3,550,660 Shares
PORTA SYSTEMS CORP.
Common Stock, par value $.01 per share
This prospectus relates to 3,550,660 shares of the Company's common stock,
par value $.01 per share ("Common Stock"), that may be sold from time to time by
certain selling stockholders ("Selling Stockholders") named under the caption
"Selling Stockholders." Of these shares, 1,840,592 shares of Common Stock are
outstanding shares that are owned by Selling Stockholders, 600,000 shares of
Common Stock are issuable upon the exercise of Series B Common Stock Purchase
Warrants (the "Series B Warrants"), 150,000 shares of Common Stock are issuable
upon the exercise of Series C Common Stock Purchase Warrants, which may be
issued in the future (the "Series C Warrants" and, together with the Series B
Warrants, the "Financing Warrants"), 500,000 shares of Common Stock issuable
upon the exercise of Series A Common Stock Purchase Warrants ("Series A
Warrants"), issued to and which may be issued to Arnhold and S. Bleichroeder,
Inc. ("Bleichroeder") and 460,068 shares of Common Stock issuable upon the
exercise of warrants (the "Foothill Warrants") issued to Foothill Capital
Corporation. The Financing Warrants, the Series A Warrants and the Foothill
Warrants are collectively referred to as the "Warrants." For a further
description of these securities, see "Background."
The Company will receive none of the proceeds from the sale of the Common
Stock owned by the Selling Stockholders. To the extent that the Selling
Stockholders exercise the Warrants, the Company may receive up to (a) $1,800,000
from the exercise of the Series B Warrants, based on an exercise price of $3.00
per share, (b) $780,000 from the exercise of the Series A Warrants based on an
exercise price of $1.56 per share, (c) $1,380,204 from the exercise of the
Foothill Warrants, based on an exercise price of $3.00 per share, and (d) an
amount to be determined from the 150,000 shares of Common Stock issuable upon
the exercise of the Series C Warrants, which may be issued in the future. See
"Background" for a description of the determination of the exercise price of the
Series C Warrants. The Foothill Warrants and the Series A Warrants have cashless
exercise provisions which will enable the holders of such warrants to receive
the number of shares of Common Stock as has a value equal to the difference
between the exercise price and the fair market value on the date of exercise. If
the holders exercise such cashless exercise rights, the Company will not receive
any proceeds from the exercise of the Foothill Warrants or Series A Warrants, as
the case may be. The cost of this registration statement, estimated at
approximately $50,000, is being paid by the Company pursuant to agreements with
the holders of the Common Stock and the Warrants.
The Selling Stockholders have advised the Company that any transfer of the
Warrants will be either pursuant to a sale at negotiated prices or by gift, and
any sale of the Common Stock owned by the Selling Stockholders or issuable upon
exercise of the Warrants held by the Selling Stockholders may be effected from
time to time in transactions (which may include block transactions) by or for
the account of the Selling Stockholders on the American Stock Exchange ("ASE")
or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise. Such securities may also be transferred by gift.
The Selling Stockholders may effect such transactions by selling
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Stockholders or to broker-dealers who may purchase securities as
principals and thereafter sell the securities from time to time on the ASE, in
negotiated transactions or otherwise. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers from whom such broker-dealer may act
as agents or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
The Selling Stockholders have advised the Company that no arrangements for the
sale of any of the shares of Common Stock included in this Prospectus have been
made.
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AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS," WHICH BEGIN ON PAGE 3.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April 15, 1998
<PAGE>
The Selling Stockholders understand that the anti-manipulative rules under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are set
forth in Regulation M, may apply to its sales in the market and the Company has
furnished the Selling Stockholders with a copy of Regulation M. The Company has
also informed the Selling Stockholders of the need for delivery of copies of
this Prospectus.
The Company furnishes its stockholders with annual reports containing
audited financial statements and with such other periodic reports as the Company
from time to time deems appropriate or as may be required by law. The Company
uses the calendar year as its fiscal year.
AVAILABLE INFORMATION
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Commission at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http//www.sec.gov. Such
reports, proxy statements and other information can also be inspected at the
offices of the American Stock Exchange, Inc., 86 Trinity Place, New York, New
York 10006-1881, on which the Company's Common Stock is listed. This Prospectus
does not contain all of the information set forth in the Registration Statement,
of which this Prospectus is a part, and exhibits thereto which the Company has
filed with Commission under the Securities Act of 1933, as amended (the
"Securities Act"), to which reference is hereby made.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
(File No. 1-8191) and are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) The Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders;
(3) The Company's Current Report on Form 8-K, dated January 2, 1998, as
filed with the Commission on February 6, 1998; and
(4) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, filed on April 26,
1977, which became effective on April 26, 1977.
All documents filed pursuant to Section 13(a), 13(c), 14 or 15 of the 1934
Act after the date of this Prospectus shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded, to
constitute a part of this Prospectus.
2
<PAGE>
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of the documents (excluding the exhibits thereto, unless such exhibits are
specifically incorporated by reference into such document) referred to above
which have been or may be incorporated herein by reference and not furnish
herewith. Requests for such documents should be directed to Mr. Edward B.
Kornfeld, Senior Vice President - Operations and Chief Financial Officer, Porta
Systems Corp., 575 Underhill Boulevard, Syosset, New York 11791, telephone (516)
364-9300.
RISK FACTORS
Purchasers of the Common Stock are cautioned that the statements in this
Prospectus, including statements in documents incorporated by reference in this
Prospectus, that are not descriptions of historical facts may be forward looking
statements that are subject to risks and uncertainties. In particular,
statements in this Prospectus, including any material incorporated by reference
in this Prospectus, that state the Company's or management's intentions,
beliefs, expectations, strategies, predictions or any other variations thereof
or comparable phraseology of the Company's future activities or other future
events or conditions are "forward-looking statements" as that term is defined
under the Federal securities laws. Forward-looking statements are subject to
risks, uncertainties and other factors, including, but not limited to, those
identified under "Risk Factors," those described in Management's Discussion and
Analysis of Financial Conditions and Results of Operations in the Company's Form
10-K for the year ended December 31, 1997, and in any other filings which are
incorporated by reference in this Prospectus, as well as general economic
conditions, any one or more of which could cause actual results to differ
materially from those stated in such statements.
An investment in the Company's Common Stock involves a high degree of
risk. Purchasers of the shares of Common Stock should consider carefully, along
with other factors, the following risks and should consult with his or her own
legal, tax and financial advisors with respect thereto.
Recent losses. For the year ended December 31, 1997, the Company incurred
a net loss of $6.9 million, or $2.22 per share (basic and diluted), on sales of
$62.2 million. Although the Company generated net income before extraordinary
gains of $1.3 million, or $.57 per share ($.23 per share on a diluted basis), on
sales of $58.0 million for the year ended December 31, 1996, prior to 1996, the
Company sustained significant losses before extraordinary gain, which amounted
to $32.8 million, or $22.45 per share, on sales of $61.2 million for the year
ended December 31, 1995, and $40.0 million, or $27.51 per share, on sales of
$69.0 million for the year ended December 31, 1994. The loss in 1997 reflects a
primarily non-cash charge of $11.5 million taken as a result of the reduction to
$3.65 from $6.55 in the conversion price of the Company's Zero Coupon Senior
Subordinated Notes due January 2, 1998 ("Zero Coupon Notes") and the conversion
of Zero Coupon Notes into Common Stock at the reduced conversion price. The
losses in 1995 and 1994 reflect declining gross margins, resulting from the
Company's illiquidity and other cash problems, and reflected (i) the inability
of the Company to purchase materials efficiently and to obtain materials from
certain suppliers, (ii) the underabsorption of significant overhead costs
allocated to costs of sales compared with the Company's standard costing
methods, (iii) the need to rework inventory in order to fulfill customer orders
and (iv) the losses and cash expenditures from unprofitable business units. In
the first quarter of 1996, the Company sold its fiber optics division, which had
been operating at a loss.
Working capital requirements. At December 31, 1997, the Company had a
working capital of $6.3 million. Since December 31, 1997, the Company's working
capital improved with the issuance of $6.0 million principal amount of 12%
Subordinated Notes due January 3, 2000. The proceeds from the sale of such notes
was used to pay the $2.8 million outstanding principal balance of its Zero
Coupon Notes which were due January 2, 1998, to reduce the Company's obligations
to Foothill, its senior lender, by approximately $2.95 million and for working
capital.
At December 31, 1997, the Company owed Foothill $17.9 million in addition
to standby letters of credit of approximately $6.8 million. Under the terms of
the Company's agreement with Foothill, as amended, the Company's obligations to
Foothill mature on August 31, 1999. The Company's obligations to Foothill are
secured by a security interest in substantially all of its assets. The Company's
revolving credit agreement with Foothill has been the Company's principal source
of funding for its operations since November 1994. Prior to August 31, 1999, the
maturity date of its obligations to Foothill, it will be necessary for the
Company either to extend its agreement with Foothill or negotiate lending
agreements with other lending institutions. There can be no assurance that the
Company will be able to extend its agreement with Foothill or enter into
acceptable agreements with other lenders. The failure to obtain the necessary
financing could have a material adverse effect upon the Company's business.
3
<PAGE>
Dependence on foreign sales. Approximately 71%, 70% and 73% of the
Company's sales for the years ended December 31, 1997, 1996 and 1995,
respectively, were made to foreign telephone operating companies. In foreign
markets, the Company faces considerable competition from other United States and
foreign telephone equipment manufacturers most of which are larger and have
substantially greater financial resources than the Company. In selling to
customers in foreign countries, there are inherent risks not normally present in
the case of sales to United States customers, including increased difficulty in
identifying and designing systems compatible with purchasers' operational
requirements, extended delays under the Company's Operational Support Systems
("OSS Systems") contracts in the completion of testing and purchaser acceptance
phases and the Company's receipt of final payments, and political and economic
change. In addition, to the extent that the Company establishes facilities in
foreign countries, the Company faces risks associated with currency devaluation,
difficulties in either converting local currency into dollars or transferring
funds to the United States, local tax and currency regulations and political
instability. Furthermore, OSS Systems are often marketed to lesser developed
countries, which may be unable to fund the purchase without the assistance of
the World Bank, a United Nations affiliate, or a similar organization, which
both delays and complicates the execution of a contract and the timing of
payments. Also, the economies of lesser developed countries are often unstable
and, as a result, such countries may be unable to perform their obligations.
Significant customers. During the years ended December 31, 1997, 1996 and
1995, the Company's five largest customers accounted for sales of $30.6 million,
or approximately 49% of sales, $27.8 million, or approximately 48% of sales, and
$31.5 million, or approximately 52% of sales, respectively. The Company's
largest customer is British Telecommunications, plc ("BT"). Sales to BT for the
1997, 1996 and 1995 amounted to approximately $13.9 million, $11.3 million and
$17.3 million, respectively, or approximately 22%, 20% and 28%, respectively, of
the Company's sales for such years. Therefore, any significant interruption or
decline in sales to BT may have a materially adverse effect upon the Company's
operations. During 1996, sales to Philippines Long Distance Telephone were $7.0
million, or approximately 12% of sales. During 1995, sales to the Korea
Telephone Company were $7.7 million, or approximately 13% of sales. No other
customer accounted for 10% or more of the Company's sales for any of such years.
Approximately 64% and 33% of accounts receivable at December 31, 1997 and 1996,
respectively, are due from the Company's five largest customers.
In November 1996, the Company amended its supply agreement with BT
pursuant to which it sold line connecting/protecting products to BT. Pursuant to
the amended agreement, the Company is no longer the exclusive supplier of these
products to BT. The amended contract also provides for a cross-license which, in
effect, enables BT to use certain of the Company's proprietary information to
modify or enhance products provided to BT and permits those products to be
manufactured by BT or others for its own purposes.
In addition, the former Bell operating companies continue to be the
ultimate purchasers of a significant portion of the Company's products sold in
the United States, while sales to foreign telephone operating companies
constitute the major portion of the Company's foreign sales. The Company's
contracts with these customers require no minimum purchases by such customers.
Significant customers for the Company's signal processing products include the
major domestic aerospace companies, Department of Defense service depots and
OEMs in the medical imaging and process control equipment industries. Both
catalog and custom designed products are sold to these customers.
Delays and unpredictability associated with OSS System contracts. OSS
Systems are complex systems and, in most applications, incorporate features
designed to respond to a purchaser's operational requirements and the particular
characteristics of the purchaser's telephone system. As a result, the
negotiation of a contract for an OSS System is an individualized and highly
technical process. In addition, contracts for OSS Systems frequently provide for
manufacturing, delivery, installation, testing and purchaser acceptance phases
which take place over periods of up to a year or more. Such contracts typically
contain performance guarantees by the Company and clauses imposing penalties on
the Company if "in-service" dates are not met. The installation, testing and
purchaser acceptance phases of these contracts may last longer than contemplated
by the contracts and, accordingly, amounts due under the contracts may not be
collected for extended periods. Delays in purchaser acceptance of the systems
and in the Company's receipt of final contract payments have occurred in
connection with a number of foreign sales. In addition, the Company has
experienced no steady or predictable flow of orders for OSS Systems.
Competition. The telephone equipment market in which the Company does
business is characterized by intense competition, rapid technological change and
a movement to private ownership of telecommunications equipment. In competing
for telephone operating company business, the purchase price of equipment and
associated operating expenses have become significant factors, along with
product design and long-standing equipment supply relationships. In the customer
premises equipment market, the Company operates in a market characterized by
distributors and installers of equipment and by commodity pricing.
4
<PAGE>
The Company competes directly with a number of large and small telephone
equipment manufacturers in the United States, with Lucent Technologies, Inc.
("Lucent") continuing to be the Company's principal United States competitor.
Lucent's greater resources, extensive research and development facilities,
long-standing equipment supply relationships with the operating companies of the
regional holding companies and history of manufacturing and marketing products
similar in function to those produced by the Company continue to be significant
factors in the Company's competitive environment. Furthermore, in the past,
competitors have used the Company's financial difficulties as a sales tool.
Currently, Lucent and a number of companies with much greater financial
resources than the Company produce, or have the design and manufacturing
capabilities to produce, products competitive with the Company's products. In
meeting this competition, the Company relies primarily on the performance and
design characteristics of its products of comparable performance or design, and
endeavors to offer its products at prices and with warranties that will make its
products competitive. Access to current technological advances is important to
the Company's ability to market its products. The inability of the Company to be
able to offer products which incorporate such technology could have a material
adverse effect upon its ability to market its products.
In connection with overseas sales of its line connecting/protecting
equipment, the Company has met with significant competition from United States
and foreign manufacturers of comparable equipment and expects this competition
to continue. In addition to Lucent, a number of the Company's overseas
competitors have significantly greater resources than the Company.
The Company competes directly with a number of substantial domestic and
international companies with respect to its sales of OSS Systems. In meeting
this competition, the Company relies primarily on the features of its line
testing equipment, its ability to customize systems and endeavors to offer such
equipment at prices and with warranties that will make it competitive.
Dependence upon key personnel. The Company may be dependent upon the
continued employment of certain key employees, including senior executive
officers. The failure of the Company to retain such employees may have a
material adverse effect upon the Company's business.
Legal proceedings. In July 1996, an action was commenced against the
Company and certain present and former directors 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. The complaint alleges breach of contract
against the Company and breach of fiduciary duty 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 $413,000; 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. The case is in the
discovery stage.
In July 1996, the Commission issued an order (the "Order") directing a
private investigation of the Company to determine whether there has been a
violation of Federal securities laws. The Commission indicated to counsel for
the Company that the investigation relates to the position of the Commission
staff that the independence of the Company's auditors for 1995, KPMG Peat
Marwick LLP ("Peat Marwick"), was adversely impacted by certain relationships
involving Peat Marwick, on one hand, and KPMG BayMark Strategies LLC ("BayMark")
and Edward R. Olson, the President of BayMark and the Company's former interim
president and chief operating officer, on the other hand. The Company is
continuing to cooperate with the Commission's investigation. The Company
retained BDO Seidman, LLP to reaudit the Company's 1995 financial statements,
which reaudit resulted in no changes to the Company's 1995 financial statements
as audited by Peat Marwick. The Company does not believe that the investigation
will result in any material liability on the part of the Company. The Company
has not been contacted by the Commission respecting this investigation since
November 1996.
Year 2000 Issue. Many existing computer programs use only two digits to
identify a year in a date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. This issue is referred to as the "Year 2000 issue." The
Company has initiated a company-wide program to prepare the Company's computer
systems and applications to deal with the Year 2000 issue. The Company expects
to incur internal staff costs and other expenses to prepare its systems for the
year 2000. The Company expects both to replace existing systems and to upgrade
other systems. The total cost of this effort is being evaluated. Although the
Company does not expect such costs to be material, there can be no assurance
that such costs will not be material.
5
<PAGE>
Status of American Stock Exchange listing. The Company presently meets the
requirements for the continued listing of its Common Stock on the ASE. However,
for several years prior to 1998 it did not meet such requirements, principally
because of its losses and deficiency in stockholders' equity. There can be no
assurance that the Company will continue to meet the ASE's requirements for
continued listing. If the Common Stock is delisted from the ASE for a failure to
meet such requirements, it may not be eligible for listing on the Nasdaq Stock
Market. Accordingly, any such delisting could have a material adverse effect
upon both the market for the Common Stock and the market price of the Common
Stock.
No Common Stock dividends anticipated. The Company has not paid dividends
on its Common Stock and does not anticipate paying dividends in the foreseeable
future. The Company presently intends to retain future earnings, if any, in
order to provide funds for use in the operation and expansion of its business
and, accordingly, does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. In addition, the Company's agreement with Foothill
prohibits payment of dividends.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of
Common Stock. To the extent that the Company receives any proceeds from the
exercise of any Warrants held or to be held by the Selling Stockholders, such
proceeds will be used by the Company for working capital and general corporate
purposes. The Foothill Warrants and the Series A Warrants have cashless exercise
provisions which will enable the holders of such warrants to receive the number
of shares of Common Stock as has a value equal to the difference between the
exercise price and the fair market value on the date of exercise. If the holders
exercise such cashless exercise rights, the Company will not receive any
proceeds from the exercise of the Foothill Warrants or Series A Warrants, as the
case may be.
BACKGROUND
Conversion of Zero Coupon Notes
On October 10, 1997, the Company executed a supplemental indenture
("Supplemental Indenture") with American Stock Transfer & Trust Company,
pursuant to which the conversion price of the Company's Zero Coupon Notes was
reduced to $3.65 from $6.55 per share. The Company has issued an aggregate of
6,464,415 shares of Common Stock upon conversion of Zero Coupon Notes in the
principal amount of approximately $23.6 million. In connection with the
execution of the Supplemental Indenture, the Company executed a registration
rights agreement pursuant to which it agreed to register the shares of Common
Stock owned by those holders of the Zero Coupon Notes who, as a result of their
conversion, became affiliates of the Company.
Prior to the execution of the Supplemental Indenture, the Company obtained
the agreement of certain holders of Zero Coupon Notes to convert their Zero
Coupon Notes into Common Stock if the amended conversion terms became effective.
In connection with such agreement, the Company agreed to elect Mr. Lloyd I.
Miller, III as a director of the Company. Mr. Miller was elected as a director
on March 17, 1998.
Pursuant to an agreement dated May 1, 1997, between the Company and
Bleichroeder relating to services rendered by Bleichroeder in connection with
the negotiation and implementation of the amended conversion terms of the Zero
Coupon Notes the Company issued Series A Warrants to purchase 400,000 shares of
Common Stock to Bleichroeder, of which warrants to purchase 350,000 shares of
Common Stock are presently exercisable and warrants to purchase 50,000 shares of
Common Stock become exercisable in May 1998. The Company also agreed to issue to
Bleichroeder Series A Warrants to purchase an additional 100,000 shares of
Common Stock in the event that Bleichroeder provides services to the Company in
connection with its efforts to find a new secured lender. The exercise price of
the Series A Warrants is $1.56 per share. The Series A Warrants contain (i) a
provision for cashless exercise of such warrants and (ii) provisions that
protect Bleichroeder against dilution by adjustment of the exercise price in
certain specified events, such as stock dividends, stock splits, mergers, sale
of substantially all of the Company's assets and other similar events.
January 1998 Interim Financing
In January 1998, the Company issued and sold 60 units for $100,000 a unit.
Each unit consisted of a 12% Note in the principal amount of $100,000 and Series
B Warrants to purchase 10,000 shares of Common Stock at $3.00 per share.
Pursuant to the subscription agreement for the units, the Company agreed that,
to the extent that any 12% Note is outstanding one year from the date on such
Note was issued (the "Anniversary Date of the Note"), the Company shall issue to
the holder of such Note on the Anniversary Date of the Note a Series C Warrant
to purchase 25 shares of Common Stock for each $1,000 principal amount of 12%
Note outstanding on the Anniversary Date of the Note. The Series C Warrant will
have an exercise price equal to the average of the closing price of the Common
Stock on each of the five trading days preceding the Anniversary Date of the
Note with respect to which the Series C Warrant is being issued. The $6.0
million gross proceeds from the sale of the units was used to pay the remaining
principal amount of Zero Coupon Notes which had not been converted
(approximately $2.8 million), and to pay a portion of the Company's debt to
Foothill, the Company's secured lender (approximately $2.95 million).
6
<PAGE>
The balance was added to working capital.
The Series B Warrants are exercisable during the period commencing on the
date of issuance and terminating on December 31, 2002. The Series C Warrants, if
issued, will be exercisable during the period commencing on the date of issuance
and terminating on December 31, 2003. The Financing Warrants provide the holders
with certain cashless exercise provisions in the event that the shares of Common
Stock issuable upon the exercise of the Financing Warrants are not registered
under the Securities Act. The Financing Warrants contain provisions that protect
the holders thereof against dilution by adjustment of the exercise price in
certain specified events, such as stock dividends, stock splits, mergers, sale
of substantially all of the Company's assets and other similar events.
In connection with the sale of the units, the Company issued 120,000
shares of Common Stock to Bleichroeder, which served as placement agent for the
sale of the units.
Foothill Warrants
In January 1998, the Company amended its agreement with Foothill, as of
November 30, 1997, to extend the expiration date of the agreement and the
Company's obligations to Foothill under the agreement from November 30, 1998 to
August 31, 1999. In connection with the amendment, the Company reduced to $3.00
per share the exercise price of warrants to purchase an aggregate of 460,068
shares of Common Stock which were held by Foothill and extended the term of such
warrants to November 30, 2002. The Foothill Warrants contain (i) a provision for
cashless exercise of such warrants and (ii) provisions that protect Foothill
against dilution by adjustment of the exercise price in certain specified
events, such as stock dividends, stock splits, mergers, sale of substantially
all of the Company's assets and other similar events and certain sales of Common
Stock at a price below the exercise price of the Foothill Warrants.
Conversion of 6% Convertible Subordinated Debentures
In January 1998, the Company issued 330,372 shares of Common Stock in
exchange for cancellation of $1.26 million principal amount of its 6%
Convertible Subordinated Debentures Due July 1, 2002 ("6% Debentures") plus
accrued interest. Pursuant to an agreement with the holders of such 6%
Debentures, the Company agreed to register such shares pursuant to the
Securities Act.
SELLING STOCKHOLDERS
The following table sets forth (i) the name of each Selling Stockholder,
(ii) the nature of any position, office or other material relationship, if any,
which each Selling Stockholder has had with the Company or any of its affiliates
within the last three years, (iii) the number of shares of Common Stock owned by
each Selling Stockholder prior to the offering, (iv) the number of shares of
Common Stock offered for each Selling Stockholder's account and (v) the
percentage owned by each Selling Stockholder after completion of the offering.
<TABLE>
<CAPTION>
Number Number of
of Shares Shares Offered Number of
Owned Prior For Account of Shares Owned Percentage Owned
Selling Stockholder to Offering (1) Selling Stockholder (1) After Offering After Offering (2)
------------------- --------------- ----------------------- -------- ------------------
<S> <C> <C> <C> <C>
Lloyd I. Miller, III (3),(5) 34,246 34,246 0 *
Lloyd I. Miller, Trust A-2 (4), (5) 31,250 31,250 0 *
Lloyd I. Miller, Trust A-4 (5) 464,063 464,063 0 *
Lloyd I. Miller, Trust C (5) 363,705 363,705 0 *
Milfam I, L.P. (5) 694,502 694,502 0 *
Milfam II, L.P. (5) 110,462 110,642 0 *
Lloyd I. Miller III Keogh Plan (4) 31,250 31,250 0 *
Lloyd I. Miller, Trustee f/b/o
Kimberly S. Miller (5), (6) 6,250 6,250 0 *
Lloyd I. Miller, Trustee f/b/o
Catherine C. Miller (5), (6) 6,250 6,250 0 *
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Number Number of
of Shares Shares Offered Number of
Owned Prior For Account of Shares Owned Percentage Owned
Selling Stockholder to Offering (1) Selling Stockholder (1) After Offering After Offering (2)
------------------- --------------- ----------------------- -------- ------------------
<S> <C> <C> <C> <C>
Lloyd I. Miller, custodian under
Florida UGMA for Alexandra B.
Miller (5), (6) 6,250 6,250 0 *
Lloyd I. Miller, custodian under
Florida UGMA for Lloyd I. Miller,
IV (5), (6) 6,250 6,250 0 *
Lloyd I. Miller, Trustee for the
Lloyd I. Miller III, Generation
Skipping Trust u/a/d 12/31/91 6,250 6,250 0 *
(5),(6)
Dail Miller (5) 1,000 1,000 0 *
Foothill Capital Corporation (7) 460,068 460,068 0 *
Arnhold and S. Bleichroeder, Inc. (8) 1,064,076 757,500 306,576 3.5%
Smith Management Company, Inc. 330,372 330,372 0 *
Clarex Limited (9) 62,500 62,500 0 *
Acamas Anstalt (9) 62,500 62,500 0 *
Senvest International L.L.C. (9) 62,500 62,500 0 *
Senvest Master Fund L.P. (10) 25,000 25,000 0 *
Winston J. Churchill (10) 25,000 25,000 0 *
The Spiro Family Foundation (10) 25,000 25,000 0 *
Arthur M. Spiro, IRA (10) 25,000 25,000 0 *
Intergroup Corp. (11) 12,500 12,500 0 *
John V. Winfield (11) 12,500 12,500 0 *
Portsmouth Square, Inc. (11) 12,500 12,500 0 *
Santa Fe Financial Corp. (10) 25,000 25,000 0 *
Offshore Strategies Ltd. (10) 25,000 25,000 0 *
Laterman & Co. L.P. (11) 12,500 12,500 0 *
Laterman Strategies 90's LLC (10) 25,000 25,000 0 *
Romulus Holdings (9) 62,500 62,500 0 *
Elmira Realty Management Corp.
Pension & Profit Sharing Plan (11), (12) 12,500 12,500 0 *
Iroquois Builders (11) 12,500 12,500 0 *
Bobbi & Steven Investment LLC (11) 12,500 12,500 0 *
Lawrence J. Arem & Stephen T.
Burmundy TTEE Klehr Harrison
Harvey Branzburg & Ellers FBO
Leonard Klehr (6) 6,250 6,250 0 *
</TABLE>
- --------------------
* Less than one percent.
(1) Includes shares of Common Stock issuable upon the exercise of the Financing
Warrants, Foothill Warrants and/or the Series A Warrants. The number of
shares issuable upon exercise of Series C Warrants represents the maximum
number of shares issuable upon exercise of such warrants if such Warrants
are issued. See "Background -- January 1998 Interim Financing."
(2) Assumes exercise of all of such Selling Stockholder's Financing Warrants,
Foothill Warrants and/or Series A Warrants. Based on 9,060,954 shares of
Common Stock outstanding.
(3) In connection with the Company's agreement with certain holders of the Zero
Coupon Notes to convert their debt securities into shares of Common Stock,
the Company agreed to have Mr. Miller elected to the Board of Directors
(the "Board"). Mr. Miller was elected to the Board on March 17, 1998.
8
<PAGE>
(4) Consists solely of 25,000 shares of Common Stock issuable upon the exercise
of the Series B Warrants and 6,250 shares of Common Stock issuable upon the
exercise of the Series C Warrants.
(5) Mr. Miller is (a) the investment adviser for the Lloyd I. Miller, Trust
A-2, the Lloyd I. Miller, Trust A-4, and the Lloyd I. Miller, Trust C, (b)
the manager of the managing general partner of Milfam I, L.P. and Milfam
II, L.P., and (c) the trustee of trusts and custodian of accounts for the
benefit of his family members. The trustee of the Lloyd I. Miller, Trusts
A-2, A-4 and C is PNC Bank, National Association. As a result of his
investment advisory agreement, Mr. Miller has shared voting and dispositive
power as to the shares held by Trust A-2, Trust A-4 and Trust C. He also
has shared voting and dispositive power as to the shares held by the Lloyd
I. Miller Trust f/b/o Kimberly Miller. Mr. Miller has sole voting and
dispositive power as to all of the other shares, including the shares held
in the custodial accounts and by the other trusts, except for the shares
owned by his wife, Dail Miller, as to which he disclaims beneficial
ownership.
(6) Consists solely of 5,000 shares of Common Stock issuable upon the exercise
of the Series B Warrants and 1,250 shares of Common Stock issuable upon the
exercise of the Series C Warrants.
(7) Consists solely of 460,068 shares of Common Stock issuable upon the
exercise of the Foothill Warrants.
(8) Consists of (a) 426,576 shares of Common Stock owned by Bleichroeder, (b)
350,000 shares of Common Stock issuable upon exercise of the Series A
Warrants currently held by Bleichroeder, (c) 50,000 shares of Common Stock
issuable upon exercise of the Series A Warrants to be issued in May 1998,
(d) 100,000 shares of Common Stock issuable upon exercise of the Series A
Warrants which may be issued to Bleichroeder under certain conditions, (e)
110,000 shares of Common Stock issuable upon the exercise of the Series B
Warrants, and (f) 27,500 shares of Common Stock issuable upon the exercise
of the Series C Warrants.
(9) Consists solely of 50,000 shares of Common Stock issuable upon the exercise
of the Series B Warrants and 12,500 shares of Common Stock issuable upon
the exercise of the Series C Warrants.
(10) Consists solely of 20,000 shares of Common Stock issuable upon the exercise
of the Series B Warrants and 5,000 shares of Common Stock issuable upon the
exercise of the Series C Warrants (when issued).
(11) Consists solely of 10,000 shares of Common Stock issuable upon the exercise
of the Series B Warrants and 2,500 shares of Common Stock issuable upon the
exercise of the Series C Warrants (when issued).
(12) Warren H. Esanu, has been a director of the Company since April 1997. He
also served as a director from 1989 to 1996 and as the Chairman of the
Board from March 1996 to October 1996. He has sole voting and dispositive
power with respect to these shares under the terms of the Elmira Realty
Management Corp. Pension and Profit Sharing Plan. Mr. Esanu is of counsel
to Esanu Katsky Korins & Siger, LLP, general counsel to the Company.
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that (i) any transfer of
any of the Warrants held by the Selling Stockholders will be either pursuant to
a sale in transactions at negotiated prices or by gift and (ii) any sales of the
shares of Common Stock which are outstanding or which are issuable upon exercise
of such warrants may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Stockholder) on
the ASE or in negotiated transactions, a combination of such methods of sale or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods of sale or
otherwise, and securities may be transferred by gift.
The Selling Stockholders may effect such transactions by selling such
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Stockholders or to broker-dealers who may purchase Warrants or
shares of Common Stock as principals and thereafter sell the securities from
time to time on the ASE, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholder and/or the purchasers
from whom such broker-dealer may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer may
exceed customary commissions).
Bleichroeder, which is one of the Selling Stockholder, is a registered
broker-dealer, and may sell shares which it owns or which may be owned by its
customers. However, Bleichroeder has no agreement or understanding with respect
to any sale of its shares of Common Stock or any sales on behalf of other
Selling Stockholders.
9
<PAGE>
The Selling Stockholders and broker-dealers, if any, acting in connection
with such sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act and any commission received by them and any
profit on the resale of the securities might be deemed to be underwriting
discount and commissions under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby has been passed upon by
Esanu Katsky Korins & Siger, LLP, legal counsel to the Company. Mr. Warren H.
Esanu, a director of the Company is of counsel to Esanu Katsky Korins & Siger,
LLP.
EXPERTS
The consolidated financial statements incorporated by reference in this
Prospectus and elsewhere in the Registration Statement to the extent and for the
periods indicated in their report have been audited by BDO Seidman, LLP,
independent certified public accountants, and are included herein in reliance
upon the authority of such firm as experts in accounting and auditing in giving
such report.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Delaware General Corporation Law ("DGCL"), a corporation may
indemnify any director, officer, employee or agent against expense (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with any specified threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe that his or her conduct was unlawful.
The Company's Certificate of Incorporation provides, among other things,
that the Company shall indemnify, to the fullest extent permitted under the DGCL
as it may be amended from time to time, any person who is or was a director or
officer of the Company and who is or was a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Company), by reason of the fact that such person (i)
is or was a director or officer of the Company, or (ii) is or was serving at the
request of the Company as director, officer, employee, agent of another
corporation, partnership, joint venture, trust, or other enterprise (including
service with respect to employee benefit plans), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) actually and reasonably
incurred by such person in connection with such action, suit or proceeding. This
indemnification continues as to a person who has ceased to be a director or
officer of the Company and inures to the benefit of such person's heirs,
executors and administrators. The right of indemnification under the Certificate
of Incorporation is deemed to be a contract right.
The Company also maintains directors and officers liability insurance
("D&O Insurance"). The D&O Insurance covers any person who has been or is an
officer or director of the Company or of any of its subsidiaries for all
expense, liability and loss (including attorneys' fees, investigation costs,
judgments, fines, penalties and amounts paid or to be paid in settlement)
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
10
<PAGE>
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TABLE OF CONTENTS
Page
----
Available Information ..................................................... 2
Incorporation of Certain Documents by
Reference ................................................................. 2
Risk Factors .............................................................. 3
Use of Proceeds ........................................................... 6
Background ................................................................ 6
Selling Stockholders ...................................................... 7
Plan of Distribution ...................................................... 9
Legal Matters ............................................................. 10
Experts ................................................................... 10
Indemnification of Officers and Directors ................................. 10
----------
================================================================================
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3,550,660 Shares
Porta Systems Corp.
Common Stock, par value $.01 per share
----------
PROSPECTUS
----------
April 15, 1998
================================================================================
