that date. The composition of inventories at the end of the respective periods is as follows: March 31, 1996 December 31,1995 -------------- ---------------- (in thousands) Parts and components $4,581 $5,370 Work-in-process 1,175 849 Finished goods 2,146 2,760 ------ ------ $7,902 $8,979 ------ ------ Note 5: Long-Term Contracts Accounts receivable include approximately $900,000 at March 31, 1996 in excess costs and related profits over amounts billed relating to long-term contracts under which the Company provides specialized products to major international customers. Substantially all such amounts are expected to be billed during the remainder of 1996. Note 6: Long-Term Debt On March 31, 1996, the Company's long-term debt consisted of senior debt under its credit facility in the amount of $21,436,000. On November 28, 1994, and as amended on February 13, 1995, the Company consummated a financing arrangement with a 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. Page 6 of 16 pages Note 6: Long-Term Debt (continued) 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 for all previous defaults. 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, 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 $20,000,000 and approximately $900,000, respectively, after all the above transactions. Through March 31, 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. 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 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. The market value of such warrants, amounting to $380,000, was recorded as an increase to additional paid-in capital in the first quarter of 1996 and will be recorded as incremental borrowing cost over the term of the debt. All such warrants provide the senior lender with certain 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. Page 7 of 16 pages Note 6: Long Term Debt (continued) 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 debt of $1,871,000. 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. Note 7: 6% Convertible Subordinated Debentures On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the 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 Through March 31, 1996, the Company exchanged approximately $28,775,000 principal amount of the Debentures, net of unamortized discount of $3,070,000 and eliminated $2,504,000 of accrued interest payable for 2,791,175 shares of the Company's common stock with a market value of $3,099,000 at the time of issuance and $22,077,000 principal amount of Notes pursuant to the Exchange Offer. The exchange of the Debentures for the Notes and common stock has been accounted for as a troubled debt restructuring in accordance with Statement of Financial Accounting Standards No. 15. Since the future principal and interest payments under the Notes is less than the carrying value of the Debentures, the Notes were recorded for the amount of the future cash payments, and not discounted, and an extraordinary gain on restructuring of $3,033,000 was recorded in the first quarter of 1996 when the exchange took place. In addition, no future interest expense will be recorded on the exchanged Notes. 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, $1.58 per share through August 1, 1996 and $1.31 per share 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 approximately 19,000,000. The Notes are redeemable at the option of the Company at 79.48% until May 1, 1996, 83.10% through August 1, 1996 increasing periodically to 100% of the principal balance on August 2, 1997. As of March 31, 1996, the Company had remaining outstanding $6,551,000 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 $749,000. The face amount of the outstanding Debentures was $7,300,000. Page 8 of 16 pages Note 7: 6% Convertible Subordinated Debentures (continued) Interest on the debentures is payable on July 1 of each year. The interest accrued as of March 31, 1996 amounted to $767,000. As of March 31, 1996 the Company is in default under the interest payment provisions of the Debentures. Accordingly, such debt has been classified as a current liability at March 31, 1996. Note 8: 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, an estimation of the market value of the shares to be issued. 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 settlement is subject to the final approval of the court. Note 9: Stock Split The Board of Directors has approved, subject to stockholder approval, a one-for-five reverse split (the "Reverse Split") of the Company's Common Stock. As a result of the Reverse Split, each share of Common Stock outstanding at the effective time of the Reverse Split, will, without any action on the part of the holder thereof, become one-fifth share of Common Stock. The par value of the Common Stock will not be affected by the Reverse Split. Page 9 of 16 pages Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's consolidated statements of operations for the periods indicated below, shown as a percentage of sales, are as follows: Three Months Ended March 31, ------------------ 1996 1995 ---- ---- Sales 100% 100% Cost of Sales 67% 69% Gross Profit 33% 31% Selling, general and administrative expenses 26% 31% Research and development expenses 7% 8% Operating income(loss) 0% (9%) Interest expense - net (16%) (12%) Other (1%) (2%) Minority interest 1% -- Extraordinary item 23% 12% Net income (loss) 7% (12%) The Company's sales by product line for the periods ended March 31, 1996 and 1995 are as follows: Three Months Ended March 31, ------------------ 1996 1995 ---- ---- Line connection/protection equipment* $ 5,797 44% $ 9,017 57% OSS equipment 5,900 44% 5,473 34% Signal Processing 1,437 11% 1,348 8% Other 87 1% 105 1% ------------- ------------ $13,221 100% $15,943 100% ============= ============ * Includes sales of fiber optics products of $452,000 for the quarter ended March 31, 1996 and $2,269,000 for the quarter ended March 31, 1995. Page 10 of 16 pages Financial Condition The Company's working capital deficit changed from $8,197,000 at December 31, 1995 to $3,552,000 at March 31, 1996. The reduced deficit is primarily the result of the sale of the fiber optics business which provided the Company funds to reduce certain of its current liabilities and the conversion of approximately 80% of the 6% subordinated debentures which reduced approximately $2,000,000 of accrued interest expense. 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 has been classified as a long-term liability of $21,436,000 at March 31, 1996. On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the 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 Through March 31, 1996, the Company exchanged approximately $28,775,000 principal amount of the Debentures, net of unamortized discount of $3,070,000 and eliminated $2,504,000 of accrued interest payable for 2,791,175 shares of the Company's common stock with a market value of $3,099,000 at the time of issuance and $22,077,000 principal amount of Notes pursuant to the Exchange Offer. The unsecured Notes will not bear interest and there are no sinking fund requirements. As of March 31, 1996, the Company had remaining outstanding $6,551,000 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 $749,000. The face amount of the outstanding Debentures was $7,300,000. Interest on the debentures is payable on July 1 of each year. The interest accrued as of March 31, 1996 amounted to $767,000. As of March 31, 1996 the Company is in default under the interest payment provisions of the Debentures. Accordingly, such debt has been classified as a current liability at March 31, 1996. 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 exchanged at March 31, 1996 is approximately $440,000. Page 11 of 16 pages Financial Condition (continued) On March 12, 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 were 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 by allowing it 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. The sale also 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. Results of Operations The Company's sales for the quarter ended March 31, 1996 decreased by $2,722,000 (17%) compared to the quarter ended March 31, 1995. Sales of line connection/protection equipment decreased by $3,220,000 from $9,017,000 for the 1995 quarter to $5,797,000 for the 1996 quarter. Within this product line, sales of copper products decreased $1,403,000 (21%) and sales of fiber optic products (see Item 2) decreased $1,817,000 (80%) from the March, 1995 quarter as compared to the March, 1996 quarter. OSS sales increased by $427,000 (8%) from $5,473,000 for the quarter ended March 31,1995 to $5,900,000 for the quarter ended March 31,1996. The Company's continuing liquidity problems during 1995, which adversely affected its ability to secure parts and components, was a key contributing factor to the net reduction of sales. Page 12 of 16 pages Results of Operations (continued) Cost of sales in the quarter ended March 31, 1996, as a percentage of sales, decreased from the quarter ended March 31, 1995 from 69% to 67%. Even though sales decreased, this improvement is attributed to the Company's efforts to reduce direct and indirect labor and overhead manufacturing costs which began late in the second quarter of 1995, and to a lesser extent, the sale of the fiber optic business as of March 1996. This sale should have a materially positive effect on cost of sales in the second quarter of 1996. Selling , general and administration expenses decreased by $1,603,000 (32%) from $5,015,000 to $3,412,000. This reduction reflects the Company's efforts to reduce personnel costs and associated expenses, especially in the area of sales and marketing support. The positive effect of the sale of the fiber optics business will be reflected in the second quarter of 1996. Research and development expenses decreased by $402,000 (32%) from $1,273,000 to $871,000. This reduced cost is reflective of the Company's efforts to be made in order to streamline its operations by focusing on those projects with the highest potential for success. As a result of the above, the Company had an operating income of $55,000 for the quarter ended March 31, 1996 as compared to a loss of $1,487,000 from operations for the quarter ended March 31, 1995. The Company's operating improvement in the quarter ended March 31, 1996, when compared to the quarter ended March 31, 1995, was the results of its continuing efforts to bring its costs and expenses more in line with its current level of sales. Interest expense increased by $252,000 from $1,926,000 in 1995 to $2,178,000 in 1996. This change is attributable primarily to a decrease in interest expense related to the exchange of the Company's 6% Convertible Subordinated Debentures offset by an increase in interest expense associated with increased borrowing costs. In the first quarter ended March 31, 1996, the Company recorded a $3,033,000 gain from the early extingushment of approximately 80% of its 6% Convertible Subordinated Debt (See Note 7). In the quarter ended March 31, 1995 the Company recorded an extraordinary gain of $1,871,000 in conjunction with the Company's repurchase from its senior lender and retirement of $3,900,000 of its 6% Convertible Subordinated Debt for approximately $2,500,000. As the result of the foregoing, the Company generated net income of $865,000, $0.07 per share, for the quarter ended March 31, 1996 vs. a net loss of $1,860,000, $0.26 per share, for the quarter ended March 31, 1995. The calculation of the weighted average shares, for the quarter ended March 31, 1996, assumes the conversion of the Notes which are considered to be a common stock equivalent. Page 13 of 16 pages PART II - OTHER INFORMATION Item 1. 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 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, an estimation of the market value of the shares to be issued. 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 settlement is subject to the final approval of the court. Item 2. Changes in Securities. On November 30, 1995, the Company offered the holders of its 6% Convertible Subordinated Debentures due July 1, 2002 (the 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 Through March 31, 1996, the Company exchanged approximately $28,775,000 principal amount of the Debentures, net of unamortized discount of $3,070,000 and eliminated $2,504,000 of accrued interest payable for 2,791,175 shares of the Company's common stock with a market value of $3,099,000 at the time of issuance and $22,077,000 principal amount of Notes pursuant to the Exchange Offer. Item 3. Defaults Upon Senior Securities. As of March 31, 1996 the Company is in default under the interest payment provisions of its 6% Convertible Subordinated Debentures due July 1, 2002 (the Debentures). Accordingly, such debt has been classified as a current liability at March 31, 1996. The Company had remaining outstanding $6,551,000 of the Debentures net of original issue discounts amortized to principal over the term of the debt using the effective interest rate method of $749,000. The face amount of the outstanding Debentures was $7,300,000. Interest on the debentures is payable on July 1 of each year. The interest accrued as of March 31, 1996 amounted to $767,000. Page 14 of 16 pages Item 4. Submission of Matters to a Vote of Security Holders. The Board of Directors has approved, subject to stockholder approval, a one-for-five reverse split (the "Reverse Split") of the Company's Common Stock. As a result of the Reverse Split, each share of Common Stock outstanding at the effective time of the Reverse Split, will, without any action on the part of the holder thereof, become one-fifth share of Common Stock. The par value of the Common Stock will not be affected by the Reverse Split. Subject to shareholder approval, the Board of Directors approved an amendment to the Company's certificate of incorporation to increase the authorized capital to 41,000,000 shares, of which 1,000,000 are shares of Preferred Stock and 40,000,000 shares are shares of Common Stock. The amendment does not affect the number of authorized shares of Preferred Stock and increases the number of authorized shares of Common Stock from 20,000,000 to 40,000,000 shares. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. A current report on form 8-K, dated March 28, 1996, was filed. Page 15 of 16 pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTA SYSTEMS CORP. Dated May 10, 1996 By /s/Warren H. Esanu ------------------ Warren H. Esanu Chairman of the Board Dated May 10, 1996 By /s/Edward B. Kornfeld --------------------- Edward B. Kornfeld Vice President and Chief Financial Officer Page 16 of 16 pages EX-27 2 FDS --
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1,312 0 12,985 0 7,902 25,129 6,598 0 51,249 28,681 0 0 0 103 (25,756) 51,249 13,221 13,221 8,883 4,283 151 0 2,169 (2,265) 13 (2,168) 0 3,033 0 865 0.07 0.07
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