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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
For the fiscal year ended December 31, 1995
Commission file number 1-8191
PORTA SYSTEMS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2203988
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
575 Underhill Boulevard, Syosset, New York 11791
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 364-9300
Purpose of Amendment: To include financial statements for the year ended
December 31, 1995 certified by BDO Seidman LLP, independent certified public
accountants (Item 8), and in connection therewith, to file amended Items 6 and
7.
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<PAGE>
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
information of the Company. For further information, see the Consolidated
Financial Statements and other information set forth in Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth in Item 7. All share and per share data have been restated to to give
effect to the one for five reverse stock split effective August 2, 1996.:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales $ 61,181 $ 68,985 $ 68,141 $ 68,993 $ 81,957
Operating
income (loss) (19,884) (17,541) (3,916) (11,466) 8,971
Income (loss) before
discontinued operations
and extraordinary
item (29,297) (39,995) (7,493) (8,539) 6,930
Net Income(loss) (31,041) (39,995) (9,545) (14,977) 8,498
Income (loss) per share from
continuing
operations $ (20.05) $ (28.05) $ (5.40) $ (6.20) $ 5.30
Cash dividends
declared -- -- -- -- --
Number of shares used in
calculating net income
(loss) per share 1,461 1,427 1,382 1,378 1,311
Balance Sheet Data:
Total Assets $ 60,591 $ 84,963 $ 109,948 $ 130,345 $ 107,303
Long-term debt
excluding current
maturities $ 55,389 $ 57,310 $ 49,931 $ 34,205 $ 20,430
Stockholders' (deficit)
equity ($ 29,323) $ 1,525 $ 39,841 $ 49,486 $ 65,809
</TABLE>
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Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations.
The Company's consolidated statements of operations for the three years
ended December 31, 1995 as a percentage of sales follows:
Years Ended December 31,
1995 1994 1993
---- ---- ----
Sales 100% 100% 100%
Cost of sales 92% 90% 73%
---- ---- ----
Gross Profit 8% 10% 27%
Selling, general and
administrative expenses 27% 29% 24%
Research and development expenses 10% 6% 9%
Litigation settlement 2% -- --
Writedown of net assets sold 1% -- --
Operating loss (33%) (25%) (6%)
Interest expense (14%) (8%) (7%)
Interest income -- -- --
Other (1%) (3%) (4%)
---- ----
Loss from continuing
operations before income
taxes and minority interest (47%) (36%) (17%)
Income tax (benefit) expense -- 22% (6%)
---- ---- ----
Loss before discontinued
operations (48%) (58%) (11%)
Provision for loss on disposal
of discontinued operations 6% -- (3%)
Extraordinary gain on early
extinguishment of debt 3% -- --
---- ---- ----
Net loss (51%) (58%) (14%)
==== ==== ====
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Financial Condition
The Company's working capital changed from $13,700,000 at December 31, 1994
to a working capital deficit of $8,200,000 at December 31, 1995. At September
30, 1995, the Company had a working capital deficit of $48,900,000. The
improvement in working capital from September 30, 1995 primarily results from
the following transactions regarding the Company's debt:
In March 1996, the Company's loan and security agreement with its senior
secured lender, Foothill Capital Corporation ("Foothill"), was amended. Pursuant
to the amendment, the Company's obligations were extended from November 1996 to
November 1998 and defaults at December 31, 1995 and through the date of the
amendment, were waived by Foothill. As a result, the Company's indebtedness to
Foothill, which was reflected as a current liability of $26,500,000 at September
30, 1995, is treated as a long-term liability of $26,600,000 at December 31,
1995.
In addition, as a result of a default under the interest payment provisions
of the Company's 6% Subordinated Debentures due 2002 (the "Debentures"), the
Company's obligations under the Debentures, which were reflected as a
$32,000,000 current liability at September 30, 1995, would have also been
reflected as a current liability at December 31, 1995. However, as a result of
an exchange offer (the "Exchange Offer") which, as of October 14, 1996, had been
accepted by the holders of approximately 94% of the outstanding Debentures, the
Company issued its new zero coupon notes due January 2, 1998 (Note) and shares
of common stock in exchange for Debentures. The Company is classifying as
current liabilities at December 31, 1995, $6,600,000 of Debentures which have
not been exchanged, and the $25,700,000 of Debentures exchanged as a long-term
liability, consistent with the payment terms of the Notes as of March 22, 1996.
As a result of the Exchange Offer, as of October 14, 1996, the Company
issued its new zero coupon notes in the aggregate principal amount of
$25,900,000 and issued 655,000 shares of Common Stock in exchange for Debentures
in the principal amount of $33,770,000. As of such date, the principal amount of
Debentures outstanding was $2,305,000. The Company is in default on payment of
interest on the Debentures which were not exchanged. The Company has no past or
ongoing interest obligation with respect to either the new zero coupon notes or
the Debentures which were exchanged. The aggregate annual interest obligation on
the Debentures which had not been converted at October 14, 1996 is approximately
$138,000, as compared with the $2,200,000 aggregate annual interest obligation
with respect to the Debentures which were outstanding prior to the Exchange
Offer.
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On March 13, 1996, the Company consummated an agreement pursuant to which
it sold certain assets and the buyer assumed certain liabilities and severance
obligations related to the operations of the Company's fiber optics management
and component business. Accordingly, at December 31, 1995, the net assets of the
fiber optics business are reflected as "assets held for sale, net" at net
realizable value, based on the terms of the sale. The net assets of the fiber
optics business were sold for a total purchase price of approximately
$8,000,000, of which $1,100,000 is held in escrow, subject to certain
conditions, plus the assumption of approximately $1,400,000 in liabilities. The
proceeds were applied to reduce the Company's obligations to Foothill in
accordance with the March 1996 amendment to the Foothill agreement.
The sale of the fiber optics business benefited the Company in two ways.
First the sale of this business enabled the Company to close two facilities,
with a resultant decrease in personnel and overhead costs, the benefits of which
are expected to be realized commencing with the second quarter of 1996. Second,
the sale enabled the Company to amend and extend its agreement with Foothill, as
described above, and make a significant payment to Foothill, which reduces its
ongoing interest costs.
The Company's obligations to Foothill are secured by substantially all of
the assets of the Company and its subsidiaries. The agreement with Foothill was
extended for two years, and the Company is no longer in default under its
agreement with Foothill. The agreement with Foothill requires the Company to
continue to meet certain financial covenants. See Note 11 of Notes to
Consolidated Financial Statements.
Inventory was reduced from $20,100,000 at December 31, 1994 to $9,000,000
at December 31, 1995. This decrease resulted from an inventory reduction program
during 1995 and a $1,800,000 increase in the reserve for slow-moving or obsolete
inventory at December 31, 1995. In addition, as a result of its illiquid
condition, certain vendors ceased shipping to the Company while others required
cash before delivery or cash on delivery. In addition, the inventory relating to
the Company's fiber optics business, amounting to $1,400,000, is included in
"Assets held for sale" at December 31, 1995.
Capital expenditures in 1995 were $1,479,000. The Company does not have any
significant commitments at December 31, 1995 to acquire fixed assets.
The Company's liquidity problems have resulted in increased cost of sales,
resulting in lower gross profits. The gross margin for 1995 is 8%, and the gross
profit of $4,700,000 is significantly less than either selling, general and
administrative expenses of $16,600,000 and research and development expenses of
$6,100,000. Accordingly, without a significant reduction of cost of goods sold,
the Company will not be able to operate profitably. To address this situation,
the Company has consummated the above transactions in 1996 to reduce costs and
is reviewing options to reduce other costs and operating expenses.
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The Company continues to require cash for its operations. Foothill has
provided the Company with funds to meet its immediate cash needs. However,
unless the Company can reverse the negative trends in its operations, it may be
unable to obtain cash from any sources, including Foothill. Although the Company
has no plans to sell any of its remaining operations, no assurance can be given
that it will not be necessary for the Company to do so. The failure of the
Company to obtain cash when needed is likely to continue to have an adverse
effect on its business.
Results of Operations
Years Ended December 31, 1995 and 1994
The Company's continued shortage of working capital has had a material
adverse effect upon its operations during 1995. The effects of the working
capital shortage were compounded by the Company's defaults during 1995 under its
agreement with Foothill, which resulted in curtailment of certain advances and
letter of credit facilities. Although the defaults were waived as a result of a
March 1996 amendment to the agreement with Foothill, during most of 1995, the
Company was in default under its agreement with Foothill. Although Foothill
provided the Company with cash to meet its immediate needs, its failure to
provide additional advances and letter of credit facilities adversely affected
the Company's operations. In March 1996, the Company sold its fiber optics
business. Substantially all of the proceeds from the sale were used to reduce
the Company's obligations to Foothill.
The Company's sales for 1995 decreased by 11% from 1994 sales, as the
Company experienced continuing liquidity problems which adversely affected the
Company's operations. Sales of OSS products were $29,000,000, a 35% increase
from OSS sales of $21,500,000 in 1994, principally as a result of increased
sales to BT and sales in the Asian market. Sales of copper connection products
decreased by $8,200,000, or 29%, from $28,600,000 in 1994 to $20,400,000 in
1995. The reduction in such sales reflects a reduction in sales to Telefonos de
Mexico, which accounted for sales of $4,600,000 in 1994 and virtually no sales
in 1995, a $1,600,000 reduction in sales of copper connection products to BT, as
well as the effects of reduced production resulting from the Company's working
capital problems. The Company believes that the significantly reduced sales to
Telefonos de Mexico is due in part to the continuing Mexican financial crisis.
However, no assurance can be given that any improvement in the Mexican economy
will result in increased sales of the Company's products.
Sales of fiber optics products declined by $5,700,000, or 47%, from
$12,200,000 in 1994 to $6,500,000 in 1995. The decline reflects the Company's
inability to produce fiber optics products as a result of its financial
problems, as the Company allocated its resources principally to the OSS and
copper connection businesses. This allocation of resources also reflected the
Company's decision late in 1995 to sell the fiber optics business. Sales of
fiber optics products in the fourth quarter of 1995 were less than $1,000,000.
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<PAGE>
Sales from signal processing products, representing approximately 8% of
1995 sales, were also hampered by the Company's ongoing financial difficulties.
Cost of sales in 1995, as a percentage of sales, increased slightly from
1994, from 90% of sales in 1994 to 92% of sales in 1995. As a result of the high
cost of sales, the gross profit for 1995 was $4,700,000, which was significantly
less than selling, general and administrative expenses and research and
development expenses. The high cost of sales reflected (i) a lower volume of
sales, (ii) the inability of the Company to purchase efficiently and to obtain
materials from certain suppliers, (iii) the under-absorption of overhead costs,
(iv) modification of inventory in order to fulfill customer orders, and (v)
significant writedown of fiber optics inventory reflecting the value of such
inventory in connection with the sale of the fiber optics business in March
1996. In addition, as part of the Company's ongoing evaluation of its inventory
and based on its 1995 level of sales, the Company increased its inventory
reserve by approximately $1,800,000 for slow-moving or obsolete inventory. Steps
taken to reduce manufacturing labor costs by reductions in direct and indirect
manufacturing personnel were not implemented until late in the second quarter of
1995 and are reflected in cost of sales in the third and fourth quarters. The
reduction of facility, personnel and overhead costs from the sale of the fiber
optics business will first be reflected in the second quarter of 1996.
Selling, general and administrative expenses decreased by $3,400,000, or
17%, from $20,000,000 in 1994 to $16,600,000 in 1995. The expense decrease
reflects the Company's efforts to reduce personnel costs, as well as a reduced
level of sales and marketing activities. To some extent, the effects of the
personnel reduction were offset by severance costs incurred during 1995.
Research and development expenses increased by $2,100,000, from $4,000,000
in 1994 to $6,100,000 in 1995, or 53%. The increase reflected a reduction in the
amount of software development costs which qualified for capitalization.
In 1995, the Company incurred expenses of $1,100,000, reflecting the value
of the Company's common stock to be issued as a result of the settlement of
class actions. See "Item 3. Legal Proceedings." In addition, in 1995, the
Company wrote down the net assets of its fiber optics business to net realizable
value to reflect the price at which the assets were sold in March 1996.
As a result of the foregoing, the Company sustained an operating loss of
$19,900,000, an increase of 14% from the operating loss of $17,500,000 in 1994.
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Interest expense increased $2,900,000, or 52%, from $5,600,000 in 1994 to
$8,500,000 in 1995. The increase in interest expense reflects substantially
higher average interest rates and increased borrowings under the Company's
agreement with Foothill as compared with the interest rate and borrowings under
the Company's prior agreement with Chemical Bank. Although most of the increased
borrowings reflect additional borrowings for operations, $2,500,000 of the
additional borrowings result from the purchase by the Company of Debentures
which were purchased from Foothill in connection with the March 1995 amendment
to the Foothill agreement.
Other expenses of approximately $900,000 include costs associated with the
modification of the Company's agreement with Foothill in March 1995. Other
expenses in 1994 related to the restructuring of the Company's secured debt when
Foothill took over Chemical Bank's note from the Company and the terms of the
financing were modified.
Income tax expense for 1995 was nominal, reflecting primarily offshore and
Delaware corporate taxes. The $14,900,000 tax expense in 1994 results from
providing a valuation allowance for deferred income taxes.
The $3,500,000 loss from the sale of discontinued operations reflects a
reduction in the amount of the expected recovery from the sale by the Company in
1993 of its Israeli subsidiaries which were engaged in the manufacture of data
communications connecting equipment. As a result of a receivership and
liquidation proceedings involving the purchaser of the subsidiaries, the
estimated recovery from the sale of such operations was reduced from $4,500,000,
which was the estimated recovery at December 31, 1994, to $1,000,000, which is
the estimated recovery at December 31, 1995. The Company's receivable was
represented by shares of common stock of the entity which now owns the
discontinued operation. During the quarter ended June 30, 1996, the Company sold
the shares of this common stock for $3,456,000. As such the Company recorded a
gain of $2,264,000 on disposal of discontinued operations.
In connection with the February 1995 amendment to the Company's agreement
with Foothill, the Company repurchased from Foothill and retired $3,900,000
principal amount of Debentures for approximately $2,500,000 through an increase
of $3,000,000 in the term loan to Foothill and the repricing of certain warrants
granted to Foothill. The Company recorded an extraordinary item, a gain of
$1,800,000 million on early extinguishment of this debt, representing the
difference between the book value of the debt and the approximate market value
of the debt on the date of the transaction.
As a result of the foregoing, the Company sustained a loss from continuing
operations in 1995 of $29,300,000, or $20.05 per share, as compared with a loss
from continuing operations in 1994 of $40,000,000, or $28.05 per share. After
giving effect to the loss on sale of discontinued operations and the gain on
early extinguishment of debt, the Company sustained a net loss of $31,000,000,
or $21.25 per share, for 1995, as compared with a net loss of $40,000,000, or
$28.05 per share, in 1994.
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In March 1996, the Company sold the net assets of its fiber optics
business, amended its agreement with Foothill and reduced its indebtedness to
Foothill. In addition, through October 14, 1996, the Company issued its zero
coupon notes in the principal amount of $25,900,000 and issued 655,000 shares of
Common Stock in exchange for $33,770,000 principal amount of Debentures and
accrued interest of $1,600,000 at December 31, 1995, pursuant to the Exchange
Offer. These transactions enabled the Company to reduce its facilities and
personnel expenses, reduce the indebtedness to Foothill and reduce ongoing
interest costs. However, the benefits to the Company from the reduction in
operating costs, including reductions resulting from the sale of the fiber
optics business, and the reduced interest expense will not enable the Company to
operate profitably unless it is able to significantly reduce its cost of goods
sold or increase its sales margins and reduce its general overhead, as to which
no assurance can be given.
Years Ending December 31, 1994 and 1993
Sales from continuing operations for the full year ended December 31, 1994
compared to 1993 were up 1% primarily due to increased sales in each of the
first three quarters of 1994 compared to the similar periods of 1993. The
Company's sales from continuing operations for the fourth quarter of 1994 were
substantially below expectations, notwithstanding adequate backlog, due to the
continuation of the shipment delays caused by persistent and worsening parts
shortages associated with the reductions in borrowing availability under the
Company's borrowing agreement with its Senior Lender, and a product mix which
resulted in shipment of lower priced and margined products. In addition, the
Company's fourth quarter 1994 OSS sales were generally and adversely impacted by
the intercreditor disagreement which resulted in the Company allocating working
capital toward product manufacture in connection with the contract in order to
fulfill its agreement with its customer and slowing performance on other
contracts in the field due to resulting scarce working capital resources.
Sales of OSS equipment during the year ended December 31, 1994 were
$21,500,000 compared to $17,700,000 in 1993, an increase of 21%, due primarily
to increased sales during 1994 by the Company's Korean joint venture subsidiary.
While sales of fiber optic connection/protection products for the year ended
December 31, 1994 increased to $12,151,000 compared to $8,854,000 in 1993, sales
of fiber optic connection/protection products during the fourth quarter of 1994
were adversely affected by the reductions in working capital availability
discussed above. Sales of copper connection/protection products decreased 16%
during the year ended December 31, 1994 compared to 1993 due in part to shipment
delays caused by persistent parts shortages during the three months ended
September 30, 1994 (which accelerated in the three months ended December 31,
1994) resulting from the reductions in working capital availability under the
Restated Credit Agreement, as well as the inability of a supplier to ship parts
meeting quality standards required by the Company. While shipments to British
Telecommunications plc had fallen during the three months ended September 30,
1994, the Company was able to increase its shipments to this customer during
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<PAGE>
the fourth quarter of 1994. The Company's backlog for copper products
significantly increased during this period due to increased orders for these
products. Also, the Company's sales to Telefonos de Mexico, which were
denominated in Mexican pesos and which were expected to be approximately the
same in 1994 as in 1993 but more evenly distributed over all four quarters of
the year, were adversely affected in early December 1994 by the Mexican economic
crisis which caused the Company to temporarily halt shipments to Telefonos de
Mexico pending negotiations with Telefonos de Mexico to determine the increased
pricing consequences of such economic crisis. Sales of other products, primarily
Signal Processing products, in the year ended December 31, 1994 were slightly
higher than sales during 1993 although sales of other products in the third and
fourth quarters of 1994 were also somewhat affected by the operational
inefficiencies resulting from the reductions in working capital availability.
The dollar amount of cost of sales for the year ended December 31, 1994
increased approximately $13,000,000 or 26% compared to 1993. Cost of sales as a
percentage of sales for the year ended December 31, 1994 compared to 1993
increased to 91% from 73%. The dollar amount of cost of sales for the third and
fourth quarters of 1994 compared to the similar periods of 1993 and to the
Company's historical cost of sales experience were particularly high and
negatively impacted the entire year's results due to the unfavorable impact on
the Company's operational costs of the reductions in working capital
availability under the Restated Credit Agreement, the effect of the Company's
concentrated effort to reduce inventories and the sale of lower margin products
in order to generate cash internally to address such reductions in externally
available working capital. In addition, the substantial contribution of the
Company's joint venture in Korea, which sells lower margin OSS products, to OSS
equipment sales tended to increase cost of sales as a percentage of sales. The
Company's operational costs were additionally affected by manufacturing
inefficiencies resulting from materials shortages, smaller productions runs,
higher per unit purchasing and freight costs as well as increased numbers of
employees and idle labor manufacturing time and maintenance of a fixed level of
expenses associated with the support of a higher level of OSS equipment sales
than actually resulted in 1994. While the Company's effort to reduce inventories
resulted in increased cash flow in the third and fourth quarters of 1994, the
consequences of this effort was higher labor costs related to rework of
inventory and reduced margins associated with the sale of certain slow moving
inventory at unfavorable prices. Also, the Company's aggressive inventory
reduction program caused it to conclude, after sales of such inventory, that no
easily accessible and significant market remained for certain of its copper
products in the markets traditionally accessed by the Company or which the
Company would reasonably be able to access in the near term given the
restructuring and cost cutting moves described elsewhere. Accordingly, the
Company determined to make a $2,000,000 provision for such products. In
addition, the Company has made a provision for approximately $2,000,000 of high
density frames which it has in stock due to its discovery that such high density
frames contain defective parts sold to it by a vendor. The Company is presently
considering taking action against such vendor to recoup its losses resulting
from such defective parts.
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The dollar amount of selling, general and administrative expenses in the
year ended December 31, 1994, increased by 22% compared to 1993, while selling,
general and administrative expenses as a percentage of sales increased by 20%
during the year ended December 31, 1994 compared to 1993. Selling, general and
administrative expenses were significantly higher during the last quarter of
1994 compared to 1993 due to the costs of servicing its Asia/Pacific marketplace
and selling associated with the European market and commission costs. In
addition, the impact of certain one time costs associated with the pursuit of
substitute financing, the costs of defense of certain lawsuits which the Company
was defending during these periods and the costs of settlement of one of these
lawsuits increased selling, general and administrative expenses during the year
ended December 31, 1994.
Research and development expenses for the year ended December 31, 1994
compared to 1993 decreased significantly, both as a dollar amount and as a
percentage of sales, in part because of a reduction in staff and related costs
due primarily to the consolidation of research and development activities
previously conducted separately by companies acquired in prior periods and in
part because of lower research and development requirements for the Company's
more mature products.
The Company's operating loss for the year ended December 31, 1994 is
primarily attributable to a number of factors, including a shortfall in the
volume of sales, a cost structuring for a much larger level of sales, an
inability to adjust the organization to deal with the sales shortfall, the
reductions in availability of working capital, inventory reduction program, and
transaction costs related to both the Restated Credit Agreement and the New
Credit Agreement.
The Company's operating loss for the year ended December 31, 1993 was
$3,916,000 and reflected an improving operational trend during the last six
months of the year. A substantial portion of this operating loss was due to low
volumes of production in comparison to manufacturing capacity, as well as, costs
associated with strategic investments in OSS and fiber optic areas being made by
the Company. In addition, and consistent with the Company's cost of sales, the
mix of product sales contributed to the extent of the loss.
Interest expense for the year ended December 31, 1994 compared to 1993
increased due to higher average interest rates although such higher average
rates were offset by a slightly lower borrowing level during most of 1994
compared to 1993. Interest expenses increased substantially during 1993 compared
to 1992 due to substantially increased debt used to finance the Company's
operating losses and a full year's interest on the 6% Convertible Subordinated
Debentures.
As reported, other expenses for the year ended December 31, 1994 compared
to 1993 decreased. However, such 1994 expenses included various advisory fees
required as a result of the Company's relationship with its lending banks and
fees related to the costs of the Company's financing with both its lending banks
and its new senior lender, which were partially offset by a $ 313,000 gain from
the satisfaction of the bank obligations.
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Other expenses for the year ended December 31, 1993 are predominantly
comprised of various advisory fees relating to the negotiation and finalization
of the Restated Credit Agreement as well as fees related to the Company's
unsuccessful efforts to acquire a telecommunications manufacturing business of
another company.
The Company adopted Financial Accounting Standard No. 109 effective January
1, 1992 and, as of December 31, 1993, had recognized a deferred tax asset of
$13,955,000, principally relating to the Company's net operating loss
carryforwards. In the third quarter of 1994, the Company, after reviewing the
deferred tax asset in the context of its results of operations for such third
quarter, recorded a valuation allowance in the entire amount of such deferred
tax asset, which is included in 1994 income tax expense. As a result, the
Company recorded income tax expense of $14,920,000 for the year ended December
31, 1994 compared to income tax benefit of $3,885,000 in 1993, principally
relating to operating losses for United States income tax purposes. The decision
to record such valuation allowance in 1994 was based on the criteria contained
in Financial Accounting Standard No. 109, generally requiring a valuation
allowance when cumulative losses have been experienced and there is a lack of
sufficient objective offsetting evidence to conclude that it is more likely than
not that the deferred tax asset will be utilized.
New Accounting Standards
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation", which must be
adopted by the Company in 1996. The Company has elected not to implement the
fair value based accounting method for employee stock options, but has elected
to disclose, commencing in 1996, the pro-forma net income and earnings per share
as if such method had been used to account for stock-based compensation cost as
described in the Statement.
In March 1995, The FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which must also be adopted by the Company in 1996. The effect of adopting this
standard will be insignificant.
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Item 8. Financial Statements and Supplementary Data
Index Page
- ----- ----
Report of Independent Certified Public Accountants 13
Independent Auditors' Report 14
Consent of Independent Certified Public Accountants 15
Consent of Independent Auditors 16
Consolidated Financial Statements and Notes:
Consolidated Balance Sheets,
December 31, 1995 and 1994 17
Consolidated Statements of Operations
for the Years Ended
December 31, 1995, 1994 and 1993 18
Consolidated Statements of Stockholders'
Equity (Deficit) for the Years Ended
December 31, 1995, 1994 and 1993 19
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995,
1994 and 1993 20
Notes to Consolidated Financial Statements 21
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Report of Independent Certified Public Accountants
The Board of Directors and
Stockholders of Porta Systems Corp.:
We have audited the accompanying consolidated balance sheet of Porta Systems
Corp. and subsidiaries as of December 31, 1995, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Porta Systems Corp.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's recurring losses from
operations and working capital and net capital deficiencies raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO SEIDMAN, LLP
Mitchel Field, New York
October 14, 1996
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Independent Auditors' Report
The Board of Directors and Stockholders
Porta Systems Corp.:
We have audited the accompanying consolidated balance sheet of Porta Systems
Corp. and subsidiaries as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Reference is made to note 2 of notes to the consolidated financial statements
with respect to liquidity and management's plans with regard thereto.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Porta Systems Corp.
as of December 31, 1994, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Jericho, New York
March 31, 1995
-14-
<PAGE>
Consent of Independent Certified Public Accountants
Board of Directors
Porta Systems Corp.:
We consent to the incorporation by reference in the registration statements:
(Reg. No. 2-95117) on Form S-8, (Reg No. 2-65375) on Form S-8, (Reg. No.
33-12146) on Form S-8 and (Reg. No. 33-41992) on Form S-8 of Porta Systems Corp.
and subsidiaries of our report dated October 14, 1996, relating to the
consolidated balance sheet of Porta Systems Corp. and subsidiaries as of
December 31, 1995 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1995, which report appears in the Porta Systems Corp. annual report on Form
10-K. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
BDO Seidman, LLP
Mitchel Field, New York
October 31, 1996
-15-
<PAGE>
Consent of Independent Auditors
Board of Directors
Porta Systems Corp.:
We consent to the incorporation by reference in the registration statements;
(Reg. No. 2-95117) on Form S-8, (Reg No. 2-65375) on Form S-8, (Reg. No.
33-12146) on Form S-8 and (Reg. No. 33-41992) on Form S-8 of Porta Systems Corp.
and subsidiaries of our report dated March 31, 1995, relating to the
consolidated balance sheet of Porta Systems Corp. and subsidiaries as of
December 31, 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1994, which report appears in the Porta Systems Corp. annual
report on Form 10-K.
KPMG PEAT MARWICK LLP
Jericho, New York
March 31, 1995
-16-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets
1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,109 2,332
Accounts receivable - trade, less allowance for doubtful
accounts of $1,251 in 1995 and $585 in 1994 12,626 13,964
Inventories 8,979 20,146
Prepaid expenses 659 1,020
Receivable from sale of discontinued operations 1,000 --
-------- --------
Total current assets 24,373 37,462
-------- --------
Assets held for sale, net 7,893 --
Property, plant and equipment, net 6,911 11,139
Receivable from sale of discontinued operations -- 4,500
Deferred computer software, net 3,188 6,257
Goodwill, net of amortization of $2,265 in 1995 and $2,192 in 1994 11,793 19,032
Other assets 6,433 6,573
-------- --------
Total assets $ 60,591 84,963
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Convertible subordinated debentures $ 6,564 --
Accounts payable 8,302 9,690
Accrued expenses 10,502 6,065
Accrued interest payable 3,534 1,414
Accrued commissions 2,016 2,180
Income taxes payable 780 478
Customer advances 504 2,525
Notes payable -- 1,237
Short-term loans 368 152
-------- --------
Total current liabilities 32,570 23,741
-------- --------
Long-term debt 26,645 21,000
Convertible subordinated debentures 25,660 35,073
Notes payable net of current maturities 3,084 1,237
Income taxes payable 811 1,330
Other long-term liabilities 385 400
Minority interest 759 657
-------- --------
Total long-term liabilities 57,344 59,697
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value; authorized 1,000,000 shares, none issued -- --
Common stock, par value $.01; authorized 20,000,000 shares,
issued 1,492,361 shares in 1995 and 1994 15 15
Additional paid-in capital 33,308 32,948
Foreign currency translation adjustment (4,199) (4,031)
Accumulated equity (deficit) (56,074) (25,033)
-------- --------
(26,950) 3,899
Treasury stock, at cost, 33,340 and 30,940
shares in 1995 and 1994, respectively (2,066) (1,938)
Receivable for employee stock purchases (307) (436)
-------- --------
Total stockholders' equity (deficit) (29,323) 1,525
-------- --------
Total liabilities and stockholders' equity (deficit) $ 60,591 84,963
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-17-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sales $ 61,181 68,985 68,141
Cost of sales 56,444 62,530 49,539
-------- -------- --------
Gross profit 4,737 6,455 18,602
-------- -------- --------
Selling, general and administrative expenses 16,556 20,037 16,443
Research and development expenses 6,103 3,959 6,075
Litigation settlement 1,100 -- --
Write-down of net assets held for sale to net realizable value 862 -- --
-------- -------- --------
Total expenses 24,621 23,996 22,518
-------- -------- --------
Operating loss (19,884) (17,541) (3,916)
Interest expense (8,484) (5,617) (4,813)
Interest income 87 251 357
Other, net (884) (2,022) (2,985)
-------- -------- --------
Loss from continuing operations before
income taxes and minority interest (29,165) (24,929) (11,357)
Income tax expense (benefit) 30 14,920 (3,885)
Minority interest (102) (146) (21)
-------- -------- --------
Loss before discontinued operations (29,297) (39,995) (7,493)
Provision for loss on disposal of discontinued operations (3,500) -- (2,052)
-------- -------- --------
Loss before extraordinary item (32,797) (39,995) (9,545)
Extraordinary gain on early extinguishment of debt 1,756 -- --
-------- -------- --------
Net loss $(31,041) (39,995) (9,545)
======== ======== ========
Per share amounts:
Continuing operations $ (20.05) (28.05) (5.40)
Discontinued operations (2.40) -- (1.50)
Extraordinary item 1.20 -- --
-------- -------- --------
Net loss per share $ (21.25) (28.05) (6.90)
======== ======== ========
Weighted average shares outstanding 1,461 1,427 1,382
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-18-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
Receivable Total
Foreign Retained for Stock-
Common Stock Additional Currency Earnings Employee holders'
No. of Par Value Paid-in Translation (Accumulated Treasury Stock Equity/
Shares Amount Capital Adjustment Deficit) Stock Purchases (Deficit)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 1,411 $ 14 $ 29,514 $ (2,102) $ 24,507 $ (1,938) $ (509) $ 49,486
Net loss 1993 -- -- -- -- (9,545) -- -- (9,545)
Stock issued 5 -- 92 -- -- -- -- 92
Repayments of receivable -- -- -- -- -- -- 11 11
Warrants issued -- -- 604 -- -- -- -- 604
Foreign currency translation
adjustment -- -- -- (807) -- -- -- (807)
----------------------------------------------------------------------------------------
Balance at December 31, 1993 1,416 14 30,210 (2,909) 14,962 (1,938) (498) 39,841
Net loss 1994 -- -- -- -- (39,995) -- -- (39,995)
Stock issued 76 1 2,138 -- -- -- -- 2,139
Warrants issued -- -- 600 -- -- -- -- 600
Write off of receivable for
employee stock purchases -- -- -- -- -- -- 62 62
Foreign currency translation
adjustment -- -- -- (1,122) -- -- -- (1,122)
----------------------------------------------------------------------------------------
Balance at December 31, 1994 1,492 15 32,948 (4,031) (25,033) (1,938) (436) 1,525
Net loss 1995 -- -- -- -- (31,041) -- -- (31,041)
Warrants issued -- -- 360 -- -- -- -- 360
Write off of receivable for
employee stock purchases -- -- -- -- -- (128) 129 1
Foreign currency translation
adjustment -- -- -- (168) -- -- -- (168)
----------------------------------------------------------------------------------------
Balance at December 31, 1995 1,492 $ 15 $ 33,308 $ (4,199) $(56,074) $ (2,066) $ (307) $(29,323)
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
-19-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(31,041) (39,995) (9,545)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Loss on disposal of discontinued operations 3,500 -- 2,052
Gain on extinguishment or refinancing of indebtedness (1,756) (913) --
Non-cash financing costs 2,698 600 202
Deferred income taxes -- 13,955 (4,841)
Depreciation and amortization 7,015 5,580 5,416
Write off of employee notes receivable 1 62 --
Amortization of discount on convertible subordinated debentures 603 442 426
Minority interest 102 163 21
Changes in assets and liabilities:
Accounts receivable 1,338 2,598 4,640
Inventories 9,700 8,047 1,613
Prepaid expenses (773) (328) 178
Other assets 1,916 (330) (1,857)
Accounts payable, accrued expenses and other liabilities 4,167 10,414 (4,621)
-------- -------- --------
Net cash (used in) provided by operating activities (2,530) 295 (6,316)
-------- -------- --------
Cash flows from investing activities:
Capital additions, net of minor disposals (1,749) (1,107) (1,559)
Repayment of employee loans -- -- 11
-------- -------- --------
Net cash used in investing activities (1,749) (1,107) (1,548)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 5,781 24,212 22,897
Repayments of debt (2,500) (22,299) (19,397)
Proceeds from issuance of common stock -- 2,139 92
Repayments of notes payable/short-term loans -- (1,162) (9,942)
-------- -------- --------
Net cash provided by (used in) financing activities 3,281 2,890 (6,350)
-------- -------- --------
Effect of exchange rate changes on cash (225) (1,473) (807)
(Decrease) increase in cash and cash equivalents (1,223) 605 (15,021)
Cash and equivalents - beginning of year 2,332 1,727 16,748
-------- -------- --------
Cash and equivalents - end of year $ 1,109 2,332 1,727
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 2,915 4,196 4,135
======== ======== ========
Cash paid for income taxes $ 73 128 80
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-20-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
Porta Systems Corp. (the "Company") designs, manufactures and markets
systems for the connection, protection, testing and administration of
public and private telecommunications lines and networks. The Company
has various patents for copper and software based products and systems
that support voice, data, image and video transmission. The Company's
principal customers are the U.S. regional telephone operating companies
and foreign telephone companies.
The accompanying consolidated financial statements include the accounts of
Porta Systems Corp. (the "Company") and its majority-owned or controlled
subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
Revenue Recognition
Revenue, from other than contracts for specialized products, is recognized
when a product is shipped. Revenues and earnings relating to long-term
contracts for specialized products are recognized on the
percentage-of-completion basis primarily measured by the attainment of
milestones. Anticipated losses, if any, are recognized in the period
determined.
Cash Equivalents
The Company considers investments with original maturities of three months
or less at the time of purchase to be cash equivalents. Cash equivalents
consist of commercial paper.
Inventories
Inventories are stated at the lower of cost (on the average or first-in,
first-out methods) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Leasehold improvements
are amortized over the term of the lease. Depreciation is computed using
the straight-line method over the related assets' estimated lives.
Deferred Computer Software
Software costs incurred for specific customer contracts are charged to cost
of sales at the time revenues on such contracts are recognized. Software
development costs relating to products the Company offers for sale are
deferred in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86 "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed". These costs are amortized to cost of
sales over the periods that the related product will be sold, up to a
maximum of four years. Amortization of computer software costs, which
all relate to products the Company offers for sale, amounted to
approximately $3,171,000, $1,847,000 and $1,414,000 in 1995, 1994, and
1993, respectively.
(Continued)
-21-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Goodwill
Goodwill represents the difference between the purchase price and the fair
market value of net assets acquired in business combinations treated as
purchases. Goodwill is amortized on a straight-line basis over 18 to 40
years. At December 31, 1995, $7,242,000 of the goodwill is being
amortized over approximately 18 years and $4,551,000 is being amortized
over 40 years. The Company assesses the recoverability of unamortized
goodwill using the undiscounted projected future cash flows from the
related businesses.
Income Taxes
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements that will result in taxable or deductible amounts
in future years. Further, the effects of enacted tax law or rate changes
are included in income as part of deferred tax expense or benefit for
the period that includes the enactment date.
Puerto Rico income taxes were accrued prior to September 30, 1993 on income
earned by a subsidiary of the Company which had operated in Puerto Rico
based on a ten year 90% industrial tax exemption effective for periods
subsequent to May 28, 1987. The Company's subsidiary operating in Puerto
Rico was liquidated by merger on September 30, 1993 (see note 9).
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at year-end
rates of exchange, and revenues and expenses are translated at the
average rates of exchange for the year. Gains and losses resulting from
translation are accumulated in a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than the functional
currency) are included in net income or loss.
Earnings (Loss) Per Share
Earnings per share are based on the weighted average number of shares
outstanding and common equivalent shares arising from dilutive
unexercised stock options. Loss per share is based on the weighted
average number of shares outstanding. Fully diluted earnings per share
information is not presented as it is anti-dilutive. All share and per
share data have been restated to give effect to the one for five reverse
stock split effective August 2, 1996 (See note 23).
Reclassifications
Certain reclassifications have been made to conform prior years'
consolidated financial statements to the 1995 presentation.
(Continued)
-22-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates
included in these consolidated financial statements are the estimated
allowance for doubtful accounts receivable, inventory reserves, and the
deferred tax asset valuation allowance. Actual results could differ from
those and other estimates.
(2) Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. In 1995 and
1994, the Company experienced a lack of liquidity. In addition, the
Company's recurring losses from operations and working capital and net
capital deficiencies raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do
not include any adjustments that might arise from the outcome of this
uncertainty.
The Company, to enhance its liquidity, sold the net assets related to its
fiber optics business in March 1996 (note 4). This sale raised
approximately $8 million of cash and the acquiring company assumed
approximately $1,400,000 of liabilities. The sale of this business,
which in 1995 and prior years sustained significant losses, eliminated a
considerable operating cash drain. A majority of the proceeds from the
sale were used to pay down a portion of the Company's debt, which in
turn will reduce ongoing interest costs and provide the Company with
working capital through the ability to then restructure its senior debt.
In addition, through October 14, 1996, the Company exchanged
approximately 94% of its 6% subordinated convertible debt for
non-interest bearing notes. This will reduce interest expense by
approximately $2,000,000 per year. In addition, the Company is reviewing
various options in which it can streamline operations or further reduce
operating expenses to enhance the Company's ability to attain profitable
operations.
(Continued)
-23-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Discontinued Operations
In 1992, the Company recorded the sale of its network communications
business, for which it received $3,750,000 in cash and cash equivalents
plus promissory notes, which after an additional provision for loss on
disposal of discontinued operations of $2,052,000 in 1993, had a balance
of $4,500,000.
During the second quarter of 1995, an ongoing dispute regarding the selling
price of this business was resolved. As a result, the $4,500,000
receivable was reduced to $1,000,000 which resulted in an additional
provision for loss on disposal of discontinued operations of $3,500,000.
The remaining receivable at December 31, 1995 is collateralized, at the
option of the Company, by either a $750,000 standby letter of credit or
approximately 54,000 shares of common stock of the entity which acquired
the business from receivership. Such shares are held in escrow and have
a fair value of $1,387,000 at December 31, 1995 based on quoted market
prices. As of October 14, 1996, such shares have been sold (see note
23).
(4) Assets Held for Sale
On March 13, 1996, the Company consummated an agreement pursuant to which
it sold certain assets and the buyer assumed certain liabilities and
severance obligations related to the operations of the Company's fiber
optics management and component business for $7,893,000, subject to
certain adjustments. The Company continues to be liable for certain
liabilities amounting to approximately $700,000, related to its fiber
optics facilities in Ireland. The Company received $6,793,000 at closing
and the remainder was placed into two escrow funds to be released over
the next year, subject to certain conditions, including a final
valuation of the net assets transferred. The proceeds were primarily
used to repay long-term debt (note 11). As a result of the transaction,
the Company recorded a charge to operations in 1995 of $862,000 to write
down the net assets sold to net realizable value. Net sales of the fiber
optics business approximated $6,513,000, $12,150,000, and $8,654,000 for
1995, 1994 and 1993, respectively.
Net assets held for sale at net realizable value as of December 31, 1995
consists of the following:
Inventory $ 1,467,000
Fixed assets 1,510,000
Deferred computer software 319,000
Goodwill 5,897,000
Other assets 115,000
Accounts payable and accrued liabilities (1,415,000)
-----------
$ 7,893,000
===========
(Continued)
-24-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Joint Venture
The Company entered into a joint venture agreement as of April 24, 1986
with a Korean partner. Unless otherwise terminated in accordance with
the joint venture agreement, the joint venture will terminate on
December 31, 2010. In addition, the Company has entered into an
agreement with its joint venture partner whereby the Company has
obtained an option, exercisable for approximately $2,300, to purchase an
additional 1% interest in Woo Shin Electro-Systems Co. (Woo Shin), which
would increase the Company's ownership percentage to 51%. The Company
consolidates the operations of Woo Shin since the Company can obtain a
controlling interest at its election for a nominal sum and Woo Shin is
entirely dependent on the Company for the products it sells as well as
receiving management assistance from the Company. The interest in the
joint venture not owned by the Company is shown as a minority interest.
(6) Inventories
Inventories consist of the following:
December 31,
----------------------------
1995 1994
----------- -----------
Parts and components $ 5,370,000 11,838,000
Work-in-process 849,000 1,854,000
Finished goods 2,760,000 6,454,000
----------- -----------
$ 8,979,000 20,146,000
=========== ===========
(7) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
------------------------- Estimated
1995 1994 useful lives
----------- ----------- -------------
Land $ 246,000 246,000 --
Buildings 2,358,000 2,288,000 20 years
Machinery and equipment 8,426,000 15,149,000 5-8 years
Furniture and fixtures 3,379,000 5,057,000 5-10 years
Transportation equipment 240,000 372,000 4 years
Tools and molds 4,233,000 5,501,000 8 years
Leasehold improvements 827,000 3,539,000 Term of lease
Construction in progress -- 35,000
----------- ------------
19,709,000 32,187,000
Less accumulated depreciation
and amortization 12,798,000 21,048,000
----------- ------------
$ 6,911,000 11,139,000
=========== ============
Total depreciation and amortization expense for 1995, 1994 and 1993
amounted to approximately $3,610,000, $3,242,000 and $2,996,000,
respectively.
(Continued)
-25-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Accounts Receivable
Accounts receivable included approximately $1,146,000 and $2,246,000 at
December 31, 1995, and 1994, of revenues earned but not yet
contractually billable relating to long-term contracts for specialized
products. All such amounts at December 31, 1995, are expected to be
billed in the subsequent year. The allowance for doubtful accounts
receivable was $1,251,000 and $585,000 as of December 31, 1995 and 1994
respectively. The allowance for doubtful accounts was increased by
provisions of $864,000, $318,000, and $434,000 and decreased by
writeoffs of $198,000, $144,000, and $187,000 for the years ended
December 31, 1995, 1994, and 1993, respectively.
(9) Income Taxes
Included in loss from continuing operations is income (loss) from foreign
operations of $1,272,000, $(920,000) and $2,253,000, for 1995, 1994 and
1993, respectively.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Current Deferred Current Deferred Current Deferred
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal $ (98,000) -- 800,000 12,670,000 -- (4,598,000)
State and foreign 128,000 -- 165,000 1,285,000 956,000 (243,000)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 30,000 -- 965,000 13,955,000 956,000 (4,841,000)
========== ========== ========== ========== ========== ==========
</TABLE>
A reconciliation of the Company's income tax provision and the amount
computed by applying the statutory U.S. federal income tax rate of 34%
to loss before income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Tax benefit at statutory rate $(10,554,000) (8,526,000) (3,861,000)
Increase (decrease) in income tax
benefit resulting from:
Increase in valuation allowance 10,741,000 22,219,000 --
Benefit of Puerto Rico industrial
tax exemption -- 813,000 (152,000)
State and foreign taxes, less
applicable federal benefits 132,000 147,000 645,000
Other (289,000) 267,000 (517,000)
------------ ------------ ------------
$ 30,000 14,920,000 (3,885,000)
============ ============ ============
</TABLE>
(Continued)
-26-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The per common share effect of the income tax savings from the Puerto Rico
industrial tax exemption for 1993 was $.10. The Company has unused
United States tax net operating loss carryforwards of approximately
$72,000,000 expiring at various dates between 2003 and 2010. In
addition, the Company has net operating loss carryforwards arising from
acquired companies of approximately $9,878,000. The carryforward amounts
are subject to review by the Internal Revenue Service (IRS). As a result
of the sale of the Company's fiber optics business (note 4) in March,
1996, the above net operating loss carryforwards and acquired net
operating loss carryforwards will be reduced by $1,969,000 and
$6,592,000, respectively. In addition, there are investment, research
and development and job tax credit carryforwards of approximately
$1,300,000 expiring at various dates between 1996 and 2001.
The Company's net operating loss carryforwards expire in the following
years:
2003 $ 187,000
2007 13,062,000
2008 17,291,000
2009 18,125,000
2010 23,335,000
-----------
$72,000,000
===========
The components of the deferred tax assets and liabilities as of December
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory allowances $ 4,157,000 3,508,000
Allowance for doubtful accounts receivable 359,000 102,000
Benefits of tax loss carryforwards 27,755,000 19,226,000
Benefit plans 1,593,000 968,000
Alternative minimum taxes 293,000 293,000
Depreciation 122,000 --
Other 30,000 458,000
Benefits of tax loss carryforwards of
acquired businesses 3,479,000 3,479,000
Differences between tax basis and book basis
of net assets of businesses acquired 3,165,000 3,165,000
------------ ------------
40,953,000 31,199,000
Valuation allowance (39,604,000) (28,863,000)
------------ ------------
1,349,000 2,336,000
------------ ------------
Deferred tax liabilities:
Capitalized software costs (1,349,000) (1,821,000)
Depreciation -- (515,000)
(1,349,000) (2,336,000)
$ -- --
============ ============
</TABLE>
(Continued)
-27-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In the third quarter of 1994, the Company, after reviewing the deferred tax
asset in the context of its results of operations for such third
quarter, recorded a valuation allowance in the entire amount of its then
existing deferred tax asset, which is included in income tax expense.
This decision was based on the criteria contained in SFAS No. 109,
generally requiring a valuation allowance when cumulative losses have
been experienced and there is a lack of sufficient objective offsetting
evidence to conclude that it is more likely than not that the deferred
tax asset will be utilized.
During 1993, the Company repatriated all undistributed accumulated earnings
of its subsidiary operating in Puerto Rico through a liquidation of such
subsidiary by means of a merger into the Company. No United States
income taxes were payable upon remittance of these earnings. Repatriated
earnings accumulated prior to May 28, 1987 are not subject to tax by the
Commonwealth of Puerto Rico; earnings accumulated subsequent to May 28,
1987 are subject to a maximum 10% tax at repatriation. In 1993 as part
of the liquidation, the Company repatriated $24,279,000 in earnings
accumulated prior to May 28, 1987 and $2,482,000 of earnings accumulated
subsequent to May 28, 1987.
The income tax returns of the Company and its subsidiary operating in
Puerto Rico were examined by the IRS for the tax years ended December
31, 1989 and 1988. As a result of this examination, the IRS increased
the Puerto Rico subsidiary's taxable income resulting from intercompany
transactions, with a corresponding increase in the Company's net
operating losses. The settlement amounted to approximately $953,000. The
Company has entered into a structured settlement with the IRS whereby
monthly payments will be made along with certain scheduled balloon
payments through February 1997. Aggregate annual amounts payable by the
Company, including interest on the unpaid amounts at a current rate of
7%, are $514,000 in 1996 and $223,000 in 1997. As of December 31, 1995,
the Company has not made all the required payments under the settlement.
The income tax returns of the Company and its subsidiary operating in
Puerto Rico were examined by the IRS for the tax years ended December
31, 1991 and 1990. As a result of this examination, the IRS increased
the Puerto Rico subsidiary's taxable income resulting from intercompany
transactions, with a corresponding increase in the Company's net
operating losses. In settlement of this examination, the Company revoked
its Section 936 election and included its subsidiary in the Company's
tax return. Accordingly, the adjustments were offset resulting in no
deficiency.
(10) Notes Payable and Short-Term Loans
The Company has outstanding $3,084,000 and $2,474,000 of non-interest
bearing deferred funding fee notes payable with its senior lender,
included in notes payable at December 31, 1995 and 1994, respectively.
As of December 31, 1995 these deferred funding fees are due on November
30, 1998 (note 11). The Company's Korean subsidiary also has short-term
borrowings with banks at December 31, 1995 and 1994 of $368,000 and
$152,000, respectively, bearing interest at 11%.
(Continued)
-28-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Long-Term Debt
On December 31, 1995 and 1994, the Company's long-term debt consisted of
senior debt under its credit facility in the amount of $26,645,000 and
$21,000,000, respectively.
On November 28, 1994, and as amended on February 13, 1995, the Company
consummated a financing arrangement with a senior lender whereby the
senior lender provided the Company advances under a revolving line of
credit up to the lesser of $10 million or a borrowing base equal to 80%
of eligible accounts receivable and 50% of eligible inventory, less the
amount of letters of credit and letter of credit guarantees outstanding,
and a $13,502,188 term loan. If the Company sells its Glen Cove real
property, the first $1 million of proceeds must be used to reduce the
term loan. In addition, on February 13, 1995 the senior lender provided
the Company with an advance under a net worth enhancement (NWE) line of
credit of $3 million. The senior lender agreed to issue standby letters
of credit or guarantees of payment in an amount not to exceed the lesser
of $8 million or the borrowing base less the amount outstanding on the
revolving line of credit. If the senior lender must make an advance
under a letter of credit or letter of credit guarantee, such amount will
be deemed outstanding under the revolving line of credit. The credit
facility is secured by substantially all of the Company's assets. All
obligations except undrawn letters of credit, letter of credit
guarantees and the deferred fee notes will bear interest at 12%. The
Company will incur a fee of 2% on the average balance of undrawn letters
of credit and letter of credit guarantees outstanding.
As of December 31, 1995, the Company violated certain financial covenants
and was in default of its agreement with its senior lender. On March 13,
1996, the Company entered into an agreement to extend its Loan and
Security Agreement with its senior lender from November 30, 1996 to
November 30, 1998, which also provided for a waiver of all previous
events of default. The agreement provides for loan principal payments of
$250,000 on each of June 30, 1997, September 30, 1997 and December 31,
1997, and $325,000 commencing March 31, 1998 and on the last day of each
quarter thereafter during the term of the agreement. Commencing June 30,
1997, the agreement requires the Company to pay additional principal
payments if certain "adjusted cash flow amounts", as defined, are
attained. The March, 1996 amendment also requires that certain proceeds
from the Company's sale of its fiber optics business (note 4), including
$6,793,000 received at closing, the first $100,000 disbursed from escrow
to the Company and 50% of any additional amounts disbursed to the
Company, must be paid directly to the senior lender. The $6,793,000
received at closing was used to pay accrued interest through March 31,
1996, repay the $3,000,000 NWE line of credit and the remainder
partially repaid the principal balance of the term loan. Upon the
payment on March 13, 1996, the lender made available to the Company a
$2,000,000 revolving line of credit. Simultaneously, and in accordance
with the amended agreement, the revolving line of credit maximum amount
was reduced from $10,000,000 to $2,000,000 and the maximum available for
letters of credit or guarantees was reduced from $8,000,000 to
$7,000,000. The outstanding balance of the term loan and revolving line
of credit was approximately $20 million and approximately $900,000,
respectively, after all the above transactions.
(Continued)
-29-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Through March 22, 1996, the Company incurred the following fees, in
connection with this credit facility: In 1994, a one-time $2,474,000
deferred funding fee for the revolving line and term loan evidenced by a
non-interest bearing promissory note due and payable on November 30,
1998, (as of December 31, 1994, $1,237,000 was due in 1995 before the
March, 1996 amendment to the agreement). The Company incurred a $300,000
NWE fee on February 13, 1995, evidenced by a non-interest bearing note
due November 30, 1998 and a $310,000 facility fee on November 30, 1995,
which amount has been added to the outstanding principal balance of the
deferred funding fee note and is also due November 30, 1998. In
consideration of the extension of the facility term to November 30,
1998, the agreement requires a monthly facility fee payment of $50,000,
commencing November 30, 1996, and continuing to the end of the
agreement. In addition to the fees, the Company incurred a $550,000
investment banking fee and attorney and filing fees amounting to
$319,000 included in other nonoperating expenses in 1994.
In connection with the credit facility, in November, 1994 the Company
issued warrants to its senior lender to purchase 55,000 shares of common
stock, immediately exercisable at $17.20 per share and expiring in
November 1999, together with warrants to purchase 27,500 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 200,000 shares of common stock at $5 per share that expire in
March 2001. All such warrants provide the senior lender demand and
"piggyback" registration rights.
Financial debt covenants include an interest coverage ratio measured
quarterly commencing with the quarter ending June 30, 1996, limitations
on the incurrence of indebtedness, limitations on capital expenditures,
and prohibitions on declarations of any cash or stock dividends or the
repurchase of the Company's stock.
In connection with the amendment to the agreement on February 13, 1995, the
Company purchased from the senior lender $3.9 million principal amount
of its 6% Subordinated Debentures for approximately $2.5 million,
including accrued interest. Such payment was financed with funds
received from the increase in the term loan. The Company recorded an
extraordinary gain on the early extinguishment of the debt of
$1,756,000. Such gain represented the excess of the book value over the
market value of the debt with the premium paid in excess of the market
value of the debt of $782,000 reflected as additional borrowing costs
over the remaining term of the facility.
Maturities of the Company's long-term debt, including convertible
subordinated debentures (exclusive of $6,564,000 which are in default
and have not been exchanged as described in note 12 and are classified
as a current liability) and notes payable net of current maturities, are
as follows:
1997 $ 750,000
1998 54,639,000
-----------
$55,389,000
===========
(Continued)
-30-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) 6% Convertible Subordinated Debentures
As of December 31, 1995 and 1994 the Company had outstanding $32,224,000
and $35,073,000 of its 6% convertible Subordinated Debentures due July
1, 2002 (the Debentures), net of original issue discounts amortized to
principal over the term of the debt using the effective interest rate
method, of $3,851,000 and $4,927,000, respectively. The face amount of
the outstanding Debentures was $36,075,000 and $40,000,000 at December
31, 1995 and 1994, respectively. The Debentures are convertible at any
time prior to maturity, unless previously redeemed, into Common Stock of
the Company at a conversion rate of 8.333 shares for each $1,000
principal amount at maturity of Debentures, subject to adjustment under
certain circumstances.
The Debentures are redeemable at the option of the Company, (a) in whole or
in part, at redemption prices ranging from 89.626% of principal amount
at maturity beginning July 1, 1995 to 100% of principal amount at
maturity beginning July 1, 2001 and thereafter, together with accrued
and unpaid interest to the Redemption Date, and (b) in whole at any
time, at a redemption price equal to the issue price plus interest and
that portion of the original issue discount and interest accrued to the
redemption date, in the event of certain changes in United States
taxation or the imposition of certain certification, information or
other reporting requirements.
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of December 31, 1995 and 1994 amounted to $3,244,000 and
$1,200,000, respectively. As of December 31, 1995 the Company is in
default under the interest payment provisions of the Debentures.
On November 30, 1995, the Company offered the holders of its Debentures an
exchange of such debt for common stock and zero coupon senior
subordinated convertible notes (the Notes) due January 2, 1998. The
exchange ratio is 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. The Company may be
required to file a registration statement for the common stock and Notes
issued in the exchange. In addition, the Board of Directors of the
Company, approved an amendment to the Company's certificate of
incorporation increasing the authorized common stock from 20 million to
40 million shares (see note 23).
(Continued)
-31-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The unsecured Notes will not bear interest and there are no sinking fund
requirements. Each Note is convertible into common stock at a conversion
price of $9.25 per share until May 1, 1996 and then at decreasing prices
to $6.55 per share on November 1, 1996 and thereafter. Accordingly, in
addition to the 699,855 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 4,225,600.
The Notes are redeemable at the option of the Company at 79.48% of the
principal balance increasing periodically to 100% of the principal
balance on November 1, 1997.
Subsequent to December 31, 1995 and through March 22, 1996, the Company
exchanged approximately $28,725,000 principal amount of the Debentures,
net of unamortized discount of $3,065,000, for 557,265 shares of the
Company's common stock and $22,038,000 principal amount of Notes
pursuant to the Exchange Offer. Accordingly, the Debentures exchanged,
which were outstanding at December 31, 1995, have been classified as a
long-term liability, consistent with the payment terms of the Notes.
Since the remaining principal amount of $7,350,000 with a carrying value
of $6,564,000 of Debentures not exchanged are in default, such debt has
been classified as a current liability at December 31, 1995. See note 23
for exchanges subsequent to March 22, 1996.
The exchange of the Debentures for the Notes and common stock will be
accounted for as a troubled debt restructuring in accordance with
Statement of Financial Accounting Standards No. 15. Since the future
principal and interest payments under the Notes is less than the
carrying value of the Debentures, The Notes will be recorded for the
amount of the future cash payments, and not discounted, and an
extraordinary gain on restructuring of approximately $3 million will be
recorded. Accordingly, no future interest expense will be recorded on
the Notes.
(13) Leases
At December 31, 1995, the Company and its subsidiaries leased manufacturing
and administrative facilities, equipment and automobiles under a number
of operating leases. The Company is required to pay increases in real
estate taxes on the facilities in addition to minimum rents. Total rent
expense for 1995, 1994, and 1993 amounted to approximately $1,277,000,
$1,397,000 and $1,468,000, respectively. Minimum rental commitments,
exclusive of future escalation charges, for each of the next five years
are as follows:
1996 $ 547,000
1997 399,000
1998 328,000
1999 312,000
2000 273,000
(Continued)
-32-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Incentive Plans
Under the Company's 1984 Employee Incentive Plan, the Company provided an
opportunity to acquire subordinated convertible debentures to certain
employees of the Company and its subsidiaries. The debentures bore
interest at 1% over the prime rate. These debentures on issuance were
convertible into a specified number of shares of Common Stock. The
conversion price was the fair market value on the date of purchase of
the debentures. Under the 1984 Plan, if requested, the Company loaned a
purchaser of a debenture all or part of the cash necessary to make such
a purchase. Any such loan was evidenced by a full recourse
interest-bearing promissory note payable to the Company for the amount
borrowed. This plan was suspended when the Company's stockholders
approved the Company's 1986 Stock Option Plan.
As of December 31, 1995, there is $307,000 of employee promissory notes
receivable outstanding related to debentures that were converted to
common stock. The maturity date of the notes was extended to April 1996.
At December 31, 1995, the majority of such notes receivable have had the
payment of interest forgiven. During 1993, $48,600 principal amount of
debentures was converted into 1,080 shares of Common Stock and $378,000
principal amount of debentures and $378,000 of loans incurred therewith
matured in accordance with their terms and were repaid by the Company
and employees, respectively. During 1995, the Company wrote off $128,000
of notes receivable and took possession of the related shares held as
collateral. Accordingly, the balance of the note has been recorded as an
addition to treasury stock.
In 1986, the stockholders of the Company approved the Company's 1986 Stock
Incentive Plan (1986 Plan), subsequently amending it to permit the
granting of options to purchase up to 170,000 shares of Common Stock to
employees of the Company and its 50% or more owned subsidiaries whom the
Company's Compensation Committee (Committee) determines are eligible for
such grants.
Options granted under the 1986 Plan may be incentive stock options, as
defined in the Internal Revenue Code, or options which are not incentive
stock options. If options granted are incentive stock options, the
option price payable upon exercise is determined by the Committee at the
time the option is granted but will not be less than 100% of the fair
market value of the Common Stock on the date of grant and will be 110%
of such fair market value on the date of grant if the individual who
receives such option is the owner of 10% or more of the Company's Common
Stock. Incentive stock options are not exercisable more than ten years
from the date of grant, except that, in the case of an incentive stock
option granted to an individual who owns 10% or more of the Company's
Common Stock, such option must be exercised within 5 years of the date
of grant. If options which are not incentive stock options are granted,
the option price at the time of exercise may not be less than 50% of the
fair market value at the time the option is granted. Options under the
1986 Plan may be subject to exercise in such installments as determined
by the Committee. The exercise price for all options granted was equal
to the fair market value at the date of grant.
(Continued)
-33-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Information regarding the 1986 Plan is as follows:
Shares Option
under option price
-------- ----------------
Balance, December 31, 1992 123,182 37.8125 - 110.00
Exercised (500) 37.8125 - 54.375
Canceled (42,352) 37.8125 - 110.00
-------- ----------------
Balance, December 31, 1993 80,330 37.8125 - 87.50
Granted 2,000 49.375
Exercised (200) 37.8125
Canceled (1,355) 65.625 - 86.25
-------- ----------------
Balance, December 31, 1994 80,775 37.8125 - 87.50
Granted 6,000 5.00
Canceled (30,415) 37.8125-87.50
Balance, December 31, 1995 56,360 5.00-87.50
======== ================
At December 31, 1995, options to purchase 50,360 shares were exercisable
and there were 105,115 options available for grant under the 1986 plan.
(15) Employee Benefit Plans
The Company has deferred compensation agreements with certain officers and
employees, with benefits commencing at retirement equal to 50% of the
employee's base salary, as defined. Payments under the agreements will
be made only after a participant's employment with the Company
terminates and then for a period of fifteen years following the earlier
of attainment of age 65 or death. During 1995, 1994 and 1993, the
Company accrued approximately $203,000, $191,000 and $162,000,
respectively, under these agreements.
In 1986, the Company established the Porta Systems Corp. 401(k) Savings
Plan (Savings Plan) for the benefit of eligible employees, as defined in
the Savings Plan. Participants contribute a specified percentage of
their base salary up to a maximum of 15%. The Company will match a
participant's contribution by an amount equal to 75% (subsequently
changed to 25% as of January 1, 1996) of the first six percent
contributed by the participant. A participant is 100% vested in the
balance to his credit. For the years ended December 31, 1995, 1994 and
1993, the Company's contribution amounted to $379,000, $417,000 and
$475,000, respectively.
The Company does not provide any other post-retirement benefits to any of
its employees.
(Continued)
-34-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Stockholders' Equity
During 1993, the Company issued warrants to purchase 31,000 shares of
Common Stock to certain consultants as partial remuneration for services
provided. Warrants to purchase 27,000 shares were issued at an exercise
price approximating the fair market value at the date of grant and
warrants to purchase the remaining 4,000 shares of Common Stock were
issued at an exercise price of $5.00 per share. In connection with the
issuance of these warrants, the Company recorded an expense of $202,000.
Also, during 1993, warrants to purchase 4,000 shares of Common Stock at
$5.00 per share were exercised.
During 1994, the Company issued warrants to purchase 82,500 shares of
common stock at an exercise price of $17.20 per share to its senior
lender that expire in November, 1999, and warrants to purchase 53,000
shares of common stock at an exercise price of $17.50 per share to its
former lenders in return for a discount with respect to the repayment of
its debt. In connection with the issuance of these warrants, the Company
recorded deferred financing costs of $360,000 and an expense of
$600,000, respectively. In March 1996, the Company, in connection with
an agreement to amend and extend certain long-term debt, issued warrants
to purchase 200,000 shares of common stock at an exercise price of $5.00
per share that expire March, 2001 (note 11). As of March 22, 1996, all
warrants issued to lenders are exercisable.
In June 1994, pursuant to a private placement to certain offshore
investors, the Company sold an aggregate of 75,000 shares of
unregistered common stock and two-year warrants to acquire 37,500 shares
of common stock at an exercise price of $55 per share. The Company
received proceeds of $2,131,750 net of expenses.
(17) Shareholder Rights Plan
The Company has adopted a Shareholder Rights Plan in which preferred stock
purchase rights were distributed to stockholders as a dividend at the
rate of one right for each common share. Each right entitles the holder
to buy from the Company one one-hundredth of a newly issued share of
Series A junior participating preferred stock at an exercise price of
$175.00 per right.
The rights will be exercisable only if a person or group acquires
beneficial ownership of 20 percent or more of the Company's Common Stock
or commences a tender or exchange offer upon consummation of which such
person or group would beneficially own 20 percent or more of the Common
Stock.
If any person becomes the beneficial owner of 20 percent or more of the
Company's Common Stock other than pursuant to an offer for all shares
which is fair to and otherwise in the best interests of the Company and
its stockholders, each right not owned by such person or related parties
will enable its holders to purchase, at the right's then current
exercise price, shares of Common Stock of the Company (or, in certain
circumstances as determined by the Board of Directors, a combination of
cash, property, common stock or other securities) having a value of
twice the right's exercise price. In addition, if the Company is
involved in a merger or other business combination transaction with
another person in which its shares are changed or converted, or sells
more than 50 percent of its assets to another person or persons, each
right that has not previously been exercised will entitle its holder to
purchase, at the right's then current exercise price, common shares of
such other person having a value of twice the right's exercise price.
(Continued)
-35-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company will generally be entitled to redeem the rights, by action of a
majority of the continuing directors of the Company, at $.05 per right
at any time until the tenth business day following public announcement
that a 20 percent position has been acquired.
(18) Fair Values of Financial Instruments
Cash equivalents, accounts receivable, accounts and notes payable, accrued
expenses and short-term loans are reflected in the consolidated
financial statements at fair value because of the short term maturity of
these instruments.
The carrying amount of the Company's long-term debt approximates fair
value as the extension of the Loan and Security Agreement was
renegotiated on March 13, 1995 with similar terms to those that existed
at December 31, 1995.
The carrying amount and estimated fair value of the Company's additional
financial instruments are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------
Carrying Estimated
amount fair value
----------- -----------
<S> <C> <C>
Receivable from sale of discontinued operations $ 1,000,000 1,370,000
----------- -----------
Convertible subordinated debentures $32,224,000 12,626,000
=========== ===========
</TABLE>
The estimated fair value of the receivable from the sale of discontinued
operations is based upon the quoted market price of the shares of common
stock collateralizing the receivable. Management's estimated fair value
of the convertible subordinated debentures is based on market prices
obtained from dealers of such debt.
(19) Major Customers
Consolidated sales made to a Korean telephone company amounted to
$7,651,000, $9,599,000 and $3,330,000 in 1995, 1994 and 1993,
respectively. Sales made to a United Kingdom telephone company in 1995,
1994 and 1993 amounted to $17,252,000, $11,566,000 and $12,713,000,
respectively. Sales made to a Mexican telephone company in 1995, 1994
and 1993 amounted to $41,000, $4,987,000 and $7,257,000, respectively.
(20) Contingencies
At December 31, 1995, the Company was contingently liable for outstanding
letters of credit aggregating approximately $5,323,000 as security for
the performance of certain long-term contracts and the borrowing from a
bank of its Korean subsidiary.
The Company is a party to various lawsuits arising out of the ordinary
conduct of its business. Management believes that the settlement of
these matters will not have a materially adverse effect on the financial
position of the Company.
(Continued)
-36-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(21) Legal Matters
The Company and certain of its present and former officers and directors
are defendants in eight alleged class actions which have been
consolidated and are pending in the United States District Court for the
Eastern District of New York. The actions allege violations of Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
under such Act. The plaintiffs seek, among other remedies, unspecified
monetary damages.
In March 1996, the Company executed a Stipulation of Settlement to settle
the class actions. In June 1996 an order of final approval and final
judgment and order of dismissal 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 220,000 shares of its common
stock, to be distributed in accordance with a plan to be approved by the
Court. Under the agreement, the Company is not required to contribute
any cash towards the proposed settlement. In connection with the
settlement, the Company recorded a charge to income of $1,100,000 in the
fourth quarter of 1995, based upon the market value of the shares to be
issued.
The Company denies the material allegations and admits no liability of any
sort in connection with the settlement and dismissal of the action.
(22) Segment Disclosure
The Company operates exclusively in the telecommunications industry.
Customers include telephone operating companies and others within and
outside the United States and its possessions.
In the following table, intercompany sales are accounted for at cost plus a
reasonable profit. Identifiable assets for the geographic areas are
those assets identified with the operations in each area. Corporate
assets consist principally of cash and cash equivalents, debt issuance
costs, employee loans for debentures and patents. The Company does not
allocate costs for product development, marketing or management to each
segment. Thus, the information may not be indicative of the extent to
which geographic areas contributed to the Company's consolidated results
of operations.
(Continued)
-37-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Geographic area data for the years ended December 31, 1995, 1994 and 1993
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Sales made from:
United States and Puerto Rico to:
U.S. customers $ 16,445,000 23,831,000 24,718,000
Foreign customers 12,875,000 11,069,000 5,828,000
Intercompany 14,849,000 25,102,000 27,068,000
------------ ------------ ------------
44,169,000 60,002,000 57,614,000
------------ ------------ ------------
Korea-to customers 7,651,000 9,599,000 3,330,000
------------ ------------ ------------
Europe-to customers 24,174,000 19,847,000 27,264,000
Intercompany 3,735,000 690,000 1,299,000
------------ ------------ ------------
27,909,000 20,537,000 28,563,000
Other-to customers 36,000 4,639,000 7,001,000
Intercompany 2,410,000 3,796,000 2,716,000
------------ ------------ ------------
2,446,000 8,435,000 9,717,000
------------ ------------ ------------
Intercompany eliminations (20,994,000) (29,588,000) (31,083,000)
------------ ------------ ------------
Consolidated sales $ 61,181,000 68,985,000 68,141,000
============ ============ ============
Operating income (loss)
United States and Puerto Rico (22,549,000) (16,621,000) (6,383,000)
Europe 2,279,000 (1,465,000) 2,341,000
Korea 288,000 387,000 (113,000)
Other 98,000 158,000 239,000
------------ ------------ ------------
Consolidated operating (loss) $(19,884,000) (17,541,000) (3,916,000)
============ ============ ============
Identifiable assets:
United States and Puerto Rico 39,600,000 63,200,000 91,915,000
Europe 11,414,000 10,505,000 8,578,000
Korea 2,540,000 2,491,000 2,459,000
Other 623,000 1,248,000 1,112,000
------------ ------------ ------------
Consolidated identifiable assets 54,177,000 77,444,000 104,064,000
Corporate assets 6,414,000 7,519,000 5,884,000
------------ ------------ ------------
Consolidated total assets $ 60,591,000 84,963,000 109,948,000
============ ============ ============
</TABLE>
(Continued)
-38-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Note to Consolidate Financial Statements, Continued
(23) Subsequent Events
Changes in certifying auditors
In June 1996, the Company was advised that it is the position of the staff
of the Securities and Exchange Commission (the "SEC") that it is the
SEC's staff position that the independence of the Company's prior
auditors, KPMG Peat Marwick LLP, is adversely impacted by certain
relationships involving the auditors and KPMG BayMark Strategies LLC and
Mr. Edward R. Olson, the Company's former interim president and chief
operating officer.
On or about July 9, 1996, the SEC issued an order directing a private
investigation of the Company. The SEC has indicated the investigation
relates to the position of the SEC staff described in the preceding
paragraph.
The Company has been cooperating with the SEC's private investigation and
has produced certain documents to the SEC. In addition, in September
1996, the Company has engaged the firm of BDO Seidman LLP as its
independent public accountants for the reaudit of its financial
statements for the year ended December 31, 1995.
Capital
On June 6, 1996, the stockholders of the Company approved (a) 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
and (b) 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
affected 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, all share and per share data have been restated to
give effect to the Reverse Split.
Discontinued Operations
At December 31, 1995 the Company's receivable from the sale of discontinued
operations was collateralized by shares of common stock of the entity
which now owns the discontinued operations. In the quarter ended June
30, 1996, the Company sold the shares of this common stock for
$3,456,000 and recorded a gain of $2,264,000. The gain represented an
adjustment in the estimated value of the shares previously received and
accordingly was reflected in continuing operations. The receivable had
previously been written down to $1,000,000 as a result of the resolution
of the dispute as discussed in note 3. As part of an agreement with the
Company's primary lender, the net proceeds from the sale were applied to
reduce the outstanding principal balance of the Company's term loan.
-39-
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Note to Consolidate Financial Statements, Continued
Long-Term Debt
Subsequent to December 31, 1995, a total of $10,249,000 of principal was
repaid to the Company's senior lender. $6,793,000 relates to the sale of
the fiber optics division in March 1996 and $3,456,000 relates to the
proceeds from the sale of discontinued operations.
6% Convertible Subordinated Debentures
Subsequent to December 31, 1995 and through October 14, 1996, the Company
exchanged approximately $33,770,000 principal amount of the Debentures,
net of unamortized discount of $355,000, for 655,000 shares of the
Company's common stock and $25,900,000 principal amount of Notes
pursuant to the Exchange Offer. The current and long-term portions of
the related debt which are presented in the financial statements only
reflects exchanges which were completed prior to March 22, 1996.
-40-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) 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 November 1, 1996 By /s/William V. Carney
---------------------------
William V. Carney
Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date
----
By /s/William V. Carney November 1, 1996
---------------------------
William V. Carney
Chairman of the Board and Director
By /s/Seymour Joffe November 1, 1996
---------------------------
Seymour Joffe
President and Director
By /s/Edward B. Kornfeld November 1, 1996
---------------------------
Edward B. Kornfeld
Senior Vice President,
Chief Financial and Accounting Officer
By /s/Howard D. Brous November 1, 1996
---------------------------
Howard D. Brous
Director
By /s/Herbert H. Feldman November 1, 1996
---------------------------
Herbert H. Feldman
Director
By /s/Stanley Kreitman November 1, 1996
---------------------------
Stanley Kreitman
Director
By /s/Michael A. Tancredi November 1, 1996
---------------------------
Michael A. Tancredi
Director
-41-
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<PERIOD-END> DEC-31-1995
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0
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