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, 1997
[ ] 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: 2,231,929
shares as of November 6, 1997
Page 1 of 14 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,
1997 1996
----------- ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 3,046 $ 2,584
Accounts receivable, net 18,388 16,034
Inventories 7,850 7,424
Prepaid expenses 1,112 782
Other receivable -- 531
-------- --------
Total current assets 30,396 27,355
-------- --------
Property, plant and equipment, net 4,793 5,422
Deferred computer software, net 826 1,676
Goodwill, net 11,217 11,555
Other assets 3,606 4,650
-------- --------
Total assets $ 50,838 $ 50,658
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Convertible subordinated debentures $ 1,771 $ 2,096
Zero coupon senior subordinated
convertible notes 26,180 --
Current portion of senior debt 2,063 750
Accounts payable 5,893 6,056
Accrued expenses 9,249 9,004
Accrued interest payable 719 583
Accrued commissions 2,472 2,708
Income taxes payable 780 780
Accrual deferred compensation 1,205 1,232
Short-term loans 123 31
-------- --------
Total current liabilities 50,455 23,240
-------- --------
Senior debt 13,903 16,835
Zero coupon senior subordinated convertible notes -- 25,885
Notes payable net of current maturities 3,084 3,084
Income taxes payable 685 802
Other long-term liabilities 430 653
Minority interest 1,027 863
-------- --------
Total long-term liabilities 19,129 48,122
-------- --------
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
2,231,929 and 2,223,861 shares at
September 30, 1997 and December 31, 1996,
respectively 22 22
Additional paid-in capital 36,737 36,561
Foreign currency translation adjustment (4,433) (4,014)
Accumulated deficit (48,699) (50,900)
-------- --------
(16,373) (18,331)
Treasury stock, at cost (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
-------- --------
Total stockholders' deficit (18,746) (20,704)
-------- --------
Total liabilities and
stockholders' deficit $ 50,838 $ 50,658
======== ========
See accompanying notes to consolidated financial statements.
Page 2 of 14 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,
1997 1996
------------ -------------
Sales $ 45,934 $ 41,476
Cost of sales 28,043 27,087
-------- --------
Gross profit 17,891 14,389
-------- --------
Selling, general and administrative expenses 9,542 9,578
Research and development expenses 3,756 2,681
-------- --------
Total expenses 13,298 12,259
-------- --------
Operating income 4,593 2,130
Interest expense (2,729) (4,209)
Interest income 174 73
Gain on sale of assets -- 2,264
Other income 244 62
-------- --------
Income before income taxes,
minority interest, and
extraordinary item 2,282 320
Income tax expense (31) (28)
Minority interest (164) (44)
-------- --------
Income before extraordinary item 2,087 248
Extraordinary gain 115 3,922
-------- --------
Net income $ 2,202 $ 4,170
======== ========
Per share data:
Income before extraordinary item $ 0.33 $ 0.05
Extraordinary item 0.02 0.85
-------- --------
Net income $ 0.35 $ 0.90
======== ========
Weighted average shares outstanding 6,367 4,618
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 3 of 14 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,
1997 1996
------------- -------------
Sales $ 17,060 $ 14,613
Cost of sales 9,948 9,343
-------- --------
Gross profit 7,112 5,270
-------- --------
Selling, general and administrative expenses 3,650 3,391
Research and development expenses 1,268 877
-------- --------
Total expenses 4,918 4,268
-------- --------
Operating income 2,194 1,002
Interest expense (889) (983)
Interest income 82 31
Other income 42 44
-------- --------
Income before income taxes,
minority interest and
extraordinary item 1,429 94
Income tax expense (8) (22)
Minority interest (179) (277)
-------- --------
Income (loss) before
extraordinary item 1,242 (205)
Extraordinary gain 104 532
-------- --------
Net income $ 1,346 $ 327
======== ========
Per share data:
Income (loss) before
extraordinary item $ 0.19 $ (0.04)
Extraordinary item 0.01 0.10
-------- --------
Net income $ 0.20 $ 0.06
======== ========
Weighted average shares outstanding 6,632 5,225
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 4 of 14 pages
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30 September 30,
1997 1996
----------- ------------
Cash flows from operating activities:
Net income $ 2,202 $ 4,170
Adjustments to reconcile net income
to net cash used in operating
activities:
Gain on sale of assets -- (2,264)
Extraordinary gain (115) (3,922)
Non-cash financing expenses 279 2,089
Realized gain on litigation settlement -- (174)
Depreciation and amortization 2,381 3,177
Amortization of discount on convertible
subordinated debentures 30 94
Minority interest (164) 44
Changes in assets and liabilities:
Accounts receivable (2,354) (2,074)
Inventories (426) 1,579
Prepaid expenses (330) 131
Other receivables 31 --
Deferred computer software -- (38)
Other assets 628 (184)
Accounts payable, accrued expenses
and other liabilities (309) (2,696)
-------- --------
Net cash provided by (used in)
operating activities 1,853 (68)
-------- --------
Cash flows from investing activities:
Proceeds from disposal of assets
held for sale, net 500 6,793
Proceeds from sale of assets -- 3,456
Capital expenditures (434) (246)
-------- --------
Net cash provided by investing
activities 66 10,003
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 314 1,340
Repayments of long-term debt (1,933) (10,157)
(Repayments of) proceeds from notes
payable and short term loans 92 (118)
-------- --------
Net cash used in financing activities (1,527) (8,935)
-------- --------
Effect of exchange rates on cash 70 (394)
-------- --------
Increase in cash and cash equivalents 462 606
Cash and equivalents - beginning of the year 2,584 1,109
-------- --------
Cash and equivalents - end of the period $ 3,046 $ 1,715
======== ========
Supplemental cash flow disclosures:
Cash paid for interest expense $ 2,298 $ 2,022
======== ========
Cash paid for income taxes $ 74 $ 66
======== ========
See accompanying notes to unaudited consolidated financial statements.
Page 5 of 14 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, 1996. Results for the first nine months of 1997 are not necessarily
indicative of results for the year.
Note 2: Inventories
Inventories are valued at lower of cost or market. Inventory costs at
September 30, 1997 have been computed using a standard cost system. The
composition of inventories at the end of the respective periods is as follows:
September 30, 1997 December 31,1996
------------------ ----------------
(in thousands)
Parts and components $5,583 $4,557
Work-in-process 1,149 515
Finished goods 1,118 2,352
------ ------
$7,850 $7,424
====== ======
Note 3: 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Notes
As of September 30, 1997, the Company had outstanding $1,771,000 of its 6%
Convertible Subordinated Debentures due July 1, 2002 ("the Debentures"), net of
original issue discount amortized to principal over the term of the debt using
the effective interest rate method, of $149,000. The face amount of the
outstanding Debentures was $1,920,000 at September 30, 1997.
Interest on the Debentures is payable on July 1 of each year. The interest
accrued as of September 30, 1997 amounted to $539,000. As of September 30, 1997
the Company is in default under the provisions of the Debentures.
As of September 30, 1997, the Company had exchanged approximately
$34,180,000 principal amount of the Debentures, net of unamortized discount and
accrued interest expense for 722,650 shares of the Company's common stock and
$26,204,000 of Zero Coupon Senior Subordinated Convertible Notes ("the Notes").
As of September 30, 1997, $26,180,000 of Notes are outstanding after the
conversion of $24,000 of principal Notes to common stock.
Page 6 of 14 pages
<PAGE>
Note 3: 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Convertible Notes (continued)
The exchange of the Debentures for the Notes and common stock was accounted
for as a troubled debt restructuring in accordance with Statement of Financial
Accounting Standards No. 15. Since the future principal and interest payments
under the Notes is less than the carrying value of the Debentures, the Notes
were recorded for the amount of the future cash payments, and not discounted. In
addition, no future interest expense will be recorded on the exchanged Notes. As
a result of the exchange, the Company recognized an extraordinary gain of
$104,000 and $532,000 for the three months ended September 30, 1997 and 1996,
and $115,000 and $3,922,000 for the nine months ended September 30, 1997 and
1996, receptively.
Note 4: Senior Debt
On September 30, 1997, the Company's senior debt under its credit facility
consisted of $15,966,000. 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 bear interest at 12% per annum.
The Company incurs an annual fee of 2% on the average balance of undrawn letters
of credit and letter of credit guarantees outstanding. In addition, the Company
is obligated to pay a monthly facility fee of $50,000. The loan agreement
requires a minimum quarterly amortized payment of $250,000, increasing to
$325,000 for the quarter ending March 31, 1998 and for the quarters thereafter
during the term of the agreement, as well as an additional principal payment if
cash flow exceeds certain amounts. Based on these required principal payments,
$2,063,000 has been classified as a current liability at September 30, 1997.
Financial debt covenants include an interest coverage ratio measured
quarterly, 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 30,1997, the Company is
in compliance with the above covenants.
Page 7 of 14 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:
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Sales 100% 100% 100% 100%
Cost of Sales 61% 65% 58% 64%
Gross Profit 39% 35% 42% 36%
Selling, general and
administrative expenses 21% 23% 21% 24%
Research and development
expenses 8% 7% 8% 6%
Operating income 10% 5% 13% 6%
Interest expense - net (6%) (9%) (5%) (7%)
Other income 1% 5% 0% 0%
Minority interest 0% 0% (1%) (2%)
Extraordinary item 0% 9% 1% 4%
Net income 5% 10% 8% 1%
The Company's sales by product line for the periods ended September 30,
1997 and 1996 are as follows:
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
---- ----
(Dollars in thousands)
Line connection/protection equipment* $18,204 40% $18,710 45%
OSS systems 21,093 46% 17,077 41%
Signal Processing 6,203 13% 5,495 13%
Other 434 1% 194 1%
------------ ------------
$45,934 100% $41,476 100%
============ ============
Three Months Ended
September 30,
1997 1996
(Dollars in thousands)
Line connection/protection equipment* $ 4,857 29% $ 6,004 41%
OSS systems 9,790 57% 6,445 44%
Signal Processing 2,261 13% 2,118 15%
Other 152 1% 46 0%
------------ ------------
$17,060 100% $14,613 100%
============ ============
* Includes sales of fiber optics products of $0 and $452,000 for the nine
months ended September 30, 1997 and 1996. There were no sales of fiber
optic products for either the three months ended September 30, 1997 or
1996.
Page 8 of 14 pages
<PAGE>
Results of Operations
The Company's sales for the nine months ended September 30, 1997 compared
to the nine months ended September 30, 1996 increased $4,458,000 (11%) from
$41,476,000 in 1996 to $45,934,000 in 1997 and sales for the quarter ended
September 30, 1997 of $17,060,000 increased by $2,447,000 (17%) compared to
$14,613,000 for the quarter ended September 30, 1996. The increased sales for
both the nine and three months is due primarily to higher revenue from the OSS
division.
OSS revenue for the nine and three months ended September 30, 1997 was
$21,093,000 and $9,790,000, respectively, compared to the nine and three months
ended September 30, 1996 of $17,077,000 and $6,445,000, respectively, an
increase of $4,016,000 (24%) and $3,345,000 (52%) for the nine and three month
periods, respectively. The increased sales relates primarily to higher revenues
generated from the installation of the OSS systems.
The line connection sales for the nine months ended September 30, 1997
compared to September 30, 1996 decreased from $18,710,000 to $18,204,000 or
$506,000 (3%). Sales for the three months ended September 30, decreased by
$1,147,000 (19%) from $6,004,000 in 1996 to $4,857,000 in 1997. The decrease
reflects the completion of an agreement to supply certain products to British
Telecommunications PLC (BT) and the introduction during the third quarter of
1997 of a replacement product to the same customer which has a lower selling
price. In addition, the sales volume related to the new product were of a lesser
quantity in the third quarter of 1997 than the previously supplied product.
Orders from BT, since the end of the third quarter, remain at the reduced level.
Signal processing sales for the nine and three months ended September 30,
1997 were $6,203,000 and $2,261,000, respectively, compared to the nine and
three months ended September 30, 1996 of $5,495,000 and $2,118,000, an increase
of $708,000 (13%) and $143,000 (7%) from 1996 to 1997, respectively. The
increased revenue was generated from the earlier than anticipated completion of
certain military orders and non-recurring revenue from certain engineering
services.
Cost of sales for the nine months ended September 30, 1997, as a percentage
of sales was 61% compared to the nine months ended September 30, 1996 of 65%.
For the quarter ended September 30, 1997 cost of sales, as a percentage of
sales, was 58% compared to the same period of 1996 of 64%. The improvement in
gross margin is attributed to the Company's continuing effort to increase
manufacturing productivity and the absorption, over a larger revenue base, of
certain fixed expenses associated with the OSS contracts.
Selling, general and administration expenses decreased by $36,000 (less
than 1%) from $9,578,000 to $9,542,000 for the nine months ended September 30,
1997 compared to the nine months ended September 30, 1996. For the quarters
ended September 30, 1997 and 1996 selling, general and administration expenses
increased by $259,000 (8%) from $3,391,000 to 3,650,000, respectively. This
increase resulted primarily from higher commissions associated with the
increased revenues for the quarter, and to a lesser extent, the Company's
efforts to increase its sales and marketing effectiveness in order to secure
future business.
Research and development expenses increased by $1,075,000 (40%) and by
$391,000 (45%) for the nine and three months ended September 30, 1997 from the
comparable periods in 1996, respectively. The increased expenses results from
the Company's efforts to develop new products, primarily related to the OSS
business.
Page 9 of 14 pages
<PAGE>
Results of Operations (continued)
As a result of the above, for the nine months ended September 30, 1997
compared to comparable nine months of 1996, the Company had operating income of
$4,593,000 in 1997 versus $2,130,000 in 1996. The Company had operating income
of $2,194,000 for the quarter ended September 30, 1997 as compared to $1,002,000
for the quarter ended September 30, 1996. The Company's operating improvement
for the nine months and the quarter ended September 30, 1997, when compared to
the comparable periods ended September 30, 1996, were the results of increased
revenue, the improved gross margins and its continuing efforts to maintain costs
and expenses at a level appropriate with the current level of sales.
Interest expense decreased for the nine months ended September 30 by
$1,480,000 (35%) from $4,209,000 in 1996 to $2,729,000 in 1997. For the quarter
ended September 30, interest expense decreased by $94,000 (10%) from $983,000 in
1996 to $889,000 in 1997. The decrease in interest expense in both periods is
attributable primarily to the exchange of the Company's Debentures for the Notes
and common stock which occurred primarily in the first and second quarters of
1996, and repayment of principal to the Company's senior lender. In addition,
for the nine month period ended September 30, 1996, the Company incurred
additional interest expense as a result of the recognition in that period of
certain deferred borrowing costs related to its loans from its senior lender.
The Company had income before extraordinary item of $2,087,000 and $248,000
for the nine months ended September 30, 1997 and 1996, respectively. For the
three months ended September 30, 1997 and 1996, the Company recorded income
before extraordinary item of $1,242,000 and a loss before extraordinary item of
$205,000, respectively. During the nine months ended September 30, 1996, the
Company had a gain of $2,264,000 on sale of assets. If not for this gain, there
would have been a loss before extraordinary item for the nine months ended
September 30, 1996 of $2,016,000. The improvement in income before extraordinary
item reflects the increased revenue and gross margin coupled with the reduction
of interest expense.
During the nine months ended 1997 and 1996, respectively, the Company
recorded a $115,000 and $3,922,000 extraordinary gain from the early
extinguishment of debt as a result of the exchange of the Debentures for the
Notes and common stock. During the three months ended September 30, 1997 and
1996, respectively, a $104,000 and $532,000 extraordinary gain was recorded as a
result of such conversions.
As the result of the foregoing the Company generated net income of
$2,202,000, $0.35 per share for the nine months ended September 30, 1997
compared with net income of $4,170,000, $0.90 per share, for the nine months
ended September 30, 1996 and net income for the quarter ended September 30, 1997
of $1,346,000, $0.20 per share, compared with net income for the quarter ended
September 30, 1996 of $327,000, $0.06 per share. The calculation of the weighted
average shares, for the period and quarter ended September 30, 1997, assumes the
conversion of the Notes which are considered to be a common stock equivalent.
Page 10 of 14 pages
<PAGE>
Liquidity and Capital Resources
The Company had income from continuing operations for the nine and three
months ended September 30, 1997. These results notwithstanding, the Company will
be required to refinance or restructure certain existing notes payable which
become due on January 2, 1998 as discussed in the following paragraph. This
factor continues to raise substantial doubt about the Company's ability to
continue as a going concern. Furthermore, the unaudited consolidated financial
statements do not include any adjustments that might result from the inability
of the Company to refinance or restructure such notes.
At September 30, 1997 the Company had cash and cash equivalents of
$3,046,000 compared with $2,584,000 at December 31, 1996. The Company's working
capital deficit at September 30, 1997, which was affected by the classification
of the Notes as current liabilities subsequent to December 31, 1996 as discussed
below, was $20,059,000, compared to working capital of $4,115,000 at December
31, 1996.
At September 30, 1997, $26,180,000 of the Notes, which are due on January
2, 1998, are classified as current liabilities. At September 30, 1997 the
Company does not have sufficient resources to pay the Notes when they mature and
it is likely that it cannot generate such cash from its operations or from its
existing credit facilities.
On October 10, 1997, the Company announced that it had made an offer to the
holders of the Notes which would amend the terms of the Notes, subject to the
tender of up to 95 % of the principal amount of the Notes for conversion. Under
the amended terms, the conversion price of the Notes will be reduced to $3.65
from $6.55. In addition, the amended terms provide for the issuance of
additional shares under certain conditions. The Company has obtained the
commitment or tender of the holders of more than 80% of the Notes to convert
their Notes in accordance with the amended terms as of November 7, 1997. The
Company has certain rights to reduce the percentage of the principal amount of
the Notes required to be tendered for conversion in order that the amended terms
become effective and to extend the deadline for obtaining such tender. The
tender period has been extended until November 14, 1997. If all of the Notes are
converted on the amended terms, the Company will issue an aggregate of
approximately 7.2 million shares of common stock. In addition, under certain
conditions, a maximum of approximately 800,000 shares may be issued if the price
of the common stock declines. If the Notes are successfully converted, such
conversion would significantly reduce debt and increase equity and would result
in a non-cash charge to earnings which would by determined by the common stock
value on the date of the conversion.
Although the Company is seeking to refinance or restructure the Notes, no
assurance can be given that it will be successful in these efforts. If the
Company is unable to refinance or restructure the Notes or the holders of the
Notes do not convert such Notes to common stock, the Company's liquidity may be
severely impaired and the Company's business may be materially and adversely
affected.
Page 11 of 14 pages
<PAGE>
At September 30, 1997, the Company's senior debt to its senior secured
lender, Foothill Capital Corporation ("Foothill") which is due November 30,
1998, was $15,966,000 of which approximately $15,106,000 and $860,000 relates to
the term loan and the revolving line of credit, respectively. The agreement
provides for (i) the repayment of loan principal of $750,000 in 1997, (ii) the
repayment of loan principal of $325,000 each quarter commencing March 31, 1998
and thereafter during the term of the agreement, (iii) the Company to pay
additional principal payments if certain "adjusted cash flow amounts", as
defined, exceed certain amounts, and (iv) the Company to pay a monthly facility
fee of $50,000. For the quarter ended September 30, 1997 the additional
principal payment based upon the "adjusted cash flow" amounts to $587,000. As of
September 30, 1997, the Company's availability under its $9,000,000 revolving
line of credit and letter of credit availability is approximately $1,557,000.
Liquidity and Capital Resources (continued)
As of September 30, 1997, the Company had remaining outstanding $1,771,000
of the Debentures, net of original issue discounts amortized to principal over
the term of the debt using the effective interest rate method, of $149,000. The
face amount of the outstanding Debentures was $1,920,000. Interest on the
Debentures is payable on July 1 of each year. The interest accrued as of
September 30, 1997 amounted to $539,000. As of September 30, 1997 the Company is
in default under the provisions of the Debentures. Accordingly, such debt has
been classified as a current liability at September 30, 1997.
Page 12 of 14 pages
<PAGE>
PART II- OTHER INFORMATION
Item 5. Other Information
The Company has entered into a Supplemental Indenture dated October 10,
1997, pursuant to which it amended the terms of its Zero Coupon Senior
Subordinated Notes due January 2, 1998 (the "Notes"), subject to receiving
tender of 95% of the principal amount of the Notes for conversion by November 7,
1997. Pursuant to the Supplemental Indenture, the conversion price of the Notes
will be reduced to $3.65 from $6.55. The Company has certain rights to reduce
the percentage of the principal amount of the Notes required to be tendered for
conversion in order that the amended terms become effective and to extend the
deadline for obtaining such tender. The tender period has been extended until
November 14, 1997. As of November 7, 1997, the holders of more than 80% of the
Notes have tendered their Notes for conversion in accordance with the amended
terms provided that the amended terms become effective.
Notes in the principal amount of approximately $26,200,000 are presently
outstanding. If all the Notes are converted on the amended terms, the Company
will issue an aggregate of approximately 7,200,000 shares of Common Stock. In
addition, under certain conditions, a maximum of approximately 800,000 shares
may be issued if the price of Common Stock declines.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Supplemental Indenture dated as of October 10, 1997 between the
Company and American Stock Transfer & Trust Company.
(b) Reports of Form 8-K
None
Page 13 of 14 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 12, 1997 By /s/William V. Carney
---------------------------
William V. Carney
Chairman of the Board
Dated November 12, 1997 By /s/Edward B. Kornfeld
---------------------------
Edward B. Kornfeld
Vice President and Chief
Financial Officer
Page 14 of 14 pages
EXHIBIT 4.1
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE, dated as of the 10th day of October, 1997, to the
Indenture (the "Indenture") dated as of November 1, 1995, by and between Porta
Systems Corp., a Delaware corporation (the "Company"), as issuer, and American
Stock Transfer & Trust Company (the "Trustee"), as trustee.
W I T N E S S E T H:
WHEREAS, the Company and the Trustee entered into the Indenture dated as of
November 1, 1995 in connection with the issuance of the Company's Zero Coupon
Senior Subordinated Convertible Notes due January 2, 1998 (the "Notes"); and
WHEREAS, pursuant to the Indenture, the Company has issued and outstanding
Notes in the principal amount of $26,156,365.00, and additional Notes in the
maximum principal amount of $1,473,062.00 may be issued in exchange for the
Company's 6% Convertible Subordinated Debentures Due July 1, 2002; and
WHEREAS, the Company desires to modify the Conversion Price of the Notes as
hereinafter provided; and
WHEREAS, the modification of the Conversion Price pursuant to this
Supplemental Indenture is permitted by the Indenture;
WHEREFORE, the Indenture is hereby modified as follows:
1. All terms defined in the Indenture and used in this Supplemental
Indenture shall have the same meanings in this Supplemental Indenture as in the
Indenture.
2. Shares of Common Stock issued upon conversion of the Notes pursuant to
the terms of this Supplemental Indenture are referred to as the "Conversion
Shares." The person who either (i) owns the Notes or (ii) is the beneficial
owner of Notes held in the name of a nominee or (iii) is a Permitted Transferee,
as hereinafter defined, is referred to as a "Converting Noteholder."
3. If any Note is tendered for conversion on or subsequent to the date of
this Supplemental Indenture, subject to the provisions of Paragraph 6 of this
Supplemental Indenture, the following terms shall apply with respect to each
such conversion.
(a) The Conversion Price shall be reduced to three and 65/100 dollars
($3.65).
(b) No fractional shares of Common Stock shall be issued. Cash shall
be paid in lieu of fractional shares as provided in Section 15.03 of the
Indenture.
(c) All certificates for Conversion Shares issued to the Converting
Noteholders (other than Converting Noteholders of record who do not identify the
beneficial owner of the Conversion Shares within thirty (30) days after the
Notes are presented for conversion) pursuant to this Supplemental Indenture
shall bear the following legend:
-1-
<PAGE>
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE WERE ISSUED
UPON CONVERSION OF THE ISSUER'S ZERO COUPON SENIOR SUBORDINATED CONVERTIBLE
NOTES DUE JANUARY 2, 1998. UNDER CERTAIN CONDITIONS, ADDITIONAL SHARES OF
COMMON STOCK MAY BE ISSUED TO THE BENEFICIAL OWNER OF THESE SHARES (BUT NOT
TO ANY TRANSFEREE OTHER THAN A PERMITTED TRANSFEREE) AS SET FORTH IN THE
SUPPLEMENTAL INDENTURE DATED AS OF OCTOBER 10, 1997, BETWEEN THE ISSUER AND
AMERICAN STOCK TRANSFER & TRUST COMPANY, AS TRUSTEE."
(d) In the event of any transfer of a Converting Noteholder's
Conversion Shares, other than to a Permitted Transferee, the legend set forth in
Paragraph 3(c) of this Supplemental Indenture shall not be placed on the
certificates issued to the transferee, and no Contingent Shares, as hereinafter
defined, shall be issued with respect to such Conversion Shares.
(e) A Permitted Transferee shall mean a transferee which is either (i)
the estate of the Converting Noteholder or (ii) a transferee of Conversion
Shares pursuant to a transfer which reflects a transfer of record ownership only
and does not reflect any change in the identity of the beneficial owner of the
Conversion Shares.
4. Subject to Paragraph 5 of this Supplemental Indenture, additional shares
(the "Contingent Shares") of Common Stock shall be issued to the Converting
Noteholder with respect to the Converting Noteholder's Retained Shares, as
hereinafter defined, in the event that the Anniversary Price, hereinafter
defined, is less than $3.65, on the terms and conditions hereinafter set forth
in this Paragraph 4.
(a) The Anniversary Price shall mean the average closing price per
share of Common Stock on the principal stock exchange or market on which the
Common Stock is traded for the sixty (60) trading days immediately preceding the
date which is one year from the Effective Date, as hereinafter defined;
provided, however, that if, on any date, there is no trading in the Common
Stock, the average of the closing bid and asked prices shall be used.
(b) (i) The Effective Date shall mean the date that the Required
Percentage of Notes have been tendered for conversion. The Required Percentage
shall mean the percentage of the outstanding principal amount of Notes (based on
the principal amount of Notes outstanding on the date of this Supplemental
Indenture) which must be tendered for conversion in order for this Supplemental
Indenture to become effective. The Required Percentage shall be 95%; provided,
however, that the Company may, in its sole discretion, on notice to the Trustee,
reduce the Required Percentage to a percentage which is not less than 85%.
(ii) Notwithstanding the provisions of Paragraph 4(b)(i) of this
Supplemental Indenture, the Required Percentage shall be deemed to have been
attained if at least 70%, but less than 85%, of the outstanding principal amount
of Notes shall have been tendered for conversion and the Company shall have
delivered to the Trustee an Officers' Certificate stating that the Company has
the ability to pay, and agrees to pay, the principal amount of all Notes which
have not been tendered for conversion, either through available cash, then
existing and in-place lines of credit or irrevocable written commitments from
financially responsible parties with a demonstrated capability to fund such
irrevocable written commitments. If subsequent to the delivery of the Officers'
Certificate referred to in this Paragraph 4(b)(ii), the Required Percentage is
attained pursuant to Paragraph 4(b)(i) of this Supplemental Indenture, this
Paragraph 4(b)(ii) shall no longer apply.
-2-
<PAGE>
(c) Retained Shares shall mean Conversion Shares that (i) were issued
to the Converting Noteholder upon conversion of the Notes pursuant to this
Supplemental Indenture, (ii) were not transferred subsequent to the initial
issuance other than to a Permitted Transferee, and (iii) were held by either a
Converting Noteholder or a Permitted Transferee continuously from the date of
conversion to the Anniversary Date. No Contingent Shares will be issued in
respect of any Conversion Shares which were sold or otherwise transferred prior
to the Anniversary Date other than to a Permitted Transferee. The Company may
request documentary evidence with respect to any transfer which purports to be a
transfer to a Permitted Transferee.
(d) In the event that the any Converting Noteholder engages in any
short sales of Common Stock (including short sales against the box), the number
of Retained Shares shall be reduced by the number of shares of Common Stock
subject to such short sales or sales against the box.
(e)(i) The number of Contingent Shares issuable with respect to the
Retained Shares of any Converting Noteholder shall be determined by the
following formula:
Contingent Shares = (Retained Shares / N) x B x (1 - (P - $2.65))
In the foregoing formula:
N shall be the number of shares determined by dividing the principal amount
of Notes outstanding on the Effective Date prior to any conversion of any
Notes pursuant to this Supplemental Indenture by $3.65.
B shall be the number of shares of Common Stock determined by subtracting N
from 8,000,000.
P shall be the greater of the Anniversary Price or $2.65. If the Anniversary
Price is equal to or greater than $3.65, no Contingent Shares shall be
issued.
(ii) In case the Company shall after the date of conversion (A)
pay a dividend or make a distribution on its shares of Common Stock in shares of
Common Stock, (B) subdivide, split or reclassify its outstanding Common Stock
into a greater number of shares, (C) effect a reverse split or otherwise combine
or reclassify its outstanding Common Stock into a smaller number of shares, or
(D) issue any shares by reclassification of its shares of Common Stock, the
amount of Contingent Shares which may be issued and the related dollar amounts
contained in this paragraph (e) will be adjusted accordingly.
(f) Prior to the issuance of any Contingent Shares to any Converting
Noteholder, the Trustee and the Company shall have received from the beneficial
owner a statement to the effect that, except as expressly set forth on such
statement, (i) the Conversion Shares beneficially owned by the Converting
Noteholder have been beneficially owned by the Converting Noteholder (including
any Permitted Transferees) for an uninterrupted period of time commencing on the
date of the conversion of the Notes until the Anniversary Date, (ii) the
Converting Noteholder has not engaged in any short sales of Common Stock
(including short sales against the box), and (iii) the Converting Noteholder has
not assigned or transferred any beneficial interest in any of the Conversion
Shares.
-3-
<PAGE>
5. No Contingent Shares shall be issued in the event that, for any period
of twenty (20) consecutive trading days during the period commencing on the
Effective Date and ending on the day prior to one year from the Effective Date,
the average closing price of the Common Stock on the principal stock exchange or
market on which the Common Stock is traded is at least $3.65. In making the
foregoing computation, if, on any date, there is no trading in the Common Stock,
the average of the closing bid and asked prices shall be used for such date.
6. In the event that the Required Percentage of Notes shall not be tendered
for conversion by November 7, 1997, this Supplemental Indenture shall terminate
and have no force or effect, and the Indenture shall continue in full force and
effect as if it had not been amended by this Supplemental Indenture.
Notwithstanding the foregoing, the Company shall have the right, in its sole
discretion to postpone the date by which the Required Percentaged of Notes must
be converted on one or more occasions from November 7, 1997 to a date not later
than December 1, 1997, which date may be extended with the consent of the
holders of a majority of the principal amount of Notes which had been tendered
for conversion.
7. Each Note shall, without any action on the part of the holder, be
entitled the benefits of this Supplemental Indenture.
8. Except as amended by this Supplemental Indenture, the Indenture shall
continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
PORTA SYSTEMS CORP.
By:_____________________________________
William V. Carney, Chairman and
Chief Executive Officer
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:_____________________________________
, Authorized Officer
-4-
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,046
<SECURITIES> 0
<RECEIVABLES> 18,388
<ALLOWANCES> 0
<INVENTORY> 7,850
<CURRENT-ASSETS> 30,396
<PP&E> 4,793
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,838
<CURRENT-LIABILITIES> 50,455
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> (18,768)
<TOTAL-LIABILITY-AND-EQUITY> 50,838
<SALES> 45,934
<TOTAL-REVENUES> 45,934
<CGS> 28,043
<TOTAL-COSTS> 13,298
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,729
<INCOME-PRETAX> 2,282
<INCOME-TAX> 31
<INCOME-CONTINUING> 2,087
<DISCONTINUED> 0
<EXTRAORDINARY> 115
<CHANGES> 0
<NET-INCOME> 2,202
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
