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 June 30, 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 ______
* See Part II, Item 5
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
2,095,052 shares as of August 6, 1996
Page 1 of 17 pages
<PAGE>
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
1996 1995
------- -------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,049 $ 1,109
Accounts receivable, net 13,292 12,626
Inventories 8,177 8,979
Prepaid expenses 728 659
Receivable from sale of discontinued operations -- 1,000
Other receivable 920 --
------- -------
Total current assets 24,166 24,373
------- -------
Assets held for sale, net -- 7,893
Property, plant and equipment, net 6,074 6,911
Deferred computer software, net 2,463 3,188
Goodwill, net 11,577 11,793
Other assets 4,888 6,433
------- -------
Total assets $49,168 $60,591
======= =======
Liabilities and Stockholders' Deficit
Current liabilities:
Convertible subordinated debentures $ 4,522 $ 6,564
Accounts payable 7,028 8,302
Accrued expenses 8,678 10,502
Accrued interest payable 784 3,534
Accrued commissions 2,040 2,016
Income taxes payable 780 780
Customer advances 500 504
Short-term loans 250 368
------- -------
Total current liabilities 24,582 32,570
------- -------
Long-term debt 18,016 26,645
Convertible subordinated debentures -- 25,660
Zero coupon senior subordinated convertible notes 23,830 --
Notes payable net of current maturities 3,084 3,084
Income taxes payable 811 811
Other long-term liabilities 501 385
Minority interest 526 759
------- -------
Total long-term liabilities 46,768 57,344
Stockholders' deficit:
Preferred stock, no par value; authorized
1,000,000 shares, none issued -- --
Common stock,par value $.01; authorized 8,000,000
and 20,000,000 shares,issued 2,095,052 and
7,461,806 shares at June 30, 1996 and December 31,
1995, respectively 21 75
Additional paid-in capital 36,206 32,248
Foreign currency translation adjustment (3,805) (4,199)
Accumulated deficit (52,231) (56,074)
------- -------
(19,809) (26,950)
Treasury stock, at cost (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
------- -------
Total stockholders' deficit (22,182) (29,323)
------- -------
Total liabilities and stockholders' deficit $49,168 $ 60,591
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Six Months Ended
June 30, June 30,
1996 1995
------- -------
Sales $26,863 $33,178
Cost of sales 17,744 25,847
Gross profit ------- -------
9,119 7,331
Selling, general and administrative expenses 6,187 8,734
Research and development expenses 1,804 2,434
------- -------
Total expenses 7,991 11,168
------- -------
Operating income (loss) 1,128 (3,837)
Interest expense (3,226) (3,810)
Interest income 42 33
Other income (expense) 18 (549)
------- -------
Loss before income taxes,
minority interest and extraordinary item (2,038) (8,163)
Income tax expense (6) (17)
Minority interest 233 (157)
------- -------
Loss from continuing operations (1,811) (8,337)
Gain (loss) on disposal of discontinued operations 2,264 (3,500)
------- -------
Income (loss) before extraordinary item 453 (11,837)
Extraordinary gain 3,390 1,871
------- -------
Net income (loss) $ 3,843 $(9,966)
======= =======
Per share data:
Loss from continuing operations $ (0.43) $ (5.83)
======= =======
Income (loss) before extraordinary item $ 0.10 $ (8.28)
Extraordinary item 0.80 1.31
------- -------
Net income (loss) $ 0.90 $ (6.97)
======= =======
Weighted average shares outstanding 4,249 1,430
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
June 30, June 30,
1996 1995
------- -------
Sales $13,642 $17,235
Cost of sales 8,861 14,705
------- -------
Gross profit 4,781 2,530
Selling, general and administrative expenses 2,775 3,719
Research and development expenses 933 1,161
------- -------
Total expenses 3,708 4,880
------- -------
Operating income (loss) 1,073 (2,350)
Interest expense (1,048) (1,884)
Interest income 33 11
Other income (expense) 169 (164)
Income (loss) before income taxes, ------- -------
minority interest and extraordinary item 227 (4,387)
Income tax benefit (expense) 7 (7)
Minority interest 123 (212)
------- -------
Income (loss) from continuing operations 357 (4,606)
Gain (loss) on disposal of discontinued operations 2,264 (3,500)
------- -------
Income (loss) before extraordinary item 2,621 (8,106)
Extraordinary gain 357 --
------- -------
Net income (loss) $ 2,978 $(8,106)
======= =======
Per share data:
Income (loss) from continuing operations $ 0.09 $ (3.22)
======= =======
Income (loss) before extraordinary item $ 0.68 $ (5.67)
Extraordinary item 0.09 --
------- -------
Net income (loss) $ 0.77 $ (5.67)
======= =======
Weighted average shares outstanding 3,880 1,430
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unauditied Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
June 30, June 30,
1996 1995
------- -------
Cash flows from operating activities:
Net income (loss) $ 3,843 $(9,966)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
(Gain) loss on disposal of discontinued operations (2,264) 3,500
Extraordinary gain (3,390) (1,871)
Non-cash financing expenses 1,799 360
Depreciation and amortization 2,237 2,752
Amortization of discount on convertible
subordinated debentures 63 395
Minority interest (233) 157
Changes in assets and liabilities:
Accounts receivable (666) (3,300)
Inventories 802 2,699
Prepaid expenses (69) (628)
Deferred computer software (38) (647)
Other assets (359) (125)
Accounts payable (1,274) 415
Accrued expenses (1,824) 2,467
Other liabilities 247 (164)
------- -------
Net cash used in operating activities (1,126) (3,956)
Cash flows from investing activities:
Proceeds from disposal of assets held for sale, net 6,793 --
Proceeds from receivable from sale of discontinued
operations 3,456 --
Capital expenditures (292) (604)
------- -------
Net cash provided by (used in) investing activities 9.957 (604)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 1,330 5,338
Repayments of long-term debt (9,959) (2,500)
(Repayments of) proceeds from notes payable
and short term loans (118) 533
------- -------
Net cash (used in) provided by financing activities (8,747) (3,371)
------- -------
Effect of exchange rates on cash (144) 193
------- -------
Decrease in cash and cash equivalents (60) (996)
Cash and equivalents - beginning of the year 1,109 2,332
------- -------
Cash and equivalents - end of the period $ 1,049 $ 1,336
======= =======
Supplemental cash flow disclosures:
Cash paid for interest expense $ 1,391 $ 1,534
======= =======
Cash paid for income taxes $ 29 $ 27
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 17 pages
<PAGE>
NOTES TO UNAUDITIED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Management's Responsibility For Interim Financial Statements Including
All Adjustments Necessary For Fair Presentation
Management acknowledges its responsibility for the preparation of the
accompanying interim consolidated financial statements which reflect all
adjustments, consisting of normal recurring adjustments, considered necessary in
its opinion for a fair statement of its consolidated financial position and the
results of its operations for the interim periods presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's annual report to stockholders for the year ended
December 31, 1995. Results for the first six months of 1996 are not necessarily
indicative of results for the year.
Note 2: Computation of Per Share Earnings
All share and per share information presented in the Consolidated Financial
Statements and the Form 10-Q for the six months ended June 30, 1996 gives
retroactive effect to the Reverse Split described in Note 10.
Six months ended Three months ended
June 30, 1996 June 30, 1996
------------- -------------
(In thousands, except per share amounts)
Net income $3,843 $2,978
====== ======
Weighted average shares outstanding-Basic 1,924 2,024
Shares of common stock contingently
issuable in connection with the
potential conversion of the zero coupon
senior subordinated convertible
notes 2,325 1,856
------ ------
Weighted average shares outstanding-
Primary 4,249 3,880
------ ------
Earnings per share $ 0.90 $ 0.77
====== ======
Note 3: Discontinued Operations
The Company's receivable from the sale of discontinued operations was
represented by shares of common stock of the entity which now owns the
discontinued operations. During the quarter ended June 30, 1996, the Company
sold the shares of this common stock for $3,456,000. In such quarter the Company
recorded a gain of $2,264,000 on disposal of discontinued operations. The
receivable had previously been written down to $1,000,000 as a result of the
liquidation and receivership of such purchaser. As part of an agreement with the
Company's primary lender, the net proceeds from the sale of the discontinued
operations were applied to reduce the outstanding principal balance of the
Company's term loan.
Page 6 of 17 pages
<PAGE>
Note 4: 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. As of December 31, 1995, in conjunction with this
transaction, the Company accrued approximately $700,000 for certain obligations
in connection with the closing of its fiber optics facility in Ireland. These
obligations were settled in the second quarter of 1996, and along with other
adjustments related to the sale of the fiber business, for a positive adjustment
of approximately $358,000. The difference was recorded as a reduction of
selling, general and administrative expenses in the accompanying statement of
operations.
The Company received $6,793,000 at closing of the sale of the fiber
business 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. As of June 30, 1996, the remainder, $920,000, has
remained in escrow and is reported as an "Other receivable" in the accompanying
consolidated balance sheet. 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 $3,684,000 for the six months ended June 30, 1996 and 1995, respectively.
Note 5: Inventories
Inventories at June 30, 1996 have been computed using a standard cost
system. The composition of inventories at the end of the respective periods is
as follows:
June 30, 1996 December 31, 1995
------------- -----------------
(in thousands)
Parts and components $4,884 $5,370
Work-in-process 1,519 849
Finished goods 1,774 2,760
------------- -----------------
$8,177 $8,979
============= =================
Note 6: Long-Term Contracts
At June 30, 1996, accounts receivable included approximately $900,000 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 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 each
$1,000 face amount of such debt and the elimination of the associated accrued
interest payable for 19.4 shares of the Company's common stock and $767.22
principal amount of zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998 (the Exchange Offer). The Notes are non-interest
bearing, unsecured and have no sinking fund requirements.
Page 7 of 17 pages
<PAGE>
Note 7: 6% Convertible Subordinated Debentures (continued)
Each Note is convertible into common stock at a conversion price of $7.90
per share until November 1, 1996 and $6.55 per share thereafter. Accordingly, in
addition to a maximum of 699,855 of common shares issuable from the exchange of
the Debentures, the maximum number of shares of common stock that could be
issued upon conversion, if all Debentures are exchanged, is approximately
4,225,600. The Notes are redeemable at the option of the Company at 86.71%
through November 1, 1996 increasing periodically to 100% of the principal
balance on November 1, 1997.
Through June 30, 1996, the Company exchanged approximately $31,060,000
principal amount of the Debentures, net of unamortized discount of $3,295,000,
for 602,564 shares of the Company's common stock and $23,830,000 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 (SFAS 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. Accordingly, the Company recorded an extraordinary gain on
restructuring of $357,000 during the quarter ended June 30, 1996 and $3,033,000
during the quarter ended March 31, 1996. Additionally, in accordance with SFAS
No. 15, no future interest expense will be recorded on the Notes.
As of June 30, 1996, $4,522,000 of the Debentures remained outstanding, net
of original issue discounts amortized to principal over the term of the debt
using the effective interest rate method, of $493,000. The face amount of the
outstanding Debentures was $5,015,000.
Interest on the Debentures is payable on July 1 of each year. The aggregate
accrued interest payable on the remaining Debentures (including amounts in
arrears) was approximately $603,000 as of June 30, 1996. The Company is
presently in default under the interest payment provisions of the Debentures.
Accordingly, such debt has been classified as current at June 30, 1996.
Note 8: Long-Term Debt
At June 30, 1996, the Company's long-term debt consisted of senior debt
under its credit facility with Foothill Capital Corporation in the amount of
$18,016,000. During the quarter ended June 30, 1996 the Company repaid
$3,456,000 of outstanding principal from the proceeds of the sale of
discontinued operations (see Note 3).
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. As of June 30, 1996, the Company is in compliance with the
above covenants.
Page 8 of 17 pages
<PAGE>
Note 9: Legal Matters
During the quarter ended June 30, 1996, the Company settled its previously
disclosed class actions. The settlement includes a cash payment by the Company's
insurers and issuance by the Company of 220,000 shares of its common stock, to
be distributed in accordance with a Plan of Allocation, also approved by the
Court. Following a settlement fairness hearing, the Court approved the
settlement in an order dated June 18, 1996. As part of the settlement, the
Company has been released from all claims where were or could have been asserted
in the class actions and all such claims against the defendants have been
dismissed with prejudice. In connection with the settlement, the Company
recorded a charge to income of $1,100,000 in the fourth quarter of 1995,
representing an estimation of the market value of the shares to be issued.
In July 1996, an action was commenced in the Supreme Court of the State of
New York, New York County by certain stockholders and warrant holders of the
Company who acquired their securities in connection with the acquisition by the
Company of Aster Corporation against the Company and certain present and former
directors. The complaint alleges breach of contract against the Company and
breach of fiduciary against the directors arising out of an alleged failure to
register certain restricted shares and warrants owned by the plaintiffs. The
complaint seeks damages of $62,000; however, counsel for the plaintiff have
advised the Company that additional plaintiffs may be added and, as a result,
the amount of damages claimed may be substantially greater than the amount
presently claimed. The Company believes that the defendants have valid defenses
to the claims.
Note 10: Capital
On June 6, 1996, the stockholders of the Company approved an amendment to
the Company's certificate of incorporation to increase the number of authorized
shares of Common Stock from 20,000,000 to 40,000,000 shares.
In addition, on June 6, 1996, the stockholders of the Company approved 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, without any action on the part of the
holder thereof, became one-fifth share of common stock. The par value of the
common stock was not effected by the Reverse Split.
The increase in authorized common stock and the Reverse Split became
effective upon filing with the Delaware Secretary of State of an amendment to
the Company's certificate of incorporation on August 2, 1996. Accordingly, the
Company has reclassified approximately $84,000 from common stock to additional
paid-in capital for the period ended June 30, 1996 and all share and per share
data have been restated to give effect to the Reverse Split.
Page 9 of 17 pages
<PAGE>
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:
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of Sales 66% 78% 65% 5%
Gross Profit 34% 22% 35% 15%
Selling, general and
administrative expenses 23% 26% 20% 22%
Research and development expenses 7% 7% 7% 7%
Operating income(loss) 4% (12%) 8% (14%)
Interest expense - net (12%) (11%) (8%) (11%)
Other income (expense) 0% (2%) 1% (1%)
Minority interest 1% (1%) 1% (1%)
Provision for discontinued operations 8% (11%) 17% 0%
Extraordinary item 13% 6% 3% (20%)
Net income (loss) 14% (30%) 22% (47%)
The Company's sales by product line for the periods ended June 30, 1996 and
1995 are as follows:
Six Months Ended
June 30,
--------
1996 1995
---- ----
(Dollars in thousands)
Line connection/protection equipment* $12,705 47% $16,105 49%
OSS equipment 10,633 40% 14,396 43%
Signal Processing 3,377 12% 2,412 7%
Other 148 1% 265 1%
----------- -----------
$26,863 100% $33,178 100%
=========== ===========
Three Months Ended
June 30,
--------
1996 1995
---- ----
(Dollars in thousands)
Line connection/protection equipment* $ 6,908 51% $ 7,088 41%
OSS equipment 4,733 35% 8,923 52%
Signal Processing 1,940 14% 1,064 6%
Other 61 0% 160 1%
----------- -----------
$13,642 100% $17,235 100%
=========== ===========
*Includes sales of fiber optics products of $452,000 and $0 for the six months
and three months ended June 30, 1996 and $3,684,000 and $1,415,000 for the six
months and three months ended June 30, 1995, respectively.
Page 10 of 17 pages
<PAGE>
Financial Condition
The Company's working capital deficit changed from $8,197,000 at December
31, 1995 to $416,000 at June 30, 1996. The reduced deficit is primarily the
result of the sale of the fiber optics business which provided the Company with
funds to reduce certain of its current liabilities, the conversion of
approximately 86% of the 6% convertible subordinated debentures which reduced
approximately $2,225,000 of accrued interest expense and the sale of stock
issued in respect of the sale of discontinued operations which was used to
reduce its obligations to its senior lender.
During the quarter ended June 30, 1996, the Company received $3,456,000
from the sale of common stock issued in respect of the obligations of the
purchaser of discontinued operations. A gain of $2,264,000, net of related
expenses, was recorded. The receivable had previously been written down to
$1,000,000 as a result of the liquidation and receivership of such purchaser.
The net proceeds were applied to reduce the outstanding principal balance of the
Company's long-term loan with its senior lender.
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. As part of the
consideration to Foothill for the amendment, the Company is obligated to pay a
monthly facility fee of $50,000 commencing November 30, 1996.
The Company's obligations to Foothill are secured by substantially all of
the assets of the Company and its subsidiaries. The agreement with Foothill
requires the Company to continue to meet certain financial covenants. At June
30, 1996, the Company is in compliance with its covenants under the agreement.
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 19.4 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.
As of June 30, 1996, approximately $31,060,000 principal amount of the
Debentures, net of unamortized discount of $3,295,000 and $2,778,000 of accrued
interest payable was exchanged for 602,564 shares of the Company's common stock
and $23,830,000 principal amount of Notes pursuant to the Exchange Offer. The
unsecured Notes do not bear interest and there are no sinking fund
requirements.
As of June 30, 1996, the Company had remaining outstanding $4,522,000 of
Debentures, net of original issue discounts amortized to principal over the term
of the debt using the effective interest rate method, of $493,000. The face
amount of the outstanding Debentures was $5,015,000.
Page 11 of 17 pages
<PAGE>
Financial Condition (continued)
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of June 30, 1996 amounted to $603,000. As of June 30, 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 June 30,
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 have not been
exchanged at June 30, 1996 is approximately $300,000.
On March 12, 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. 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 was 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.
As of June 30, 1996 certain claims have been resolved and funds have been
disbursed from the escrow account to reduce the balance to $920,000.
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 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.
Results of Operations
The Company's sales for the six months ended June 30, 1996 compared to the
six months ended June 30, 1995 decreased $6,315,000 (19%) and the sales for the
quarter ended June 30, 1996 decreased by $3,593,000 (21%) compared to the
quarter ended June 30, 1995. The primary reasons were reduced OSS revenue and
the sale of the fiber optics business in March 1996.
OSS revenue was decreased by $3,763,000 and $4,190,000 for the six and
three months ended June 30, 1996, respectively. This reduced volume is due to
lower levels of sales of our Korea joint venture partner and to a lesser extent
sales to British Telecommunications plc.
The line connection/protection equipment sales for the six months ended
June 30 decreased by approximately $3,400,000 from 1995 to 1996. This decline
reflected the sale of the fiber optics division in March 1996. Sales of fiber
optics products were $452,000 and $3,684,000 for the six months ended June 30,
1996 and 1995, respectively.
Line connection/protection equipment revenue for the June 1996 quarter did
not materially change, but the product mix within this category changed from the
same quarter last year. Copper products increased approximately $1,300,000 from
last year's quarter. There were no fiber optic sales for the quarter ended June
30, 1996 compared to $1,415,000 of fiber sales for the quarter ended June 30,
1995 (see Note 3).
Page 12 of 17 pages
<PAGE>
Results of Operations (continued)
Cost of sales for the six months and the quarter ended June 30, 1996, as a
percentage of sales compared to the same periods of 1995, decreased from 78% to
66% and from 85% to 65%, respectively. This improvement in gross margin is
attributed to the Company's continuing 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.
Selling, general and administration expenses decreased by $2,547,000 (29%)
from $8,734,000 to $6,187,000 for the six months ended June 30, 1996 compared to
1995. For the quarter ended June 30, 1996 and 1995 selling, general and
administration expenses decreased by $944,000 (24%). This reduction reflects the
Company's efforts to reduce personnel costs and associated expenses, especially
in the area of sales and marketing support, the elimination of the expenses
associated with the fiber business and to a lesser extent, a reversal of a
December 1995 accrued expense of approximately $342,000 (see Note 4).
Research and development expenses decreased by $630,000 (26%) and by
$228,000 (20%) for the six and three months ended June 30, 1996 from the
comparable periods in 1995, respectively. This reduced cost reflects the
Company's efforts to streamline its operations by focusing on those projects
with the highest potential for success and to a lesser extent, the elimination
of those expenses related to fiber activities.
As a result of the above, for the six months ended June 30, 1996 compared
to 1995, the Company had operating income of $1,128,000 versus an operating loss
of $3,837,000. The Company had an operating income of $1,073,000 for the quarter
ended June 30, 1996 as compared to a loss of $2,350,000 from operations for the
quarter ended June 30, 1995. The Company's operating improvement for the six
months and the quarter ended June 30, 1996, when compared to the comparable
periods ended June 30, 1995, were the results of its continuing efforts to bring
its costs and expenses in line with its current level of sales and the sale of
the fiber optics business.
Interest expense decreased for the six months ended June 30 by $584,000
from $3,810,000 in 1995 to $3,226,000 in 1996. For the quarter ended June 30,
interest expense decreased by $836,000 from $1,884,000 in 1995 to $1,048,000 in
1996. This change is attributable primarily to a decrease in interest expense
related to the exchange of the Company's Debentures and repayment of principal
to the Company's senior lender from the proceeds of the sale of the fiber
business and the sale of common stock issued in respect of the sale of
discontinued operations. (see Notes 3 and 4). These reductions of interest
expense are offset by an increase in interest expense associated with increased
borrowing costs.
During the six month period ended June 30, 1996, the Company recorded a
$3,390,000 gain from the early extingushment of approximately 86% of its
Debentures. Of this gain, $357,000 was recognized in the second quarter of 1996
as an additional 6% of the Debentures were exchanged (See Note 8). During the
six month period ended June 30, 1995, the Company recorded an extraordinary gain
of $1,871,000 arising from the Company's repurchase from its senior lender and
retirement of $3,900,000 of its Debentures for approximately $2,500,000.
Page 13 of 17 pages
<PAGE>
Results of Operations (continued)
During the quarter ended June 30, 1996, the Company received $3,456,000
from the sale of common stock issued in respect of the obligations of the
purchaser of the discontinued operations resulting in a gain of $2,264,000 (see
Note 3). During the quarter ended June 30, 1995, the Company recorded a
$3,500,000 loss from the sale of discontinued operations. At that time the best
estimate for recovery was $1,000,000 as a result of the liquidation and
receivership of the purchaser of such operations.
As the result of the foregoing the Company generated net income of
$3,843,000, $0.90 per share for the six months ended June 30, 1996 compared with
a net loss of $9,966,000, $6.97 per share, for the six months ended June 30,
1995 and net income for the quarter ended June 30, 1996 of $2,978,000, $0.77 per
share and a net loss for the quarter ended June 30, 1995 of $8,106,000, $5.67
per share. The calculation of the weighted average shares, for the period and
quarter ended June 30, 1996, assumes the conversion of the Notes which are
considered to be a common stock equivalent.
Page 14 of 17 pages
<PAGE>
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
(a) During the quarter ended June 30, 1996, the Company settled its
previously disclosed class actions. The settlement includes a cash payment by
the Company's insurers and issuance by the Company of 220,000 shares of its
common stock, to be distributed in accordance with a Plan of Allocation, also
approved by the Court. Following a settlement fairness hearing, the Court
approved the settlement in an order dated June 18, 1996. As part of the
settlement, the Company has been released from all claims where were or could
have been asserted in the class actions and all such claims against the
defendants have been dismissed with prejudice. In connection with the
settlement, the Company recorded a charge to income of $1,100,000 in the fourth
quarter of 1995, representing an estimation of the market value of the shares to
be issued.
(b) In July 1996, an action was commenced in the Supreme Court of the State
of New York, New York County by certain stockholders and warrant holders of the
Company who acquired their securities in connection with the acquisition by the
Company of Aster Corporation against the Company and certain present and former
directors. The complaint alleges breach of contract against the Company and
breach of fiduciary against the directors arising out of an alleged failure to
register certain restricted shares and warrants owned by the plaintiffs. The
complaint seeks damages of $62,000; however, counsel for the plaintiff have
advised the Company that additional plaintiffs may be added and, as a result,
the amount of damages claimed may be substantially greater than the amount
presently claimed. The Company believes that the defendants have valid defenses
to the claims.
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 19.4 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 June 30, 1996, the Company exchanged approximately $31,060,000
principal amount of the Debentures, net of unamortized discount of $3,295,000
for 3,012,820 shares of the Company's common stock and $23,830,000 principal
amount of Notes pursuant to the Exchange Offer.
Item 3. Defaults Upon Senior Securities.
As of June 30, 1996 the Company is in default under the interest payment
provisions of its 6% Convertible Subordinated Debentures due July 1, 2002. See
Note 7 to the unaudited quarterly financial statements.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's 1996 Annual Meeting of Stockholders was held on June 6, 1996.
At the annual meeting, the stockholders (I) reelected its present board,
consisting of Messrs. Warren H. Esanu, Howard D. Brous, Herbert H. Feldman,
Stanley Kreitman, William V. Carney and Michael A. Tancredi, (ii) approved an
amendment to its certificate of incorporation to change the authorized capital
stock by increasing the number of authorized shares of common stock from
20,000,000 shares to 40,000,000 shares (iii) approved a one-for-five reverse
split of the common stock, (iv) approved the 1996 Stock Option Plan and (v)
ratified the appointment of KPMG Peat Marwick LLP as independent auditors for
the year ended December 31, 1996.
Page 15 of 17 pages
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders (continued).
Each director received at least 8,025,927 votes for his election. Set forth
below is the vote on the other matters approved at the meeting.
Matter Votes for Votes Against Abstentions
------ --------- ------------- -----------
Amendment to Certificate
of Incorporation 8,526,496 528,761 22,377
Reverse Split 8,718,875 332,819 25,940
1996 Stock Option Plan 8,376,870 599,736 101,028
Appointment of Auditors 8,852,467 93,033 34,072
Item 5. Other Information.
(a) The Company was advised by the staff of the Securities and Exchange
Commission (SEC) that it is the SEC staff's position that the independence of
the Company's current auditors, KPMG Peat Marwick L.L.P., is adversely impacted
by certain relationships involving the auditors and KPMG BayMark Strategies LLC,
and Mr. Edward R. Olson, the President of KPMG BayMark who is also serving as
the Company's interim president and chief operating officer. In connection with
the SEC's position on the independence of the auditors, the SEC has issued an
order directing a private investigation of the Company.
The only question raised by the staff concerns the independence of the
auditors in connection with the Company's 1995 financial statements. The Company
has been advised by KPMG Peat Marwick that the accounting firm disagrees with
the staff's position on the independence issue. The SEC staff has not made any
claim that the Company acted improperly in preparing its 1995 financial
statements. Under the circumstances, the Company is arranging to have its 1995
financial statements reaudited by another nationally recognized accounting firm.
The Company does not believe that such reaudit will result in any change from
the 1995 financial statements previously filed in the Company's 10-K Annual
Report.
(b) On August 2, 1996, the one-for-five reverse split of the common stock
became effective. As a result of the reverse split, each share of common stock
outstanding on such date automatically became converted into two-tenths of a
share of common stock. The par value of the common stock was not affected. See
Note 10 to Consolidate Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
A current report on form 8-K (Item 5), dated June 25, 1996, was filed.
Page 16 of 17 pages
<PAGE>
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 August 12, 1996 By /s/Warren H. Esanu
------------------------
Warren H. Esanu
Chairman of the Board
Dated August 12, 1996 By /s/Edward B. Kornfeld
---------------------------
Edward B. Kornfeld
Vice President and Chief Financial Officer
Page 17 of 17 pages
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,049
<SECURITIES> 0
<RECEIVABLES> 13,292
<ALLOWANCES> 0
<INVENTORY> 8,177
<CURRENT-ASSETS> 24,166
<PP&E> 6,074
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,168
<CURRENT-LIABILITIES> 24,282
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> (22,203)
<TOTAL-LIABILITY-AND-EQUITY> 49,168
<SALES> 13,642
<TOTAL-REVENUES> 13,642
<CGS> 8,861
<TOTAL-COSTS> 3,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,015
<INCOME-PRETAX> 227
<INCOME-TAX> 0
<INCOME-CONTINUING> 357
<DISCONTINUED> 2,264
<EXTRAORDINARY> 357
<CHANGES> 0
<NET-INCOME> 2,978
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
