================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (IRS Employer
of incorporation or organization) Identification No.)
575 Underhill Boulevard, Syosset, New York 11791
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 364-9300
--------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 American Stock Exchange
- ---------------------------- -----------------------
(Title of Class) (Name of Exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K. [ ]
State aggregate market value of the voting stock held by non-affiliates of
the registrant: $32,119,200 as of March 13, 2000.
Indicate the number of shares outstanding of each of the registrant's
class of common stock, as of the latest practicable date: 9,516,800 shares of
Common Stock, par value $.01 per share, as of March 13, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement in connection with its 1999 Annual
Meeting of Stockholders to be filed within 120 days of the close of the
registrant's fiscal year is incorporated by reference into Part III of the
Report.
================================================================================
<PAGE>
Item 1. Business
Porta Systems Corp. develops, designs, manufactures and markets a broad
range of standard and proprietary telecommunications equipment and integrated
software applications for sale domestically and internationally. Porta's core
products, focused on ensuring communications for service providers worldwide,
fall into three categories:
Computer-based operation support systems. Our operation support systems,
which we call our OSS systems, focus on the access loop and are components of
telephone companies' service assurance and service delivery initiatives. The
systems primarily focus on trouble management, line testing, network
provisioning, inventory and assignment, and automatic activation, and most
currently single ended line qualification for the delivery of xDSL high
bandwidth services. We market these systems principally to foreign telephone
operating companies in established and developing countries primarily in Asia,
South and Central America and Europe.
Telecommunications connection and protection equipment. These systems are
used to connect copper-wired telecommunications networks and to protect
telecommunications equipment from voltage surges. We market our copper
connection equipment and systems to telephone operating companies and customer
premise systems providers in the United States and foreign countries.
Signal processing equipment. These products, which we sell principally for
use in defense and aerospace applications, support copper wire-based
communications systems.
Porta Systems Corp. is a Delaware corporation incorporated in 1972 as the
successor to a New York corporation incorporated in 1969. Our principal offices
are located at 575 Underhill Boulevard, Syosset, New York 11791; telephone
number, 516-364-9300. References to Porta include its subsidiaries, unless the
context indicates otherwise.
Forward-Looking Statements
The statements in this Form 10-K Annual Report that are not descriptions
of historical facts may be forward looking statements that are subject to risks
and uncertainties. In particular, statements in this Form 10-K Annual Report,
including any material incorporated by reference in this Form 10-K, that state
our intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions are forward-looking statements. Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under Risk Factors, and those described in Management's
Discussion and Analysis of Financial Condition and Results of Operations and in
any other filings we make with the Securities and Exchange Commission, 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.
Risk Factors
We recently incurred net losses from our operations, and our losses may
continue. We incurred a net loss of $13,686,000, or $1.44 per share (basic and
diluted), on sales of $38,936,000 for 1999. The loss resulted from a decline in
sales of $20,407,000, or 34%, from 1998 combined with a reduced gross margin and
an increase in selling, general and administrative expenses. We cannot give
assurance that we will be able to operate profitably in the future.
<PAGE>
We have a need to finance our working capital requirements. Our working
capital at December 31, 1999 was $6,135,000, compared to $14,262,000 at December
31, 1998. However, as of December 31, 1999, our long-term debt includes
$17,518,000 ($19,668,000 at April 10, 2000) due to our senior lender, all of
which is due and payable on July 3, 2001, at which time our agreement with the
senior lender will terminate. At December 31, 1999, we did not have sufficient
resources to pay the senior lender at maturity and we do not expect to generate
the necessary cash from our operations to enable us to make that payment. In
addition, $6,000,000 of subordinated notes were outstanding as of December 31,
1999 that mature on January 3, 2001. We can extend these Notes to July 3, 2001.
As of April 10, 2000 $5,100,000 of these notes can be extended by Porta to July
3, 2001. The remaining $900,000 can be extended under certain conditions. We
cannot give any assurance that we will be able to either pay our obligations to
our senior or subordinated lenders at their respective maturity dates or renew
our agreement with our senior lender or enter into an agreement with a new
lender. At December 31, 1999, we were in default on a covenant on our agreement
with our senior lender. Such default was waived; however, we cannot assure you
that any future defaults will be waived, in which event the principal and
interest on our obligations to our senior lender may become immediately due and
payable. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We are heavily dependent on foreign sales. Approximately 62% of our sales
in 1999, 60% of our sales in 1998 and 69% of our sales for 1997, were made to
foreign telephone operating companies. In selling to customers in foreign
countries, we are exposed to inherent risks not normally present in the case of
our sales to United States customers, including extended delays in completing
and customer final payment for our Operational Support Systems contracts, and
political and economic change. In foreign markets, we face considerable
competition from other United States and foreign telephone equipment
manufacturers most of which are larger and have substantially greater financial
resources than us. In addition, if we establish facilities in foreign countries,
we face 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.
We rely heavily on British Telecommunications for most of our sales. Our
largest customer in both 1999 and 1998 was British Telecommunications. Sales to
British Telecommunications for 1999 were $7,825,000, or approximately 20% of
sales, and sales in 1998 were$15,349,000, or 26% of sales. Therefore, any
significant interruption or decline in sales to British Telecommunications may
have a materially adverse effect upon our operations. Under our agreement with
British Telecommunications, we give British Telecommunications the right to use
our technology or have products using our technology manufactured for it by
others.
We experience difficulties with Operations Support Systems contracts. We
experience delays in purchaser acceptance of the Operations Support Systems and
our receipt of final contract payments in connection with a number of foreign
sales. In addition, we have no steady or predictable flow of orders for
Operations Support Systems and the negotiation of a contract for an operations
support system is an individualized and highly technical process. These
contracts typically contain performance guarantees by us and clauses imposing
penalties on us if we do not meet the contractual in-service dates. 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.
Because of our small size and our financial problems, we may have
difficulty competing for business. We compete directly with a number of large
and small telephone equipment manufacturers in the United States, with Lucent
Technologies, Inc. continuing to be our principal United States competitor.
Lucent's greater resources, extensive research and development facilities,
long-standing equipment supply relationships with the regional Bell operating
companies and history of manufacturing and marketing products similar in
function to those produced by us continue to be significant factors in our
competitive environment. Other domestic and foreign companies also have
significantly greater resources than we do. Furthermore, in the past,
competitors have used our financial difficulties as a sales tool and our loss
for 1999, combined with our reduced working capital and the scheduled expiration
of our agreement with our senior lender in 2001 may place us in a competitive
disadvantage.
2 of 25
<PAGE>
We require access to current technological developments. We rely primarily
on the performance and design characteristics of our products and we try to
offer our products at prices and with warranties that will make our products
competitive. Our business could be adversely affected if we cannot obtain
licenses for such updated technology or self develop state-of-the-art
technology.
We rely on certain key employees. We may be dependent upon the continued
employment of certain key employees, including our senior executive officers.
Our failure to retain such employees may have a material adverse effect upon our
business.
We do not pay dividends on common stock. We have not paid dividends on our
common stock and do not anticipate paying dividends in the foreseeable future.
We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, do not
anticipate paying cash dividends on our common stock in the foreseeable future.
In addition, our agreement with our senior secured lender prohibits payment of
dividends.
Products
Operations Support Systems. We sell our OSS systems primarily to telephone
operating companies in established and developing countries in Asia, South and
Central America and Europe, and to a lesser extent, in the United States.
Porta's principal OSS systems are computer-based testing, provisioning,
activation and trouble management products which include software and capital
equipment and typically sell for prices ranging from several hundred thousand to
several million dollars.
The testing products are designed to automatically test for and diagnose
problems in customer telephone lines and to notify telephone company service
personnel of required maintenance. The associated trouble management system
provides automated record keeping (including repair and disposition records) and
analyzes these records to enable the telephone company to identify recurring
problems and equipment deterioration and to fulfill maintenance service level
agreement obligations. The integration of these systems provides a service
assurance function for telephone companies.
A major component of the testing system is the "test head," which provides
the access to, and tests the required telephone line. We have continually
developed our test head capability to meet the changing requirements of the
customer loop, and have recently introduced our latest advanced technology
platform (sixth generation) product, the MKIII. An enhanced version of the
MKIII, the Sherlock, will provide the capability to determine whether customer
lines are xDSL capable, enabling telephone companies to expeditiously
characterize their outside plant, and optimize their responsiveness to market
conditions.
Porta's other software applications, including the automated assignment of
facilities and activation of service, form part of a telephone company's service
activation function, and can be integrated with the testing and trouble
management systems, to provide a comprehensive access loop capability including
flow-thru. In addition, if requested by customers, Porta develops software to
meet specific customer requirements, including integration of its systems with
telephone company legacy or third party OSS systems.
Porta has entered into a number of agreements with suppliers of
complementary market ready products and plans to offer those products through
its distribution channels to its customer base. Those products enhance the
customers Service Delivery and Service Assurance initiatives and address
specific operations areas such as Facility and Records Verification and
purification, Work Force scheduling and task mapping, and Call Fraud Detection.
3 of 25
<PAGE>
Porta's OSS products are complex and, in most applications, incorporate
features designed to respond to the purchaser's operational requirements and the
particular characteristics of the purchaser's telephone system and operation
processes. 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 ranging from
several months to a year or more. Such contracts typically contain performance
guarantees by Porta and clauses imposing penalties on us 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 Porta's receipt of final
contract payments have occurred in connection with a number of foreign sales. In
addition, Porta has not experienced a steady or predictable flow of orders for
OSS systems.
Telecommunications Connection Equipment. Porta's copper
connection/protection equipment and systems are used by telephone operating
companies, by owners of private telecommunications equipment and by
manufacturers and suppliers of telephone central office and customer premises
equipment. Products of the types comprising Porta's telecommunications
connection equipment are included as integral parts of all domestic and foreign
telephone and telecommunications systems. Such products are sold in a worldwide
market, which generally grows in proportion to increases in the number of
telephone subscribers and owners of private telecommunications equipment, as
well as to increases in upgrades to modern digital switching technology such as
DSL, ADSL, and ISDN lines.
Porta's connection equipment consists of connector blocks and protection
modules used by telephone companies to interconnect copper-based subscriber
lines to switching equipment lines. The protector modules protect central office
personnel and equipment from electrical surges. The need for protection products
has increased as a result of the worldwide move to digital technology, which is
extremely sensitive to damage by electrical overloads, and because private
owners of telecommunications equipment now have the responsibility to protect
their equipment from damage caused by electrical surges. Line
connecting/protecting equipment usually incorporates protector modules to
safeguard equipment and personnel from injury due to power surges. Currently,
these products include a variety of connector blocks, protector modules and
frames used in telephone central switching offices, PBX installations, multiple
user facilities and customer premise applications.
Porta also has developed an assortment of frames for use in conjunction
with our traditional line of connecting/protecting products. Frames for the
interconnection of copper circuits are specially designed structures which, when
equipped with connector blocks and protectors, interconnect and protect
telephone lines and distribute them in an orderly fashion allowing access for
repairs and changes in line connections. One of our frame products, the CAM
frame, is designed to produce computer-assisted analysis for the optimum
placement of connections for telephone lines and connector blocks mounted on the
frame.
Porta's copper connection/protection products are used by many of the
Regional Bell Operating Companies (RBOC's) as well as by independent telephone
operating companies (CLEC's) in the United States and owners of private
telecommunications equipment. These products are also purchased by other
companies for inclusion within their systems. In addition, our
telecommunications connection products have been sold to telephone operating
companies in various foreign countries. This equipment is compatible with
existing telephone systems both within and outside the United States and can
generally be used without modification, although we do custom design
modifications to accommodate the specific needs of our customers.
Signal Processing Products. Porta's signal processing products include
data bus systems and wideband transformers. Data bus systems, which are the
communication standard for military and aerospace systems, require an extremely
high level of reliability and performance. Wideband transformers are required
for ground noise elimination in video imaging systems and are used in the
television and broadcast, medical imaging and industrial process control
industries.
4 of 25
<PAGE>
The table below shows, for the last three fiscal years, the contribution
made to Porta's sales by each of its major categories of the telecommunications
industry:
Sales by Product Category
Years Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
OSS Systems $14,254 37% $27,318 46% $29,561 48%
Line Connecting
/Protecting
Equipment 18,189 47% 24,291 41% 23,753 38%
Signal Processing 6,328 16% 7,539 13% 8,280 13%
Other 165 0% 195 0% 636 1%
------- ---- ------- ---- ------- ----
Total $38,936 100% $59,343 100% $62,230 100%
======= ==== ======= ==== ======= ====
Markets
Porta supplies equipment and systems to telephone companies used to
provide improved services to ensure communication to their customers. In
addition, we provide businesses with systems, which improve their internal
telecommunication systems.
Telephone networks in certain regions of the world, notably Latin America,
Eastern Europe and certain areas in the Asia/Pacific region, were designed to
carry voice traffic and are not well suited for high-speed data transmissions or
for other forms of telecommunications that operate more effectively with digital
telecommunications equipment and lines. The telephone networks in these
countries are also characterized by a very low ratio of telephone lines to
population. Countries with emerging telecommunication networks have to rapidly
add access lines in order to increase the availability of telephone service and
to significantly upgrade the quality of the lines already in service.
Porta's OSS systems are designed to meet many of the needs of a rapidly
changing telephone network. OSS systems facilitate rapid change and expansion
without a comparable increase in the requirement for skilled technicians, while
the computerized line test system insures increased quality and rapid
maintenance and repair of subscriber local loops. The automated database, which
computerizes the inventory and maintenance history of all subscriber lines in
service, helps to keep the rapid change under control.
During 1999, approximately 37% of Porta's sales consisted of OSS products.
5 of 25
<PAGE>
As a telephone company expands the number of its subscriber lines, it also
requires additional connection equipment to interconnect and protect those lines
in its central offices. We provide a line of copper connection equipment for
this purpose. Recent trends towards the transmission of high frequency signals
on copper lines are sustaining this market. Less developed countries, such as
those with emerging telecommunications networks or those upgrading to digital
switching systems, provide a growing market for copper connection and protection
equipment.
The increased sensitivity of the newer digital switches to small amounts
of voltage requires the telephone company which is upgrading its systems to
digital switching systems to also upgrade its central office
connection/protection systems in order to meet these more stringent protection
requirements. We supply central office connection/protection systems to meet
these needs.
During 1999, approximately 47% of Porta's sales were made to customers in
this category.
Porta's line of signal processing products is supplied to customers in the
military and aerospace industry as well as manufacturers of medical equipment
and video systems. The primary communication standard in new military and
aerospace systems is the MIL-STD-1553 Command Response Data Bus, an application
which requires an extremely high level of reliability and performance. Products
are designed to be application specific to satisfy the requirements of each
military or aerospace program.
Porta's wideband transformers are required for ground noise elimination in
video imaging systems and are used in the television and broadcast, medical
imaging and industrial process control industries. If not eliminated, ground
noise caused by poor electrical system wiring or power supplies, results in
significant deterioration in system performance, including poor picture quality
and process failures in instrumentation. The wideband transformers provide a
cost effective and quick solution to the problem without the need of redesign of
the rest of the system.
During 1999, signal processing equipment accounted for approximately 16%
of Porta's sales.
Marketing and Sales
Porta operates through three business units, which are organized by
product line, and with each having responsibility for the sales and marketing of
its products.
When appropriate to obtain sales in foreign countries, we may enter into
arrangements and technology transfer agreements covering our products with local
manufacturers and participate in manufacturing and licensing arrangements with
local telephone equipment suppliers.
In the United States and throughout the world, we use independent
distributors in the marketing of all copper based products to the RBOC's and the
customer premises equipment market. All distributors marketing copper-based
products also market directly competing products. In addition, Porta continues
to promote the direct marketing relationships it developed in the past with
telephone operating companies.
We have an agreement with British Telecommunications plc ("BT") covering
Porta's line connecting/protecting products. This agreement which will expire on
August 31, 2001, provides, among other things, that Porta is a non-exclusive
supplier to BT for these products. BT purchased line connecting/protecting
products amounting to $6,566,000 (17% of sales) in 1999, $11,345,000 (19% of
sales) in 1998, and $9,397,000 (15% of sales) in 1997. During these years, we
also sold our products to unaffiliated suppliers to BT for resale to BT. Our
agreement with BT provides for a cross license which, in effect, enables BT to
use certain of our proprietary information to modify or enhance products
provided to BT and permits BT to manufacture or engage others to manufacture
those products.
6 of 25
<PAGE>
Porta's OSS systems historically have been sold to foreign telephone
operating companies which are government controlled. Recently, Porta has entered
into sales, marketing and management co-operative agreements and strategic
alliances with various companies.
Subsequent to December 31, 1999, Porta entered into a multi-year sales,
marketing, and management co-operative agreement with Fujitsu Telecommunications
Europe LTD to market Internet infrastructure products. Under the agreement,
Fujitsu will sell and market Porta's advanced Internet infrastructure
technologies, including ADSL Single Ended Line Qualification System (SELQ) for
broadband services and the sixth generation Sherlock remote test unit to telecom
service operators in the United Kingdom and the remainder of Europe. Porta
anticipates this significant relationship may result in up to $50,000,000 in
sales over the next four years.
Porta's signal processing products are sold primarily to US military and
aerospace prime contractors, and domestic original equipment manufacturers and
end users.
The following table sets forth for the last three fiscal years the
Company's sales to customers by geographic region:
Sales to Customers By Geographic Region (1)
Year Ended December 31,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
North America $14,664 38% $20,830 35% $19,269 31%
United Kingdom 15,673 40% 20,441 34% 18,640 30%
Asia/Pacific 4,159 11% 7,181 12% 10,278 17%
Other Europe 3,130 8% 3,377 6% 10,587 17%
Latin America 1,257 3% 7,463 13% 2,429 4%
Middle East 47 0% 51 0% 879 1%
Other 6 0% -- 0% 148 0%
------- ---- ------- ---- ------- ----
Total Sales $38,936 100% $59,343 100% $62,230 100%
======= ==== ======= ==== ======= ====
(1) For information regarding the amount of sales, operating profit or loss
and identifiable assets attributable to each of Porta's divisions and
geographic areas, see Note 22 of Notes to the Consolidated Financial
Statements.
7 of 25
<PAGE>
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 OSS systems
contracts in the completion of testing and purchaser acceptance phases and
difficulty in Porta's receipt of final payments and political and economic
change. In addition, to the extent that Porta establishes facilities in foreign
countries, the Company faces risks associated with currency devaluation,
inability to convert local currency into dollars, local tax regulations and
political instability.
Manufacturing
Porta's computer-based testing products include proprietary testing
circuitry and computer programs, which provide platform-independent solutions
based on UNIX or UNIX compatible operating systems. The testing products also
incorporate disk data storage, teleprinters, minicomputers and personal
computers (PC's) purchased by us. These products are installed and tested by us
at our customers' premises.
At present, Porta's manufacturing operations are conducted at facilities
located in Glen Cove, New York and Matamoros, Mexico. From time to time we also
use subcontractors to augment various aspects of our production activities and
periodically explore the feasibility of conducting operations at lower cost
manufacturing facilities located abroad. In selling to foreign telephone
companies, we may be required to provide local manufacturing facilities and, in
conjunction with these facilities, we may grant the facility a license to our
proprietary technology.
Porta develops software at its facilities in Syosset, New York, Charlotte,
North Carolina, and Coventry, United Kingdom.
Source and Availability of Components
Porta generally purchases the standard components used in the manufacture
of its products from a number of suppliers. Porta attempts to assure itself that
the components are available from more than one source. Porta purchases all of
its MKIII test units from two suppliers. Porta purchases the majority of its
minicomputers used in its OSS systems from Digital Equipment Corporation
("DEC"). However, we could use other computer equipment in our systems if we
were unable to purchase DEC products. Other components, such as PCs and
teleprinters, used in connecting with our electronic products could be obtained
from alternate sources and readily integrated with our products.
Significant Customers
During 1999, Porta's five largest customers accounted for sales of
$19,700,000, or approximately 51% of sales, and during 1998 its five largest
customers accounted for sales of $28,797,000, or approximately 49% of sales.
Porta's largest customer in both 1999 and 1998 was BT. Sales to BT for 1999 were
$7,825,000 or approximately 20% of sales, and sales in 1998 were $15,349,000, or
26% of sales. Therefore, any significant interruption or decline in sales to BT
may have a materially adverse effect upon our operations. During 1998, sales to
a Chilean telephone company were $6,834,000, or approximately 12% of sales. No
other customers account for 10% or more of our sales for either year.
The former Bell operating companies continue to be the ultimate purchasers
of a significant portion of our products sold in the United States, while sales
to foreign telephone operating companies constitute the major portion of Porta's
foreign sales. Porta's contracts with these customers require no minimum
purchases by such customers. Significant customers for the signal processing
products include major US aerospace companies, the Department of Defense and
original equipment manufacturers in the medical imaging and process control
equipment industries. We sell both catalog and custom designed products to these
customers. Some contracts are multi-year procurements.
8 of 25
<PAGE>
Backlog
At December 31, 1999, Porta's backlog was $23,800,000 compared with
approximately $8,800,000 at December 31, 1998. Of the December 31, 1999 backlog,
approximately $19,800,000 represented orders from foreign telephone operating
companies. We expect to ship substantially all of our December 31, 1999 backlog
during 2000.
Intellectual Property Rights
Porta owns a number of domestic utility and design patents and has pending
patent applications for these products. In addition, Porta has foreign patent
protection for a number of its products.
From time to time Porta enters into licensing and technical information
agreements under which it receives or grants rights to produce certain specified
subcomponents used in Porta's products. These agreements are for varying terms
and provide for the payment or receipt of royalties or technical license fees.
While we consider patent protection important to the development of our
business, we believe that our success depends primarily upon our engineering,
manufacturing and marketing skills. Accordingly, we do not believe that a denial
of any of our pending patent applications, expiration of any of our patents, a
determination that any of the patents which have been granted to us are invalid
or the cancellation of any of our existing license agreements would have a
material adverse effect on our business.
Competition
The telephone equipment market in which Porta 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, Porta is functioning in a market characterized by distributors
and installers of equipment and by commodity pricing.
We compete directly with a number of large and small telephone equipment
manufacturers in the United States, with Lucent Technologies continuing to be
our 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 us continue to be significant factors in our competitive
environment.
Currently, Lucent and a number of companies with greater financial
resources than us produce, or have the design and manufacturing capabilities to
produce, products competitive with our products. In meeting this competition, we
rely primarily on the engineered performance and design characteristics of our
products to comparable performance or design, and endeavors to offer our
products at prices and with warranties that will make our products compete world
wide.
In connection with overseas sales of its line connecting/protecting
equipment, Porta 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 Porta's overseas competitors have
significantly greater resources than we do.
We compete directly with a limited number of substantial domestic and
international companies with respect to our sales of OSS systems. In meeting
this competition, we rely primarily on the features of our line testing
equipment, our ability to customize systems and endeavor to offer such equipment
at prices and with warranties that make them competitive.
9 of 25
<PAGE>
Research and Development Activities
Porta spent approximately $6,100,000 in 1999, $6,500,000 in 1998, and
$5,400,000 in 1997 on its research and development activities. All research and
development was company sponsored and is expensed as incurred.
Employees
As of February 18, 2000, Porta had 477 employees of which 112 were
employed in the United States, 272 in Mexico, 45 in the United Kingdom, 5 in
Poland, 8 in Chile, 6 in China, and 29 in Korea (in connection with Porta's
Korean joint venture). Porta believes that its relations with its employees are
good, and it has never experienced a work stoppage. Porta's employees are not
covered by collective bargaining agreements, except for its hourly employees in
Mexico who are covered by a collective bargaining agreement that expires on
December 31, 2001.
Item 2. Properties
Porta currently leases approximately 20,400 square feet of executive,
sales, marketing and research and development space located in Syosset, New
York; and 7,000 square feet of office space used for software development
located in Charlotte, North Carolina. We also own a 31,000 square foot
manufacturing and research and development facility located in Glen Cove, New
York. These facilities represent substantially all of our office, plant and
warehouse space in the United States. The Syosset, New York lease expires
December 2000, and the Charlotte, North Carolina lease expires in November 2004.
The aggregate annual rental is approximately $554,000.
Our wholly-owned United Kingdom subsidiary entered into a sale lease-back
agreement in 1999 whereby we sold our 34,300 square foot facility in Coventry,
England, which facility comprises all of our office, plant and warehouse space
for approximately $400,000 and entered into a 20 year lease arrangement. The
purchaser of the property committed substantial resources to renovate the
facility. The aggregate annual rental is approximately $250,000.
Porta's wholly-owned Mexican subsidiary owns an approximately 40,000
square foot manufacturing facility in Matamoros, Mexico.
We believe our properties are adequate for our needs.
Item 3. Legal Proceedings
In July 1996, an action was commenced against Porta 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 Porta who acquired their
securities in connection with the acquisition by Porta of Aster Corporation. The
complaint alleges breach of contract against Porta 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 has advised Porta that
additional plaintiffs may be added and, as a result, the amount of damages
claimed may be substantially greater than the amount presently claimed. Porta
believes that the defendants have valid defenses to the claims. The action is
currently in the discovery stage.
In December 1999, Porta was served with a request for arbitration for
commissions allegedly owed to a former sales representative. Porta terminated
its sales representative agreement in July 1999. The request for arbitration
alleges that Porta's termination of the agreement was improper and that the
representative is entitled to be paid damages based on the commissions he
allegedly would have received for an indefinite term beginning August 1999.
Additionally, the request for arbitration alleges that the representative was
not paid for certain unspecified commissions that he was supposedly entitled to
receive during the period from February 1, 1986 through July 31, 1999. The
request for arbitration does not specify the precise amount of damages, but
estimates damages approximating $500,000. The arbitration is in its earliest
stages and Porta intends to defend it vigorously.
10 of 25
<PAGE>
Item 4. Submission of Matters to a Vote of Securities Holders
During the fourth quarter of 1999, there were no matters required to be
submitted to a vote of security holders of the Company.
Item Pursuant to Instruction 3 of Item 401 (b) of Regulation S-K:
Executive Officers of the Company
Name and Position Age
- ----------------- ---
William V. Carney 62
Chairman of the Board
Chief Executive Officer
Michael A. Tancredi 70
Senior Vice President, and Secretary and Treasurer
Edward B. Kornfeld 56
Senior Vice President - Operations
Chief Financial Officer
Ronald Wilkins 43
Senior Vice President and Managing
Director - OSS
John J. Gazzo 56
Senior Vice President
Michael Bahlo 41
Senior Vice President
Prem G. Chandran 47
Senior Vice President
David Rawlings 56
Senior Vice President
All of Porta's officers serve at the pleasure of the board of directors.
Messrs. Carney and Tancredi are also members of the board of directors. There is
no family relationship between any of the executive officers listed above.
11 of 25
<PAGE>
Mr. Carney was elected as Chairman of the Board of Directors and Chief
Executive Officer in 1996 and has served as a director since 1970. Previously,
Mr. Carney had served as Secretary since 1970, Senior Vice President since
November 1989 and Chief Technical Officer from December 1990. He was elected
Vice Chairman in January 1988. He was Senior Vice President-Mechanical
Engineering from January 1988 to November 1989 and was Senior Vice
President-Manufacturing from March 1984 to February 1985, Senior Vice
President-Operations from June 1977 to February 1984 and Vice President from
1970 to June 1977.
Mr. Tancredi was elected Senior Vice President and Secretary in 1996. He
has been Treasurer since April 1978 and Director since 1970. He had served as
Vice President between March 1984 to October of 1996. He was Vice President from
April 1978 to February 1984 and Comptroller from April 1971 to March 1978.
Mr. Kornfeld was elected a Senior Vice President-Operations in 1996. He
has served as Vice President-Finance and Chief Financial Officer of the Company
since October 1995. For more than five years prior to his election to this
position, Mr. Kornfeld held positions with several technology companies,
including Excel Technology Inc. (Quantronix Corp.) and Anorad Corporation.
Mr. Wilkins was elected a Senior Vice President and Managing Director, OSS
Division in 1998. Prior to joining Porta Systems Corp. in 1998, Mr. Wilkins was
involved in the wireless telecommunication industry as President and CEO of
Sycom Technologies from November 1997 to August 1998, and Vice President of
Strategic Planning and Alliances at Conxus Communications from December 1995 to
October 1997. Prior to October 1997, Mr. Wilkins held various management
positions with Digital Equipment Corporation.
Mr. Gazzo was elected Senior Vice President in March 1996. He was Vice
President-Marketing since April 1993, general manager of our Porta Electronics
Division from November 1989 to April 1993, Vice President-Research and
Development from March 1984 to November 1989 and Vice President-Engineering from
February 1978 to February 1984.
Mr. Bahlo was elected Senior Vice President - OSS Sales and Marketing in
January 1999. Prior to joining the Company, Mr. Bahlo was the Vice President,
Marketing and Sales for Daikin U.S. Comtec Laboratories from March 1997 to March
1999, and held various management and marketing positions with Digital Equipment
Corporation from October 1986 to March 1997 most recently as Marketing Group
Manager.
Mr. Chandran was elected Senior Vice President in May 1999. Prior to his
appointment as Senior Vice President, Mr. Chandran was Vice President since
December 1995 and Assistant Vice President of Engineering from 1991 until
December 1995.
Mr. Rawlings was elected Senior Vice President in May 1999. Prior to his
appointment as Senior Vice President, Mr. Rawlings was Vice President since
March 1996 and Assistant Vice President of Research and Development - Copper
products since from 1992 until March 1996.
12 of 25
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Porta's common stock is traded on the American Stock Exchange, Inc. under
the symbol PSI. The following table sets forth, for 1998 and 1999, the quarterly
high and low sales prices for Porta's common stock on the consolidated
transaction reporting systems for American Stock Exchange listed issues.
High Low
---- ---
1998 First Quarter $4 $2 7/8
Second Quarter 5 3/8 3 1/2
Third Quarter 4 15/16 1 5/8
Fourth Quarter 2 1/4 1 1/4
1999
First Quarter $2 1/2 $1 3/4
Second Quarter 2 3/16 1 1/2
Third Quarter 1 7/8 5/8
Fourth Quarter 1 1/4 5/8
Porta did not declare or pay any cash dividends in 1999 or 1998. It is the
present policy of Porta to retain earnings, if any, to finance the growth and
development of the business and therefore, Porta does not anticipate paying cash
dividends on its common stock in the foreseeable future. In addition, Porta's
agreement with its senior lender prohibits it from paying cash dividends on its
common stock.
As of March 13, 2000, Porta had approximately 1,005 stockholders of
record.
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
information of Porta. All share and per share data have been restated to give
effect to the one for five reverse stock split which became effective on August
2, 1996. For further information, see the Consolidated Financial Statements and
other information set forth in Item 8 and Management's Discussion and Analysis
of Financial Condition and Results of Operations set forth in Item 7:
13 of 25
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Sales $ 38,936 $ 59,343 $ 62,230 $ 57,987 $ 61,181
Operating income (loss) (9,709) 4,566 6,101 3,982 (19,884)
Debt conversion expense -- (945) (11,458) -- --
Income (loss) before discontinued
operations and extraordinary item (13,686) 451 (7,021) 1,252 (29,297)
Net income (loss) (13,686) 527 (6,899) 5,174 (31,041)
Basic per share amounts:
Continuing operations $ (1.44) $ 0.05 $ (2.26) $ 0.57 $ (20.05)
Net income (loss) $ (1.44) $ 0.06 $ (2.22) $ 2.37 $ (21.25)
Diluted per share amounts:
Continuing operations $ (1.44) $ 0.04 $ (2.26) $ 0.23 $ (20.05)
Net income (loss) $ (1.44) $ 0.05 $ (2.22) $ 0.94 $ (21.25)
Cash dividends declared -- -- -- -- --
Number of shares used in
calculating net income (loss)
per share-basic 9,489 9,281 3,111 2,184 1,461
Number of shares used in
calculating net income (loss)
per share-diluted 9,489 9,785 3,111 5,528 1,461
Balance Sheet Data:
Total assets $ 43,448 $ 52,136 $ 51,000 $ 51,660 $ 60,591
Long-term debt excluding current
maturities $ 21,902 $ 17,238 $ 18,858 $ 45,804 $ 55,839
Stockholders' equity (deficit) $ (1,387) $ 11,984 $ 6,813 $(19,702) $(29,323)
</TABLE>
14 of 25
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Porta's consolidated statements of operations for the three years ended
December 31, 1999, 1998 and 1997, respectively, as a percentage of sales
follows:
Years Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
Sales 100% 100% 100%
Cost of sales 74% 59% 61%
---- ---- ----
Gross Profit 26% 41% 39%
Selling, general and
administrative expenses 35% 22% 20%
Research and development expenses 16% 11% 9%
---- ---- ----
Operating income (loss) (25%) 8% 10%
Interest expense (9%) (6%) (5%)
Other 1% 2% 2%
Debt conversion expense -- (2%) (19%)
---- ---- ----
Income (loss) from continuing
operations before income
taxes and minority interest (33%) 2% (12%)
Income tax expense (benefit)
and minority interest 2% 1% (1%)
---- ---- ----
Net income (loss) (35%) 1% (11%)
==== ==== ====
15 of 25
<PAGE>
Results of Operations
Years Ended December 31, 1999 and 1998
Porta's sales for 1999 were $38,936,000 compared to $59,343,000 in 1998, a
decrease of $20,407,000 (34%). The decrease in revenue is attributed principally
to shortfalls from our OSS division, although all divisions sustained decreased
revenues in 1999 as compared to 1998.
OSS sales for 1999 were $14,254,000, compared to 1998 sales of
$27,318,000, a decrease of $13,064,000 (47%). Sales of OSS systems are not made
on a recurring basis to customers, but are the result of extended negotiations
that frequently cover many months and do not always result in a contract. In
addition, OSS contracts may include conditions precedent, such as obtaining
financing or bank approval, and the contracts are not effective until the
conditions are satisfied. During 1999, OSS sales resulted primarily from the
completion of OSS contracts, which were in effect at the beginning of the year,
and our major new OSS contracts were signed during the fourth quarter of 1999.
The new contracts, which total $17,000,000 are with the Philippines Long
Distance Telephone Co. for approximately $5,000,000, and Fujitsu
Telecommunications Europe LTD for approximately $12,000,000. We expect to begin
to recognize revenue from these new OSS contracts in 2000.
Line connection/protection equipment sales for 1999 decreased
approximately $6,102,000 (25%) from $24,291,000 in 1998 to $18,189,000 in 1999.
The decline reflected a reduction in volume of sales to United States and
Mexican customers, which were not offset by an increase in sales to new
customers.
Signal processing revenue for 1999 compared to 1998 decreased by
$1,211,000 (16%) from $7,539,000 to $6,328,000. The decrease in sales primarily
reflects customer requested delays in deliveries in 1999 of orders which are
expected to be shipped during 2000.
Cost of sales for the year ended December 31, 1999, as a percentage of
sales compared to 1998, increased from 59% to 74%. The increase in cost of sales
and the resulting decline in gross margin is primarily attributed to
inefficiency resulting from the inability to absorb fixed expenses associated
with the OSS contracts over a substantially lower revenue base.
Selling, general and administrative expenses increased by $524,000 (4%)
from $13,079,000 in 1998 to $13,603,000 in 1999. The increase relates primarily
to additional accounts receivable reserve requirements on OSS contracts in the
Far East of approximately $1,000,000, offset by reductions in various operating
expenses.
Research and development expenses decreased by $420,000 (6%) from
$6,510,000 in 1998 to $6,090,000 in 1999. The decreased expense in 1999 resulted
from the completion of certain efforts to develop new products primarily related
to the OSS business including the MKIII test head during 1999.
As a result of the above, we had an operating loss of $9,709,000 in 1999
versus operating income of $4,566,000 in 1998. Although we sustained a decline
in sales in all of our product lines, our decreased operating income for 1999,
when compared to 1998, was primarily the result of lower levels of revenue from
OSS combined with the reduced margin on OSS business and the accounts receivable
reserve on OSS contracts.
Interest expense for 1999 decreased by $179,000 from $3,750,000 for 1998
to $3,571,000 in 1999. The decrease in interest expense is attributable
primarily to the completion of non-cash interest expenses associated with the
issuance of warrants to Porta's senior lender. This decrease was substantially
offset by additional interest on the increased outstanding principal balance and
waiver fee for non-compliance of the interest coverage covenant to the senior
lender.
16 of 25
<PAGE>
Results of Operations (continued)
Other income for 1998 included approximately $240,000 from the final
settlement of an insolvency procedure involving the purchaser of Porta's Israeli
operations, which was sold in 1992, and $400,000 from the settlement of a
lawsuit against a former vendor.
During 1998, Porta recorded debt conversion expenses of $945,000 as a
result of the exchange of zero coupon notes into common stock. The debt
conversion expense represents the difference between the original conversion
price per share of $6.55 and the reduced conversion price per share of $3.65.
During 1998, Porta recorded an extraordinary gain from the early
extinguishment of its Debentures of $76,000.
For 1999, Porta recorded an income tax expense of $873,000, which includes
an $811,000 increase in deferred tax asset valuation allowance and tax expenses
of $62,000. For 1998, income tax expenses of $606,000 primarily represents
income taxes payable by Porta's UK and Chilean subsidiaries.
As the result of the foregoing, the 1999 net loss was $13,686,000, $1.44
per share basic and diluted, compared with net income of $527,000, $0.06 per
share basic and $0.05 per share diluted, for 1998.
Based on our current backlog and recent forecasts, we expect to return to
profitability in 2000.
Years Ended December 31, 1998 and 1997
Sales for 1998 were $59,343,000 compared to $62,230,000 in 1997, a
decrease of $2,887,000 (5%). The decrease in revenue is attributed principally
to shortfalls from our OSS division.
OSS sales for 1998 were $27,318,000, compared to 1997 sales of
$29,561,000, a decrease of $2,243,000 (8%). The decreased sales relate primarily
to delays in the installation of certain contracts and delays in the receipt of
new anticipated orders.
Line connection/protection equipment sales for 1998 increased
approximately $538,000 (2%) from $23,753,000 in 1997 to $24,291,000 1998. This
increase relates to improved sales to a customer in Mexico, which were offset by
decreased sales of a certain product line to BT. During 1997, Porta completed
delivery of products to BT under a prior agreement and commenced delivery of a
replacement product. The decline reflected both a decrease in the number of
units sold and a lower selling price per unit for the replacement product.
Signal processing revenue for 1998 compared to 1997 decreased by $741,000
(9%) from $8,280,000 to $7,539,000. During 1997 revenue was generated from the
earlier than anticipated completion of military orders and non-recurring revenue
from certain engineering services, which was not repeated in 1998.
Cost of sales for 1998, as a percentage of sales, decreased from 61% in
1997 to 59% in 1998. The improvement in gross margin is attributed to Porta's
continuing effort to increase manufacturing productivity and the decrease of
certain fixed expenses associated with the OSS contracts.
17 of 25
<PAGE>
Results of Operations (continued)
Selling, general and administrative expenses increased by $261,000 (2%)
from $12,818,000 to $13,079,000 from December 31, 1998 compared to 1997. The
increase relates primarily to sales commissions on certain line
connection/protection equipment sales for 1998.
Research and development expenses increased by $1,149,000 (21%) from
$5,361,000 in 1997 to $6,510,000 in 1998. The increased expense results from
Porta's efforts to develop new products primarily related to the OSS business
including the MKIII test head.
As a result of the above, Porta had operating income of $4,566,000 in 1998
versus $6,101,000 in 1997, a decrease of 25%. The decreased operating income for
1998, when compared to 1997, was primarily the result of lower levels of revenue
from OSS coupled with increased research and development expenses.
Interest expense for 1998 increased by $371,000 from $3,379,000 for 1997
to $3,750,000 in 1998. The increase in interest expense is attributable
primarily to the issuance of $6,000,000 of 12% subordinated notes, which was
slightly offset by repayments of principal to Porta's senior lender.
Other income for 1998 included approximately $240,000 from the final
settlement of an insolvency procedure involving the purchaser of Porta's Israeli
operations, which was sold in 1992, and $400,000 from the settlement of a
lawsuit against a former vendor.
During 1998 and 1997, Porta recorded debt conversion expenses of $945,000
and $11,458,000 as a result of the exchange of zero coupon notes into common
stock. The debt conversion expense represents the difference between the
original conversion price per share of $6.55 and the reduced conversion price
per share of $3.65.
Porta recorded an extraordinary gain from the early extinguishment of its
debentures of $76,000 in 1998 and $122,000 in 1997.
At December 31, 1998, income tax expenses of $606,000 primarily represents
income taxes payable by the Company's UK and Chilean subsidiaries. For 1997,
Porta recorded an income tax benefit of $585,000, reflecting the difference
between a $802,000 deferred tax asset and tax expenses of $217,000.
As the result of the foregoing, the 1998 net income was $527,000, $0.06
per basic share and $0.05 per diluted share, compared with a net loss of
$6,899,000, $2.22 per share, for 1997.
18 of 25
<PAGE>
Liquidity and Capital Resources
At December 31, 1999 Porta had cash and cash equivalents of $3,245,000
compared with $3,044,000 at December 31, 1998. The working capital at December
31, 1999 was $6,135,000, compared to $14,262,000 at December 31, 1998. The
decline in working capital from December 31, 1998 to December 31, 1999 reflects
decreased accounts receivable which was a result of reduced levels of revenue
for 1999. During 1999, we used $3,027,000 in our operations. Our principal
source of funds during 1999 was borrowings from our senior lender.
Porta had senior debt outstanding of $17,518,000 as of December 31, 1999
of which $1,242,000 was a non-interest bearing note, $5,600,000 was outstanding
against the revolving line of credit, and $10,676,000 was a term loan agreement.
The Company's loan and security agreement with its senior secured lender expires
January 2, 2001. The agreement requires a quarterly loan amortization of
$400,000. In addition, the agreement requires all principal payments be applied
first to the non-interest bearing notes payable until the notes are paid in full
and then to the term loan. Porta had a revolving line of credit and a letter of
credit facility of $9,000,000 as of December 31, 1999. Availability under this
facility as of that date was approximately $1,600,000. During 1999, we borrowed
$6,150,000 and repaid $1,820,000 to the senior secured lender, of which $220,000
was provided from the proceeds of the sale of our UK facility. Subsequent to
December 31, 1999, we borrowed an additional $2,550,000 and repaid $400,000,
resulting in a balance owed of approximately $19,668,000.
In April 2000, Porta and its senior lender agreed to extend the loan and
security agreement to July 3, 2001. As consideration Porta agreed to re-price
all outstanding warrants held by the senior lender to $2.00 per warrant.
Porta was not in compliance with the interest coverage covenant under the
agreement and obtained a waiver from its senior lender for the period ended
December 31, 1999. However, if losses continue during 2000 Porta may be in
violation of its loan covenants at March 31, 2000 and the lender may not grant a
waiver, which would result in all of Porta's obligations to the senior lender
becoming due. Any action by the senior lender to force collection of the
obligations owed could materially and adversely affect Porta's ability to
continue in business.
As of December 31, 1999, Porta had remaining outstanding $371,000 of 6%
Debentures, net of original issue discount of $14,000, which mature July 2,
2002. The face amount of the outstanding 6% Debentures was $385,000. The
interest accrued on the 6% Debentures is payable on July 1 of each year and as
of December 31, 1999 was $12,000. At December 31, 1999, Porta was current on its
interest obligations.
During December 1999, Porta amended the terms of its outstanding
$6,000,000 subordinated notes. The amended terms include a one-year extension to
January 3, 2001. Furthermore, at Porta's option, Porta may extend the notes for
an additional extension period of six months to July 3, 2001 if Porta achieves
specific financial goals. As consideration for the amendment the interest rate
of the subordinated notes was increased from 12% to 14% per annum during the
initial term, and to 15% during the extended term, and the exercise price of the
outstanding warrants issued in conjunction with the subordinated notes was
reduced to $1.00. The amendment to the notes gives the holder the right to elect
to receive interest on the subordinated notes in new subordinated notes of Porta
in an amount equal to 125% of the interest then due on the subordinated notes on
which Porta is to pay interest at 125% of the interest rate of the underlying
subordinated note. If Porta extends the maturity date of the Subordinated Notes
to July 3, 2001, it will issue to the noteholders New Warrants to purchase a
total of 300,000 shares of Common Stock at the average closing price of the
Common Stock for five trading days preceding January 3, 2001. As a result of the
above, Porta recorded a debt discount of approximately $56,000 relating to the
re-pricing of the warrants and additional interest expense for noteholders who
elected the paid in kind option at December 31, 1999 of approximately $13,000.
As of December 31, 1999, $6,013,000 of subordinated notes were outstanding which
includes $64,000 of additional principal from paid in kind options and
unamortized debt discount of $51,000.
In April 2000, Porta and the holders of $5,100,000 or 85% of its
subordinated notes agreed to eliminate the requirement that Porta meet specific
financial goals for Porta to extend the maturity date of their subordinated
notes to July 3, 2001. In connection with this agreement, Porta agreed to issue
to these noteholders New Warrants to purchase 127,500 shares of Common Stock at
$3.00 per share. Porta may issue to any other noteholders who agree to this
amendment New Warrants to purchase up to 22,500 shares of Common Stock at $3.00
per share. The remaining New Warrants to purchase 150,000 shares of Common Stock
will be issued if the notes are extended.
19 of 25
<PAGE>
Porta believes that its current cash position, internally generated cash
flow and its loan facility will be sufficient to satisfy our anticipated
operating needs for at least the ensuing twelve months. At December 31, 1999,
Porta's long-term debt includes $17,518,000 due to its senior lender, all of
which are due and payable on July 3, 2001. At December 31, 1999, we do not
have sufficient resources to pay the senior lender at maturity and it is likely
that we cannot generate such cash from our operations. Although we are seeking
to refinance or restructure this debt and believe we will be able to prior to
the maturity date, no assurance can be given that we will be successful in these
efforts. If we are unable to refinance or restructure our business may be
materially and adversely affected.
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
is referred to as the "Year 2000 Issue." Management initiated a company-wide
program to prepare our computer systems and applications for year 2000
compliance. To date, we have not experienced any significant Year 2000 issues.
Porta incurred internal staff costs as well as other expenses necessary to
prepare its systems for the year 2000. We replaced some systems and upgraded
others. The total cost of this program was approximately $500,000, with
approximately $200,000 representing internal costs and $300,000 representing
external equipment and services.
Statements contained in this Year 2000 disclosure are subject to certain
protection under the Year 2000 Information and Readiness Disclosure Act.
20 of 25
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
See Exhibit I
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.
Not Applicable
Part III
Item 10, 11, 12, and 13.
The information called for by Item 10 (Directors and Executive Officers),
Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain
Beneficial Owners and Management), and Item 13 (Certain Relationships and
Related Transactions) is incorporated herein by reference from the Company's
definitive proxy statement for the Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the year ended December 31, 1999.
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) Document filed as part of this Annual Report on Form 10-K:
(i) Financial Statements.
See Index to Consolidated Financial Statements under Item 8 hereof.
(ii) Financial Statement Schedules.
None
Schedules not listed above have been omitted for the reasons that they
were inapplicable or not required or the information is given elsewhere in the
financial statements.
Separate financial statements of the registrant have been omitted since
restricted net assets of the consolidated subsidiaries do not exceed 25% of
consolidated net assets.
(b) Reports on Form 8-K
None.
21 of 25
<PAGE>
(c) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Certificate of Incorporation of the Company, as amended to
date, incorporated by reference to Exhibit 4 (a) of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991.
3.2 Certificate of Designation of Series B Participating
Convertible Preferred Stock, incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
3.3 By-laws of the Company, as amended to date, incorporated by
reference to Exhibit 3.3 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
4.1 Amendment dated as of December 16, 1993 to the Warrant
Agreement among the Company, Aster Corporation and Chemical
Bank as successor to Manufacturers Hanover Trust Company as
Warrant Agent, incorporated by reference to Exhibit 4.2 of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
4.2 Form of Rights Amendments, dated as of March 22, 1989 between
the Company and Manufacturers Hanover Trust Company, as Rights
Agent, incorporated by reference to the Company's Registration
Statement on Form 8-A dated April 3, 1989.
4.3 Amendment No. 1 to Rights Agreement, dated July 28, 1993
between the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) as Rights Agent,
incorporated by reference to the Company's Registration
Statement on Form 8-A/A filed August 4, 1993.
4.4 Amendment No. 2 to Rights Agreement, dated December 24, 1997
between the Company and The Chase Manhattan Bank (formerly
known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) as Rights Agent,
incorporated by reference to Exhibit 4.2.2 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1997.
4.5 Amended and Restated Loan and Security Agreement dated as of
November 28, 1994, between the Company and Foothill Capital
Corporation, incorporated by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated November 30, 1994.
4.6 Amendment Number One dated February 13, 1995 to the Amended
and Restated Loan and Security Agreement dated as of November
28, 1994 between the Company and Foothill Capital Corporation,
incorporated by reference to Exhibit 4.7 of the Company's
Annual Report on Form 10K for the year ended December 31,
1995.
4.7. Letter Agreement dated as of February 13, 1995, incorporated
by reference to Exhibit 4.7.1 of the Company's Annual Report
on Form 10K for the year ended December 31, 1995.
4.8 Amendment Number Two dated March 30, 1995 to the Amended and
Restated Loan and Security Agreement dated as of November 28,
1994 between the Company and Foothill Capital Corporation,
incorporated by reference to Exhibit 4.7.2 of the Company's
Annual Report on Form 10K for the year ended December 31,
1995.
22 of 25
<PAGE>
Exhibits (continued)
Exhibit No. Description of Exhibit
- ----------- ----------------------
4.9 Amended and Restated Secured Promissory Note dated February
13, 1995, incorporated by reference to Exhibit 4.9 of the
Company's Annual Report on Form 10K for the year ended
December 31, 1995.
4.10 Deferred Funding Fee Note dated November 28, 1994 made by the
Company in favor of Foothill Capital Corporation, incorporated
by reference to Exhibit 5 to the Company's Current Report on
Form 8-K dated November 30, 1994.
4.11 Amendment Number Three to Amended and Restated Loan and
Security Agreement dated March 12, 1996, between the Company
and Foothill Capital Corporation, incorporated by reference to
Exhibit 4.11 of the Company's Annual Report on Form 10K for
the year ended December 31, 1995.
4.12 Warrant to Purchase Common Stock of the Company dated November
28, 1994 executed by the Company in favor of Foothill Capital
Corporation, incorporated by reference to Exhibit 6 to the
Company's Current Report on Form 8-K dated November 30, 1994.
4.14 Lockbox Operating Procedural Agreement dated as of November
28, 1994 among Chemical Bank, the Company and Foothill Capital
Corporation, incorporated by reference to Exhibit 7 to the
Company's Current Report on Form 8-K dated November 30, 1994.
4.15 Amendment No. Five dated as of November 30, 1997, to Amended
and Restated Loan and Security agreement between Foothill
Capital Corp. ("Foothill") and the Company, including
amendments to the warrants held by Foothill, incorporated by
reference to Exhibit 4.23 of the Company's Form 8-K dated
January 2, 1998.
4.16 Amendment No. Six dated as of August 1, 1998 to Amended and
Restated Loan and Security agreement between Foothill Capital
Corp. ("Foothill") and the Company, incorporated by reference
to Exhibit 4.24 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
4.17 Amendment No. Seven dated as of December 1, 1998 to Amended
and Restated Loan and Security agreement between Foothill
Capital Corp. ("Foothill") and the Company, incorporated by
reference to Exhibit 4.25 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
10.14 Form of Executive Salary Continuation Agreement, incorporated
by reference to Exhibit 19 (cc) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1985.
10.2 Agreement dated May 25, 1988 between British
Telecommunications plc and the Company, incorporated by
reference to Exhibit 19 (a) of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1988. Confidential
Treatment granted; document filed separately with the SEC.
10.3 Amendment to agreement of May 25, 1988, dated September 1,
1996, between British Telecommunications plc and the Company,
incorporated by reference to Exhibit 10.6.1 of the Company's
Annual Report on Form 10-K for the year ended December 31,
1996.
23 of 25
<PAGE>
Exhibits (continued)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.4 Lease dated December 17, 1990 between the Company and LBA
properties, Inc., incorporated by reference to Exhibit 10 (d)
of the Company's annual report on Form 10-K for the year ended
December 31, 1990.
10.5 Employee Stock Bonus Program filed as Exhibit 4.3 to the Form
S-8 dated February 12, 1999 and incorporated herein by
reference.
10.6 1999 Stock Option Plan filed as Exhibit A to the Proxy
Statement for the 1999 Annual Meeting to Stockholders and
incorporated herein by reference.
10.7 1996 Stock Option Plan filed as Exhibit A to the Proxy
Statement for the 1996 Annual Meeting to Stockholders and
incorporated herein by reference.
10.8 1998 Stock Option Plan filed as Exhibit 4.2 to the Form S-8
dated December 3. 1998 and incorporated herein by reference.
10.9 Senior Officers and Directors Stock Purchase Program filed as
Exhibit 4.2 to the Form S-8 dated February 12, 1999 and
incorporated herein by reference.
10.10 Employee Stock Purchase Plan filed as Exhibit 4.1 to the Form
S-8 dated February 12, 1999 and incorporated herein by
reference.
22 Subsidiaries of the Company, incorporated by reference to
Exhibit 22.1 of the Company's Annual Report on Form 10K for
the year ended December 31, 1995.
23 Consent of Independent Auditors.
27 Financial Data Schedule
24 of 25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PORTA SYSTEMS CORP.
Dated April 12, 2000 By /s/ William V. Carney
-----------------------------
William V. Carney
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes William V. Carney and Edward B.
Kornfeld or either of them acting in the absence of the others, as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission.
Signature Title Date
--------- ----- ----
/s/ William V. Carney Chairman of the Board, April 12, 2000
- --------------------------- Chief Executive Officer
William V. Carney and Director (Principal
Executive Officer)
/s/ Edward B. Kornfeld Senior Vice President and April 12, 2000
- --------------------------- Chief Financial Officer
Edward B. Kornfeld (Principal Financial and
Accounting Officer)
/s/ Seymour Joffe Director April 12, 2000
- ---------------------------
Seymour Joffe
/s/ Michael A. Tancredi Director April 12, 2000
- ---------------------------
Michael A. Tancredi
/s/ Warren H. Esanu Director April 12, 2000
- ---------------------------
Warren H. Esanu
/s/ Herbert H. Feldman Director April 12, 2000
- ---------------------------
Herbert H. Feldman
/s/ Stanley Kreitman Director April 12, 2000
- ---------------------------
Stanley Kreitman
/s/ Lloyd I. Miller, III Director April 12, 2000
- ---------------------------
Lloyd I. Miller, III
/s/ Robert Schreiber Director April 12, 2000
- ---------------------------
Robert Schreiber
25 of 25
<PAGE>
Exhibit I
Item 8. Financial Statements and Supplementary Data
Index Page
- ----- ----
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements and Notes:
Consolidated Balance Sheets,
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations and
Comprehensive Income (Loss),
Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders'
Equity (Deficit), Years Ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999,
1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and
Stockholders of Porta Systems Corp.
Syosset, New York
We have audited the accompanying consolidated balance sheets of Porta Systems
Corp. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Porta Systems Corp.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
---------------------------
BDO SEIDMAN, LLP
Melville, New York
March 15, 2000, except for Notes 2 and 6
as to which the date is April 10, 2000
as they relate to the Company's
senior and subordinated debt
F-2
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in thousands)
1999 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 3,245 3,044
Accounts receivable - trade, less
allowance for doubtful accounts of
$1,879 in 1999 and $915 in 1998 12,137 19,802
Inventories 8,893 8,944
Prepaid expenses and other current assets 1,373 1,716
-------- -------
Total current assets 25,648 33,506
Property, plant and equipment, net 4,193 4,213
Deferred computer software, net -- 82
Goodwill, net of amortization of $4,284
in 1999 and $3,763 in 1998 11,076 11,597
Other assets 2,531 2,738
-------- -------
Total assets $ 43,448 52,136
======== =======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current portion of senior debt $ 2,000 2,000
Accounts payable 8,831 6,893
Accrued expenses 5,723 6,266
Accrued interest payable 588 545
Accrued commissions 1,864 2,438
Accrued deferred compensation 196 196
Income taxes payable 267 762
Short-term loans 44 144
-------- -------
Total current liabilities 19,513 19,244
-------- -------
Senior debt net of current maturities 15,518 11,188
Subordinated notes 6,013 5,685
6% Convertible subordinated debentures 371 365
Deferred compensation 1,004 1,021
Income taxes payable 352 719
Other long-term liabilities 971 776
Minority interest 1,093 1,154
-------- -------
Total long-term liabilities 25,322 20,908
-------- -------
Total liabilities 44,835 40,152
-------- -------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value;
authorized 1,000,000 shares,
none issued -- --
Common stock, par value $.01;
authorized 20,000,000 shares,
issued 9,638,861 and 9,484,742
shares in 1999 and 1998, respectively 96 95
Additional paid-in capital 75,310 75,135
Accumulated deficit (70,959) (57,273)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (3,896) (3,754)
-------- -------
551 14,203
Treasury stock, at cost, 30,940 shares (1,938) (1,938)
Receivable from directors and officers under
stock purchase program -- (281)
-------- -------
Total stockholders' equity (deficit) (1,387) 11,984
-------- -------
Total liabilities and stockholders'
equity (deficit) $ 43,448 52,136
======== =======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
Sales $ 38,936 59,343 62,230
Cost of sales 28,952 35,188 37,950
-------- ------ --------
Gross profit 9,984 24,155 24,280
-------- ------ --------
Selling, general and administrative
expenses 13,603 13,079 12,818
Research and development expenses 6,090 6,510 5,361
-------- ------ --------
Total expenses 19,693 19,589 18,179
-------- ------ --------
Operating income (loss) (9,709) 4,566 6,101
Interest expense (3,571) (3,750) (3,379)
Interest income 188 272 259
Other income (expense), net 218 1,028 1,047
Debt conversion expense -- (945) (11,458)
-------- ------ --------
Income (loss) before income
taxes and minority interest (12,874) 1,171 (7,430)
Income tax expense (benefit) 873 606 (585)
Minority interest (61) 114 176
-------- ------ --------
Income (loss) before
extraordinary item (13,686) 451 (7,021)
Extraordinary gain on early
extinguishment of debt -- 76 122
-------- ------ --------
Net income (loss) $(13,686) 527 (6,899)
======== ====== ========
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (142) 273 (1,015)
-------- ------ --------
Comprehensive income (loss) $(13,828) 800 (7,914)
======== ====== ========
Basic per share amounts:
Income (loss) before extraordinary item $ (1.44) 0.05 (2.26)
Extraordinary item -- 0.01 0.04
-------- ------ --------
Net income (loss) per share
of common stock $ (1.44) 0.06 (2.22)
======== ====== ========
Weighted average shares of common
stock outstanding 9,489 9,281 3,111
======== ====== ========
Diluted per share amounts:
Income (loss) before extraordinary item $ (1.44) 0.04 (2.26)
Extraordinary item -- 0.01 0.04
-------- ------ --------
Net income (loss) per share
of common stock $ (1.44) 0.05 (2.22)
======== ====== ========
Weighted average shares of common
stock outstanding 9,489 9,785 3,111
======== ====== ========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Accumulated Receivable Total
Common Stock Other Retained for Stock-
------------------- Additional Comprehensive Earnings Employee holders'
No. of Par Value Paid-in Income (Accumulated Treasury Stock Equity/
Shares Amount Capital (Loss) Deficit) Stock Purchases (Deficit)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 2,224 $22 $ 36,561 $(3,012) $(50,900) $(2,066) $(307) $(19,702)
Net loss 1997 -- -- -- -- (6,899) -- -- (6,899)
Common stock issued 6,420 64 34,001 -- -- -- -- 34,065
Warrants issued -- -- 364 -- -- -- -- 364
Foreign currency translation
adjustment -- -- -- (1,015) -- -- -- (1,015)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 8,644 86 70,926 (4,027) (57,799) (2,066) (307) 6,813
Net income 1998 -- -- -- -- 527 -- -- 527
Common stock issued 841 9 3,702 -- -- -- -- 3,711
Warrants issued -- -- 630 -- -- -- -- 630
Restructure of receivable for
employee stock purchases -- -- (123) -- (1) 128 294 298
Receivable from directors and
officers under stock purchase
program -- -- -- -- -- -- (268) (268)
Foreign currency translation
adjustment -- -- -- 273 -- -- -- 273
------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,485 95 75,135 (3,754) (57,273) (1,938) (281) 11,984
Net loss 1999 -- -- -- -- (13,686) -- -- (13,686)
Common stock issued 154 1 119 -- -- -- -- 120
Warrant repricing -- -- 56 -- -- -- -- 56
Collection of receivable from
directors and officers under
stock purchase program -- -- -- -- -- -- 281 281
Foreign currency translation
adjustment -- -- -- (142) -- -- -- (142)
------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,639 $96 $ 75,310 $(3,896) $(70,959) $(1,938) $ -0- $ (1,387)
===== === ======== ======= ======== ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 21)
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(13,686) 527 (6,899)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Extraordinary gain -- (76) (122)
Non-cash debt conversion expense -- 945 10,646
Non-cash financing expenses 18 473 274
Non-cash compensation expense 8 298 --
Realized gain on litigation settlement -- -- (229)
Depreciation and amortization 1,677 2,195 3,040
Amortization of debt discounts 326 323 40
Minority interest (61) 114 (176)
Changes in operating assets and
liabilities:
Accounts receivable 7,665 (4,911) 1,143
Inventories 51 (785) (735)
Prepaid expenses 343 (450) (484)
Other receivables -- -- 31
Other assets 113 962 (122)
Accounts payable, accrued expenses
and other liabilities 238 276 (999)
-------- ------ -------
Net cash provided by (used in)
operating activities (3,308) (109) 5,408
-------- ------ -------
Cash flows from investing activities:
Repayment of receivables from stock purchase
program 281 -- --
Proceeds from disposal of assets held
for sale, net -- -- 500
Capital expenditures, net (951) (665) (409)
-------- ------ -------
Net cash provided by (used in)
investing activities (670) (665) 91
-------- ------ -------
Cash flows from financing activities:
Proceeds from senior debt 6,150 6 306
Repayments of senior debt (1,820) (4,780) (3,013)
Proceeds from Subordinated debentures
and warrants 64 6,000 --
Repayment of zero coupon senior
subordinated convertible notes -- (2,796) --
Proceeds (repayments) of notes
payable/short-term loans (100) 24 89
-------- ------ -------
Net cash provided by (used in)
financing activities 4,294 (1,546) (2,618)
-------- ------ -------
Effect of exchange rate changes on cash (115) 273 (374)
-------- ------ -------
Increase (decrease) in cash and cash
equivalents 201 (2,047) 2,507
Cash and equivalents - beginning of year 3,044 5,091 2,584
-------- ------ -------
Cash and equivalents - end of year $ 3,245 3,044 5,091
======== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
Porta Systems Corp. ("Porta" or the "Company") designs, manufactures and
markets systems for the connection, protection, testing and administration
of public and private telecommunications lines and networks. The Company
has various patents for copper and software based products and systems
that support voice, data, image and video transmission. Porta's principal
customers are the U.S. regional telephone operating companies and foreign
telephone companies.
The accompanying consolidated financial statements include the accounts of
Porta and its majority-owned or controlled subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Revenue Recognition
Revenue, other than from long-term contracts for specialized products, is
recognized when a product is shipped. Revenues and earnings relating to
long-term contracts for specialized products are recognized on the
percentage-of-completion basis primarily measured by the attainment of
milestones. Anticipated losses, if any, are recognized in the period in
which they are identified.
Concentration of Credit Risk
Financial instruments, which potentially subject Porta to concentrations
of credit risk, consist principally of cash and accounts receivable. At
times such cash in banks exceeds the FDIC insurance limit.
As discussed in notes 17 and 22, substantial portions of Porta's sales are
to customers in foreign countries. The Company's credit risk with respect
to new foreign customers is reduced by obtaining letters of credit for a
substantial portion of the contract price, and by monitoring credit
exposure related to each customer.
Cash Equivalents
The Company considers investments with original maturities of three months
or less at the time of purchase to be cash equivalents. Cash equivalents
consist of commercial paper.
Inventories
Inventories are stated at the lower of cost (on the average or first-in,
first-out methods) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Leasehold improvements
are amortized over the term of the lease. Depreciation is computed using
the straight-line method over the related assets' estimated lives.
(Continued)
F-7
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Deferred Computer Software
Software costs incurred for specific customer contracts are charged to
cost of sales at the time revenues on such contracts are recognized.
Software development costs relating to products the Company offers for
sale are deferred in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86 "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed". These costs are amortized to cost
of sales over the periods that the related product will be sold, up to a
maximum of four years. Amortization of computer software costs, which all
relate to products the Company offers for sale, amounted to approximately
$82,000, $461,000 and $1,133,000 in 1999, 1998, and 1997, respectively.
Goodwill
Goodwill represents the difference between the purchase price and the fair
market value of net assets acquired in business combinations treated as
purchases. Goodwill is amortized on a straight-line basis over a remaining
life of 13 to 31 years. During 1999, in view of recent competitive
developments in the telecommunications market place and Porta's changing
business model in response, management has reassessed the useful life of
certain of its goodwill. While in management's opinion, there is currently
no impairment in the carrying value of this long-lived intangible asset
(based upon an analysis of undiscounted future cash flows), management has
determined that the useful life of the goodwill should be shortened to be
more reflective of the current rate of technology change and competitive
conditions. Accordingly, management changed the estimated useful life of
certain goodwill from an original life of 40 years to a remaining life of
13 years, which change was applied prospectively from the fourth quarter
of 1999. This change in accounting estimate increased amortization expense
in 1999 by approximately $58,000. At December 31, 1999, $7,053,000 of the
goodwill is being amortized over a remaining life of approximately 13
years and $4,024,000 is being amortized over a remaining life of
approximately 31 years. The Company assesses the recoverability of
unamortized goodwill using the undiscounted projected future cash flows
from the related businesses.
Income Taxes
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements that will result in taxable or deductible amounts in
future years. Further, the effects of tax law or rate changes are included
in income as part of deferred tax expense or benefit for the period that
includes the enactment date (note 14).
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at year-end
rates of exchange, and revenues and expenses are translated at the average
rates of exchange for the year. Gains and losses resulting from
translation are accumulated in a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than the functional
currency) are included in net income or loss.
(Continued)
F-8
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net Income (Loss) Per Share
Basic net income (loss) per share is based on the weighted average number
of shares outstanding. Diluted net income (loss) per share is based on the
weighted average number of shares outstanding plus dilutive potential
shares of common stock, if such shares had been issued. The calculation of
the diluted net income per share for the year ended December 31, 1998,
assumes the exercise of dilutive options and warrants and the conversion
of the 6% Subordinated Debentures. For 1999 and 1997, no dilutive
potential shares of common stock were added to compute diluted loss per
share because the effect was anti-dilutive.
Reclassifications
Certain reclassifications have been made to conform prior years'
consolidated financial statements to the 1999 presentation.
Accounting for Stock-Based Compensation
The Company follows the Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation". Porta has elected not to
implement the fair value based accounting method for employee stock
options, but has elected to disclose the pro-forma net income and earnings
per share as if such method had been used to account for stock-based
compensation cost as described in the Statement.
Accounting for the Impairment of Long-Lived Assets
The Company follows the Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Porta believes that there is no
impairment of its long-lived assets.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates included
in these consolidated financial statements are the estimated allowance for
doubtful accounts receivable, inventory reserves, percentage of completion
for long-term contracts, and the deferred tax asset valuation allowance.
Actual results could differ from those and other estimates.
(Continued)
F-9
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Liquidity
As of December 31, 1999, Porta's debt includes $17,500,000 of senior debt,
which matures on January 2, 2001, and $6,000,000 of subordinated debt
which matures in January 2001. Subsequent to December 31, 1999, Porta
borrowed an additional $2,550,000 of senior debt and repaid $400,000 of
senior debt, resulting in a balance owed of approximately $20,000,000 to
the senior lender at March 15, 2000. The subordinated lenders have agreed
to extend the maturity date for six months if Porta meets certain
financial milestones. At December 31, 1999, Porta did not have sufficient
resources to pay either the senior lender or the subordinated lenders at
maturity and it is likely that it cannot generate such cash from its
operations. In April 2000, the Company and its senior lender agreed to
extend the loan and security agreement to July 3, 2001. As consideration
Porta agreed to re-price all outstanding warrants held by its senior
lender to $2.00 per warrant. In addition, in April 2000, the Company and
the holders of $5,100,000, or 85%, of its subordinated notes, agreed to
eliminate the requirement that Porta meet specific financial goals for
Porta to extend the maturity date of their subordinated notes to July 3,
2001. In connection with this agreement, Porta agreed to issue to these
noteholders New Warrants to purchase 127,500 shares of Common Stock at
$3.00 per share. Porta may issue to any other noteholders who agree to
this amendment New Warrants to purchase up to 22,500 shares of Common
Stock at $3.00 per share. The remaining New Warrants to purchase 150,000
shares of Common Stock will be issued if the notes are extended. Although
Porta is seeking to refinance or restructure this debt prior to the
maturity date, its business may be impaired if it is unable to do so.
Porta's backlog at December 31, 1999 was $23,800,000 compared with
approximately $8,800,000 at December 31, 1998. Of the December 31, 1999
backlog, approximately $19,800,000 represented orders from foreign
telephone operating companies. Porta expects to ship substantially all of
its December 31, 1999 backlog during 2000. Porta believes that its current
cash position, internally generated cash flow from its existing backlog,
anticipated orders and its loan facility will be sufficient to satisfy its
anticipated operating needs for at least 2000.
Porta is responding to its liquidity problems by:
o Negotiating with its senior lender for an increase in its available
credit;
o Developing relationships with strategic partners who would continue
the development of new products to reduce Porta's cash requirements
for its OSS business; and
o Scaling back its operations to reduce the cash requirements.
(Continued)
F-10
<PAGE>
(3) Accounts Receivable
Accounts receivable included approximately $3,211,000 and $5,657,000 at
December 31, 1999 and 1998, respectively, of revenues earned but not yet
contractually billable relating to long-term contracts for specialized
products. All such amounts at December 31, 1999 are expected to be billed
in the subsequent year. In addition, accounts receivable included
approximately $1,252,000 and $2,860,000 at December 31, 1999 and 1998,
respectively, of retainage balances due on various long-term contracts.
All such amounts are expected to be collected during the subsequent year.
The allowance for doubtful accounts receivable was $1,879,000 and $915,000
as of December 31, 1999 and 1998, respectively. The allowance for doubtful
accounts was increased by provisions of $1,070,000, $210,000, and $107,000
and decreased by write-offs of $106,000, $353,000, and $599,000 for the
years ended December 31, 1999, 1998, and 1997, respectively. In 1999, the
increase in the provision was adjusted during the fourth quarter.
(4) Inventories
Inventories consist of the following:
December 31,
----------------------------
1999 1998
---------- ---------
Parts and components $5,558,000 4,959,000
Work-in-process 584,000 743,000
Finished goods 2,751,000 3,242,000
---------- ---------
$8,893,000 8,944,000
========== =========
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
--------------------- Estimated
1999 1998 useful lives
---- ---- ------------
Land $ 246,000 246,000 --
Buildings 2,284,000 2,585,000 20-50 years
Machinery and equipment 9,079,000 7,947,000 3-8 years
Furniture and fixtures 2,825,000 3,566,000 5-10 years
Transportation equipment 151,000 129,000 4 years
Tools and molds 3,474,000 3,124,000 8 years
Leasehold improvements 871,000 805,000 Term of lease
----------- -----------
18,930,000 18,402,000
Less accumulated depreciation
and amortization 14,737,000 14,189,000
----------- -----------
$ 4,193,000 4,213,000
=========== ===========
Total depreciation and amortization expense for 1999, 1998 and 1997,
related to property, plant and equipment amounted to approximately
$998,000, $1,197,000 and $1,468,000, respectively.
(Continued)
F-11
<PAGE>
(6) Senior Debt
On December 31, 1999 and 1998, Porta's long-term debt consisted of senior
debt under its credit facility in the amount of $16,276,000 and
$10,682,000, respectively, and non-interest bearing deferred funding fee
notes payable to the senior lender in the amounts of $1,242,000 and
$2,512,000, respectively. Of these amounts outstanding $2,000,000 are
classified as the current portion of senior debt as of December 31, 1999
and 1998, respectively. The credit facility consists of a combined
revolving line of credit and letter of credit availability of $9,000,000.
The balance of the facility is comprised of a term loan. The credit
facility is secured by substantially all of Porta's assets. All
obligations, except undrawn letters of credit, letter of credit guarantees
and the deferred fee notes, bear interest at 12%. The Company incurs a fee
of 2% per annum on the average balance of letter of credit guarantees
outstanding.
The agreement, which expires on January 2, 2001, provides for loan
principal payments of $400,000 on the last day of each quarter during the
term of the agreement. As part of the agreement, the loan amortization
shall first be applied to the non-interest bearing notes payable until
these notes are paid in full and then to the term loan. The agreement also
requires Porta to pay additional principal payments if its cash flow
exceeds certain amounts. A monthly facility fee payment of $50,000
continuing to the end of the agreement is also required.
Pursuant to the November 30, 1997 extension of the credit facility, Porta
agreed to amend the terms of the warrants previously issued to its senior
lender. The 82,500 and 200,000 warrants, after adjustment for the
antidilution provisions contained in the warrant agreement, provides for
the purchase of 164,627 and 295,441 shares of common stock, respectively
and are immediately exercisable at $3.00 per share and expire on November
30, 2002. The value of the change in warrant terms is estimated to be
$45,000 and was recorded as a deferred financing expense and additional
paid in capital in 1997.
(Continued)
F-12
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Financial debt covenants include an interest coverage ratio measured
quarterly with 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 December
31, 1999, Porta was not in compliance with the interest coverage covenant
and has obtained a waiver of such non-compliance from its senior lender.
In April 2000, the Company and its senior lender agreed to extend the loan
and security agreement to July 3, 2001. As consideration Porta agreed to
re-price all outstanding warrants to its senior lender to $2.00 per
warrant.
Maturities of Porta's long-term debt, including convertible subordinated
debentures and subordinated notes (notes 7 and 8), are as follows:
2000 $ 2,000,000
2001 21,531,000
2002 371,000
-----------
$23,902,000
(7) 6% Convertible Subordinated Debentures and Zero Coupon Senior Subordinated
Convertible Notes
As of December 31, 1999 and 1998 Porta had outstanding $371,000 and
$365,000 of its 6% convertible subordinated debentures due July 1, 2002
(the "Debentures"), net of original issue discount of $14,000 and $20,000,
respectively. The face amount of the outstanding Debentures was $385,000
at both December 31, 1999 and 1998. The Debentures are convertible at any
time prior to maturity into Common Stock of the Company at a conversion
rate of 8.333 shares for each $1,000 face amount of Debentures, subject to
adjustment under certain circumstances.
The Debentures are redeemable at the option of Porta, (a) in whole or in
part, at redemption prices ranging from 89.626% of face amount beginning
July 1, 1995 to 100% of face amount beginning July 1, 2001 and thereafter,
together with accrued and unpaid interest to the redemption date, and (b)
in whole at any time, at a redemption price equal to the issue price plus
interest and that portion of the original issue discount and interest
accrued to the redemption date, in the event of certain changes in United
States taxation or the imposition of certain certification, information or
other reporting requirements.
Interest on the Debentures is payable on July 1 of each year. The interest
accrued amounted to $12,000 as of both December 31, 1999 and 1998.
On November 30, 1995, Porta offered the holders of its Debentures an
exchange of such debt for common stock and zero coupon senior subordinated
convertible notes (the "Notes") due January 2, 1998. The exchange ratio
was 19.4 shares of common stock and $767.22 of principal of Notes in
exchange for each $1,000 principal amount of Debentures converted. Accrued
interest on the Debentures, which were exchanged was eliminated.
The Notes were unsecured and did not bear interest. There were no sinking
fund requirements for the Notes. Each Note was convertible into common
stock at a conversion price of $6.55 prior to the amendment as discussed
below.
(Continued)
F-13
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
As of December 31, 1996, Porta had exchanged approximately $33,770,000
principal amount of the Debentures, net of related unamortized discount
and accrued interest expense, for 655,000 shares of stock and $25,909,000
of Notes. In addition, as of December 31, 1996, $24,000 of Notes had been
converted into 3,600 shares of stock.
During 1997, Porta exchanged approximately $410,000 principal amount of
the Debentures, net of related unamortized discount and accrued interest
expense, for 8,000 shares of common stock and $315,000 principal amount of
Notes.
Effective November 13, 1997, Porta amended the terms of the Notes. Under
the amended terms, the conversion price of the Notes was reduced to $3.65
from $6.55. As of December 31, 1997, approximately $23,400,000 principal
amount of Notes was converted into approximately 6,412,000 shares of
common stock. The conversion of the Notes for common stock reduced debt by
$23,400,000, increased equity by $34,049,000 and resulted in a primarily
non-cash charge of $11,458,000. The non-cash charge was based on the
difference between the value of the shares issuable under the original
terms of the Notes and the value of the shares issued with respect to the
Notes under the amended terms. In connection with the conversion of the
Notes, Porta issued to its investment banking firm 120,000 shares of
common stock.
During 1998, Porta (i) repaid the remaining balance of the Notes from the
proceeds of the Subordinated Notes (note 8) (ii) exchanged $250,000
additional principal amount of the Debentures for 5,000 shares of common
stock and $192,000 principal amount of Notes which were then converted to
53,000 shares of common stock based on the amended terms of the Notes as
described above and (iii) issued approximately 330,000 shares of common
stock in exchange for $1,260,000 principal amount of Debentures and
accrued interest. Porta recorded a debt conversion expense of
approximately $945,000, net of interest forgiven, in the first quarter of
1998. After giving effect to these transactions, as of December 31, 1998
Porta has no Notes outstanding and $385,000 principal amount of Debentures
outstanding.
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, the common stock issued was
recorded at the market value at the time of issuance, and an extraordinary
gain on restructuring was recorded of approximately $76,000 and $122,000,
for 1998 and 1997, respectively. Accordingly, no future interest expense
was recorded on the Notes, subsequent to the time of issuance.
(Continued)
F-14
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Subordinated Notes
In January 1998, Porta raised $6,000,000 from the private placement of 60
units at $100,000 per unit. Each unit consisted of (a) 12% Subordinated
Note in the principal amount of $100,000, and (b) a Series B Common Stock
Purchase Warrant (a "Series B Warrant") to purchase 10,000 shares of
Common Stock at $3.00 per share through December 31, 2002. In the event
that any Subordinated Note was outstanding one year from the date on which
such Subordinated Note was issued (the "Anniversary Date of the Note"),
Porta agreed to the holder of such Subordinated Note on the Anniversary
Date of the Note a Series C Common Stock Purchase Warrant ( a "Series C
Warrant") to purchase 25 shares of Common Stock for each $1,000 principal
amount of Subordinated Notes outstanding on the Anniversary Date of the
Note. The Series C Warrant has an exercise price equal to the average
closing prices 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 and will expire on December 31, 2003.
As of December 31, 1998, the Series B and Series C Warrants were valued at
$630,000 and were recorded as part of additional paid-in capital.
Accordingly, Porta recorded the net Subordinated Notes at a value of
$5,370,000. As of December 31, 1998, the Company had Subordinated Notes
outstanding of $5,685,000, net of original issue discount of $315,000. In
1999, pursuant to the terms of the Notes, the Company issued to the
holders of the Subordinated Notes Series C Warrants to purchase an
aggregate of 150,000 shares of common stock at an average exercise price
of $1.94.
During December 1999, Porta (a) extended its maturity date of the
$6,000,000 outstanding principal amount of Subordinated Notes with the
right to extend the maturity date for an additional period of six months
to July 3, 2001 if Porta achieves certain financial results, (b) increased
the interest rate of the Subordinated Notes to 14% per annum during the
initial term and to 15% during the extended term, (c) reduced the exercise
price of the Series B and C Warrants to $1.00 per share, (d) granted the
holders of the Subordinated Notes the right to a payment in kind option,
whereby the Noteholder has the right to receive interest in the form of a
new subordinated note in the principal amount equal to 125% of the
interest then due, with the new subordinated note bearing interest at the
rate of 125% of the then current interest rate of the Subordinated Notes,
and (e) agreed that, if Porta extends the maturity date of the
Subordinated Notes to July 3, 2001, it will issue to the noteholders New
Warrants to purchase a total of 300,000 shares of Common Stock at the
average closing price of the Common Stock for five trading days preceding
January 3, 2001. As a result of the amendment to the Subordinated Notes,
Porta recorded a discount of approximately $56,000 relating to the
re-pricing of the warrants and additional interest expense for Noteholders
who elected the paid in kind option at December 31, 1999 of approximately
$13,000. As of December 31, 1999, $6,013,000 of Subordinated Notes were
outstanding which includes $64,000 of additional principal from paid in
kind options and unamortized debt discount of $51,000.
In April 2000, the Company and the holders of $5,100,000 or 85%, of the
subordinated notes agreed to eliminate the requirement that Porta meet
specific financial goals for Porta to extend the maturity date of their
subordinated Notes to July 3, 2001. In connection with this agreement,
Porta agreed to issue to these noteholders New Warrants to purchase
127,500 shares of Common Stock at $3.00 per share. Porta may issue to any
other noteholders who agree to this amendment New Warrants to purchase up
to 22,500 shares of Common Stock at $3.00 per share. The remaining New
Warrants to purchase 150,000 shares of Common Stock will be issued if the
notes are extended.
(Continued)
F-15
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Joint Venture
The Company has a 50% interest in a joint venture agreement with a Korean
partner. Unless otherwise terminated in accordance with the joint venture
agreement, the joint venture will terminate on December 31, 2010. In
addition, the Company has obtained an option to acquire an additional 1%
interest of the joint venture, for approximately $190,000. The Company
consolidates the operations of the joint venture since the Company can
obtain a controlling interest at its election and the joint venture is
entirely dependent on the Company for the products it sells and receives
management assistance from the Company. The joint venture partner's
interest is shown as a minority interest.
(10) Stockholders' Equity
Porta had outstanding warrants to its senior lender to purchase 460,068
shares of common stock, which are immediately exercisable at $3.00 per
share and expire on November 30, 2002.
In 1997, in consideration for advisory services by an investment banking
firm, Porta issued warrants to purchase 400,000 shares of common stock at
$1.56 per share until April 2002. In addition, in consideration for the
advisory services related to the debt conversion, Porta issued to the
investment banking firm 120,000 shares of common stock (note 7). In 1997,
Porta recorded deferred consulting of approximately $80,000 and debt
conversion expense of approximately $580,000.
See Note 8 in connection with the issuance of the Series B and C Warrants
as part of the private placement of the subordinated Notes in the
principal amount of $6,000,000 and the amendment of the terms of the
Subordinated Notes and Series B and C Warrants.
As of December 31, 1999, Porta also had stock purchase warrants
outstanding to purchase 53,000 shares of common stock at an exercise price
of $17.50 per share until November 2001.
Under a 1984 Employee Incentive Plan, Porta provided an opportunity for
certain employees of the Company and its subsidiaries to acquire
subordinated convertible debentures. As a result, as of December 31, 1998,
there was $13,000 of employee promissory notes receivable outstanding, of
which the maturity date has been extended to April 1999. During 1998, the
Board of Directors approved a reduction in the original issue price of the
debentures to the then current market rate of the common stock,
approximately $1.38 per share, which common stock was held by Porta as
collateral for the notes. Accordingly, the related receivable from
employees was reduced from $307,000 to $13,000 to reflect the new
valuation. The reduction on the original issue resulted in a non-cash
compensation charge in 1998 of $298,000. During 1999, all of the
receivables from employees were paid.
(Continued)
F-16
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1998, the Board of Directors adopted a Stock Purchase Program (the
"program") for senior executive officers and directors of the Company. The
program was established to increase the direct equity investment in the
Corporation of the senior executives and directors. The program sets forth
that each participant shall purchase common stock equal to ten percent of
the participant's salary for those who are officers and $30,000 with
respect to those who are outside directors. The number of shares purchased
is based on the fair market value per share of Common stock of $1.50. The
stock purchase for each officer is payable to the Company on an
installment basis. Porta is holding the shares as security against the
outstanding obligation until it is paid in full. The maximum number of
shares to be issued pursuant to the program is 186,000. The initial
receivable related to the program was $279,000. As of December 31, 1999
and 1998, the receivable balance was $0 and $268,000, respectively.
(11) Stockholder Rights Plan
Porta has a Stockholder Rights Plan in which preferred stock purchase
rights were distributed to stockholders as a dividend at the rate of one
right for each common share. Each right entitles the holder to buy from
Porta one one-hundredth of a newly issued share of Series A junior
participating preferred stock at an exercise price of $175.00 per right.
The rights will be exercisable only if a person or group acquires
beneficial ownership of 22.5 percent or more of Porta's common stock or
commences a tender or exchange offer upon consummation of which such
person or group would beneficially own 22.5 percent or more of the common
stock.
If any person becomes the beneficial owner of 22.5 percent or more of
Porta's common stock other than pursuant to an offer for all shares which
is fair to and otherwise in the best interests of Porta and its
stockholders, each right not owned by such person or related parties will
enable its holders to purchase, at the right's then current exercise
price, shares of common stock of Porta (or, in certain circumstances as
determined by the Board of Directors, a combination of cash, property,
common stock or other securities) having a value of twice the right's
exercise price. In addition, if Porta is involved in a merger or other
business combination transaction with another person in which its shares
are changed or converted, or sells more than 50 percent of its assets to
another person or persons, each right that has not previously been
exercised will entitle its holder to purchase, at the right's then current
exercise price, common shares of such other person having a value of twice
the right's exercise price.
Porta will generally be entitled to redeem the rights, by action of a
majority of the continuing directors of the Company, at $.01 per right at
any time until the tenth business day following public announcement that a
22.5 percent position has been acquired.
(Continued)
F-17
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Employee Benefit Plans
Porta has deferred compensation agreements with certain officers and
employees, with benefits commencing at retirement equal to 50% of the
employee's base salary, as defined. Payments under the agreements will be
made for a period of fifteen years following the earlier of attainment of
age 65 or death. During 1999, 1998 and 1997, Porta accrued approximately
$180,000, $185,000 and $203,000, respectively, under these agreements.
In 1986, Porta established the Porta Systems Corp. 401(k) Savings Plan for
the benefit of eligible employees, as defined in the Savings Plan.
Participants contribute a specified percentage of their base salary up to
a maximum of 15%. Porta will match a participant's contribution by an
amount equal to 25% of the first 6% contributed by the participant. A
participant is 100% vested in the balance to his credit. For the years
ended December 31, 1999, 1998 and 1997, Porta's contribution amounted to
$93,000, $96,000 and $96,000, respectively.
In 1999, Porta established the Employee Stock Purchase Plan for the
benefit of eligible employees, as defined in the Purchase Plan, which
permits employees to purchase Porta's common stock at discounts up to 15%.
Porta has reserved 1,000,000 shares of Porta stock for issuance under the
plan. The first quarterly period under the Purchase Plan commenced October
1999. Subsequent to December 31, 1999, Porta issued approximately 28,000
shares of stock to the participants of the Purchase Plan at a 10%
discount, resulting in a purchase price $0.675.
Porta does not provide any other post-retirement benefits to any of its
employees.
(13) Incentive Plans
During 1999, Porta established an Employee Stock Bonus Plan whereby stock
may be given to non-officers or directors to recognize the contributions
of employees. A maximum of 100,000 shares of common stock is reserved for
issuance pursuant to the Bonus Plan. During 1999 Porta issued 4,250 shares
of common stock pursuant to the Bonus Plan and recorded a charge of
approximately $8,000.
Porta's 1986 Stock Incentive Plan ("1986 Plan"), expired in March 1996,
although options granted prior to the expiration date remain in effect in
accordance with their terms. Options granted under the 1986 Plan may be
incentive stock options, as defined in the Internal Revenue Code, or
options that are not incentive stock options. The exercise price for all
options granted were equal to the fair market value at the date of grant.
Porta's 1996 Stock Incentive Plan ("1996 Plan") covers 450,000 shares of
common stock. Incentive stock options cannot be issued subsequent to ten
years from the date the 1996 Plan was approved. Options under the 1996
Plan may be granted to key employees, including officers and directors of
the Company and its subsidiaries, except that members and alternate
members of the stock option committee are not eligible for options under
the 1996 Plan. The exercise price for all options granted were equal to
the fair market value at the date of grant and vest as determined by the
board of directors. In addition, the 1996 Plan provides for the automatic
grant to non-management directors of non-qualified options to purchase
2,000 shares on May 1st of each year commencing May 1, 1996, based upon
the average closing price of the last ten trading days of April of each
year.
(Continued)
F-18
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Porta's 1998 Stock Non-Qualified Stock Option Plan ("1998 Plan") covers
450,000 shares of common stock. Options under the 1998 Plan may be granted
to key employees, including officers and directors of the Company and its
subsidiaries. The exercise price for all options granted were equal to the
fair market value at the date of grant and vest as determined by the board
of directors.
Porta's 1999 Incentive and Non-Qualified Stock Option Plan ("1999 Plan")
covers 400,000 shares of common stock. Incentive stock options cannot be
issued subsequent to ten years from the date the 1999 Plan was approved.
Options under the 1999 Plan may be granted to key employees, including
officers and directors of the Company and its subsidiaries, except that
members and alternate members of the stock option committee are not
eligible for options under the 1999 Plan. The exercise price for all
options granted were equal to the fair market value at the date of grant
and vest as determined by the board of directors. In addition, the 1999
Plan provides for the automatic grant to non-management directors of
non-qualified options to purchase 5,000 shares on May 1st of each year
commencing May 1, 1999, based upon the average closing price of the last
ten trading days of April of each year; provided, however, that the
non-management directors will not be granted non-qualified options
pursuant to the 1999 Plan for any year to the extent options are granted
under the 1996 Plan for such year.
During 1998, pursuant to an employment contract with an officer, Porta
issued options to purchase 30,000 shares of common stock at $1.25 per
share, which approximated market value on the date of issuance, and expire
on August 2004. As of December 31, 1999, options to purchase 10,000 shares
of common stock had vested.
During 1999, pursuant to employment contracts with 4 officers, Porta
issued options to purchase 95,000 shares of common stock at $2.06, as to
60,000 shares and $1.75, as to 35,000 shares. The exercise prices
approximated market value on the date of issuance. The options expire in
January 2004 and May 2005, respectively. As of December 31, 1999 none of
the options are vested.
Porta applies APB Opinion 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for the 1999, 1998,
1996 and 1986 Plans. Under APB 25, no compensation cost is recognized for
options granted to employees at exercise prices greater than or equal to
fair market value of the underlying common stock at the date of grant.
Porta has adopted the disclosure only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS No.123") which requires the Company to provide, beginning with 1995
grants, pro forma information regarding net income and net income per
common share (basic and diluted) as if compensation costs for Porta's
stock option plans had been determined in accordance with the fair value
method prescribed in SFAS No.123. If Porta had elected to recognize
compensation costs based on fair value of the options granted at grant
date as prescribed by SFAS No. 123, net income (loss) and net income
(loss) per share (basic and diluted) would have been reduced to the pro
forma amounts indicated below:
(Continued)
F-19
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(Dollars in thousands, except per share data)
1999 1998 1997
---- ---- ----
Pro forma net income (loss) $(14,280) $ 237 $(7,026)
Pro forma net income (loss)
per share (basic and diluted) $ (1.50) $0.03 $ (2.26)
The weighted-average fair value of options granted was $1.36, $ 1.47 and
$0.35 per share in 1999, 1998 and 1997, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1999, 1998 and 1997:
Dividends: $0.00 per share
Volatility: 45.8%-80.00%
Risk-free interest: 4.50%-6.40%
Expected term: 5 years
A summary of the status of Porta's 1986 stock option plan as of December
31, 1999, 1998, and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 15,527 $ 57 16,392 $57 16,397 $57
Granted -- -- --
Exercised -- -- --
Forfeited (12,527) 70 (865) 63 (5) 38
------- ------ ------
Outstanding end of year 3,000 $ 5 15,527 $57 16,392 $57
======= ====== ====== ===
Options exercisable at year-end 3,000 15,527 16,392
======= ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1986 Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 5 3,000 2.8 years $ 5 3,000 $ 5
===== =====
</TABLE>
(Continued)
F-20
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the status of Porta's 1996 stock option plan as of December
31, 1999, 1998 and 1997, and changes during the year is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ----------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 447,938 $ 1.73 437,988 $1.67 79,448 $2.45
Granted -- -- 12,000 3.85 358,780 1.50
Exercised -- -- -- -- -- --
Forfeited (35,100) 1.77 (2,050) 1.51 (240) 2.00
------- ------- -------
Outstanding end of year 412,838 $ 1.73 447,938 $1.73 437,988 $1.67
======= ======= =======
Options exercisable at year-end 412,838 447,938 333,488
======= ======= =======
</TABLE>
The following table summarizes information about stock options outstanding
under the 1996 Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1 to 5 412,838 6.5 years $ 1.73 412,838 $ 1.73
======= =======
</TABLE>
A summary of the status of Porta's 1998 stock option plan as of December
31, 1999, and changes during the year is presented below:
1999 1998
---------------------- ----------------------
Shares Weighted Shares Weighted
Under Average Under Average
Option Exercise Price Option Exercise Price
------ -------------- ------ --------------
Outstanding beginning of year 444,500 $3.25 0 $0.00
Granted 2,200 1.96 448,000 3.25
Exercised -- -- -- --
Forfeited (17,500) 2.32 (3,500) 3.25
------- -------
Outstanding end of year 429,200 $3.28 444,500 $3.25
======= =======
Options exercisable at
year-end 358,400 -0-
======= =======
The following table summarizes information about stock options outstanding
under the 1998 Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1 to 5 429,200 4.1 years $ 3.28 358,400 $ 2.64
======= =======
</TABLE>
(Continued)
F-21
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the status of Porta's 1999 stock option plan as of December
31, 1999, and changes during the year is presented below:
1999
-----------------------------
Shares Weighted
Under Average
Option Exercise Price
------ --------------
Outstanding beginning of year 0 $0.00
Granted 25,500 1.72
Exercised -- --
Forfeited -0-
------
Outstanding end of year 25,500 $1.72
======
Options exercisable at year-end 25,000
======
The following table summarizes information about stock options outstanding
under the 1999 Plan at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1 to 5 25,500 9.3 years $ 1.72 25,000 $ 1.73
====== ======
</TABLE>
(14) Income Taxes
The provision for income taxes consists of the following:
1999 1998 1997
---- ---- ----
Current Deferred Current Deferred Current Deferred
Federal $ -- 716,000 -- (8,000) 40,000 (708,000)
State and foreign 62,000 95,000 615,000 (1,000) 177,000 (94,000)
------- ------- ------- ------ ------- --------
Total $62,000 811,000 615,000 (9,000) 217,000 (802,000)
======= ======= ======= ====== ======= ========
(Continued)
F-22
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of Porta's income tax provision and the amount computed
by applying the statutory U.S. federal income tax rate of 34% to income
(loss) from continuing operations before income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate $(4,356,000) 398,000 (2,526,000)
Increase (decrease) in income tax benefit resulting from:
Increase (decrease) in valuation allowance 5,486,000 (4,097,000) (22,740,000)
State and foreign taxes, less applicable federal benefits (368,000) 615,000 83,000
Debt conversion expense not deductible for tax -- 411,000 3,620,000
Other expenses not deductible for tax 152,000 136,000 206,000
Foreign income taxed at rates
lower than U.S. statutory rate (5,000) (239,000) (730,000)
Utilization of net operating loss carryforward -- (118,000) (669,000)
Expiration of capital loss and investment
tax credit carryforwards -- 4,387,000 642,000
Estimated NOL in excess of 382 limitation -- (719,000) 21,500,000
Other (36,000) (168,000) 29,000
----------- ---------- ------------
$ 873,000 606,000 (585,000)
=========== ========== ============
</TABLE>
Porta has unused United States tax net operating loss (NOL) carryforwards
of approximately $74,593,000 expiring at various dates between 2007 and
2019. No tax benefit or expense was apportioned to the 1997 and 1998
extraordinary gains, as such amounts are immaterial. Due to the change in
ownership which resulted from the conversion of Porta's Zero coupon
subordinated convertible notes to common stock, Porta's usage of its NOL
will be limited in accordance with Internal Revenue Code section 382.
Porta's carryforward utilization of the NOL is limited to $1,767,000 per
year. The carryforward amounts are subject to review by the Internal
Revenue Service (IRS). The capital loss carryforwards expired during 1998
and, as a result of the section 382 limitation, no benefit from tax credit
carryforwards will be available. In addition, Porta has foreign NOL
carryforwards of approximately $5,300,000 with indefinite expiration
dates.
Porta's United States net operating loss carryforwards expire in the
following years:
2009 $ 4,105,000
2010 18,880,000
2011 884,000
2018 37,000
2019 5,912,000
------------
$ 29,818,000
============
(Continued)
F-23
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of the deferred tax assets and liabilities, the net balance
of which is included in prepaid and other current assets, as of December
31, 1999 and 1998 are as follows:
1999 1998
------------ -----------
Deferred tax assets:
Inventory $ 1,193,000 1,488,000
Allowance for doubtful accounts
receivable 723,000 345,000
Benefits of tax loss carryforwards 13,285,000 9,056,000
Benefit plans 819,000 871,000
Accrued commissions 718,000 913,000
Other 449,000 290,000
Depreciation 906,000 487,000
------------ -----------
18,093,000 13,450,000
Valuation allowance (18,903,000) (12,607,000)
------------ -----------
-- 843,000
Deferred tax liabilities:
Capitalized software costs -- (32,000)
------------ -----------
$ -- 811,000
============ ===========
Deferred taxes result from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial
statements. The temporary differences result from costs required to be
capitalized for tax purposes by the US Internal Revenue Code, and certain
items accrued for financial reporting purposes in the year incurred but
not deductible for tax purposes until paid.
Because of Porta's tax losses in 1999, a valuation allowance for the
entire deferred tax asset was provided due to the uncertainty as to future
realization. During the years ended December 31, 1998 and 1997, the
valuation allowance was carried at an amount that reflected a net deferred
tax asset equal to the anticipated tax benefit of the temporary
differences, which were expected to be realized within one year.
The income tax returns of Porta and its subsidiary operating in Puerto
Rico were examined by the IRS for the tax years ended December 31, 1989
and 1988. As a result of this examination, the IRS increased the Puerto
Rico subsidiary's taxable income resulting from intercompany transactions,
with a corresponding increase in Porta's net operating losses. The
settlement amounted to approximately $953,000. Porta is currently in a
structured settlement with the IRS, which is reviewed annually, whereby
monthly payments will be made to liquidate the settlement. Aggregate
annual amounts payable by Porta, including interest on the unpaid amounts
at a current rate of 7%, is $240,000 in 1999. As of December 31, 1999,
Porta has made all the required payments through that date under the
settlement and approximately $586,000 remains outstanding.
No provision was made for U.S. income taxes on the undistributed earnings
of Porta's foreign subsidiaries as it is management's intention to utilize
those earnings in the foreign operations for an indefinite period of time
or repatriate such earnings only when tax effective to do so. At December
31, 1999, undistributed earnings of the foreign subsidiaries amounted to
approximately $2,908,000. It is not practicable to determine the amount of
income or withholding tax that would be payable upon the remittance of
those earnings.
(Continued)
F-24
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Leases
At December 31, 1999, Porta and its subsidiaries leased manufacturing and
administrative facilities, equipment and automobiles under a number of
operating leases. Porta is required to pay increases in real estate taxes
on the facilities in addition to minimum rents. Total rent expense for
1999, 1998, and 1997 amounted to approximately $874,000, $716,000 and
$827,000, respectively. Minimum rental commitments, exclusive of future
escalation charges, for each of the next five years are as follows:
2000 $ 758,000
2001 445,000
2002 436,000
2003 414,000
2004 385,000
Thereafter 3,631,000
------------
$ 6,069,000
============
(16) Contingencies
At December 31, 1999, Porta was contingently liable for outstanding
letters of credit and surety bonds aggregating approximately $1,780,000
and $1,323,000, respectively, as security for the performance of certain
long-term contracts.
In December 1999, Porta entered into a series of agreements with a
non-affiliated party relating to the proposed licensing and development of
certain new products and the performance by the other party of maintenance
services for certain of Porta's clients. Porta has determined that it
cannot recognize income or expense under these contracts and that the
contracts do not reflect correctly the fair market value of the licenses
exchanged and that the contracts are null and void. However, it is
possible that the other party may assert claims against Porta under the
contracts. Although Porta believes that it has valid defenses to any claim
under the contracts, if there is litigation concerning the contracts, the
other party may prevail.
Porta is a party to legal actions arising out of the ordinary conduct of
its business. Management believes that the settlement of these matters
will not have a materially adverse effect on the financial position of the
Company (note 20).
(17) Major Customers
During the years ended December 31, 1999, 1998 and 1997, Porta's five
largest customers accounted for sales of $19,700,000, or approximately 51%
of sales, $28,797,000, or approximately 49% of sales, and $30,633,000, or
approximately 48% of sales, respectively. Porta's largest customer is
British Telecommunications plc ("BT"). Sales to BT for the year ended
December 31, 1999, 1998 and 1997 amounted to $7,825,000, $15,349,000 and
$13,876,000, respectively, or approximately 20%, 26% and 22%,
respectively, of Porta's sales for such years. Therefore, any significant
interruption or decline in sales to BT may have a materially adverse
effect upon Porta's operations. During 1998, sales to a Chilean telephone
company were $6,834,000, or approximately 12% of sales. No other customers
account for 10% or more of Porta's sales for any year. Approximately 28%,
64% and 64%, respectively, of Porta's accounts receivable are due from the
five largest customers as of December 31, 1999, 1998 and 1997.
respectively.
(18) Fair Values of Financial Instruments
Cashequivalents, accounts receivable, accounts and notes payable, accrued
expenses and short-term loans are reflected in the consolidated financial
statements at fair value because of the short term maturity of these
instruments.
The fair value of Porta's long-term debt cannot be reasonably estimated
due to the lack of marketability of such instruments.
(Continued)
F-25
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(19) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
Numerator-Basic and diluted
net income (loss) per share: 1999 1998 1997
------------ -------- ------------
<S> <C> <C> <C>
Income (loss) from continuing operations $(13,686,000) $451,000 $ (7,021,000)
Extraordinary item -- 76,000 122,000
------------ -------- ------------
Net income (loss) $(13,686,000) $527,000 $ (6,899,000)
============ ======== ============
Denominator:
Denominator for basic net income (loss)
per share-weighted-average shares 9,489,000 9,281,000 3,111,000
Effect of dilutive securities:
Options and Warrants -- 452,000 --
6% Convertible Subordinated Notes -- 52,000 --
------------ -------- ------------
Denominator for diluted net income (loss)
per share-adjusted weighted-average
shares and assumed conversions 9,489,000 9,785,000 3,111,000
============ ======== ============
Basic per share amounts:
Continuing operations $ (1.44) $ 0.05 $ (2.26)
Extraordinary item -- 0.01 0.04
------------ -------- ------------
Net income (loss) per share
of common stock $ (1.44) $ 0.06 $ (2.22)
============ ======== ============
Diluted per share amounts:
Continuing operations $ (1.44) $ 0.04 $ (2.26)
Extraordinary item -- 0.01 0.04
------------ -------- ------------
Net income (loss) per share
of common stock $ (1.44) $ 0.05 $ (2.22)
============ ======== ============
</TABLE>
In November 1997, approximately $23,400,000 of the Notes were converted
into approximately 6,412,000 shares of common stock. Had this conversion
taken place as of January 1, 1997, the denominator for the basic net loss
per share (the weighted-average shares) and the diluted net loss per share
(adjusted weighted-average shares and assumed conversion) would have been
8,639,000 for 1997.
Options to purchase 638,508, 486,577 and 25,442 shares of common stock for
1999, 1998 and 1997, respectively, with exercise prices ranging from $1.69
to $5.00, $3.25 to $86.25 and $3.69 to $86.25 for 1999, 1998 and 1997,
respectively, were outstanding but not included in the computation of
diluted net income (loss) per share because the exercise prices were
greater than the average market price of common stock during such years.
(Continued)
F-26
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Warrants to purchase 860,000, 53,000 and 548,668 shares of common stock
for 1999, 1998 and 1997, respectively, with exercise prices ranging from
$1.56 to $3.00, $17.50 and $3.00 to $50.00 for 1999, 1998 and 1997,
respectively, were outstanding but not included in the computation of
diluted net income (loss) per share because the exercise prices were
greater than the average market price of common stock during such years.
(20) Legal Matters
In July 1996, an action was commenced against Porta 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 Porta who
acquired their securities in connection with the acquisition by Porta of
Aster Corporation. The complaint alleges breach of contract against Porta
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 Porta that additional plaintiffs
may be added and, as a result, the amount of damages claimed may be
substantially greater than the amount presently claimed. Porta believes
that the defendants have valid defenses to the claims. Discovery is
proceeding.
In December 1999, Porta was served with a request for arbitration for
commissions allegedly owed to a former sales representative. Porta
terminated its sales representative agreement in July 1999. The request
for arbitration alleges that Porta's termination of the agreement was
improper and that the representative is entitled to be paid damages based
on the commissions he allegedly would have received for an indefinite term
beginning August 1999. Additionally, the request for arbitration alleges
that the representative was not paid for certain unspecified commissions
that he was supposedly entitled to receive during the period from February
1, 1986 through July 31, 1999. The request for arbitration does not
specify the precise amount of damages, but estimates damages approximating
$500,000. The arbitration is in its earliest stages and Porta intends to
defend it vigorously.
(21) Cash Flow Information
(1) Supplemental cash flow information for the years ended December 31,
is as follows:
1999 1998 1997
------ ----- -----
Cash paid for interest $3,117 2,629 2,757
====== ===== =====
Cash paid for income taxes $ 379 223 117
====== ===== =====
(2) Non-cash transactions:
(i) During 1998 and 1997, the Company exchanged approximately
$250,000 and $410,000 principal amount of its Debentures, net of
unamortized discount and accrued interest, for 5,000 and 8,000
shares of common stock, and $192,000 and $315,000 of Notes,
respectively (note 7).
(Continued)
F-27
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(ii) During 1998 and 1997, the Company issued 53,000 and 6,412,000
shares of common stock, respectively, upon the conversion of Notes
valued at approximately $280,000 and $34,000,000, respectively (note
7).
(iii) During 1998, the Company issued 330,000 shares of common stock
upon the conversion of $1,260,000 of Debentures (note 7)
(iv) During 1998, the Company issued 147,000 shares of common stock
valued at approximately $500,000 to satisfy a portion of the final
settlement of a class action lawsuit (note 10).
(v) In connection with the November 1997 extension of the Company's
credit facility with its senior lender, the Company amended the
terms of previously issued warrants to purchase common stock to
reduce the exercise price. The value of the reduction in the
exercise price, approximately $45,000 was recorded as deferred
financing and additional paid in capital.
(vi) In connection with advisory services provided in 1997 by an
investment banking firm, the Company issued 120,000 shares of common
stock in 1998 valued at approximately $340,000 and warrants to
purchase 400,000 shares of common stock valued at approximately
$160,000 were issued in 1997 (notes 7 and 10).
(vii) In 1998, in connection with the subordinated notes, the
Company issued Series B and Series C Warrants, which were valued at
$630,000 and were recorded as part of additional paid in capital and
original issue discount (note 8).
(viii) In 1999, in connection with advisory services provided by an
investment banking firm, the Company issued 150,000 shares of common
stock valued at approximately $113,000 (notes 7 and 10).
(ix) In 1999, in connection with the amendment to the subordinated
notes, Porta reduced the exercise price of the Series B and Series C
Warrants, which was valued at $56,000 and recorded as part of
additional paid in capital and debt discount (note 8).
(22) Segment and Geographic Data
Porta has three reportable segments: Line Connection and Protection
Equipment ("Line") whose products interconnect copper telephone lines to
switching equipment and provides fuse elements that protect telephone
equipment and personnel from electrical surges; Operating Support Systems
("OSS") whose products automate the testing, provisioning, maintenance and
administration of communication networks and the management of support
personnel and equipment; and Signal Processing ("Signal") whose products
are used in data communication devices that employ high frequency
transformer technology.
(Continued)
F-28
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The factors used to determine the above segments focused primarily on the
types of products and services provided, and the type of customer served.
Each of these segments is managed separately from the others, and
management evaluates segment performance based on operating income.
1999 1998 1997
------------ ----------- ----------
Revenue:
Line $ 18,189,000 24,291,000 23,753,000
OSS 14,254,000 27,318,000 29,561,000
Signal 6,328,000 7,539,000 8,280,000
------------ ----------- ----------
$ 38,771,000 59,148,000 61,594,000
============ =========== ==========
Segment profit:
Line $ 3,582,000 6,580,000 7,091,000
OSS (10,650,000) (365,000) 634,000
Signal 1,884,000 1,953,000 2,325,000
------------ ----------- ----------
$ (5,184,000) 8,168,000 10,050,000
============ =========== ==========
Depreciation and amortization:
Line $ 505,000 722,000 831,000
OSS 881,000 1,170,000 1,850,000
Signal 199,000 200,000 215,000
------------ ----------- ----------
$ 1,585,000 2,092,000 2,896,000
============ =========== ==========
Total identifiable assets:
Line $ 7,921,000 10,330,000 9,329,000
OSS 21,637,000 28,283,000 25,018,000
Signal 7,965,000 8,176,000 8,273,000
------------ ----------- ----------
$ 37,523,000 46,789,000 42,620,000
Capital expenditures: ============ =========== ==========
Line $ 415,000 280,000 277,000
OSS 670,000 283,000 97,000
Signal 27,000 93,000 12,000
------------ ----------- ----------
$ 1,112,000 656,000 386,000
============ =========== ==========
(Continued)
F-29
<PAGE>
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table reconciles segment totals to consolidated totals:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenue:
Total revenue for reportable segments $ 38,771,000 59,148,000 61,594,000
Other revenue 165,000 195,000 636,000
------------ ----------- -----------
Consolidated total revenue $ 38,936,000 59,343,000 62,230,000
============ =========== ===========
Operating income:
Total segment profit for reportable segments $ (5,184,000) 8,168,000 10,050,000
Corporate and unallocated (4,525,000) (3,602,000) (3,949,000)
------------ ----------- -----------
Consolidated total operating income $ (9,709,000) 4,566,000 6,101,000
============ =========== ===========
Depreciation and amortization:
Total for reportable segments $ 1,585,000 2,092,000 2,896,000
Corporate and unallocated 91,000 103,000 144,000
------------ ----------- -----------
Consolidated total deprecation and amortization $ 1,676,000 2,195,000 3,040,000
============ =========== ===========
Total assets:
Total for reportable segments $ 37,523,000 46,789,000 42,620,000
Corporate and unallocated 5,925,000 5,347,000 8,380,000
------------ ----------- -----------
Consolidated total assets $ 43,448,000 52,136,000 51,000,000
============ =========== ===========
Capital expenditures:
Total for reportable segments $ 1,112,000 656,000 386,000
Corporate and unallocated 79,000 9,000 23,000
------------ ----------- -----------
Consolidated total capital expenditures $ 1,191,000 665,000 409,000
============ =========== ===========
</TABLE>
The following table presents information about the Company by geographic
area:
1999 1998 1997
----------- ---------- ----------
Revenue:
United States $14,368,000 18,951,000 17,980,000
United Kingdom 15,673,000 20,441,000 18,640,000
Asia/Pacific 4,159,000 7,181,000 10,278,000
Other Europe 3,130,000 3,377,000 10,587,000
Latin America 1,257,000 7,463,000 2,429,000
Other North America 296,000 1,879,000 1,289,000
Other 53,000 51,000 1,027,000
----------- ---------- ----------
Consolidated total revenue $38,936,000 59,343,000 62,230,000
=========== ========== ==========
Consolidated long-lived assets:
United States $12,011,000 12,317,000 13,044,000
United Kingdom 2,398,000 2,520,000 2,776,000
Other North America 618,000 663,000 650,000
Asia/Pacific 200,000 273,000 245,000
Latin America 35,000 26,000 0
Other 8,000 11,000 11,000
----------- ---------- ----------
15,270,000 15,810,000 16,726,000
Current and other assets 28,178,000 36,326,000 34,274,000
----------- ---------- ----------
Consolidated total assets $43,448,000 52,136,000 51,000,000
=========== ========== ==========
F-30
EXHIBIT 23
Consent of Independent Certified Public Accountants
The Board of Directors and
Stockholders of Porta Systems Corp.
Syosset, New York
We hereby consent to the incorporation by reference in the Prospectuses
constituting a part of the Registration Statements (Reg. No. 33-12146) on Form
S-8, (Reg. No. 33-41992) on Form S-8, (Reg. No. 333-48839) on Form S-3, (Reg.
No. 333-68321) on Form S-8, and (Reg. No. 333-72369) on Form S-8 of our report
dated March 15, 2000, except for Notes 2 and 6 as to which the date is April 10,
2000 as they relate to the Company's senior and subordinated debt, relating to
the consolidated financial statements of Porta Systems Corp. and subsidiaries
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectuses.
/s/ BDO Seidman, LLP
---------------------------
BDO SEIDMAN, LLP
Melville, New York
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,245
<SECURITIES> 0
<RECEIVABLES> 12,137
<ALLOWANCES> 0
<INVENTORY> 8,893
<CURRENT-ASSETS> 25,648
<PP&E> 4,193
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,448
<CURRENT-LIABILITIES> 19,513
<BONDS> 0
0
0
<COMMON> 96
<OTHER-SE> (1,483)
<TOTAL-LIABILITY-AND-EQUITY> 43,448
<SALES> 38,936
<TOTAL-REVENUES> 38,936
<CGS> 28,952
<TOTAL-COSTS> 19,693
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,571
<INCOME-PRETAX> (12,874)
<INCOME-TAX> 873
<INCOME-CONTINUING> (13,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,686)
<EPS-BASIC> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
