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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, 2000
|_| 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. |X|
State aggregate market value of the voting stock held by non-affiliates of
the registrant: $3,449,620 as of March 16, 2001.
Indicate the number of shares outstanding of each of the registrant's
class of common stock, as of the latest practicable date: 9,856,056 shares of
Common Stock, par value $.01 per share, as of March 16, 2001.
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.
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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. Our 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 $10,176,000, or $1.04 per share (basic and
diluted), on sales of $51,140,000 for 2000 following a loss of $13,686,000, or
$1.44 per share (basic and diluted) for 1999, and our losses are continuing at
least through the first quarter of 2001 and may continue thereafter. We cannot
give assurance that we will be able to operate profitably in the future.
Our independent auditors have included an explanatory paragraph relating
to our ability to continue as a going concern in their report on our financial
statements. Because of our substantial losses in 2000 and 1999, our
stockholders' deficit of $ 10,792,000 at December 31, 2000, and our working
capital deficit of $24,152,000 as of December 31, 2000, resulting primarily from
approximately $27,000,000 of debt maturing in July 2001, our auditors included
in their report an explanatory paragraph about our ability to continue as a
going concern.
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We require substantial financing to meet our working capital requirements.
We had a working capital deficit at December 31, 2000 of $24,152,000, compared
to working capital of $6,135,000 at December 31, 1999. As of December 31, 2000,
our current liabilities include $20,746,000 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, 2000, 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, $6,144,000 of subordinated notes were outstanding as of December 31,
2000 of which $900,000 matured on January 3, 2001 and $5,244,000 will mature on
July 3, 2001. We did not have sufficient resources to pay the principal portion
which matured on January 3, 2001 or the interest which was due on the
subordinated notes on January 3, 2001, and we failed to make the scheduled
principal and interest payments on the subordinated debt. 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, 2000, we were in default on a covenant on our agreement with our senior
lender and the outstanding advances from the senior lender exceeded the maximum
allowable under the borrowing base formula since the Company's eligible assets
were not sufficient to support the outstanding balance under the combined
revolving advance and standby letters of credit guarantee (see Note 6, Notes to
Consolidated Financial Statements). The senior lender waived the default and
permitted us to continue to maintain the over advance through July 2, 2001. 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 66% of our sales
in 2000, 62% of our sales in 1999 and 60% of our sales for 1998, 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 both
completing the installation and receiving the final payment from our customers
for our Operational Support Systems contracts, and as well as further risks
relating to political and economic changes.
We rely heavily on British Telecommunications for most of our sales.
During 2000, our direct sales to British Telecommunications were $5,098,000, or
approximately 10% of our sales. Pursuant to our agreement with Fujitsu
Telecommunications Europe LTD, which purchases telecommunications equipment from
us for sale to British Telecommunications, our sales to Fujitsu
Telecommunications for 2000 were $12,051,000 or 24% of 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 either British Telecommunications or Fujitsu
Telecommunications may have a materially adverse effect upon our operations.
We have granted to British Telecommunications rights to our technology.
Under our agreement with British Telecommunications, we gave British
Telecommunications the right to use our connection/protection technology or have
products using our technology manufactured for it by others. As a result,
British Telecommunication may have the right to use our technology and purchase
products based on our technology from others, which may result in a significant
decline in our sales to British Telecommunications. Furthermore, we are
currently negotiating a supply agreement with British Telecommunication. There
are no assurances that we will be successful in securing a new agreement. If we
do not enter into a new agreement with British Telecommunications, our business
may be impaired.
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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. Furthermore, our
Operation Support Systems contracts typically contain performance guarantees by
us and clauses imposing penalties if we do not meet "in-service" dates.
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. In
the past, competitors have used our financial difficulties in successfully
competing against us. We anticipate that our loss for 2000, our working capital
deficiency and the scheduled expiration of our financing agreement may continue
to place us in a competitive disadvantage, particularly in seeking Operations
Support Systems contracts, where we frequently deal with national
telecommunications companies.
We face significant competition for both foreign and domestic sales. In
both foreign and domestic 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 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 of our business and repayment of debt 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.
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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. Our
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.
Our 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. 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.
We have entered into a number of agreements with suppliers of
complementary products and plans to offer those products through our
distribution channels to our 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.
Our 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 operational
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. These contracts typically contain performance
guarantees by us and clauses imposing penalties 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 and,
in some instances, may not be collected. Delays in purchaser acceptance of the
systems and in our receipt of final contract payments have occurred in
connection with a number of foreign sales. In addition, we have not experienced
a steady or predictable flow of orders for OSS systems.
Telecommunications Connection Equipment. Our 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 our 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.
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Our 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.
We also have 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.
Our copper connection/protection products are used by many of the Regional
Bell Operating Companies as well as by independent telephone operating companies
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. Our 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.
The table below shows, for the last three fiscal years, the contribution
made to our sales by each of its major categories of the telecommunications
industry:
Sales by Product Category
Years Ended December 31,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
OSS Systems $22,296 44% $14,254 37% $27,318 46%
Line Connecting
/Protecting
Equipment 20,546 40% 18,189 47% 24,291 41%
Signal Processing 7,644 15% 6,328 16% 7,539 13%
Other 654 1% 165 0% 195 0%
------- --- ------- --- ------- ---
Total $51,140 100% $38,936 100% $59,343 100%
======= === ======= === ======= ===
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Markets
We supply equipment and systems to telephone companies which provides
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.
Our 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 2000, approximately 44% of our sales consisted of OSS products and
services.
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 2000, approximately 40% of our sales were made to customers in this
category.
Our 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.
Our 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 2000, signal processing equipment accounted for approximately 15%
of our sales.
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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
business 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 regional bell
operating companies 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 covering our
connecting/protecting products. This agreement which will expire on August 31,
2001 provides, among other things, that we are a non-exclusive supplier to
British Telecommunications for these products. British Telecommunications
purchased line connecting/protecting products amounting to $4,261,000 (8% of
sales) in 2000, $6,566,000 (17% of sales) in 1999, and $11,345,000 (19% of
sales) in 1998. During these years, we also sold our products to unaffiliated
suppliers for resale to British Telecommunications. Our agreement with British
Telecommunications provides for a cross license which, in effect, enables
British Telecommunications to use certain of our proprietary information to
modify or enhance products provided to British Telecommunications and permits
British Telecommunications to manufacture or engage others to manufacture those
products. We are currently negotiating a new multi-year agreement with British
Telecommunications. There are no assurances that we will be successful in
securing a new agreement. If we do not enter into a new agreement British
Telecommunications, our business could be impaired.
Our OSS systems historically have been sold to foreign telephone operating
companies which are government controlled. Recently, we entered into sales,
marketing and management co-operative agreements and strategic alliances with
various companies.
During 2000, we entered into a multi-year sales, marketing, and management
co-operative agreement with Fujitsu Telecommunications 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 for broadband services and the sixth generation
Sherlock remote test unit to telecom service operators in the United Kingdom,
principally British Telecommunications, and certain other European countries.
Our signal processing products are sold primarily to US military and
aerospace prime contractors, and domestic original equipment manufacturers and
end users.
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The following table sets forth for the last three fiscal years our sales
to customers by geographic region:
Sales to Customers By Geographic Region (1)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
(Dollars in thousands)
North America $22,795 45% $14,664 38% $20,830 35%
United Kingdom 20,244 40% 15,673 40% 20,441 34%
Asia/Pacific 5,429 10% 4,159 11% 7,181 12%
Other Europe 2,482 5% 3,130 8% 3,377 6%
Latin America 146 0% 1,257 3% 7,463 13%
Middle East 25 0% 47 0% 51 0%
Other 19 0% 6 0% -- 0%
------- --- ------- --- ------- ---
Total Sales $51,140 100% $38,936 100% $59,343 100%
======= === ======= === ======= ===
(1) For information regarding the amount of sales, operating profit or loss
and identifiable assets attributable to each of our divisions and
geographic areas, see Note 22 of Notes to the Consolidated Financial
Statements.
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 our 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
Our 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 purchased
by us. These products are installed and tested by us at our customers' premises.
At present, our 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.
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Source and Availability of Components
We generally purchase the standard components used in the manufacture of
our products from a number of suppliers. Porta attempts to assure itself that
the components are available from more than one source. We purchase all of our
MKIII test units from two suppliers. We purchase the majority of our
workstations and servers used in its OSS systems from Compaq Computer
Corporation. However, we could use other computer equipment in our systems if we
were unable to purchase Compaq products. Other components, such as personal
computers and line printers used in connecting with our electronic products, are
readily available from a number of sources.
Significant Customers
During 2000, our five largest customers accounted for sales of
$28,323,000, or approximately 55% of sales, and, during 1999, our five largest
customers accounted for sales of $19,700,000, or approximately 51% of sales. Our
largest customer in 2000 with sales of $12,051,000, or approximately 24% of
sales was Fujitsu Telecommunications. A significant amount of sales of our
products for use by British Telecommunications were sold to Fujitsu
Telecommunications, as purchasing agent for British Telecommunications. As a
result, most of the sales to Fujitsu Telecommunications were for use by British
Telecommunications. Our largest customer in 1999 was British Telecommunications.
Direct sales to British Telecommunications were $5,098,000, or 10% of sales, for
2000 and $7,825,000, or 20% of sales, for 1999. Any significant interruption or
decline in sales to Fujitsu Telecommunications or British Telecommunications may
have a materially adverse effect upon our operations. During 2000, sales to a
Mexican telephone company were $5,507,000, or approximately 11% 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 our
foreign sales. Our 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.
Backlog
At December 31, 2000, our backlog was approximately $10,000,000 compared
with approximately $23,800,000 at December 31, 1999. Of the December 31, 2000
backlog, approximately $7,600,000 represented orders from foreign telephone
operating companies. We expect to ship substantially all of our December 31,
2000 backlog during 2001.
Intellectual Property Rights
We own a number of domestic utility and design patents and have pending
patent applications for these products. In addition, we have foreign patent
protection for a number of our products.
From time to time we enter into licensing and technical information
agreements under which we receive or grant rights to produce certain
subcomponents used in our 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.
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Competition
The telephone equipment market in which we do business is characterized by
intense competition, rapid technological change and a movement to private
ownership of telecommunications networks. 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, we are functioning in a market characterized by distributors and
installers of equipment and by price competition.
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 our line connecting/protecting
equipment, we have met with significant competition from United States and
foreign manufacturers of comparable equipment and we expect this competition to
continue. In addition to Lucent, a number of our 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.
In addition to the quality and price of the products being offered, the
financial stability of a supplier, especially for OSS contracts, is a crucial
element. Because these contracts require the supplier to spend considerable
funds before the project is completed and require ongoing maintenance service,
potential customers consider the financial stability of the supplier as a major
consideration in awarding a contract. Our financial position, combined with our
recent losses, our working capital deficiency and the scheduled expiration of
our financing agreement with our senior lender, may place us at a competitive
disadvantage in seeking new business and new orders for existing customers.
Research and Development Activities
Porta spent approximately $5,800,000 in 2000, $6,100,000 in 1999, and
$6,500,000 in 1998 on its research and development activities. All research and
development was company sponsored and is expensed as incurred.
Employees
As of February 24, 2001, we had 419 employees of which 79 were employed in
the United States, 253 in Mexico, 45 in the United Kingdom, 5 in Poland, 3 in
Chile, 3 in China, and 31 in Korea (in connection with our Korean joint
venture). We believe that our relations with our employees are good, and we have
never experienced a work stoppage. Our employees are not covered by collective
bargaining agreements, except for our hourly employees in Mexico who are covered
by a collective bargaining agreement that expires on December 31, 2002.
10 of 24
Executive Officers
Name and Position Age
- ----------------- ---
William V. Carney 63
Chairman of the Board and Chief Executive Officer
Michael A. Tancredi 71
Senior Vice President, and Secretary and Treasurer
Edward B. Kornfeld 57
Senior Vice President -- Operations and Chief Financial Officer
Prem G. Chandran 48
Senior Vice President
David Rawlings 57
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.
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 from 1970 to 1996, Senior Vice President from
1989 to 1996 and Chief Technical Officer from 1990 to 1996. 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. 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.
11 of 24
Item 2. Properties
We currently lease approximately 20,400 square feet of executive, sales,
marketing and research and development space 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 2005, and the Charlotte, North
Carolina lease expires in November 2004. The aggregate annual rental is
approximately $435,000.
Our wholly-owned United Kingdom subsidiary leases approximately 34,300
square foot facility in Coventry, England, which facility comprises all of our
office, plant and warehouse space. The lease expires in 2019. The aggregate
annual rental is approximately $225,000.
Our wholly-owned Mexican subsidiary owns an approximately 40,000 square
foot manufacturing facility in Matamoros, Mexico.
In March 2001, we entered into a contract to sell our Glen Cove, New York
facility for $1,850,000. All personnel will be relocated to other locations.
We believe our properties are adequate for our needs.
Item 3. Legal Proceedings
In March 2000, we suspended (with pay) Messrs. Ronald Wilkins and Michael
Bahlo, two of our executive officers, from their positions pending completion of
our investigation of certain matters that had come to our attention. Prior to
the completion of this investigation, however, these two executives accepted
positions with another company and thereby voluntarily resigned from their
positions with us. In February 2001, these two executives, together with a third
former executive officer, Mr. Michael Lamb, who similarly resigned from his
position with us, filed suit in the Supreme Court for the State of New York,
County of New York, entitled Ronald Wilkins, Michael Bahlo and Michael Lamb v.
Porta Systems Corp., Index No 600677/01. The complaint asserts various claims
against us based on the allegation that each of these three executives was
improperly terminated from his employment without cause, and seeks compensatory
damages, liquidating damages and attorney's fees. The Company believes that it
has valid defenses to the claims and intends to defend this action vigorously
and to assert counterclaims against these former executives.
In September 2000, we and BMS Corporation each disputed the performance by
the other party of its obligation under certain settlement agreements which were
entered into in June 2000. BMS commenced an arbitration proceeding which was
settled in January 2001 with the execution of amended agreements. The amended
agreement included, among other things, an extended payment schedule, with each
such payment being secured by our confession of judgment held in escrow by BMS.
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. Discovery is
proceeding, although there has been no significant activity in this matter
subsequent to December 31, 1999.
Item 4. Submission of Matters to a Vote of Securities Holders
During the fourth quarter of 2000, there were no matters required to be
submitted to a vote of security holders of the Company.
12 of 24
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Our common stock is traded on the American Stock Exchange, Inc. under the
symbol PSI. The following table sets forth, for 1999 and 2000, the quarterly
high and low sales prices for our common stock on the consolidated transaction
reporting systems for American Stock Exchange listed issues.
High Low
---- ---
1999 First Quarter $2.50 $1.75
Second Quarter 2.19 1.50
Third Quarter 1.88 0.63
Fourth Quarter 1.25 0.63
2000 First Quarter $4.88 $0.81
Second Quarter 3.63 1.56
Third Quarter 2.00 0.88
Fourth Quarter 1.00 0.38
We did not declare or pay any cash dividends in 2000 or 1999. It is our
present policy to retain earnings, if any, to finance the growth and development
of the business, and therefore, we do 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 16, 2001, Porta had approximately 983 stockholders of record
and the closing price of our common stock was $0.35.
During 2000, we issued unregistered securities in the following
transactions: (i) 100,000 5-year warrants to purchase shares of common stock
exercisable at $2.00 which were subsequently re-priced at an exercise price of
$1.00, (ii) 127,500 3-year warrants to purchase shares of common stock
exercisable at $3.00, and (iii) 15,000 5-year warrants to purchase shares of
common stock exercisable at $1.81. All sales were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
or 4(6) thereunder or Rule 506 of the Securities and Exchange Commission. No
fees were paid to any placement agent or underwriter in connection with any of
these sales.
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
information. 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 24
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Sales $ 51,140 $ 38,936 $ 59,343 $ 62,230 $ 57,987
Operating income (loss) (5,153) (9,709) 4,566 6,101 3,982
Debt conversion expense -- -- (945) (11,458) --
Income (loss) before discontinued
operations and extraordinary item (10,176) (13,686) 451 (7,021) 1,252
Net income (loss) (10,176) (13,686) 527 (6,899) 5,174
Basic per share amounts:
Continuing operations $ (1.04) $ (1.44) $ 0.05 $ (2.26) $ 0.57
Net income (loss) $ (1.04) $ (1.44) $ 0.06 $ (2.22) $ 2.37
Diluted per share amounts:
Continuing operations $ (1.04) $ (1.44) $ 0.04 $ (2.26) $ 0.23
Net income (loss) $ (1.04) $ (1.44) $ 0.05 $ (2.22) $ 0.94
Cash dividends declared -- -- -- -- --
Number of shares used in
calculating net income (loss)
per share-basic 9,763 9,489 9,281 3,111 2,184
Number of shares used in
calculating net income (loss)
per share-diluted 9,763 9,489 9,785 3,111 5,528
Balance Sheet Data:
Total assets $ 34,174 $ 43,448 $ 52,136 $ 51,000 $ 51,660
Long-term debt excluding current
maturities $ 376 $ 21,902 $ 17,238 $ 18,858 $ 45,804
Stockholders' equity (deficit) $(10,792) $ (1,387) $ 11,984 $ 6,813 $(19,702)
14 of 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Our consolidated statements of operations for the three years ended
December 31, 2000, 1999 and 1998, respectively, as a percentage of sales is as
follows:
Years Ended December 31,
2000 1999 1998
---- ---- ----
Sales 100% 100% 100%
Cost of sales 70% 74% 59%
---- ---- ----
Gross Profit 30% 26% 41%
Selling, general and
administrative expenses 28% 35% 22%
Research and development expenses 12% 16% 11%
---- ---- ----
Operating income (loss) (10%) (25%) 8%
Interest expense (9%) (9%) (6%)
Other (1%) 1% 2%
Debt conversion expense -- -- (2%)
---- ---- ----
Income (loss) from continuing
operations before income
taxes and minority interest (20%) (33%) 2%
Income tax expense (benefit)
and minority interest -- 2% 1%
---- ---- ----
Net income (loss) (20%) (35%) 1%
==== ==== ====
15 of 24
Results of Operations
Years Ended December 31, 2000 and 1999
Our sales for 2000 were $51,140,000 compared to $38,936,000 in 1999, an
increase of $12,204,000 (31%). The increase in revenue is attributed principally
to completion of contracts from our OSS division, although all divisions
achieved increased revenues in 2000 as compared to 1999.
OSS sales for 2000 were $22,296,000, compared to 1999 sales of
$14,254,000, an increase of $8,042,000 (56%). During 2000, OSS sales resulted
primarily from the completion of OSS contracts, which were secured during the
latter part of 1999. We expect to complete revenue recognition from these OSS
contracts in 2001. 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 the customer obtaining financing or
bank approval, and the contracts are not effective until the conditions are
satisfied.
Line connection/protection equipment sales for 2000 increased
approximately $2,357,000 (13%) from $18,189,000 in 1999 to $20,546,000 in 2000.
The improved sales level reflected an increase in volume of sales to United
States and Mexican customers, which were offset by a decrease in sales to
customers in the United Kingdom.
Signal processing revenue for 2000 compared to 1999 increased by
$1,316,000 (21%) from $6,328,000 to $7,644,000. The increase in sales primarily
reflects accommodations made to customers where requested delays in deliveries
in 1999 of orders were shipped during 2000.
Gross margin increased from 26% in 1999 to 30% in 2000. The increase in
gross margin is primarily attributed to the higher sales volume in the OSS
division. However, the increase in revenue was still not satisfactory in
completely eliminating the inefficiency resulting from our inability to absorb
our fixed expenses associated with the OSS contracts over our revenue base. This
improvement in gross margin was slightly offset by a lower gross margin in
connection/protection products in 2000 compared to 1999 due to changes in
product mix.
Selling, general and administrative expenses increased by $970,000 (7%)
from $13,603,000 in 1999 to $14,573,000 in 2000. The increase from 1999 to 2000
primarily reflects higher than anticipated professional legal expenses due
primarily to litigation involving us, particularly litigation and settlement of
a dispute with a vendor.
Research and development expenses decreased by $260,000 (4%) from
$6,090,000 in 1999 to $5,830,000 in 2000. The decreased expense in 2000 resulted
from the completion during 2000 of certain efforts to develop new products
primarily related to the OSS business.
As a result of the above, we had an operating loss of $5,153,000 in 2000
versus operating loss of $9,709,000 in 1999. The reduced operating loss for 2000
reflects continued profitability in our line connection/protection equipment and
signal processing divisions, and a reduction of the operating loss in our OSS
division from $10,650,000 in 1999 to $6,201,000 in 2000.
Interest expense for 2000 increased by $929,000 from $3,571,000 for 1999
to $4,500,000 in 2000. This change is attributable primarily to increased levels
of borrowing from the Company's senior lender and non cash interest expense
associated with the issuance and re-pricing of warrants held by the senior
lender and subordinated note holders (See Notes to Financial Statements 6 and
8).
16 of 24
Results of Operations (continued)
During 2000, we requested the early termination of our obligations to a
number of current and former executive officers regarding the funding of split
dollar life insurance policies in order to obtain approximately $1,200,000 of
premiums paid by us into the policies. Due to the early termination, we agreed
to forfeit approximately $600,000 of premiums and terminate our interest in the
policies which amount was charged to other expenses during 2000.
As the result of the foregoing, the 2000 net loss was $10,176,000, $1.04
per share (basic and diluted), compared with a net loss of $13,686,000, $1.44
per share (basic and diluted) for 1999.
Years Ended December 31, 1999 and 1998
Our 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.
Our major new OSS contracts were signed during the fourth quarter of 1999, and
had no effect on our revenue for 1999. These 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 recognized substantially all 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.
17 of 24
Results of Operations (continued)
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 our 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.
Other income for 1998 included approximately $240,000 from the final
settlement of an insolvency procedure involving the purchaser of our Israeli
operations, which was sold in 1992, and $400,000 from the settlement of a
lawsuit against a former vendor.
During 1998, we 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, we recorded an extraordinary gain from the early
extinguishment of its Debentures of $76,000.
For 1999, we 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 our 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.
Liquidity and Capital Resources
At December 31, 2000 we had cash and cash equivalents of $2,366,000
compared with $3,245,000 at December 31, 1999. Our working capital deficit was
$24,152,000 at December 31, 2000 compared to working capital of $6,135,000 at
December 31, 1999. The decline in working capital was primarily a result of the
classification of our senior debt and subordinated debt from long-term to
current liabilities. During 2000, we used $2,901,000 of cash to support our
operations. Our principal source of funds during 2000 was borrowings from our
senior lender.
We had senior debt outstanding of $20,746,000 as of December 31, 2000 of
which $150,000 was a non-interest bearing note, $10,160,000 was outstanding
against the revolving line of credit, and $10,436,000 was a term loan agreement.
The agreement requires a quarterly loan amortization of $400,000. Porta had a
revolving line of credit and a letter of credit facility of $11,000,000 as of
December 31, 2000 which decreased to $9,000,000 on January 2, 2001. During 2000,
we borrowed $5,010,000 and repaid $1,782,000 to the senior secured lender, of
which $182,000 was provided from the proceeds of the sale of our UK facility.
Our loan and security agreement with our senior secured lender expires
July 3, 2001. Pursuant to this agreement, $1,160,000 of the revolving line of
credit matured on January 2, 2001.
18 of 24
Liquidity and Capital Resources (continued)
On January 2, 2001, we did not have the resources to make the $1,160,000
payment. On March 13, 2001, our senior lender agreed to allow us to defer the
repayment of borrowings related to the increased maximum, defer all monthly
facility fees and the April 1, 2001 principal payment of $400,000 until the
earlier of the termination of the agreement on July 3, 2001 or the sale by us of
one or more of our divisions. The senior lender, as a condition to the above,
prohibited us from making any payments on indebtedness to any subordinated
creditors except to pay accounts payable in the ordinary course of business.
In addition, we were not in compliance with the interest coverage covenant
and borrowing base coverage under the agreement and obtained a waiver from our
senior lender through July 2, 2001.
As of December 31, 2000, we had remaining outstanding $376,000 of 6%
Debentures, net of original issue discount of $9,000, 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, 2000 was $12,000. At December 31, 2000, we were current on our
interest obligations.
As of December 31, 2000, we had outstanding $6,144,000 of subordinated
notes. As a result of an agreement with the holders of 85% of these notes, the
maturity date of the notes was extended to July 3, 2001. As a result, notes in
the principal amount of $900,000 were due January 3, 2001 and notes in the
principal amount of $5,244,000 become due July 3, 2001. We did not have the
resources to pay the $900,000 of subordinated debt on January 2, 2001 and
approximately $440,000 of interest which was due on January 2, 2001. We are
engaged in preliminary discussions with the holders of certain subordinated
notes with respect to the possible extension of the notes or the exchange of the
notes for equity in Porta.
Our cash availability during 2001 and thereafter may be affected by a
number of factors. At December 31, 2000, we had no cash available under our
credit facility and we had borrowed more than the amount available to us under
our borrowing base. To the extent that credit is not available, we may have
difficulty performing our obligations under our contracts, which could result in
the cancellation of contracts or the loss of future business. In addition,
$1,160,000 of senior debt and $900,000 of subordinated debt became due in
January 2001 and $24,830,000 of senior and subordinated debt will become due in
July 2001. Under the default provisions of the loan agreement with our senior
lender, a default on the subordinated notes can trigger a default in our
obligations to the senior lender. We do not presently have the ability to pay
these debts and, if we cannot obtain either an extension on the maturity of the
debts or an alternative financing source or raise funds from the sale of one of
our divisions, we may be unable to meet these financial obligations. We are
continuing to negotiate with our senior lender with respect to an extension
beyond the July 3, 2001 maturity of our current facility.
We are seeking to address our need for liquidity by seeking to extend our
agreement with our senior lender, negotiate an agreement with the holders of the
subordinated debt which would result in a deferral of our payment obligations or
a conversion of the debt to equity or a combination, and a sale of one or more
of our divisions. Although we have been engaged in negotiations with respect to
the sale of one of our divisions, these negotiations were terminated without our
entering into any agreement. Although we are continuing to explore the possible
sale of one or more of our divisions, we cannot assure you that we will be
successful in these efforts. Because of our present stock price, it is highly
unlikely that we will be able to raise funds through the sales of our equity
securities, and our financial condition prevents us from issuing debt
securities. In the event that we are unable to extend our debt obligations and
sell one or more of our divisions, we cannot assure you that we will be able to
continue in operations. In addition, our auditors included in their report an
explanatory paragraph about our ability to continue as a going concern.
19 of 24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Although we conduct operations outside of the United States, most of our
contracts and sales are dollar denominated. A portion of the revenue from our
United Kingdom operations and the majority of our United Kingdom expenses are
denominated in Sterling. Any Sterling-denominated receipts are promptly
converted into United States dollars. We do not engage in any hedging or other
currency transactions. For 2000, the currency translation adjustment was not
significant in relation to our total revenue.
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, 2000.
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.
20 of 24
(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 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.
21 of 24
Exhibits (continued)
Exhibit No. Description of Exhibit
- ----------- ----------------------
4.8 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.
4.9 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.
4.10 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.
4.11 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.
4.12 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.
4.13 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.
4.14 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.
4.15 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.
4.16 Amendment No. Eight dated as of April 10, 2000 to Amended and
Restated Loan and Security agreement between Foothill Capital
Corp. ("Foothill") and the Company.
4.17 Amendment No. Nine dated as of June 9, 2000 to Amended and
Restated Loan and Security agreement between Foothill Capital
Corp. ("Foothill") and the Company.
4.18 Amendment No. Ten dated as of March 1, 2001 to Amended and
Restated Loan and Security agreement between Foothill Capital
Corp. ("Foothill") and the Company.
22 of 24
Exhibits (continued)
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.1 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.
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.
23 of 24
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 March 29, 2001 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, March 29, 2001
- ----------------------------- Chief Executive Officer
William V. Carney and Director (Principal
Executive Officer)
/s/ Edward B. Kornfeld Senior Vice President and March 29, 2001
- ----------------------------- Chief Financial Officer
Edward B. Kornfeld (Principal Financial and
Accounting Officer)
/s/ Seymour Joffe Director March 29, 2001
- -----------------------------
Seymour Joffe
/s/ Michael A. Tancredi Director March 29, 2001
- -----------------------------
Michael A. Tancredi
/s/ Warren H. Esanu Director March 29, 2001
- -----------------------------
Warren H. Esanu
/s/ Herbert H. Feldman Director March 29, 2001
- -----------------------------
Herbert H. Feldman
/s/ Stanley Kreitman Director March 29, 2001
- -----------------------------
Stanley Kreitman
/s/ Marco Elser Director March 29, 2001
- -----------------------------
Marco Elser
/s/ Robert Schreiber Director March 29, 2001
- -----------------------------
Robert Schreiber
24 of 24
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, 2000 and 1999 F-3
Consolidated Statements of Operations and
Comprehensive Income (Loss),
Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders'
Equity (Deficit), Years Ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2000,
1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered substantial losses from
operations in 2000 and 1999 and, as of December 31, 2000, has a stockholders'
deficit of $10,792,000, and has a working capital deficit of $24,152,000,
resulting primarily from approximately $27 million of debt maturing in July
2001. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Melville, New York
March 21, 2001
F-2
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands, except par value)
2000 1999
-------- --------
Assets
------
Current assets:
Cash and cash equivalents $ 2,366 3,245
Accounts receivable -- trade, less
allowance for doubtful accounts of
$2,477 in 2000 and $1,879 in 1999 7,425 12,137
Inventories 7,150 8,893
Prepaid expenses and other current
assets 1,130 1,373
-------- --------
Total current assets 18,071 25,648
Property, plant and equipment, net 4,555 4,193
Goodwill, net of amortization of $5,003
in 2000 and $4,284 in 1999 10,357 11,076
Other assets 1,191 2,531
-------- --------
Total assets $ 34,174 43,448
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of senior debt $ 20,746 2,000
Current portion of subordinated notes 6,144 --
Accounts payable 7,173 8,831
Accrued expenses 5,385 5,723
Accrued interest payable 766 588
Accrued commissions 1,553 1,864
Accrued deferred compensation 196 196
Income taxes payable 259 267
Short-term loans 1 44
-------- --------
Total current liabilities 42,223 19,513
-------- --------
Senior debt net of current maturities -- 15,518
Subordinated notes -- 6,013
6% Convertible subordinated debentures 376 371
Deferred compensation 987 1,004
Income taxes payable 154 352
Other long-term liabilities 918 971
Minority interest 308 1,093
-------- --------
Total long-term liabilities 2,743 25,322
-------- --------
Total liabilities 44,966 44,835
-------- --------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value;
authorized 1,000,000 shares, none
issued -- --
Common stock, par value $.01;
authorized 20,000,000 shares, issued
9,817,165 and 9,638,861 shares in
2000 and 1999, respectively 98 96
Additional paid-in capital 75,980 75,310
Accumulated deficit (81,135) (70,959)
Accumulated other comprehensive loss:
Foreign currency translation
adjustment (3,797) (3,896)
-------- --------
(8,854) 551
Treasury stock, at cost, 30,940 shares (1,938) (1,938)
-------- --------
Total stockholders' deficit (10,792) (1,387)
-------- --------
Total liabilities and
stockholders' deficit $ 34,174 43,448
======== ========
See accompanying notes to consolidated financial statements.
F-3
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2000, 1999 and 1998
(in thousands, except per share amounts)
2000 1999 1998
-------- -------- --------
Sales $ 51,140 38,936 59,343
Cost of sales 35,890 28,952 35,188
-------- -------- --------
Gross profit 15,250 9,984 24,155
-------- -------- --------
Selling, general and administrative expenses 14,573 13,603 13,079
Research and development expenses 5,830 6,090 6,510
-------- -------- --------
Total expenses 20,403 19,693 19,589
-------- -------- --------
Operating income (loss) (5,153) (9,709) 4,566
Interest expense (4,500) (3,571) (3,750)
Interest income 129 188 272
Other income (expense), net (813) 218 1,028
Debt conversion expense -- -- (945)
-------- -------- --------
Income (loss) before income taxes
and minority interest (10,337) (12,874) 1,171
Income tax expense 227 873 606
Minority interest (388) (61) 114
-------- -------- --------
Income (loss) before extraordinary item (10,176) (13,686) 451
Extraordinary gain on early extinguishment of debt -- -- 76
-------- -------- --------
Net income (loss) $(10,176) (13,686) 527
======== ======== ========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 99 (142) 273
-------- -------- --------
Comprehensive income (loss) $(10,077) (13,828) 800
======== ======== ========
Basic per share amounts:
Income (loss) before extraordinary item $ (1.04) (1.44) 0.05
Extraordinary item -- -- 0.01
-------- -------- --------
Net income (loss) per share of common stock $ (1.04) (1.44) 0.06
======== ======== ========
Weighted average shares of common stock outstanding 9,763 9,489 9,281
======== ======== ========
Diluted per share amounts:
Income (loss) before extraordinary item $ (1.04) (1.44) 0.04
Extraordinary item -- -- 0.01
-------- -------- --------
Net income (loss) per share of common stock $ (1.04) (1.44) 0.05
======== ======== ========
Weighted average shares of common stock outstanding 9,763 9,489 9,785
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2000, 1999 and 1998
(In thousands)
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)
------ --------- ---------- ------------- ------------ -------- ---------- ---------
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 re-pricing -- -- 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)
Net loss 2000 -- -- -- -- (10,176) -- -- (10,176)
Common stock issued 178 2 174 -- -- -- -- 176
Warrants issued or re-priced -- -- 496 -- -- -- -- 496
Foreign currency translation
adjustment -- -- -- 99 -- -- -- 99
----- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 9,817 $ 98 $ 75,980 $ (3,797) $(81,135) $ (1,938) $ -0- $(10,792)
===== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
F-5
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 21)
Years ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
-------- -------- ------
Cash flows from operating activities:
Net income (loss) $(10,176) (13,686) 527
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain -- -- (76)
Non-cash debt conversion expense -- -- 945
Non-cash financing expenses 373 18 473
Non-cash compensation expense -- 8 298
Depreciation and amortization 1,911 1,677 2,195
Amortization of debt discounts 56 326 323
Minority interest (388) (61) 114
Changes in operating assets and liabilities:
Accounts receivable 4,712 7,665 (4,911)
Inventories 1,743 51 (785)
Prepaid expenses 243 343 (450)
Other assets 1,427 113 962
Accounts payable, accrued expenses and other liabilities (2,405) 238 276
-------- -------- ------
Net cash used in operating activities (2,504) (3,308) (109)
-------- -------- ------
Cash flows from investing activities:
Repayment of receivables from stock purchase program -- 281 --
Capital expenditures, net (1,533) (951) (665)
-------- -------- ------
Net cash used in investing activities (1,533) (670) (665)
-------- -------- ------
Cash flows from financing activities:
Proceeds from senior debt 5,010 6,150 6
Repayments of senior debt (1,782) (1,820) (4,780)
Proceeds from Subordinated debentures and warrants 80 64 6,000
Repayment of zero coupon senior subordinated convertible notes -- -- (2,796)
Proceeds from the exercise of options and warrants 176 -- --
Proceeds (repayments) of notes payable/short-term loans (43) (100) 24
-------- -------- ------
Net cash provided by (used in) financing activities 3,441 4,294 (1,546)
-------- -------- ------
Effect of exchange rate changes on cash (283) (115) 273
-------- -------- ------
Increase (decrease) in cash and cash equivalents (879) 201 (2,047)
Cash and equivalents - beginning of year 3,245 3,044 5,091
-------- -------- ------
Cash and equivalents - end of year $ 2,366 3,245 3,044
======== ======== ======
See accompanying notes to consolidated financial statements.
F-6
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
(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
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 $0,
$82,000, and $461,000 in 2000, 1999 and 1998, 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 10 to 30 years. During 1999 and 2000, 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 in 1999 and 10 years in
2000, which changes were applied prospectively from the fourth
quarters of 1999 and 2000. These changes in accounting estimates
increased amortization expense in 2000 and in 1999 by approximately
$25,000 and $58,000, respectively. At December 31, 2000, $6,465,000
of the goodwill is being amortized over a remaining life of
approximately 10 years and $3,892,000 is being amortized over a
remaining life of approximately 30 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 comprehensive income
or loss.
(Continued)
F-8
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 2000 and 1999, 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 2000 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.
New Accounting Standard
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements", provides guidance on the recognition, presentation and
disclosure of revenues in financial statements and requires adoption
no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company implemented SAB 101 and its
adoption did not have a material impact on the Company's earnings or
financial position.
(Continued)
F-9
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Liquidity
As of December 31, 2000, Porta's debt includes $20,746,000 of senior
debt of which $1,160,000 matured on January 2, 2001 and $19,586,000
matures on July 3, 2001, and $6,144,000 of subordinated debt of
which $900,000 matured on January 2, 2001 and $5,244,000 matures on
July 3, 2001. Porta did not have the resources to pay the $1,160,000
due to the senior lender and the $900,000 due the subordinated debt
holders on the January 2, 2001 maturity date. On March 13, 2001, the
Company and its senior lender agreed to defer the payment of
borrowings due on January 2, 2001, defer all monthly facility fees
and the $400,000 principal payment due on April 1, 2001 to the
earlier of the termination of the agreement of July 3, 2001 or the
sale of one or more of the divisions of the Company. As part of this
agreement, the senior lender precluded the Company from making any
payments on indebtedness to any subordinated creditors except to pay
accounts payable in the ordinary course of business.
The Company was unable to pay the interest payment on the subordinated
notes of approximately $440,000 which was due on January 2, 2001. At
December 31, 2000, the Company 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, and the senior lender had precluded us from making
payments on the subordinated debt. 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.
The Company's cash availability during 2001 and thereafter may be
affected by a number of factors. At December 31, 2000, the Company
had no cash available under its credit facility and had borrowed
more than the amount available to the Company under its borrowing
base. To the extent that credit is not available, the Company may
have difficulty performing its obligations under its contracts,
which could result in the cancellation of contracts or the loss of
future business and penalties for non-performance. In addition,
$1,160,000 of senior debt and $900,000 of subordinated debt became
due in January 2001 and $24,830,000 of senior and subordinated debt
will become due in July 2001. Under the default provisions of the
loan agreement with the senior lender, a default on the subordinated
notes can trigger a default in the Company's obligations to the
senior lender. The Company does not presently have the ability to
pay these debts and, if the Company cannot obtain either an
extension on the maturity of the debts or an alternative financing
source or raise funds from the sale of one or more of its divisions,
the Company may be unable to meet these financial obligations.
The Company has been exploring alternatives, including the possible sale
of one of its divisions. The Company has been engaged in discussions
with respect to the possible sale of one of its divisions. Previous
discussions terminated without an agreement. The Company has not
signed any agreements with respect to such a sale, and it cannot
give any assurance that it will be able to sell any divisions on
reasonable terms, if at all. During 2000 and early 2001, the Company
has taken
(Continued)
F-10
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
steps to reduce overhead and headcount, and consolidate OSS
operations. The Company has also entered into an agreement to sell
its Glen Cove facility. The Company will continue to look to reduce
costs while it seeks additional business from new and existing
customers, and pursues an extension of its existing sources of
finance or alternative finance sources. The Company has no formal or
informal agreement or understanding as to an extension of its
existing loans or any alternative financing source, and it cannot
give any assurance that it will be able to obtain either an
extension of its existing debt or generate funds to enable it to pay
its loans.
These financial statements have been prepared assuming that the Company
will continue as a going concern and, accordingly, do not include
any adjustments that might result from the outcome of the
uncertainties described above.
(3) Accounts Receivable
Accounts receivable included approximately $0 and $3,211,000 at December
31, 2000 and 1999, respectively, of revenues earned but not yet
contractually billable relating to long-term contracts for
specialized products. All such amounts at December 31, 1999 were
billed in 2000. In addition, accounts receivable included
approximately $1,197,000 and $1,252,000 at December 31, 2000 and
1999, respectively, of retainage balances due on various long-term
contracts. All such amounts, net of reserves, at December 31, 2000
are expected to be collected 2001 and all such amounts, net of
reserves, at December 31, 1999, were collected in 2000. The
allowance for doubtful accounts receivable was $2,477,000 and
$1,879,000 as of December 31, 2000 and 1999, respectively. The
allowance for doubtful accounts was increased by provisions of
$730,000, $1,070,000, and $210,000 and decreased by write-offs of
$132,000, $106,000, and $353,000 for the years ended December 31,
2000, 1999, and 1998, respectively.
(4) Inventories
Inventories consist of the following:
December 31,
-----------------------------
2000 1999
---------- ---------
Parts and components $4,973,000 5,558,000
Work-in-process 543,000 584,000
Finished goods 1,634,000 2,751,000
---------- ---------
$7,150,000 8,893,000
========== =========
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
------------------------- Estimated
2000 1999 useful lives
----------- --------- -------------
Land $ 246,000 246,000 --
Buildings 2,284,000 2,284,000 20-50 years
Machinery and equipment 8,870,000 9,079,000 3-8 years
Furniture and fixtures 2,700,000 2,825,000 5-10 years
Transportation equipment 133,000 151,000 4 years
Tools and molds 4,124,000 3,474,000 8 years
Leasehold improvements 858,000 871,000 Term of lease
----------- ---------
19,215,000 18,930,000
Less accumulated depreciation
and amortization 14,660,000 14,737,000
----------- ---------
$ 4,555,000 4,193,000
=========== =========
(Continued)
F-11
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Total depreciation and amortization expense for 2000, 1999 and 1998,
related to property, plant and equipment amounted to approximately
$1,156,000, $998,000 and $1,197,000, respectively.
In March 2001, Porta entered into a contract to sell its Glen Cove, New
York facility for $1,850,000. It is expected that the transaction
will close in June 2001. The carrying value of the land and building
at December 31, 2000 was approximately $1,000,000.
(6) Senior Debt
On December 31, 2000 and 1999, Porta's long-term debt consisted of
senior debt under its credit facility in the amount of $20,596,000
and $16,276,000, respectively, and non-interest bearing deferred
funding fee notes payable to the senior lender in the amounts of
$150,000 and $1,242,000, respectively. As of December 31, 2000, the
total outstanding principal balance, of which $1,160,000 was due on
January 1, 2001 and $19,586,000 is due on July 3, 2001, has been
classified as a current liability. (See Note 2)
During 2000, the Company and its senior lender agreed to extend the loan
and security agreement to July 3, 2001. As part of the agreement,
Porta agreed to reduce the exercise price of outstanding warrants to
purchase 471,000 shares of common stock held by its senior lender to
$2.00 per share, the value of the reduction of the warrant price was
$169,000 which was recorded as deferred financing expense and
additional paid in capital in 2000. In addition during 2000, the
Company and its senior lender agreed to increase the revolving line
maximum by $2,000,000 from $9,000,000 to $11,000,000 through January
1, 2001. As of December 31, 2000, the Company had borrowed
$1,160,000 under the increased revolving line. As of January 1, 2001
the revolving line maximum will return to $9,000,000. As
consideration, the Company issued to its senior lender a five-year
warrant to purchase 100,000 shares of common stock at $2.00 per
share. The value of the warrants issued was $129,000 which was
recorded as deferred financing expense and additional paid in
capital in 2000. 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. In connection with the
senior lender's waiver of non-compliance during 2000, the Company
reduced from $2.00 per share to $1.00 per share, the exercise price
of warrants to purchase 571,000 shares of common stock which are
held by the lender. The value of the reduction on exercise price was
$59,000 and recorded as deferred financing expense and additional
paid in capital. Based upon the warrant transactions during 2000,
additional non-cash interest expense of $289,000 was recognized.
The agreement 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.
(Continued)
F-12
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On January 2, 2001, Porta did not have the resources to repay the
$1,160,000 of principal due. In March 2001, the senior lender agreed
to allow the Company to defer the repayment of borrowings related to
the increased maximum, defer all monthly facility fees and the April
1, 2001 principal payment to the earlier of the termination of the
agreement of July 3, 2001 or the sale of one or more of the
divisions of the Company. The agreement also precluded the Company
from making any payments on indebtedness to any subordinated
creditors, although it permits payment of accounts payable in the
ordinary course of business.
Financial debt covenants include an interest coverage ratio measured
quarterly, limitations on the incurrence of indebtedness,
limitations on capital expenditures, and prohibitions on
declarations of any cash or stock dividends or the repurchase of the
Company's stock. As of December 31, 2000, the Company was not in
compliance with the interest coverage covenant. In addition, as of
December 31, 2000, the outstanding advances from the senior lender
exceeded the maximum allowable under the borrowing base formula
since the Company's eligible assets were not sufficient to support
the outstanding balance under the combined revolving advance and
standby letters of credit guarantee. As a result, the outstanding
advances from the senior lender exceeded the maximum allowable under
the borrowing base formula by $3,700,000 as of March 9, 2001. The
Company has obtained a waiver of such non-compliance from its senior
lender related to the interest coverage ratio and the over advance
under the line through July 2, 2001.
Maturities of Porta's long-term debt, including convertible subordinated
debentures and subordinated notes (notes 7 and 8), are as follows:
2001 $26,890,000
2002 376,000
-----------
$27,266,000
===========
(7) 6% Convertible Subordinated Debentures and Zero Coupon Senior Subordinated
Convertible Notes
As of December 31, 2000 and 1999 Porta had outstanding $376,000 and
$371,000 of its 6% convertible subordinated debentures due July 1,
2002 (the "Debentures"), net of original issue discount of $9,000
and $14,000, respectively. The face amount of the outstanding
Debentures was $385,000 at both December 31, 2000 and 1999. 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, 2000 and 1999.
Pursuant to a debt restructuring prior to and during 1998, the Company
recorded an extraordinary gain of approximately $76,000 in 1998.
(Continued)
F-13
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Subordinated Notes
As of December 31, 2000 and 1999, $6,144,000 and $6,013,000,
respectively, of Subordinated Notes were outstanding which includes
$144,000 and $64,000, respectively, of additional principal from
paid in kind options and unamortized debt discount of $0 and
$51,000, respectively. As of December 31, 2000, $900,000 matured on
January 2, 2001 and $5,244,000 will mature on July 3, 2001.
Porta did not have the resources to pay the $900,000 principal and
approximately $440,000 of interest on the subordinated debt which
was due on January 2, 2001. In addition, the senior lender had
precluded the Company from making payments on the subordinated debt.
(See Note 2)
During December 1999, Porta (a) extended its maturity date of the
$6,000,000 outstanding principal amount of Subordinated Notes to
January 3, 2001 with the right to extend the maturity date 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 previously issued 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 note holder
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.
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 the noteholders New
Warrants to purchase 127,500 shares of Common Stock at $3.00 per
share, the value of which was determined to be $140,000 and recorded
as deferred financing expenses and additional paid in capital in
2000. Additional non-cash interest expense of $84,000 was recorded
during 2000 in connection with this transaction. 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-14
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 571,152
shares of common stock, which are immediately exercisable at $1.00
per share and for which 471,152 expire on November 30, 2002 and
100,000 expire on June 6, 2005.
Porta had outstanding to an investment banker warrants to purchase 400,000
shares of common stock at $1.56 per share which expire April 2002.
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
and the amendment of the terms of the Subordinated Notes and Series
B and C Warrants.
As of December 31, 2000, Porta had stock purchase warrants outstanding
to purchase (i) 53,000 shares of common stock at an exercise price
of $17.50 per share until November 2001 and (ii) 15,000 shares of
common stock at an exercise price of $1.8125 per share until May
2005 of which warrants to purchase 5,000 shares of common stock are
immediately exercisable.
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-15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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.
(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 2000, 1999 and
1998, Porta accrued approximately $180,000, $180,000 and $185,000,
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, 2000, 1999 and 1998,
Porta's contribution amounted to $72,000, $93,000 and $96,000,
respectively.
(Continued)
F-16
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 10%. Porta has reserved 1,000,000 shares of Porta
stock for issuance under the plan. During 2000, 84,804 shares were
issued pursuant to the Purchase Plan. Subsequent to December 31,
2000, Porta issued approximately 38,900 shares of stock to the
participants of the Purchase Plan.
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. No share of
common stock were issued pursuant to the Bonus Plan during 2000.
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.
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.
(Continued)
F-17
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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, 2000, all options to
purchase shares of common stock had been forfeited pursuant to the
terms of the contract.
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. As of
December 31, 2000, 80,000 options to purchase shares of common stock
had been forfeited. The remaining 15,000 options expire in May 2005.
As of December 31, 2000, 5000 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:
(Dollars in thousands, except per share data)
2000 1999 1998
------- -------- ------
Pro forma net income (loss) $(10,393) $(14,280) $ 237
Pro forma net income (loss) per
share (basic and diluted) $ (1.06) $ (1.50) $ 0.03
The weighted-average fair value of options granted was $1.62, $ 1.36 and
$1.47 per share in 2000, 1999 and 1998, respectively.
(Continued)
F-18
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Dividends: $0.00 per share $0.00 per share $0.00 per share
Volatility: 57.64%-68.70% 45.80%-80.00% 46.10%-80.00%
Risk-free interest: 5.54%-6.53% 4.50%-6.40% 4.80%-6.40%
Expected term: 5 years 5 years 5 years
A summary of the status of Porta's 1986 stock option plan as of December
31, 2000, 1999, and 1998, and changes during the years ending on those
dates is presented below:
2000 1999 1998
----------------------- ----------------------- -----------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding beginning of year 3,000 $ 5 15,527 $ 57 16,392 $ 57
Granted -- -- --
Exercised -- -- --
Forfeited -- -- (12,527) 70 (865) 63
----- ------- ----- ------
Outstanding end of year 3,000 $ 5 3,000 $ 5 15,527 $ 57
===== ===== ======
Options exercisable at year-end 3,000 3,000 15,527
===== ===== ======
The following table summarizes information about stock options
outstanding under the 1986 Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 5 3,000 1.8 years $ 5 3,000 $ 5
===== =====
A summary of the status of Porta's 1996 stock option plan as of
December 31, 2000, 1999 and 1998, and changes during the year is
presented below:
2000 1999 1998
----------------------- ----------------------- -----------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding beginning of year 412,838 $ 1.73 447,938 $ 1.73 437,988 $ 1.67
Granted -- -- -- -- 12,000 3.85
Exercised (6,000) 1.50 -- -- --
Forfeited (6,075) 1.51 (35,100) 1.77 (2,050) 1.51
------- ------- ------- -------
Outstanding end of year 400,763 $ 1.73 412,838 $ 1.73 447,938 $ 1.73
======= ======= =======
Options exercisable at year-end 400,763 412,838 447,938
======= ======= =======
(Continued)
F-19
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table summarizes information about stock options
outstanding under the 1996 Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 1 to 5 400,763 5.5 years $ 1.73 400,763 $ 1.73
======= =======
A summary of the status of Porta's 1998 stock option plan as of
December 31, 2000, and changes during the year is presented below:
2000 1999 1998
----------------------- ----------------------- -----------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Price Option Exercise Price Option Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding beginning of year 429,200 $3.28 444,500 $3.25 0 $0.00
Granted -- -- 2,200 1.96 448,000 3.25
Exercised -- -- -- -- -- --
Forfeited (17,250) 3.25 (17,500) 2.32 (3,500) 3.25
------- ------- -------
Outstanding end of year 411,950 $3.24 429,200 $3.28 444,500 $3.25
======= ======= =======
Options exercisable at year-end 358,850 358,400 -0-
======= ======= =======
The following table summarizes information about stock options
outstanding under the 1998 Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 1 to 5 411,950 3.1 years $ 3.24 358,850 $ 3.25
======= =======
A summary of the status of Porta's 1999 stock option plan as of
December 31, 2000, and changes during the year is presented below:
2000 1999
----------------------- -----------------------
Shares Weighted Shares Weighted
Under Average Under Average
Option Exercise Price Option Exercise Price
------ -------------- ------ --------------
Outstanding beginning of year 25,500 $1.72 0 $0.00
Granted 108,500 3.12 25,500 1.72
Exercised -- -- -- --
Forfeited -- -- -- --
------- ------
Outstanding end of year 134,000 $2.86 25,500 $1.72
======= ======
Options exercisable at year-end 45,167 25,000
======= ======
(Continued)
F-20
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table summarizes information about stock options
outstanding under the 1999 Plan at December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------- -------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 1 to 5 134,000 6.4 years $ 2.86 45,167 $ 1.97
======= ======
(14) Income Taxes
The provision for income taxes consists of the following:
2000 1999 1998
---- ---- ----
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
Federal $ -- -- -- 716,000 -- (8,000)
State and foreign 227,000 -- 62,000 95,000 615,000 (1,000)
-------- ----- -------- -------- -------- --------
Total $227,000 -- 62,000 811,000 615,000 (9,000)
======== ===== ======== ======== ======== ========
The domestic and foreign components of income (loss) before provision
for income taxes were as follows:
2000 1999 1998
---- ---- ----
United States $(7,519,000) (7,516,000) (1,424,000)
Foreign (2,430,000) (5,297,000) 2,481,000
----------- ----------- ----------
Income (loss) before
provision for income taxes $(9,949,000) (12,813,000) 1,057,000
=========== =========== ==========
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:
2000 1999 1998
---- ---- ----
Tax expense (benefit) at statutory rate $(3,383,000) (4,356,000) 398,000
Increase (decrease) in income tax benefit resulting from:
Increase (decrease) in valuation allowance 2,776,000 5,486,000 (4,097,000)
State and foreign taxes, less applicable federal benefits (127,000) (368,000) 615,000
Debt conversion expense not deductible for tax -- -- 411,000
Other expenses not deductible for tax 345,000 152,000 136,000
Foreign income taxed at rates
Different from U.S. statutory rate 25,000 (5,000) (239,000)
Utilization of net operating loss carryforward -- -- (118,000)
Expiration of capital loss and investment
tax credit carryforwards -- -- 4,387,000
Estimated NOL adjustments, including Section 382 limitation 594,000 -- (719,000)
Other (3,000) (36,000) (168,000)
----------- ----------- -----------
$ 227,000 873,000 606,000
=========== =========== ===========
Porta has unused United States tax net operating loss (NOL) carryforwards
of approximately $85,000,000 expiring at various dates between 2009
and 2020. No tax benefit or expense was apportioned to the 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 $3,400,000 with indefinite expiration dates.
(Continued)
F-21
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Porta's United States net operating loss carryforwards (after limitations
as described above) expire in the following years:
2009 $ 4,106,000
2010 18,880,000
2011 884,000
2018 37,000
2019 7,546,000
2020 8,761,000
------------
$ 40,214,000
============
The components of the deferred tax assets, the net balance of which zero
after the valuation allowance, as of December 31, 2000 and 1999 are
as follows:
2000 1999
---- ----
Deferred tax assets:
Inventory $ 1,211,000 1,193,000
Allowance for doubtful accounts receivable 828,000 723,000
Benefits of tax loss carryforwards 16,622,000 13,285,000
Benefit plans 845,000 819,000
Accrued commissions 581,000 718,000
Other 390,000 449,000
Depreciation 392,000 906,000
------------ ------------
20,869,000 18,093,000
Valuation allowance (20,869,000) (18,093,000)
------------ ------------
$ -- --
============ ============
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 losses in 2000 and 1999, a valuation allowance for the
entire deferred tax asset was provided due to the uncertainty as to
future realization.
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 2000. As of December 31, 2000, Porta has made
all the required payments through that date under the settlement and
approximately $398,000 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, 2000, undistributed earnings of
the foreign subsidiaries amounted to approximately $26,000. 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-22
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Leases
At December 31, 2000, 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 2000, 1999, and 1998 amounted to
approximately $876,000, $874,000 and $716,000, respectively. Minimum
rental commitments, exclusive of future escalation charges, for each
of the next five years are as follows:
2001 $ 1,005,000
2002 866,000
2003 753,000
2004 719,000
2005 558,000
Thereafter 3,215,000
-----------
$ 7,116,000
===========
(16) Contingencies
At December 31, 2000, Porta was contingently liable for outstanding
letters of credit and surety bonds aggregating approximately
$720,000 and $3,480,000, respectively, as security for the
performance of certain long-term contracts.
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
Duringthe years ended December 31, 2000, 1999 and 1998, Porta's five
largest customers accounted for sales of $28,323,000, or
approximately 55% of sales, $19,700,000, or approximately 51% of
sales, and $28,797,000, or approximately 49% of sales, respectively.
Porta's largest customer in 2000 with sales of $12,051,000, or
approximately 24% of sales, was Fujitsu Telecommunications Europe
LTD ("FTEL"). A significant amount of sales of our products for use
by British Telecommunications plc ("BT") were sold to FTEL as
purchasing agent to BT. Porta's largest customer in 1999 and 1998
was BT. Sales to BT for the year ended December 31, 2000, 1999 and
1998 amounted to $5,098,000, $7,825,000 and $15,349,000,
respectively, or approximately 10%, 20% and 26%, respectively, of
Porta's sales for such years. Therefore, any significant
interruption or decline in sales to FTEL or BT may have a materially
adverse effect upon Porta's operations. During 2000, sales to a
Mexican telephone company were $5,507,000, or approximately 11% of
sales. 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
26% and 28%, respectively, of Porta's accounts receivable are due
from the five largest customers as of December 31, 2000 and 1999,
respectively.
(Continued)
F-23
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(18) Fair Values of Financial Instruments
Cash equivalents, accounts receivable, accounts and notes payable, 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.
(19) Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted net
income (loss) per share:
2000 1999 1998
------------ ------------ -----------
Numerator-Basic and diluted
Net income (loss) per share:
Income (loss) from continuing operations $(10,176,000) $(13,686,000) $ 451,000
Extraordinary item -- -- 76,000
------------ ------------ -----------
Net income (loss) $(10,176,000) $(13,686,000) $ 527,000
============ ============ ===========
Denominator:
Denominator for basic net income (loss)
per share -weighted-average shares 9,763,000 9,489,000 9,281,000
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 9,763,000 9,489,000 9,785000
============ ============ ===========
Basic per share amounts:
Continuing operations $ (1.04) $ (1.44) $ 0.05
Extraordinary item -- -- 0.01
------------ ------------ -----------
Net income (loss) per share
of common stock $ (1.04) $ (1.44) $ 0.06
============ ============ ===========
Diluted per share amounts:
Continuing operations $ (1.04) $ (1.44) $ 0.04
Extraordinary item -- -- 0.01
------------ ------------ -----------
Net income (loss) per share
of common stock $ (1.04) $ (1.44) $ 0.05
============ ============ ===========
(Continued)
F-24
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Options to purchase 649,733, 638,508 and 486,577 shares of common stock
for 2000, 1999 and 1998, respectively, with exercise prices ranging
from $1.69 to $5.00, $1.69 to $5.00 and $3.25 to $86.25 for 2000,
1999 and 1998, 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.
Warrants to purchase 195,500, 913,000 and 53,000 shares of common stock
for 2000, 1999 and 1998, respectively, with exercise prices ranging
from $1.81 to $17.50, $1.56 to $17.50 and $17.50 for 2000, 1999 and
1998, 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 March 2000, the Company suspended (with pay) Messrs. Ronald Wilkins
and Michael Bahlo, two of its executive officers, from their
positions pending completion of the Companies investigation of
certain matters that had come to its attention. Prior to the
completion of this investigation, however, these two executives
accepted positions with another company and thereby voluntarily
resigned from their positions with the Company. In February 2001,
these two executives, together with a third former executive
officer, Mr. Michael Lamb, who similarly resigned from his position
with the Company, filed suit in the Supreme Court for the State of
New York, County of New York. The complaint asserts various claims
against the Company based on the allegation that each of these three
executives was improperly terminated from his employment without
cause, and seeks compensatory damages, liquidating damages and
attorney's fees. The Company believes that it has valid defenses to
the claims and intends to defend this action vigorously and to
assert counterclaims against these former executives.
In September 2000, the Company and BMS Corporation each disputed the
performance by the other party of its obligations under certain
settlement agreements which were entered into in June 2000. BMS
commenced an arbitration proceeding which was settled in January
2001 with the execution of amended agreements. The amended agreement
included, among other things, an extended payment schedule, with
each such payment being secured by the Company's confession of
judgment held in escrow by BMS.
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, although
there has been no significant activity in this matter subsequent to
December 31, 1999.
(21) Cash Flow Information
(1) Supplemental cash flow information for the years ended December 31, is
as follows:
2000 1999 1998
------ ------ ------
Cash paid for interest $3,763 3,117 2,629
====== ====== ======
Cash paid for income taxes $ 183 379 223
====== ====== ======
(Continued)
F-25
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Non-cash transactions:
(i) During 1998, the Company exchanged approximately $250,000
principal amount of its Debentures, net of unamortized discount and
accrued interest, for 5,000 shares of common stock, and $192,000 of
Notes, (note 7).
(ii) During 1998, the Company issued 53,000 shares of common stock
upon the conversion of Notes valued at approximately $280,000 (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 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 (notes 7 and 10).
(vi) 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).
(vii) 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).
(viii) In 1999, Porta incurred a non-cash charge of $56,000 as a
result of the reduction in the exercise price of the Series B and
Series C Warrants (note 8).
(ix) In 2000, Porta incurred a non-cash charge of $140,000 as a
result of the issuance New Warrants (note 8).
(x) In 2000, Porta incurred a non-cash charge of $169,000 as a
result of the reduction in the exercise price of the Warrants issued
to its senior lender (note 6).
(xi) In 2000, Porta incurred a non-cash charge of $129,000 as a
result of Warrants issued to its senior lender in connection with an
increase in its revolving line of credit to its senior lender (note
6).
(xii) In 2000, Porta incurred a non-cash charge of $59,000 as a
result of the reduction in the exercise price of the Warrants issued
to its senior lender in connection with a waiver of default (note
6).
(Continued)
F-26
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(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.
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.
2000 1999 1998
---- ---- ----
Revenue:
Line $ 20,546,000 18,189,000 24,291,000
OSS 22,296,000 14,254,000 27,318,000
Signal 7,644,000 6,328,000 7,539,000
------------ ------------ ------------
$ 50,486,000 38,771,000 59,148,000
============ ============ ============
Segment profit:
Line $ 3,665,000 3,582,000 6,580,000
OSS (6,201,000) (10,650,000) (365,000)
Signal 2,088,000 1,884,000 1,953,000
------------ ------------ ------------
$ (448,000) (5,184,000) 8,168,000
============ ============ ============
Depreciation and amortization:
Line $ 424,000 505,000 722,000
OSS 1,262,000 881,000 1,170,000
Signal 162,000 199,000 200,000
------------ ------------ ------------
$ 1,848,000 1,585,000 2,092,000
============ ============ ============
Total identifiable assets:
Line $ 8,508,000 7,921,000 10,330,000
OSS 14,942,000 21,637,000 28,283,000
Signal 6,591,000 7,965,000 8,176,000
------------ ------------ ------------
$ 30,041,000 37,523,000 46,789,000
============ ============ ============
Capital expenditures:
Line $ 340,000 415,000 280,000
OSS 1,132,000 670,000 283,000
Signal 45,000 27,000 93,000
------------ ------------ ------------
$ 1,517,000 1,112,000 656,000
============ ============ ============
(Continued)
F-27
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table reconciles segment totals to consolidated totals:
2000 1999 1998
---- ---- ----
Revenue:
Total revenue for reportable segments $ 50,486,000 38,771,000 59,148,000
Other revenue 654,000 165,000 195,000
------------ ------------ ------------
Consolidated total revenue $ 51,140,000 38,936,000 59,343,000
============ ============ ============
Operating income (loss):
Total segment profit (loss) for reportable segments $ (448,000) (5,184,000) 8,168,000
Corporate and unallocated (4,705,000) (4,525,000) (3,602,000)
------------ ------------ ------------
Consolidated total operating income (loss) $ (5,153,000) (9,709,000) 4,566,000
============ ============ ============
Depreciation and amortization:
Total for reportable segments $ 1,848,000 1,585,000 2,092,000
Corporate and unallocated 63,000 92,000 103,000
------------ ------------ ------------
Consolidated total deprecation and amortization $ 1,911,000 1,677,000 2,195,000
============ ============ ============
Total assets:
Total for reportable segments $ 30,041,000 37,523,000 46,789,000
Corporate and unallocated 4,133,000 5,925,000 5,347,000
------------ ------------ ------------
Consolidated total assets $ 34,174,000 43,448,000 52,136,000
============ ============ ============
Capital expenditures:
Total for reportable segments $ 1,517,000 1,112,000 656,000
Corporate and unallocated 16,000 79,000 9,000
------------ ------------ ------------
Consolidated total capital expenditures $ 1,533,000 1,191,000 665,000
============ ============ ============
The following table presents information about the Company by geographic
area:
2000 1999 1998
---- ---- ----
Revenue:
United States $17,225,000 14,368,000 18,951,000
United Kingdom 20,244,000 15,673,000 20,441,000
Asia/Pacific 5,429,000 4,159,000 7,181,000
Other Europe 2,482,000 3,130,000 3,337,000
Latin America 146,000 1,257,000 7,463,000
Other North America 5,570,000 296,000 1,879,000
Other 44,000 53,000 51,000
----------- ----------- -----------
Consolidated total revenue $51,140,000 38,936,000 59,343,000
=========== =========== ===========
Consolidated long-lived assets:
United States $12,115,000 12,011,000 13,317,000
United Kingdom 1,107,000 2,398,000 2,520,000
Other North America 568,000 618,000 663,000
Asia/Pacific 612,000 200,000 273,000
Latin America 14,000 35,000 26,000
Other 3,000 8,000 11,000
----------- ----------- -----------
14,419,000 15,270,000 16,810,000
Current and other assets 19,755,000 28,178,000 36,326,000
----------- ----------- -----------
Consolidated total assets $34,174,000 43,448,000 53,136,000
=========== =========== ===========
(Continued)
F-28
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(23) Quarterly Information (Unaudited)
The following presents certain unaudited quarterly financial data:
Quarter Ended
----------------------------------------------------------------------------------
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
Net sales $ 15,928,000 $ 13,828,000 $ 11,195,000 $ 10,189,000
Gross profit 5,716,000 3,570,000 2,852,000 3,112,000
Net income (loss) 306,000 (2,887,000) (3,156,000) (4,439,000)
Net income (loss) per share:
Basic $ 0.03 $ (0.30) $ (0.32) $ (0.45)
Diluted $ 0.03 $ (0.30) $ (0.32) $ (0.45)
Quarter Ended
----------------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
Net sales $ 9,526,000 $ 9,109,000 $ 8,397,000 $ 11,904,000
Gross profit 2,811,000 2,639,000 1,878,000 2,656,000
Net loss (1,744,000) (2,940,000) (3,999,000) (5,003,000)
Net loss per share:
Basic $ (0.18) $ (0.31) $ (0.42) $ (0.53)
Diluted $ (0.18) $ (0.31) $ (0.42) $ (0.53)
Net loss for the quarter ended December 31, 2000 reflects an accrual
associated with the reduction of overhead and headcount, and
consolidation of OSS operations of approximately $900,000.
F-29