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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
<PAGE>
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
<PAGE>
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
<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 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
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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0
0
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<OTHER-SE> (25,756)
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<INCOME-PRETAX> (2,265)
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