SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.................to...................
Commission file number 1-8191
PORTA SYSTEMS CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2203988
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 Underhill Boulevard, Syosset, New York
(Address of principal executive offices)
11791
(Zip Code)
516-364-9300
(Company's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ___X___ No ______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
2,190,008 shares as of November 5, 1996
Page 1 of 17 pages
<PAGE>
PART I.- FINANCIAL INFORMATION
Item 1- Financial Statements
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
1996 1995
------------- ------------
Assets (Unaudited)
------
Current assets:
Cash and cash equivalents $ 1,715 $ 1,109
Accounts receivable, net 14,700 12,626
Inventories 7,400 8,979
Prepaid expenses 528 659
Receivable from sale of
discontinued operations -- 1,000
Other receivable 862 --
------- -------
Total current assets 25,205 24,373
------- -------
Assets held for sale, net -- 7,893
Property, plant and equipment, net 5,650 6,911
Deferred computer software, net 2,071 3,188
Goodwill, net 11,480 11,793
Other assets 4,341 6,433
------- -------
Total assets $48,747 $60,591
======= =======
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion Long-term debt $ 500 $ --
Convertible subordinated debentures 2,086 6,564
Accounts payable 7,015 8,302
Accrued expenses 8,598 10,502
Accrued interest payable 493 3,534
Accrued commissions 2,338 2,016
Income taxes payable 780 780
Customer advances 251 504
Short-term loans 250 368
------- -------
Total current liabilities 22,311 32,570
------- -------
Long-term debt 17,328 26,645
Convertible subordinated debentures -- 25,660
Zero coupon senior subordinated convertible notes 25,909 --
Notes payable net of current maturities 3,084 3,084
Income taxes payable 811 811
Other long-term liabilities 625 385
Minority interest 803 759
------- -------
Total long-term liabilities 48,560 57,344
------- -------
Stockholders' deficit:
Preferred stock, no par value; authorized
1,000,000 shares, none issued -- --
Common stock, par value $.01; authorized
40,000,000 and 20,000,000 shares,
issued 2,190,009 and 1,492,361
shares at September 30, 1996 and December 31,
1995, respectively 22 15
Additional paid-in capital 36,537 33,308
Foreign currency translation adjustment (3,700) (4,199)
Accumulated deficit (52,610) (56,074)
------- -------
(19,751) (26,950)
Treasury stock, at cost (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
------- -------
Total stockholders' deficit (22,124) (29,323)
------- -------
Total liabilities and
stockholders' deficit $48,747 $60,591
======= =======
See accompanying notes to consolidated financial statements.
Page 2 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Nine Months Ended
September 30, September 30,
1996 1995
------------- -------------
Sales $41,476 $ 47,922
Cost of sales 27,087 37,269
------- --------
Gross profit 14,389 10,653
------- --------
Selling, general and administrative expenses 9,578 11,573
Research and development expenses 2,681 3,853
------- --------
Total expenses 12,259 15,426
------- --------
Operating income (loss) 2,130 (4,773)
Interest expense (4,209) (5,882)
Interest income 73 48
Gain on sale of assets 2,264 --
Other income (expense) 62 (642)
Income (loss) before income taxes,
minority interest, discontinued
operations and extraordinary item 320 (11,249)
Income tax expense (28) (70)
Minority interest (44) (199)
------- --------
Income (loss) from continuing operations 248 (11,518)
Loss on disposal of discontinued operations -- (3,500)
Income (loss) before extraordinary item 248 (15,018)
Extraordinary gain 3,922 1,871
------- --------
Net income (loss) $ 4,170 $(13,147)
======= ========
Per share data:
Income (loss) from continuing operations $ 0.05 $ (7.90)
======= ========
Income (loss) before extraordinary item $ 0.05 $ (10.27)
Extraordinary item 0.85 1.28
------- --------
Net income (loss) $ 0.90 $ (8.99)
======= ========
Weighted average shares outstanding 4,618 1,461
======= ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
September 30, September 30,
1996 1995
------------- -------------
Sales $14,613 $14,744
Cost of sales 9,343 11,422
------- -------
Gross profit 5,270 3,322
------- -------
Selling, general and administrative expenses 3,391 2,839
Research and development expenses 877 1,419
------- -------
Total expenses 4,268 4,258
------- -------
Operating income (loss) 1,002 (936)
Interest expense (983) (2,072)
Interest income 31 15
Other income (expense) 44 (93)
------- -------
Income (loss) before income taxes,
minority interest and extraordinary item 94 (3,086)
Income tax benefit (expense) (22) (53)
Minority interest (277) (42)
------- -------
Loss from continuing operations (205) (3,181)
Extraordinary gain 532 --
------- -------
Net income (loss) $ 327 $(3,181)
======= =======
Per share data:
Loss from continuing operations $ (0.04) $ (2.18)
======= =======
Loss before extraordinary item $ (0.04) $ (2.18)
Extraordinary item 0.10 --
------- -------
Net income (loss) $ 0.06 $ (2.18)
======= =======
Weighted average shares outstanding 5,225 1,461
======= =======
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 17 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unauditied Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30, September 30,
1996 1995
------------ -------------
Cash flows from operating activities:
Net income (loss) $ 4,170 $(13,147)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Loss on disposal of discontinued operations -- 3,500
Gain on sale of assets (2,264) --
Extraordinary gain (3,922) (1,871)
Non-cash financing expenses 2,089 1,031
Realized gain on litigation settlement (174) --
Depreciation and amortization 3,177 3,735
Amortization of discount on convertible
subordinated debentures 94 544
Minority interest 44 199
Changes in assets and liabilities:
Accounts receivable (2,074) (1,980)
Inventories 1,579 3,278
Prepaid expenses 131 (314)
Deferred computer software (38) (510)
Other assets (184) (409)
Accounts payable (1,287) 564
Accrued expenses (1,904) 1,827
Other liabilities 495 (81)
------- --------
Net cash used in operating activities (68) (3,634)
------- --------
Cash flows from investing activities:
Proceeds from disposal of assets
held for sale, net 6,793 --
Proceeds from sale of assets 3,456 --
Capital expenditures (246) (702)
------- --------
Net cash provided by (used in)
investing activities 10,003 (702)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt 1,340 5,338
Repayments of long-term debt (10,157) (2,500)
(Repayments of) proceeds from notes
payable and short term loans (118) 469
------- --------
Net cash (used in) provided
by financing activities (8,935) 3,307
------- --------
Effect of exchange rates on cash (394) 133
------- --------
Increase (decrease) in cash
and cash equivalents 606 (896)
Cash and equivalents - beginning of the year 1,109 2,332
------- --------
Cash and equivalents - end of the period $ 1,715 $ 1,436
======= ========
Supplemental cash flow disclosures:
Cash paid for interest expense $ 2,022 $ 2,365
======= ========
Cash paid for income taxes $ 66 $ 41
======= ========
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 17 pages
<PAGE>
NOTES TO UNAUDITIED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Management's Responsibility For Interim Financial Statements Including
All Adjustments Necessary For Fair Presentation
Management acknowledges its responsibility for the preparation of the
accompanying interim consolidated financial statements which reflect all
adjustments, consisting of normal recurring adjustments, considered necessary in
its opinion for a fair statement of its consolidated financial position and the
results of its operations for the interim periods presented. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's annual report to stockholders for the year ended
December 31, 1995. Results for the first nine months of 1996 are not necessarily
indicative of results for the year.
Note 2: Computation of Per Share Earnings
All share and per share information presented in the Consolidated Financial
Statements and the Form 10-Q for the nine months ended September 30, 1996 gives
retroactive effect to the Reverse Split described in Note 10.
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, 1996 September 30, 1996
------------------ ------------------
(In thousands, except per share amounts)
<S> <C> <C>
Net income $4,170 $ 327
====== ======
Weighted average shares outstanding 1,985 2,107
Shares of common stock contingently issuable in
connection with the potential conversion of the
zero coupon senior subordinated convertible notes 2,633 3,118
------ ------
Weighted average shares outstanding-Primary 4,618 5,225
====== ======
Earnings per share $ 0.90 $ 0.06
====== ======
</TABLE>
Note 3: Discontinued Operations
The Company's receivable from the sale of discontinued operations was
represented by shares of common stock of the entity which now owns the
discontinued operations. During the quarter ended June 30, 1996, the Company
sold the shares of this common stock for $3,456,000 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 as an item in
continuing operations. The receivable had previously been written down to
$1,000,000 as a result of the Israeli receivership proceedings involving the
purchaser of the discontinued operation. As part of an agreement with the
Company's primary lender, the net proceeds from the sale of the discontinued
operations were applied to reduce the outstanding principal balance of the
Company's term loan.
Page 6 of 17 pages
<PAGE>
Note 4: Assets Held For Sale
On March 13, 1996, the Company sold certain assets and the buyer assumed
certain liabilities and severance obligations related to the operations of the
Company's fiber optics management and component business for $7,893,000, subject
to certain adjustments. As of December 31, 1995, in conjunction with this
transaction, the Company accrued approximately $700,000 for certain obligations
in connection with the closing of its fiber optics facility in Ireland. These
obligations were settled in the second quarter of 1996, and along with other
adjustments related to the sale of the fiber business, for a positive adjustment
of approximately $358,000. The difference was recorded as a reduction of
selling, general and administrative expenses in the accompanying statement of
operations.
The Company received $6,793,000 at closing of the sale of the fiber
business and the remainder was placed into two escrow funds to be released over
the next year, subject to certain conditions, including a final valuation of the
net assets transferred. As of September 30, 1996, the remainder, $862,000, has
remained in escrow and is reported as an "Other receivable" in the accompanying
consolidated balance sheet. The proceeds were primarily used to repay long-term
debt. As a result of the transaction, the Company recorded a charge to
operations in 1995 of $862,000 to write down the net assets sold to net
realizable value. Net sales of the fiber optics business approximated $452,000
and $5,577,000 for the nine months ended September 30, 1996 and 1995,
respectively.
Note 5: Inventories
Inventories at September 30, 1996 have been computed using a standard cost
system. The composition of inventories at the end of the respective periods is
as follows:
September 30, 1996 December 31,1995
------------------ ----------------
(in thousands)
Parts and components $ 4,683 $ 5,370
Work-in-process 1,065 849
Finished goods 1,652 2,760
--------- ---------
$ 7,400 $ 8,979
========= =========
Note 6: Long-Term Contracts
At September 30, 1996, accounts receivable included approximately $900,000
in excess costs and related profits over amounts billed relating to long-term
contracts under which the Company provides specialized products to major
international customers. Substantially all such amounts are expected to be
billed during the remainder of 1996.
Note 7: 6% Convertible Subordinated Debentures
On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of each
$1,000 face amount of such debt and the elimination of the associated accrued
interest payable for 19.4 shares of the Company's common stock and $767.22
principal amount of zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998 (the Exchange Offer). The Notes are non-interest
bearing, unsecured and have no sinking fund requirements.
Page 7 of 17 pages
<PAGE>
Note 7: 6% Convertible Subordinated Debentures (continued)
Each Note is convertible into common stock at a conversion price of $7.90
per share until November 1, 1996 and $6.55 per share thereafter. Accordingly, in
addition to a maximum of 699,855 of common shares issuable from the exchange of
the Debentures, the maximum number of shares of common stock that could be
issued upon conversion, if all Debentures are exchanged, is approximately
4,225,600. The Notes are redeemable at the option of the Company at 86.71%
through November 1, 1996 increasing periodically to 100% of the principal
balance on November 1, 1997.
Through September 30, 1996, the Company exchanged approximately $33,770,000
principal amount of the Debentures, net of unamortized discount of $3,552,000,
for 655,000 shares of the Company's common stock and $25,909,000 principal
amount of Notes pursuant to the Exchange Offer.
The exchange of the Debentures for the Notes and common stock has been
accounted for as a troubled debt restructuring in accordance with Statement of
Financial Accounting Standards No. 15 (SFAS No. 15). Since the future principal
and interest payments under the Notes is less than the carrying value of the
Debentures, the Notes were recorded for the amount of the future cash payments,
and not discounted. Accordingly, the Company recorded an extraordinary gain on
restructuring of $532,000 during the quarter and $3,922,000 for the nine months
ended September 30, 1996. Additionally, in accordance with SFAS No. 15, no
future interest expense will be recorded on the Notes.
As of September 30, 1996, $2,086,000 of the Debentures remained
outstanding, net of original issue discounts amortized to principal over the
term of the debt using the effective interest rate method, of $219,000. The face
amount of the outstanding Debentures was $2,305,000.
Interest on the Debentures is payable on July 1 of each year. The aggregate
accrued interest payable on the remaining Debentures (including amounts in
arrears) was approximately $311,000 as of September 30, 1996. The Company is
presently in default under the interest payment provisions of the Debentures.
Accordingly, such debt has been classified as current at September 30, 1996.
Note 8: Long-Term Debt
At September 30, 1996, the Company's long-term debt consisted of senior
debt under its credit facility with Foothill Capital Corporation in the amount
of $17,828,000 of which $500,000 has been reclassified as current in accordance
with the terms of the credit facility. During the quarter ended September 30,
1996 the Company repaid $198,000 of outstanding principal from the disposal of
the sale of certain other assets.
Financial debt covenants include an interest coverage ratio measured
quarterly commencing with the quarter ending June 30, 1996, limitations on the
incurrence of indebtedness, limitations on capital expenditures, and
prohibitions on declarations of any cash or stock dividends or the repurchase of
the Company's stock. As of September 30, 1996, the Company is in compliance with
the above covenants.
Page 8 of 17 pages
<PAGE>
Note 9: Legal Matters
In July 1996, an action was commenced in the Supreme Court of the State of
New York, New York County by certain stockholders and warrant holders of the
Company who acquired their securities in connection with the acquisition by the
Company of Aster Corporation against the Company and certain present and former
directors. The complaint alleges breach of contract against the Company and
breach of fiduciary against the directors arising out of an alleged failure to
register certain restricted shares and warrants owned by the plaintiffs. The
complaint seeks damages of $392,000; however, counsel for the plaintiff have
advised the Company that additional plaintiffs may be added and, as a result,
the amount of damages claimed may be substantially greater than the amount
presently claimed. The Company believes that the defendants have valid defenses
to the claims.
Note 10: Capital
On June 6, 1996, the stockholders of the Company approved (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 effected by the Reverse Split.
The Company has reclassified approximately $84,000 from common stock to
additional paid-in capital. All share and per share data have been restated to
give effect to the Reverse Split.
Page 9 of 17 pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's consolidated statements of operations for the periods
indicated below, shown as a percentage of sales, are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 100% 100% 100% 100%
Cost of Sales 65% 78% 64% 77%
Gross Profit 35% 22% 36% 23%
Selling, general and administrative expenses 23% 24% 24% 19%
Research and development expenses 7% 8% 6% 10%
Operating income(loss) 5% (10%) 6% (6%)
Interest expense - net (9%) (12%) (7%) (14%)
Other income (expense) 5% (1%) 0% (1%)
Minority interest 0% (0%) (2%) (0%)
Provision for discontinued operations 0% (7%) 0% 0%
Extraordinary item 9% 4% 4% (0%)
Net income (loss) 10% (27%) 1% (22%)
</TABLE>
The Company's sales by product line for the periods ended September 30,
1996 and 1995 are as follows:
Nine Months Ended
September 30,
-----------------
1996 1995
---- ----
(Dollars in thousands)
Line connection/protection equipment* $ 18,710 45% $ 23,051 48%
OSS equipment 17,077 41% 20,995 44%
Signal Processing 5,495 13% 3,519 7%
Other 194 1% 357 1%
-------------- ---------------
$ 41,476 1 00% $ 47,922 100%
============== ===============
Three Months Ended
September 30,
-----------------
1996 1995
---- ----
(Dollars in thousands)
Line connection/protection equipment* $ 6,004 41% $ 6,946 47%
OSS equipment 6,445 44% 6,599 45%
Signal Processing 2,118 15% 1,108 7%
Other 46 0% 91 1%
-------------- ---------------
$ 14,613 100% $ 14,744 100%
============== ===============
*Includes sales of fiber optics products of $452 and $0 for the nine months and
three months ended September 30, 1996 and $5,577 and $1,893 for the nine months
and three months ended September 30, 1995, respectively.
Page 10 of 17 pages
<PAGE>
Financial Condition
The Company's working capital changed from a deficit of $8,197,000 at
December 31, 1995 to a positive $2,894,000 at September 30, 1996. The reduction
is primarily the result of the sale of the fiber optics business which provided
the Company with funds to reduce certain of its current liabilities, the
conversion of approximately 94% of the 6% convertible subordinated debentures
which reduced approximately $2,591,000 of accrued interest expense and the sale
of stock issued in respect of the sale of discontinued operations which was used
to reduce its obligations to its senior lender.
During the quarter ended June 30, 1996, the Company received $3,456,000
from the sale of common stock issued in respect of the obligations of the
purchaser of discontinued operations. A gain of $2,264,000, net of related
expenses, was recorded. The receivable had previously been written down to
$1,000,000 as a result of the Israeli receivership proceedings involving the
purchaser of the discontinued operation. The net proceeds were applied to reduce
the outstanding principal balance of the Company's long-term loan with its
senior lender.
In March 1996, the Company's loan and security agreement with its senior
secured lender, Foothill Capital Corporation ("Foothill"), was amended. Pursuant
to the amendment, the Company's obligations were extended from November 1996 to
November 1998 and defaults at December 31, 1995 and through the date of the
amendment, were waived by Foothill. As a result the Company's indebtedness to
Foothill has been classified as a long-term liability. As part of the
consideration to Foothill for the amendment, the Company is obligated to pay a
monthly facility fee of $50,000 commencing November 30, 1996.
The Company's obligations to Foothill are secured by substantially all of
the assets of the Company and its subsidiaries. The agreement with Foothill
requires the Company to continue to meet certain financial covenants. At
September 30, 1996, the Company is in compliance with its covenants under the
agreement.
On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of such
debt for common stock and zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998. The exchange ratio is 19.4 shares of common stock
and $767.22 of principal of Notes in exchange for $1,000 principal amount of
Debentures. Accrued interest on the Debentures would also be eliminated.
As of September 30, 1996, approximately $33,770,000 principal amount of the
Debentures, net of unamortized discount of $3,552,000 have been exchanged for
655,000 shares of the Company's common stock and $25,909,000 principal amount of
Notes pursuant to the Exchange Offer. The unsecured Notes do not bear interest
and there are no sinking fund requirements.
As of September 30, 1996, the Company had remaining outstanding $2,086,000
of Debentures, net of original issue discounts amortized to principal over the
term of the debt using the effective interest rate method, of $219,000. The face
amount of the outstanding Debentures was $2,305,000.
Page 11 of 17 pages
<PAGE>
Financial Condition (continued)
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of September 30, 1996 amounted to $311,000. As of September 30, 1996
the Company is in default under the interest payment provisions of the
Debentures for July 1, 1996 and 1995. Accordingly, such debt has been classified
as a current liability at September 30, 1996.
The Company has no past or ongoing interest obligation with respect to
either the new zero coupon notes or the Debentures which were exchanged. The
aggregate annual interest obligation on the Debentures which have not been
exchanged at September 30, 1996 is approximately $138,000.
On March 12, 1996, the Company sold certain assets and the buyer assumed
certain liabilities and severance obligations related to the operations of the
Company's fiber optics management and component business. Accordingly, at
December 31, 1995, the net assets of the fiber optics business were reflected as
"assets held for sale, net" at net realizable value, based on the terms of the
sale. The net assets of the fiber optics business were sold for a total purchase
price of approximately $8,000,000 of which $1,100,000 was held in escrow,
subject to certain conditions, plus the assumption of approximately $1,400,000
in liabilities. The proceeds were applied to reduce the Company's obligations to
Foothill in accordance with the March 1996 amendment to the Foothill agreement.
As of September 30, 1996 certain claims have been resolved and funds have been
disbursed from the escrow account to reduce the balance to $862,000.
The sale of the fiber optics business benefited the Company by allowing it
to close two facilities, with a resultant decrease in personnel and overhead
costs. The sale also enabled the Company to amend and extend its agreement with
Foothill, as described above, and make a significant payment to Foothill, which
reduces its ongoing interest costs.
Results of Operations
The Company's sales for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1995 decreased $6,446,000 (13%) and the
sales for the quarter ended September 30, 1996 decreased by $131,000 (1%)
compared to the quarter ended September 30, 1995. The primary reason for the
decrease for the nine months was the sale of the fiber optics business during
the first quarter of 1996 (see note 4).
OSS revenue decreased by $3,918,000 and $154,000 for the nine and three
months ended September 30, 1996, respectively. This reduced volume for the nine
months reflects lower levels of sales of our Korea joint venture partner, as
well as reduced sales to British Telecommunications plc.
The line connection/protection equipment sales for the nine months ended
September 30 decreased by approximately $4,341,000 from 1995 to 1996. This
decline reflected the sale of the fiber optics division in March 1996. Sales of
fiber optics products were $452,000 and $5,577,000 for the nine months ended
September 30, 1996 and 1995, respectively.
Line connection/protection equipment revenue for the September 1996 quarter
decreased approximately $942,000 as a result of a change in the product mix
within this category from the same quarter last year. Copper products increased
approximately $951,000 from last year's quarter. There were no fiber optic sales
for the quarter ended September 30, 1996 compared to $1,893,000 of fiber sales
for the quarter ended September 30, 1995 (see Note 4).
Page 12 of 17 pages
<PAGE>
Results of Operations (continued)
Signal processing revenue for the quarter and nine months ended September
30, 1996 increased by $1,010,000 and $1,976,000, respectively. This increase
reflects higher sales volumes than for the comparable periods of 1995.
Cost of sales for the nine months and the quarter ended September 30, 1996,
as a percentage of sales compared to the same periods of 1995, decreased from
78% to 65% and from 77% to 64%, respectively. This improvement in gross margin
is attributed to the Company's continuing efforts to reduce direct and indirect
labor and overhead manufacturing costs which began late in the second quarter of
1995, and to a lesser extent, the effect of the sale of the fiber optic business
as of March 1996.
Selling, general and administration expenses decreased by $1,995,000 (17%)
from $11,573,000 to $9,578,000 for the nine months ended September 30, 1996
compared to 1995. This decrease is due to the Company's continuing efforts to
reduce costs and expenses. For the quarter ended September 30, 1996 and 1995
selling, general and administration expenses increased by $552,000 (19%). The
primary reason for this increase is the write off of additional expenses related
to the sale of the fiber optics business during 1996 (see Note 4).
Research and development expenses decreased by $1,172,000 (30%) and by
$542,000 (38%) for the nine and three months ended September 30, 1996 from the
comparable periods in 1995, respectively. This reduced cost reflects the
Company's efforts to streamline its operations by focusing on those projects
with the highest potential for success and to a lesser extent, the elimination
of those expenses related to fiber activities.
As a result of the above, for the nine months ended September 30, 1996
compared to 1995, the Company had operating income of $2,130,000 versus an
operating loss of $4,773,000. The Company had operating income of $1,002,000 for
the quarter ended September 30, 1996 as compared to a loss of $936,000 from
operations for the quarter ended September 30, 1995. The Company's operating
improvement for the nine months and the quarter ended September 30, 1996, when
compared to the comparable periods ended September 30, 1995, were the results of
its continuing efforts to bring its costs and expenses in line with its current
level of sales and the sale of the fiber optics business.
Interest expense decreased for the nine months ended September 30 by
$1,673,000 from $5,882,000 in 1995 to $4,209,000 in 1996. For the quarter ended
September 30, interest expense decreased by $1,089,000 from $2,072,000 in 1995
to $983,000 in 1996. This change is attributable primarily to a decrease in
interest expense related to the exchange of the Company's Debentures and
repayment of principal to the Company's senior lender from the proceeds of the
sale of the fiber business and the sale of common stock issued in respect of the
sale of discontinued operations (see Notes 3 and 4). These reductions of
interest expense are offset by an increase in interest expense associated with
increased borrowing costs.
During the nine month period ended September 30, 1996, the Company recorded
a $3,922,000 gain from the early extingushment of approximately 94% of its
Debentures. Of this gain, $532,000 was recognized in the third quarter of 1996
as an additional 8% of the Debentures were exchanged (See Note 8). During the
nine month period ended June 30, 1995, the Company recorded an extraordinary
gain of $1,871,000 arising from the Company's repurchase from its senior lender
and retirement of $3,900,000 of its Debentures for approximately $2,500,000.
Page 13 of 17 pages
<PAGE>
Results of Operations (continued)
During the quarter ended June 30, 1996, the Company received $3,456,000
from the sale of common stock issued in respect of the obligations of the
purchaser of the discontinued operations resulting in a gain of $2,264,000 (see
Note 3). During the quarter ended June 30, 1995, the Company recorded a
$3,500,000 loss from the sale of discontinued operations. At that time the best
estimate for recovery was $1,000,000 as a result of the liquidation and
receivership of the purchaser of such operations.
As the result of the foregoing the Company generated net income of
$4,170,000, $0.90 per share for the nine months ended September 30, 1996
compared with a net loss of $13,147,000, $8.99 per share, for the nine months
ended September 30, 1995 and net income for the quarter ended September 30, 1996
of $327,000, $0.06 per share and a net loss for the quarter ended September 30,
1995 of $3,181,000, $2.18 per share. The calculation of the weighted average
shares, for the period and quarter ended September 30, 1996, assumes the
conversion of the Notes which are considered to be a common stock equivalent.
Page 14 of 17 pages
<PAGE>
PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
In July 1996, an action was commenced in the Supreme Court of the State of
New York, New York County by certain stockholders and warrant holders of the
Company who acquired their securities in connection with the acquisition by the
Company of Aster Corporation against the Company and certain present and former
directors. The complaint alleges breach of contract against the Company and
breach of fiduciary against the directors arising out of an alleged failure to
register certain restricted shares and warrants owned by the plaintiffs. The
complaint seeks damages of $392,000; however, counsel for the plaintiff have
advised the Company that additional plaintiffs may be added and, as a result,
the amount of damages claimed may be substantially greater than the amount
presently claimed. The Company believes that the defendants have valid defenses
to the claims.
Item 2. Changes in Securities.
On November 30, 1995, the Company offered the holders of its 6% Convertible
Subordinated Debentures due July 1, 2002 (the Debentures) an exchange of such
debt for common stock and zero coupon senior subordinated convertible notes (the
Notes) due January 2, 1998. The exchange ratio is 19.4 shares of common stock
and $767.22 of principal of Notes in exchange for $1,000 principal amount of
Debentures. Accrued interest on the Debentures would also be eliminated.
Through September 30, 1996, the Company exchanged approximately $33,770,000
principal amount of the Debentures, net of unamortized discount of $3,552,000
for 655,000 shares of the Company's common stock and $25,909,000 principal
amount of Notes pursuant to the Exchange Offer.
Item 3. Defaults Upon Senior Securities.
As of September 30, 1996 the Company is in default under the interest
payment provisions of its 6% Convertible Subordinated Debentures due July 1,
2002. See Note 7 to the unaudited quarterly financial statements.
Page 15 of 17 pages
<PAGE>
Item 5. Other Information.
(a) In June 1996, the Company was advised that it is the position of the
staff of the Securities and Exchange Commission (the "SEC") 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 above. 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 audit of its financial statements for the year ended
December 31, 1995. The audit by BDO Seidman LLP resulted in an amended Form 10-K
which was filed on November 5, 1996 and reflected no change from the financial
statements previously filed.
(b) On August 2, 1996, the one-for-five reverse split of the common stock
became effective. As a result of the reverse split, each share of common stock
outstanding on such date automatically became converted into two-tenths of a
share of common stock. The par value of the common stock was not affected. See
Note 10 to Consolidate Financial Statements.
Item 6. Exhibits and Reports on Form 8-K.
A current report on form 8-K (Item 4), dated September 13, 1996, was filed.
Page 16 of 17 pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PORTA SYSTEMS CORP.
Dated November 6, 1996 By /s/William V. Carney
--------------------
William V. Carney
Chairman of the Board
Dated November 6, 1996 By /s/Edward B. Kornfeld
---------------------
Edward B. Kornfeld
Vice President and
Chief Financial Officer
Page 17 of 17 pages
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