FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
[ ] 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
(Registrant's telephone number, including area code)
Indicate by check mark whether (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 the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
7,307,106 shares as of August 10, 1995
Page 1 of pages
<PAGE>
Part I
Financial Information
Porta Systems Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
1995 1994
Assets (Unaudited)
-------------------------------------------------------------------------------
Current assets:
Cash $ 1,336 $ 2,332
Accounts receivable - trade, net 17,264 13,964
Inventories 17,447 20,146
Prepaid expenses 1,648 1,020
--------- ---------
Total current assets 37,695 37,462
--------- ---------
Property, plant and equipment, at cost 32,791 32,187
Less accumulated depreciation
and amortization (22,457) (21,048)
--------- ---------
Total 10,334 11,139
--------- ---------
Other assets:
Amounts receivable from sale
of discontinued operations 1,000 4,500
Deferred computer software 5,821 6,257
Goodwill - net of accumulated amortization 18,772 19,032
Other assets 7,481 6,573
--------- ---------
33,074 36,362
--------- ---------
Total assets $ 81,103 $ 84,963
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - banks 1,786 1,253
Current maturities of long-term debt 26,490 152
6% Convertible subordinated debentures
due July 1, 2002 31,880 --
Accounts payable 10,105 9,690
Accrued expenses 14,635 12,168
Income taxes payable 345 478
--------- ---------
Total current liabilities 85,241 23,741
--------- ---------
Long-term liabilities:
6% Convertible subordinated debentures
due July 1, 2002 -- 35,073
Long-term debt, net of current maturities -- 21,000
Other long-term liabilities 2,936 2,967
Minority interest 814 657
--------- ---------
Total long-term liabilities 3,750 59,697
--------- ---------
Stockholders' equity:
Preferred stock, no par value; authorized
1,000,000 shares of which 100,000 shares
are designated as Series A; none issued -- --
Common stock, par value $.01; authorized
20,000,000 shares, issued 7,307,106 shares
in 1995 and 7,082,889 in 1994 75 75
Additional paid-in capital 33,248 32,888
Foreign currency translation adjustment (3,838) (4,031)
Accumulated deficit (34,999) (25,033)
--------- ---------
(5,514) 3,899
Less shares held in treasury, at cost,
154,700 shares in 1995 and 1994 (1,938) (1,938)
Receivable for employee stock purchases (436) (436)
--------- ---------
Total stockholders' equity (deficit) (7,888) 1,525
--------- ---------
Total liabilities and stockholders' equity 81,103 84,963
========= =========
See accompanying notes to condensed consolidated financial statements.
2
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Porta Systems Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales 33,178 37,076 17,235 18,742
Cost of sales 25,847 23,630 14,705 12,054
------- ------- ------- -------
Gross profit 7,331 13,446 2,530 6,688
Selling, general and administrative expenses 8,734 9,313 3,719 4,622
Research and development expenses 2,434 2,016 1,161 1,028
------- ------- ------- -------
Total expenses 11,168 11,329 4,880 5,650
------- ------- ------- -------
Operating income (loss) (3,837) 2,117 (2,350) 1,038
Interest expense (3,810) (2,464) (1,884) (1,302)
Interest income 33 124 11 66
Other (549) (142) (164) (171)
------- ------- ------- -------
Loss from continuing operations
before income taxes and minority interest (8,163) (365) (4,387) (369)
Income tax (17) (33) (7) (13)
Minority interest (157) (82) (212) 92
------- ------- ------- -------
Loss from continuing operations after income tax
and minority interest (8,337) (480) (4,606) (290)
Loss on sale of discontinued operations (3,500) -- (3,500) --
Extraordinary Item:
Gain on early extinguishment of debt 1,871 -- -- --
------- ------- ------- -------
Net loss (9,966) (480) (8,106) (290)
======= ======= ======= =======
Net loss per share ($ 1.39) ($ 0.07) ($ 1.13) ($ 0.04)
======= ======= ======= =======
Weighted average shares outstanding (in thousands) 7,152 6,961 7,152 6,927
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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Porta Systems Corp. and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30, June 30,
1995 1994
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($9,966) ($ 480)
Adjustments to reconcile net loss
to net cash used in operating activities:
Adjustment of receivable from sale
of discontinued operations 3,500
Gain on early extinguishment of debt (1,871)
Depreciation and amortization 2,752 1,213
Accretion of convertible subordinated debentures 395 221
Issuance of warrants 360
Minority interest 157 99
------- -------
Total (4,673) 1,053
Changes in assets and liabilities,
Accounts receivable (3,300) (49)
Inventories 2,699 383
Prepaid expenses (628) (1,489)
Deferred computer software (647) (541)
Intangible and other assets (125) (965)
Accounts payable 415 3,725
Accrued expenses 2,467 (1,190)
Other liabilities (164) (1,490)
------- -------
Net cash used in operating activities (3,956) (563)
------- -------
Cash flows from investing activities:
Capital additions, net of minor disposals (604) (530)
------- -------
Net cash used in investing activities (604) (530)
------- -------
Cash flows from financing activities:
Proceeds from additional long-term debt 5,338 (642)
Repayments of long-term debt (2,500) --
Proceeds from issuance of common stock -- 2,135
Repayments of notes payable/short term loans 533 207
------- -------
Net cash provided by financing activities 3,371 1,700
------- -------
Effect of exchange rates on cash 193 (420)
Increase (decrease) in cash and cash equivalents (996) 187
Cash and equivalents - beginning of year 2,332 1,727
------- -------
Cash and equivalents - end of period $ 1,336 $ 1,914
======= =======
Supplemental cash flow disclosure:
Cash paid for interest expense $ 1,534 $ 3,340
======= =======
Cash paid for income taxes $ 27 $ 34
======= =======
See accompanying notes to condensed consolidated financial statements.
4
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PORTA SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the results for the interim period
presented. Results for the first six months of 1995 are not necessarily
indicative of results for the year.
Note 2: Discontinued Operations
At December 31, 1994, the Company's balance sheet reflected a $4.5 million
receivable from sale of discontinued operations. This amount represented the
Company's expected recovery at such date 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 liquidation and
receivership proceedings involving the buyer of the subsidiaries, the estimated
recovery from the sale of such operations has been reduced to $1.0 million,
which resulted in an extraordinary loss on sale of discontinued operations of
$3.5 million during the quarter ended June 30, 1995.
Note 3: Inventories
Inventories at June 30, 1995 have been computed using a standard cost
system. Inventories at December 31, 1994 resulted from a physical inventory
conducted on that date. The composition of inventories at the end of the
respective periods is as follows:
June 30, 1995 December 31, 1994
------------- -----------------
(in thousands)
Parts and Components $11,299 $11,838
Work in Process 1,273 1,854
Finished Goods 4,875 6,454
------- -------
$17,447 $20,146
======= =======
Note 4: Long Term Contracts
Accounts receivable include approximately $1.7 million at June 30, 1995 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 will be billed during
the remainder of 1995.
5
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Note 5: Long-Term Debt
At December 31, 1994, the Company's long-term debt consisted principally of
$35 million of 6% convertible subordinated debentures due July 1, 2002 (the
"Debentures"), and $21 million due to Foothill Capital Corporation ("Foothill")
pursuant to the Company's Amended and Restated Loan and Security Agreement,
dated as of November 28, 1994, as amended, between Foothill and the Company (the
"Foothill Agreement"). At June 30, 1995, the Company's debt under the Debentures
and the Foothill Agreement was $31.9 million an $26.5 million respectively. The
change in outstanding debt reflects primarily the repurchase by the Company from
Foothill of certain Debentures which had been acquired by Foothill and an
increase in borrowings pursuant to the Foothill Agreement. The purchase of the
Debentures from Foothill was paid in part through increased borrowings from
Foothill. The amount of Debentures outstanding reflects the amount paid by the
initial purchasers of the Debentures plus the unamortized original issue
discount. Borrowings under the Foothill Agreement are secured by substantially
all the assets of the Company and its subsidiaries. The Debentures are unsecured
obligations of the Company, and the Company's obligations under the Foothill
Agreement are senior to its obligations on the Debentures. Loans pursuant to the
Foothill Agreement bear interest at 12% per annum which rate may increase as a
result of the event of default.
The Foothill Agreement contains various restrictive covenants, including
the maintenance of various financial ratios and tests, including a consolidated
net worth test, maintenance of ratios of cash and accounts receivable to current
liabilities and a minimum operating income test. As of June 30, 1995, the
Company was in default with respect to financial covenants under the Foothill
Agreement. In addition, the Foothill Agreement prohibits payment of dividends.
The borrowings under the Foothill Agreement are limited by a borrowing base
formula. During the quarter, the borrowings, including obligations with respect
to letter of credit, under the Foothill Agreement exceeded the maximum
availability. As of June 30, 1995, the Company's borrowings and letter of credit
obligations exceeded the maximum availability by approximately $1.8 million.
As a result of the Company's default with respect to the financial
covenants, Foothill has the right to accelerate payment of the Company's
obligations under the Foothill Agreement. In July 1995, Foothill issued a notice
of event of default under the Foothill Agreement. Although the Foothill
Agreement provides various remedies to Foothill if an event of default occurs,
Foothill, while expressly reserving the right to enforce any right or remedy
permitted by the Foothill Agreement, in its notice it elected only to exercise
its right to require the Company to refrain from making payments on account of
the Debentures for up to 225 days. As a result, the Company did not make the
interest payment of approximately $2.2 million due on July 31, 1995 with respect
to the Debentures. While the terms of the indenture pursuant to which the
Debentures were issued precluded the Company from making the interest payment,
6
<PAGE>
the failure of the Company to make the interest payment constitutes a default
with respect to the Debentures, and gives the holders of the Debentures certain
rights with respect to the Debentures, including certain acceleration rights. As
a result of the occurrence of events of default under both the Foothill
Agreement and the Debentures, the Company's liabilities with respect to such
indebtedness have been classified as current liabilities at June 30, 1995.
Note 6: Legal Matters
Eight alleged class action complaints have been consolidated and are
pending in the U.S. District Court for the Eastern District of New York against
the Company and certain of its present and former directors and alleging
violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder. The plaintiffs seek, among other things, unspecified
money damages. The Company intends to vigorously defend these suits, however
management cannot presently determine what, if any, damages may be sustained as
a result of these actions. No reserves for any such losses have been recorded.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The company's consolidated statements of income (loss) for the periods
indicated below, shown as a percentage of Sales, are as follows:
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
1995 1994 1995 1994
------ ----- ------ ------
Sales 100% 100% 100% 100%
Cost of sales 78% 64% 85% 64%
--- --- --- ---
Gross profit 22% 36% 15% 36%
Selling, general and
administrative expenses 26% 25% 22% 25%
Research and development expenses 7% 5% 7% 5%
Operating income (loss) (11)% 6% (14)% 6%
Interest expense - net (11)% (7)% (11)% (7)%
Other (2)% -- (1)% (1)%
Minority interest -- -- 1% --
Loss on sale of discontinued
Operations (11)% -- (20)% --
Gain on extinguishment of debt 6% -- -- --
Net loss (29)% (1)% (45)% (2)%
The Company's sales from continuing operations by product line for the
periods ended June 30, 1995 and 1994 are as follows:
Six Months Ended
June 30,
----------------------------------------------
(Dollars in thousands)
1995 1994
-------------------- --------------------
Line connection/protection
equipment $16,105 49% $21,771 60%
OSS equipment 14,396 43% 11,710 32%
Other 2,677 8% 3,595 8%
------- --- ------- ---
$33,178 100% $37,076 100%
8
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Three Months Ended
June 30,
----------------------------------------------
(Dollars in thousands)
1995 1994
-------------------- --------------------
Line connection/protection
equipment $ 7,088 41% $10,519 56%
OSS equipment 8,923 52% 7,091 38%
Other 1,224 7% 1,132 6%
------- --- ------- ---
$17,235 100% $18,742 100%
Financial Condition and Liquidity
The Company's working capital changed from working capital of $13.7 million
at December 31, 1994 to a working capital deficiency of $47.1 million at June
30, 1995. This change results principally from the reclassification of the
Company's obligations to Foothill Capital Corporation ("Foothill") and its 6%
convertible subordi nated debentures due July 1, 2002 (the "Debentures") from
long-term at December 31, 1994 to current at June 30, 1995. Such change resulted
from the occurrence of an event of default under the agreement relating to the
Company's debt to Foothill. As a result of the event of default, Foothill took
action to prohibit the Company from making a $2.2 million interest payment on
the Debentures, which was due by July 31, 1995, thereby triggering a default
under the Debentures. As a result of the defaults under both the agreement with
Foothill and the Debentures, Foothill and the holders of the Debentures have
certain rights, including certain acceleration rights. Accordingly, such
indebtedness is treated as current at June 30, 1995. See Note 5 of Notes to
Consolidated Financial Statements. Furthermore, although Foothill is, as of the
date of this Report, continuing to fund the Company's operations and has not
taken any action other than to prohibit the Company from paying the $2.2 million
interest payment due to the holders of the Debentures, as a result of events of
default, Foothill has no obligation to provide financing to the Company, and
Foothill has reserved its rights and remedies.
The Company's obligations to Foothill are secured by substantially all of
the assets of the Company and its subsidiaries. Other than cash generated from
accounts receivable, the Company does not have any significant source of funds
to fund its ongoing operations. Under the Company's agreement with Foothill, all
receipts generated from its accounts receivable are deposited in a lockbox
account under Foothill's control. Although Foothill is continuing to finance the
Company's business and has not demanded repayment of the Company's borrowings in
excess of its borrowing base, there is no assurance that it will continue to
advance money to the Company, or refrain from demanding repayment of the excess
borrowings. In the event that Foothill forecloses on the Company's assets,
particularly its accounts receivable, or does not permit the Company to
re-borrow, the Company will not have sufficient funds to continue operations.
9
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The Company is conducting negotiations with certain holders of the
Debentures with a view to making an exchange offer to the Debenture holders.
However, no assurance can be given that an exchange offer can be effected with a
significant percentage of the Debenture holders or that any exchange offer which
may be effected can or will enable the Company to operate profitably.
The Company's liquidity problems have resulted in increased cost of sales,
resulting in lower gross profits. As discussed under "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Results of
Operation," the gross profit for the three and six months ended June 30, 1995 is
less than the selling, general and administrative expenses for the periods.
Accordingly, without a significant improvement in gross profit and/or a
significant reduction in selling, general and administrative and other expenses,
any restructuring of the Company's debt will not be sufficient to enable the
Company to operate profitably.
The Company may seek to raise funds through the sale of one or more of its
lines of business. Currently, the Company is engaged in informal exploratory
discussions with a number of parties. However, no assurance can be given that
such discussion will result in any agreement.
Results of Operations
The Company's liquid financial position had a material adverse effect
upon its operations during the three and six months ended June 30, 1995. During
these periods, certain of the Company's suppliers delayed shipments, shipped on
a COD basis or refused to sell to the Company, all of which resulted in
increased cost of goods sold and impaired the Company's ability to manufacture
efficiently. Moreover, the Company has embarked on an inventory reduction
program which required the reworking and modification of certain inventory to
meet customer needs resulting in additional costs. In addition the Company has
reduced its manufacturing work force as a result of a lower level of sales.
While such reduction is expected to reduce cost on an ongoing basis, the Company
incurred severance costs during the three and six months ended June 30, 1995.
The Company's sales for the three and six months ended June 30, 1995
decreased from the same periods of the prior year by 8% and 11%, respectively,
as the Company experienced continuing cash constraints which adversely affected
the Company's operations. Sales of fiber products fell substantially, primarily
due to the effects of the Company's liquidity problems. Sales of copper based
connection/protection products in general in the three and six months ended June
30, 1995 were significantly lower than the same periods in 1994, as a result of
no sales to Telefonos de Mexico due to the continuing Mexican financial crisis
which began in December 1994, plus lower sales to British Telecommunications
because of BT's postponement of purchase orders to subsequent periods. Domestic
sales of copper based connection/protection products remained generally the
same. Sales of OSS equipment during the three and six months ended June 30, 1995
increased compared to the same periods of 1994, due to the Company's level of
performance under OSS contracts generally during these periods, and the
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increased shipments by the Company's Korean joint venture subsidiary. Sales of
other products decreased due primarily to decreased third party sales of plastic
molded product in the three and six months ended June 30, 1995 partially offset
by certain price increases.
Cost of sales for the three and six months ended June 30, 1995 increased
22% and 9%, respectively, from the comparable periods of 1994. The increase in
cost of sales, which resulted from the Company's cash problems, 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
approximately $2.5 million of overhead costs allocated to costs of goods based
on the Company's standard costing methods, and (iv) the need to rework inventory
in order to fulfill customer orders. Although the Company has taken steps to
reduce manufacturing labor costs by staffing reductions, these reductions were
not largely implemented until late in the second quarter and, accordingly, did
not have any significant effect in the second quarter of 1995.
Although selling, general and administrative expenses decreased 19.5% and
6.2% for the three and six months ended June 30, 1995 from the comparable
periods of 1994, such decreases were significantly less than the decrease in
gross margin, and, for both periods, exceeded gross profits. Although the
Company is taking steps to reduce both the cost of goods and the selling,
general and administrative expenses, no assurance can be given that such
reductions will be sufficient to enable the Company to operate profitably.
Research and development increased during the three and six months ended
June 30, 1995 from the comparable periods of 1994. During the 1995 periods, a
greater precentage of the Company's research and development expenditures were
expensed rather than capitalized. During the 1994 periods, the Company
capitalized a greater amount based upon FASB 86, which deals with the
capitalization of software development costs. Research and development expenses
and capitalized software development costs during the 1995 and 1994 periods are
as follows (dollars in thousands):
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1995 1994 1995 1994
----- ----- ----- -----
Total R&D 3,081 2,970 1,610 1,502
Capitalized software (note 1) 647 953 450 472
----- ----- ----- -----
Net expense 2,434 2,016 1,160 1,028
Note 1. Represents software development costs during the periods, without
giving effect to any amortization of previously capitalized software
development costs.
Interest expense was significantly higher for the three and six months
ended June 30, 1995 compared with the comparable periods in 1994, as a result of
substantially higher average interest rates under the Foothill agreement as
compared with the interest rate payable during the 1994 periods on the Company's
11
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borrowings from Chemical Bank. In addition, the Company's borrowings were
substantially higher borrowings during the 1995 periods.
Other expense includes costs associated with the modification of the
Company's agreement with Foothill during the three months ended March 31, 1995
which were not present in the comparable period of 1994.
In the three and six months ended June 30, 1995, the Company's tax expense
was generally the same as that in the similar period of 1994 and, for both the
1995 and 1994 periods, was comprised primarily of offshore taxes.
During the three and six months ended June 30, 1995, the Company recorded
charges of approximately $210,000 and $160,000, respectively, representing the
minority interest in the income of its Korean subsidiary, during the comparable
periods of 1994 the company incurred income of $90,000 and a charge of $80,000
interest in the income of its Korean subsidiary during the three and six months
ended June 30, 1994, respectively.
The $3.5 million extraordinary 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
receivership and liquidation proceedings involving the purchaser of the
subsidiaries, the estimated recovery from the sale of such operations has been
reduced from $4.5 million which was the estimated recovery at December 31, 1994,
to $1.0 million which is the estimated recovery at June 30, 1995.
In connection with the modification of the Company's agreement with
Foothill, the Company repurchased from Foothill and retired $3.9 million
principal amount of its 6% Convertible Subordinated Debentures for approximately
$2.5 million through an increase in the term-loan under the New Credit Agreement
and the repricing of certain warrants granted to the senior lender. The Company
included as an extraordinary item a gain of $1.9 million on early extinguishment
of this debt, representing the difference between the principal amount of the
debt retired less the related amount of the unamortized original issue discount
and the approximate market value of the debt on the date of the transaction.
12
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PART II
Item 1. Legal Proceedings.
As previously disclosed, seven complaints alleging class actions pending in
the U.S. District Court for the Eastern District of New York were consolidated,
and styled "In re Porta Systems Securities Litigation." On or about September 9,
1993, plaintiffs in those cases filed a consolidated amended and supplemental
complaint naming as defendants the Company and certain of its present or former
officers and directors. On or about November 11, 1994 plaintiffs in those cases
filed a revised third consoli dated amended and supplemental class action
complaint ( the "amended complaint").
The amended complaint alleges violations of the anti-fraud provisions of
Sections 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and
Rule 10b-5 thereunder and Section 20(a) of the Exchange Act based on the
Company's April 1, 1993 announcement that certain revenue attributable to a sale
of a line test system previously recorded during 1992 was being reversed during
the fourth quarter and that the Company would suffer a loss for the year ended
December 31, 1992. The amended complaint also alleges that certain other public
statements made by the Company during 1992 were false, including statements
relating to anticipated sales and the divestiture of its North Hills Israel,
Ltd. subsidiary and the NetCom business of its North Hills Electronics, Inc.
subsidiary. The amended complaint alleges that the Company and certain of the
other named defendants knew or should have known that statements contained in
various of the Company's public filings and press releases misrepresented
material facts concerning the Company and its financial prospects, resulting in
the Company's reported revenues and profits for the second and third quarters of
1992 being misstated, and the market price of the Company's Common Stock being
artificially inflated during the purported class period. The plaintiffs seek,
among other things, unspecified money damages.
The Company moved under Rules 9(b) and 12(b)(6) of the Federal Rules of
Civil Procedure to dismiss the complaint. Following the Court's denial of that
motion by order entered October 13, 1994, on or about November 11, 1994,
defendants filed an answer to the amended complaint, denying the material
factual allegations of the amended complaint and asserting affirmative defenses
to the alleged claims. Discovery is in progress. The Company intends to continue
to defend this action.
As previously disclosed, on or about April 23, 1993, a complaint alleging a
class action entitled Klein vs. Porta Systems Corporation et al. was filed in
Delaware Chancery Court naming as defendants the Company and certain of its
current and former officers and directors, and alleging certain violations of
Delaware law, including breach of fiduciary duty, fraudulent misrepresentation,
concealment, and nondisclosure. An amended complaint was filed on or about
October 4, 1993. The amended complaint substantially the same facts as those
alleged in the New York action, and the claims were likewise based on
allegations concerning the Company's April 1, 1993 announcement and certain
other allegedly false and misleading public statements made by the Company
13
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during 1992. The plaintiff sought, among other things, unspecified money damages
on behalf of the alleged class of shareholders.
Prior to filing an answer in which the material factual allegations of the
amended complaint would have been denied, the Company and other defendants moved
to dismiss or stay the action in view of the prior pending litigation in New
York. In a decision dated April 21, 1994, the Court granted the motion to stay
the Delaware action pending the outcome of the earlier filed New York
litigation. Subsequently, by stipulation-so-ordered by the Court on April 22,
1994, the Delaware action was dismissed without prejudice. The plaintiff (and
his counsel) have since joined the action pending in New York.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PORTA SYSTEMS CORP.
Date: August 8, 1995 By /s/Vincent F. Santulli
------------------------
Vincent F. Santulli
Chairman of the Board
Chief Executive Officer
Date: August 8, 1995 By /s/Michael A. Tancredi
------------------------
Michael A. Tancredi
Vice President-Finance and
Treasurer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995, FILED BY PORTA SYSTEMS CORP. AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,336
<SECURITIES> 0
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0
0
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</TABLE>
