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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, 1997
[ ] 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: $34,745,149 as of March 5, 1998.
Indicate the number of shares outstanding of each of the registrant's
class of common stock, as of the latest practicable date: 9,265,373 shares of
Common Stock, par value $.01 per share, as of March 5, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement in connection with its 1997 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. (the "Company") develops, designs, manufactures and
markets a broad range of proprietary and standard telecommunications equipment
and systems for sale domestically and internationally. The Company's core
products fall into three categories:
Computer-based operation support systems ("OSS"). The Company's OSS
systems automate the operational, administrative, maintenance and testing
functions within telephone companies. These systems are marketed 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. The Company's copper
connection equipment and systems are marketed to telephone operating companies
in the United States and foreign countries.
Signal processing equipment. These products support copper wire-based
communications systems and are sold principally for use in defense and aerospace
applications.
In March 1996 the Company sold its fiber optics connector business and,
accordingly, its products are designed for use by telecommunication companies
and other users that utilize copper wire, and not fiber optics for their
transmission facilities. See Item 7 Management Discussion and Analysis of
Financial Condition and Results of Operations.
Porta Systems Corp. is a Delaware corporation incorporated in 1972 as the
successor to a New York corporation incorporated in 1969. The Company's
principal offices are located at 575 Underhill Boulevard, Syosset, New York
11791; telephone number, 516-364-9300. References to the Company include its
subsidiaries, unless the context indicates otherwise.
Products
Operations Support Systems. OSS systems are used primarily by telephone
operating companies. The Company's principal OSS system is a computer-based
testing product--the Line Condition Report, ("LCR") system--which is a major
item of capital equipment and typically sells for prices ranging from several
hundred thousand to several million dollars. The Company also manufactures and
sells a number of other products, primarily software based, which are used in
testing, maintenance, provisioning and repair of telephone equipment.
The LCR, introduced in the mid-1970's, was the first computer-controlled
electronic system used to automatically test for and diagnose problems in
customer telephone lines and to notify telephone company service personnel of
required maintenance. The associated Mechanized Line Record ("MLR") database
system provides automated record keeping (including repair and disposition
records) and analyzes these records for identification of recurring problems and
equipment deterioration. The Company's LCR systems are sold to telephone
operating companies in a number of foreign countries as well as in the United
States.
The Company's software, which can be packaged and integrated with the LCR,
provides additional OSS functions, such as the automated assignment of telephone
company facilities and activation of service. In addition, pursuant to certain
contracts with customers, the Company develops software to meet specific
customer requirements.
1
The Company's OSS products are complex and, in most applications,
incorporate features designed to respond to the purchaser's operational
requirements and the particular characteristics of the purchaser's telephone
system. As a result, the negotiation of a contract for an OSS system is an
individualized and highly technical process. In addition, contracts for OSS
systems frequently provide for manufacturing, delivery, installation, testing
and purchaser acceptance phases, which take place over periods ranging from
several months to a year or more. Such contracts typically contain performance
guarantees by the Company and clauses imposing penalties on the Company if
"in-service" dates are not met. The installation, testing and purchaser
acceptance phases of these contracts may last longer than contemplated by the
contracts and, accordingly, amounts due under the contracts may not be collected
for extended periods. Delays in purchaser acceptance of the systems and in the
Company's receipt of final contract payments have occurred in connection with a
number of foreign sales. In addition, the Company has not experienced a steady
or predictable flow of orders for OSS systems.
Telecommunications Connection Equipment. The Company's copper
connection/protection equipment and systems are used by telephone operating
companies, by owners of private telecommunications equipment and by
manufacturers and suppliers of telephone central office and customer premises
equipment. Products of the types comprising the Company's line of
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.
The Company's connection equipment consists of connector blocks and
protection modules used by telephone companies to interconnect copper-based
subscriber lines to switching equipment lines. The protector modules protect
central office personnel and equipment from electrical surges. The need for
protection products has increased as a result of the worldwide move to digital
technology, which is extremely sensitive to damage by electrical overloads, and
because private owners of telecommunications equipment now have the
responsibility to protect their equipment from damage caused by electrical
surges. Line connecting/protecting equipment usually incorporates protector
modules to safeguard equipment and personnel from injury due to power surges.
Currently, these products include a variety of connector blocks; protector
modules and frames used in telephone central switching offices, PBX
installations and multiple user facilities.
The Company also has developed an assortment of frames for use in
conjunction with the Company's 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 the
Company's frame products, the CAM frame, is designed to produce
computer-assisted analysis and for the optimum placement of connections for
telephone lines on the connector blocks mounted on the frame.
The Company's copper connection/protection products are used by several of
the six regional Bell holding 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, the Company's
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 the Company does design
modifications to accommodate the specific needs of its customers.
2
Signal Processing Products. The Company's signal processing products
include data bus system 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 the Company's sales by each of its major categories of the
telecommunications industry:
Sales by Product Category
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
OSS Systems $29,561 48% $26,804 46% $28,988 47%
Line Connecting
/Protecting
Equipment (*) 23,753 38% 23,249 40% 26,867 44%
Signal Processing 8,280 13% 7,597 13% 4,857 8%
Other 636 1% 337 1% 469 1%
------- --- ------- --- ------- ---
Total $62,230 100% $57,987 100% $61,181 100%
======= === ======= === ======= ===
(*) Includes sales of fiber optics products of $447,000 in 1996 and $6,513,000
in 1995. The assets comprising the fiber optics business unit were sold in
March 1996.
Markets for the Company's Products
The Company supplies equipment and systems to telephone companies used to
provide improved services to their customers. In addition, the Company provides
businesses with systems, which improve their internal telecommunication systems.
Typically, telephone networks in certain regions of the world, notably
Latin America, Eastern Europe and certain areas in the Asia/Pacific region,
utilize telephone-switching systems which use analog technology. These networks
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 among its population and to significantly upgrade the
quality of the lines already in service.
3
The Company's OSS systems are designed to meet many of the needs of a
rapidly changing telephone network. OSS systems facilitate rapid change and
expansion without a comparable increase in the requirement for skilled
technicians, while the computerized line test system insures increased quality
and rapid maintenance and repair of subscriber local loops. The automated
database, which computerizes the inventory and maintenance history of all
subscriber lines in service, helps to keep the rapid change under control.
During 1997, approximately 48% of the Company's sales consisted of OSS
products.
As a telephone company expands the number of its subscriber lines, it also
requires connection equipment to interconnect and protect those lines in its
central offices. The Company provides 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 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. The Company supplies central office connection/protection systems
to meet these needs.
During 1997, approximately 38% of the Company's sales were made to
customers in this category.
The Company's line of signal processing products is supplied to customers
in the military and aerospace industry as well as manufacturers of medical
equipment and video systems. The primary communication standard in new military
and aerospace systems is the MIL-STD-1553 Command Response Data Bus, and
applications require 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.
The Company's wideband transformers are required for ground noise
elimination in video imaging systems and are used in the television and
broadcast, medical imaging and industrial process control industries. If not
eliminated, ground noise caused by poor electrical system wiring or power
supplies, results in significant deterioration in system performance (poor
picture quality, process failures in instrumentation, etc.). 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 1997, signal processing equipment accounted for approximately 13%
of the Company's sales.
4
Marketing and Sales
The Company 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, the Company may
enter into arrangements and technology transfer agreements covering its products
with local manufacturers and participate in manufacturing and licensing
arrangements with local telephone equipment suppliers.
In the United States and throughout the world, the Company uses
independent distributors in the marketing of Company products to the customer
premises equipment market. All distributors marketing copper-based products also
market directly competing products. In addition, the Company continues to
promote the direct marketing relationships it forged in the past with telephone
operating companies.
In November 1996, the Company amended its supply agreement with British
Telecommunications plc ("BT") for the Company's line connecting/protecting
products. The amended agreement will expire on August 31, 2001, and provides,
among other things, that the Company may no longer be the exclusive supplier to
BT for these products. During 1997, 1996, and 1995, BT purchased $9,397,000 (15%
of sales), $9,296,000 (16% of sales), and $8,060,000 (13% of sales),
respectively, of the Company's line connecting/protecting products. During these
years, additional sales of the Company's products were also made at the
direction of BT to certain unaffiliated suppliers to BT for resale to BT. The
amended contract also provides for a cross license which, in effect, enables BT
to use certain of the Company's proprietary information to modify or enhance
products provided to BT and permits those products to be manufactured by BT or
others for its own purposes.
The Company's OSS systems have primarily been sold to foreign telephone
operating companies (which are sometimes controlled by foreign governments), and
the contracts relating to OSS systems are principally negotiated directly
between the Company and these purchasers.
The Signal Processing line of products is sold primarily to US military
and aerospace prime contractors, and domestic OEMs and end users.
5
The following table sets forth for the last three fiscal years the
Company's sales to customers by geographic region:
Sales to Customers By Geographic Region (1)
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
United States
and Puerto Rico $17,980 29% $17,644 30% $16,445 27%
United Kingdom 18,640 30% 16,000 28% 22,230 36%
Other Europe 10,587 17% 5,416 9% 2,831 5%
Asia/Pacific 10,278 17% 15,812 27% 13,470 22%
Latin America 3,718 6% 1,738 3% 4,743 8%
Middle East 879 1% 1,248 2% 899 1%
Other 148 0% 129 1% 563 1%
------- --- ------- --- ------- ---
Total Sales $62,230 100% $57,987 100% $61,181 100%
======= === ======= === ======= ===
(1) For information regarding the amount of sales, operating profit or loss
and identifiable assets attributable to each of the Company's geographic
areas, see Note 23 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 the Company's receipt of final payments and political and economic
change. In addition, to the extent that the Company establishes facilities in
foreign countries, the Company faces risks associated with currency devaluation,
inability to convert local currency into dollars, local tax regulations and
political instability.
6
Manufacturing
The Company's computer-based testing products include the Company's
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, data terminals
("CRTs"), teleprinters, minicomputers and personal computers (PC's) purchased by
the Company. These products are installed and tested by the Company on its
customers' premises.
At present, the Company's manufacturing operations are conducted at
facilities located in Glen Cove, New York; Matamoros, Mexico and Seoul, South
Korea. The Company from time to time also uses subcontractors to augment various
aspects of its production activities and periodically explores the feasibility
of conducting operations at lower cost manufacturing facilities located abroad.
In pursuing sales opportunities with foreign telephone companies, the Company
may locate its production activities in foreign countries which require domestic
involvement in the production of equipment purchased for their telephone systems
and in foreign countries which, in addition, require full or partial technology
transfers to domestic enterprises. In addition, the Company had software
development sites in Syosset, New York, Charlotte, North Carolina, and Coventry,
United Kingdom.
Source and Availability of Components
The Company generally purchases the standard components used in the
manufacture of its products from a number of suppliers. The Company attempts to
assure itself that the components are available from more than one source. The
Company purchases the majority of its minicomputers used in its OSS systems from
Digital Equipment Corporation ("DEC"). However, the Company could use other
computer equipment in its systems if the Company were unable to purchase DEC
products. Other components, such as CRTs and teleprinters, used in connecting
with the Company's electronic products could be obtained from alternate sources
and readily integrated with the Company's products.
Significant Customers
During the years ended December 31, 1997 and 1996, the Company's five
largest customers accounted for sales of $30,633,000, or approximately 49% of
sales, and $ 27,807,000, or approximately 48% of sales, respectively. The
Company's largest customer is BT. Sales to BT for the year ended December 31,
1997 and 1996 amounted to $13,876,000 and $11,308,000, respectively, or
approximately 22% and 20%, respectively, of the Company's sales for such years.
Therefore, any significant interruption or decline in sales to BT may have a
materially adverse effect upon the Company's operations. During 1996, sales to
the Philippines Long Distance Telephone were $7,034,000, or approximately 12% of
sales. No other customers account for 10% or more of the Company's sales for
either year.
In addition, the former Bell operating companies continue to be the
ultimate purchasers of a significant portion of the Company's products sold in
the United States, while sales to foreign telephone operating companies
constitute the major portion of the Company's foreign sales. The Company's
contracts with these customers require no minimum purchases by such customers.
Significant customers for the Signal Processing products include the major US
Aerospace companies, Department of Defense service depots and OEMs in the
medical imaging and process control equipment. Both catalog and custom designed
products are sold to these customers. Some contracts are multi-year
procurements.
7
Backlog
At December 31, 1997, the Company's backlog was $19,558,000 compared with
approximately $18,296,000 at December 31, 1996. Of the December 31, 1997
backlog, approximately $15,948,000 represented orders from foreign telephone
operating companies, including $4,474,000 attributable to the contract with BT.
See "Marketing and Sales". The Company expects to ship substantially all of its
December 31, 1997 backlog during 1998. However, certain of the Company's OSS
contracts provide for deliveries subsequent to December 31, 1998.
Patents
The Company is the owner of a number of utility and design patents and
patent applications. In addition, the Company has sought foreign patent
protection for a number of its products.
From time to time the Company enters into licensing and technical
information agreements under which it receives or grants rights to produce
certain specified subcomponents used in certain of the Company's products or in
connection with products developed by the Company. These agreements are for
varying terms and provide for the payment or receipt of royalties or technical
license fees.
While the Company considers patent protection important to the development
of its business, and produces certain subcomponents of its products under
licensing agreements, the Company believes that its success depends primarily
upon its engineering, manufacturing and marketing skills. Accordingly, the
Company does not believe that a denial of any of its pending patent
applications, expiration of any of its patents, a determination that any of the
patents which have been granted to it are invalid or the cancellation of any of
its existing license agreements would have a material adverse effect on the
Company's business.
Competition
The telephone equipment market in which the Company does business is
characterized by intense competition, rapid technological change and a movement
to private ownership of telecommunications equipment. In competing for telephone
operating company business, the purchase price of equipment and associated
operating expenses have become significant factors, along with product design
and long-standing equipment supply relationships. In the customer premises
equipment market, the Company is functioning in a market characterized by
distributors and installers of equipment and by commodity pricing.
The Company competes directly with a number of large and small telephone
equipment manufacturers in the United States, with Lucent Technologies
("Lucent") continuing to be the Company's principal United States competitor.
Lucent's greater resources, extensive research and development facilities,
long-standing equipment supply relationships with the operating companies of the
regional holding companies and history of manufacturing and marketing products
similar in function to those produced by the Company continue to be significant
factors in the Company's competitive environment.
Currently, Lucent and a number of companies with greater financial
resources than the Company produce, or have the design and manufacturing
capabilities to produce, products competitive with the Company's products. In
meeting this competition, the Company relies primarily on the performance and
design characteristics of its products of comparable performance or design,
endeavors to offer its products at prices and with warranties that will make its
products competitive.
8
In connection with overseas sales of its line connecting/protecting
equipment, the Company has met with significant competition from United States
and foreign manufacturers of comparable equipment and expects this competition
to continue. In addition to Lucent, a number of the Company's overseas
competitors have significantly greater resources than the Company.
The Company competes directly with a limited number of substantial
domestic and international companies with respect to its sales of OSS systems.
In meeting this competition, the Company relies primarily on the features of its
line testing equipment, its ability to customize systems and endeavors to offer
such equipment at prices and with warranties that will make them competitive.
Research and Development Activities
During the fiscal years ended December 31, 1997, 1996 and 1995, the
Company spent approximately $5,361,000, $3,848,000, and $6,103,000,
respectively, on its research and development activities. All research and
development was company sponsored and is expensed as incurred.
Employees
As of February 28, 1998, the Company had 457 employees of which 134 were
employed in the United States, 229 in Mexico, 48 in the United Kingdom, 5 in
Poland and 41 in Korea. The Company believes that its relations with its
employees are good, and it has never experienced a work stoppage. The Company's
employees are not covered by collective bargaining agreements, except for its
hourly employees in Mexico who are covered by a collective bargaining agreement
that expires on December 31, 1998.
Item 2. Properties
The Company currently leases approximately 20,400 square feet of
executive, sales, marketing and research and development space located in
Syosset, New York; 5,300 square feet of office space used for software
development located in Charlotte, North Carolina; and 15,000 square feet of
manufacturing space located in Kingsville, Texas. The Company also owns a 31,000
square foot manufacturing and research and development facility located in Glen
Cove, New York. These facilities represent substantially all of the Company's
office, plant and warehouse space in the United States. The Syosset, New York
lease expires December 2000; the Charlotte, North Carolina lease expires in
April 1999 and the Kingsville, Texas lease expire December 1999. The aggregate
annual rental is approximately $400,000.
The Company's wholly-owned Mexican subsidiary owns approximately 40,000
square foot manufacturing facility Matamoros, Mexico. A wholly-owned United
Kingdom subsidiary owns a 34,261 square foot facility in Coventry, England,
which facility comprises all of the Company's office, plant and warehouse space
in the United Kingdom.
The Company believes its properties are adequate for its needs.
9
Item 3. Legal Proceedings
In July 1996, an action was commenced against the Company and certain
present and former directors in the Supreme Court of the State of New York, New
York County by certain stockholders and warrant holders of the Company who
acquired their securities in connection with the acquisition by the Company of
Aster Corporation. The complaint alleges breach of contract against the Company
and breach of fiduciary duty against the directors arising out of an alleged
failure to register certain restricted shares and warrants owned by the
plaintiffs. The complaint seeks damages of $413,000; however, counsel for the
plaintiff has advised the Company that additional plaintiffs may be added and,
as a result, the amount of damages claimed may be substantially greater than the
amount presently claimed. The Company believes that the defendants have valid
defenses to the claims. The action is currently in the discovery stage.
In July 1996, the Securities and Exchange Commission (the "SEC") issued an
order (the "Order") directing a private investigation of the Company to
determine whether there has been a violation of Federal securities laws. The SEC
indicated to counsel for the Company that the investigation relates to the
position of the SEC staff that the independence of the Company's auditors for
1995, KPMG Peat Marwick LLP ("Peat Marwick"), was adversely impacted by certain
relationships involving Peat Marwick, on the one hand, and KPMG BayMark
Strategies LLC ("BayMark") and Edward R. Olson, the President of BayMark and the
Company's former interim president and chief operating officer, on the other
hand. Although the Company does not agree with the position of the SEC staff
with respect to the independence of Peat Marwick, the Company is cooperating
with the SEC's investigation. The Company retained BDO Seidman, LLP to reaudit
the Company's 1995 financial statements, which reaudit resulted in no changes to
the Company's 1995 financial statements as audited by Peat Marwick. The Company
does not believe that the investigation will result in any material liability on
the part of the Company. The Company is not aware of any further activity
respecting this investigation since November 1996.
Item 4. Submission of Matters to a Vote of Securities Holders
During the fourth quarter of 1997, there were no matters required to be
submitted to a vote of security holders of the Company.
10
Item Pursuant to Instruction 3 of Item 401 (b) of Regulation S-K:
Executive Officers of the Company
Name and Position Age
- ----------------- ---
William V. Carney 60
Chairman of the Board
Chief Executive Officer
Seymour Joffe 68
President and
Chief Operating Officer
Michael A. Tancredi 68
Senior Vice President
Secretary and Treasurer
Edward B. Kornfeld 54
Senior Vice President - Operations
Chief Financial Officer
John J. Gazzo 54
Senior Vice President
Prem G. Chandran 45
Vice President
Edmund Chiodo 43
Vice President
David Rawlings 54
Vice President
William Novelli 66
Vice President
Gerald Hammond 43
Vice President
All of the Company's officers serve at the pleasure of the Board of
Directors. Of the executive officers listed above, Messrs. Carney, Joffe and
Tancredi are also members of the Board of Directors. There is no family
relationship between any of the executive officers listed above.
11
Mr. Carney was elected as Chairman of the Board of Directors and Chief
Executive Officer in 1996 and has served as a director since 1970. Previously,
Mr. Carney had served as Secretary since 1970, Senior Vice President since
November 1989 and Chief Technical Officer from December 1990. He was elected
Vice Chairman in January 1988. He was Senior Vice President-Mechanical
Engineering from January 1988 to November 1989 and was Senior Vice
President-Manufacturing from March 1984 to February 1985, Senior Vice
President-Operations from June 1977 to February 1984 and Vice President from
1970 to June 1977.
Mr. Joffe was elected President and Chief Operating Officer in 1996. Mr.
Joffe, who served as director of the Company from 1987 to 1992, has most
recently served the Company as senior consultant to its Operations Support
Systems (OSS) business. Mr. Joffe has been Chairman of JSI International, Inc.
which represents companies in the marketing and positioning of high-tech
products and serves in the Asia Pacific area. Mr. Joffe has also served as an
officer and director of a number of public and private companies involved in the
computer and telecommunications industries.
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. Prior to his election to this position, Mr. Kornfeld held
positions with several companies for more than five years, including Excel
Technology Inc. (Quantronix Corp.) and Anorad Corporation.
Mr. Gazzo was elected Senior Vice President in March 1996. He has been
Vice President-Marketing of the Company since April 1993 and was general manager
of its Porta Electronics Division from November 1989 to April 1993; he was the
Company's Vice President-Research and Development from March 1984 to November
1989 and was Vice President-Engineering from February 1978 to February 1984.
Prior to that time, he was Chief Engineer of the Company.
Mr. Chandran was elected Vice President in December 1995. Mr. Chandran had
been with the Company as Assistant Vice President of Engineering since 1991.
Mr. Chiodo was elected Vice President in March 1996. Mr. Chiodo had been
with the Company since 1980. During that time he has held various positions with
in the Company, most recently as Assistant Vice President of OSS operations.
Mr. Rawlings was elected Vice President in March 1996. Mr. Rawlings has
been the Assistant Vice President of Research and Development - Copper products
since 1992.
Mr. Novelli was elected Vice President in December 1996. Mr. Novelli has
been the Assistant Vice President of Sale and Marketing - Copper products since
1989.
Mr. Hammond was elected Vice President in March 1997. Mr. Hammond has been
with the Company since 1970. During that time he has held various positions with
the Company, most recently as Assistant Vice President of Research and
Development.
12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the American Stock Exchange, Inc.
under the symbol PSI. The following table sets forth, for the period January 1,
1996 through December 31, 1997, the quarterly high and low sales prices for the
Company's Common Stock on the consolidated transaction reporting systems for
American Stock Exchange listed issues. Share prices listed below have been
restated to give effect to the one for five reverse stock split which became
effective on August 2, 1996.
High Low
---- ---
1996 First Quarter 6 9/16 3 7/16
Second Quarter 4 11/16 3 1/8
Third Quarter 3 3/4 1 7/8
Fourth Quarter 2 1/2 1 1/4
1997
First Quarter 2 1/8 1 3/8
Second Quarter 2 15/16 1 1/4
Third Quarter 5 1/4 2 5/16
Fourth Quarter 4 1/4 3
The Company did not declare or pay any cash dividends in 1997 or 1996. It
is the present policy of the Company to retain earnings to finance the growth
and development of the business and therefore, the Company does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. In
addition, the Company's Amended and Restated Loan and Security Agreement
prohibits the Company from paying cash dividends on its Common Stock.
As of March 5, 1998, the number of holders of record of the Company's
Common Stock was approximately 1,560.
Item 6. Selected Financial Data
The following table sets forth certain selected consolidated financial
information of the Company. 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
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
Income Statement Data:
Sales $ 62,230 $ 57,987 $ 61,181 $ 68,985 $ 68,141
Operating income (loss) 6,101 3,982 (19,884) (17,541) (3,916)
Debt conversion expense (11,458) -- -- -- --
Income (loss) before discontinued
operations and extraordinary item (7,021) 1,252 (29,297) (39,995) (7,493)
Net income (loss) (6,899) 5,174 (31,041) (39,995) (9,545)
Basic per share amounts*:
Continuing operations $ (2.26) $ 0.57 $ (20.05) $ (27.51) $ (5.29)
Net income (loss) $ (2.22) $ 2.37 $ (21.25) $ (27.51) $ (6.74)
Diluted per share amounts*:
Continuing operations $ (2.26) $ 0.23 $ (20.05) $ (27.51) $ (5.29)
Net income (loss) $ (2.22) $ 0.94 $ (21.25) $ (27.51) $ (6.74)
Cash dividends declared -- -- -- -- --
Number of shares used in
calculating net income (loss)
per share-basic 3,111 2,184 1,461 1,454 1,416
Number of shares used in
calculating net income (loss)
per share-diluted 3,111 5,528 1,461 1,454 1,416
Balance Sheet Data:
Total assets $ 51,000 $ 51,660 $ 60,591 $ 84,963 $ 109,948
Long-term debt excluding current
maturities $ 18,858 $ 45,804 $ 55,389 $ 57,310 $ 49,931
Stockholders' equity (deficit) $ 6,813 $(19,702) $(29,323) $ 1,525 $ 39,841
* Income or loss per share for years prior to 1997 have been restated in
accordance with the requirements of FASB No. 128.
14
Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations.
The Company's consolidated statements of operations for the three years
ended December 31, 1997, 1996 and 1995, respectively, as a percentage of sales
follows:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Sales 100% 100% 100%
Cost of sales 61% 63% 92%
---- ---- ----
Gross Profit 39% 37% 8%
Selling, general and
administrative expenses 20% 23% 27%
Research and development expenses 9% 7% 10%
Litigation settlement -- -- 2%
Write down of net assets sold -- -- 1%
---- ---- ----
Operating income (loss) 10% 7% (33%)
Interest expense (5%) (9%) (14%)
Gain on sale of assets -- 4%- --
Other 2% 1% (1%)
Debt conversion expense (19%) -- --
---- ---- ----
Income (loss) from continuing
operations before income
taxes and minority interest (12%) 3% (47%)
Income tax expense (benefit)
and minority interest (1%) 1% -%
---- ---- ----
Income (loss) before discontinued
operations and extraordinary gain (11%) 2% (48%)
Provision for loss on disposal
of discontinued operations -- -- 6%
Extraordinary gain on early
extinguishment of debt -- 7% 3%
---- ---- ----
Net income (loss) (11%) 7% (51%)
==== ==== ====
15
Results of Operations
Years Ended December 31, 1997 and 1996
The Company's sales for 1997 were $62,230,000 compared to $57,987,000 in
1996, an increase of $4,243,000 (7%). The increase in revenue is attributed to
improvement in all of the Company's divisions.
OSS sales for 1997 were $29,561,000, compared to 1996 sales of
$26,804,000, an increase of $2,757,000 (10%). The increased sales relate
primarily to higher volumes generated from the installation of the OSS systems
to the existing customer base.
Line connection/protection equipment sales for 1997 increased
approximately $504,000 (2%) from $23,249,000 in 1996 to $23,753,000 1997. This
increase relates to improved domestic sales, which were offset by decreased
sales of a certain product line to BT. During 1997, the Company completed
delivery of products to BT under a prior agreement and commenced delivery of a
replacement product. The decline reflected both a decline in the number of units
sold and a lower selling price per unit for the replacement product. At December
31, 1997, the orders from BT for this product reflect a continuation of sales at
the reduced level.
Signal processing revenue for 1997 compared to 1996 increased by $683,000
(9%) from $7,597,000 to $8,280,000. The increased revenue was generated from the
earlier than anticipated completion of military orders and non-recurring revenue
from certain engineering services.
Cost of sales for the year ended December 31, 1997, as a percentage of
sales compared to 1996, decreased from 63% to 61%. The improvement in gross
margin is attributed to the Company's continuing effort to increase
manufacturing productivity and the absorption, over a larger revenue base, of
certain fixed expenses associated with the OSS contracts.
Selling, general and administration expenses decreased by $748,000 (6%)
from $13,566,000 to $12,818,000 from December 31, 1997 compared to 1996. The
decrease reflects the Company's continuing efforts to reduce its costs and
expenses.
Research and development expenses increased by $1,513,000 (39%) from
$3,848,000 in 1996 to $5,361,000 in 1997. The increased expenses results from
the Company's efforts to develop new products, primarily related to the OSS
business.
As a result of the above, the Company had operating income of $6,101,000
in 1997 versus $3,982,000 in 1996, an increase of 53%. The Company's operating
improvement for the year ended December 31, 1997, when compared to the year
ended December 31, 1996, were the results of increased revenue which allowed for
greater manufacturing efficiencies, and the reduced level of selling, general
and administrative expenses.
Interest expense for 1997 decreased by $1,949,000 from $5,328,000 for 1996
to $3,379,000 in 1997. The decrease in interest expense is attributable
primarily to the exchange of the Company's Debentures for the Notes and common
stock, which occurred primarily in the first and second quarters of 1996, and
repayment of principal to the Company's senior lender. In addition, during 1996,
the Company incurred additional interest expense resulting from recognition of
certain deferred borrowing costs related to its loans from its senior lender.
16
Results of Operations (continued)
Other income for 1997 included $700,000 from the final settlement of an
insolvency procedure involving the purchaser of the Company's Israeli
operations, which the Company sold in 1992.
During 1997, the Company recorded debt conversion expenses of $11,458,000
as a result of the exchange of 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. In addition,
in connection with the transaction the Company incurred legal expenses of
$234,000 and incurred expenses valued at $578,000 related to the issuance of
common stock and warrants (see Notes to Consolidated Financial Statements, Note
8).
During 1997 and 1996, the Company recorded an extraordinary gain from the
early extinguishment of its Debentures of $122,000 and $3,922,000, receptively
(see Notes to Consolidated Financial Statements, Note 8).
At December 31, 1997, based upon year-end tax calculations, the Company
recorded an income tax benefit of $585,000, reflecting the difference between a
$802,000 deferred tax asset and the Company's tax expenses of $217,000, at
December 31, 1997.
As the result of the foregoing, the Company incurred a net loss of
$6,899,000, $2.22 per share, for 1997, compared with net income of $5,174,000,
$2.37 per basic share and $0.94 per diluted share, for the year ended December
31, 1996. Basic earnings (loss) per share are based on the weighted average
number of shares outstanding. Diluted earnings (loss) per share are based on
weighted average number of shares outstanding plus dilutive potential common
shares. The calculation of the diluted earnings per share for the year ended
December 31, 1996, assumes the conversion of the Notes which are dilutive. For
1997, no dilutive potential shares of common stock were added to compute diluted
loss per share because the effect is anti-dilutive.
17
Results of Operations
Years Ended December 31, 1996 and 1995
The Company's sales for 1996 were $57,987,000 compared to $61,181,000 in
1995, a decrease of $3,194,000 (5%). The 1995 sales include sales of $6,513,000
from the Company's fiber optics business unit which was sold in March 1996.
Sales of fiber optics products were $447,000 in 1996 prior to the sale.
Therefore, sales, exclusive of fiber optics products, increased by $2,872,000
(5.3%) from 1995. OSS net revenue decreased by $2,184,000 for 1996 reflecting
lower levels of sales of the Company's Korea joint venture, as well as reduced
sales to BT that was partially offset by increased sales in Asia and Europe.
Line connection/protection equipment revenue for 1996 increased approximately
$2,448,000 reflecting improved domestic sales, as well as increased sales of
such equipment to BT. Signal processing revenue for 1996 increased by $2,740,000
due to the Company's improved cash position in 1996, which enabled the
completion of backlog orders on an accelerated basis.
As a result of the sale of the fiber optics business unit, the Company
extended its credit agreement with Foothill which provided funds to enable the
Company to procure materials to satisfy outstanding orders during 1996. This
positively affected revenue for all operating units in 1996.
Cost of sales for the year ended December 31, 1996, as a percentage of
sales compared to 1995, decreased from 92% to 63%. This improvement in gross
margin is attributed to manufacturing efficiencies created by the ability to
obtain raw materials on a consistent basis, improved management and more
efficient utilization of personnel, and the elimination of under utilized
facilities associated with the fiber optics business.
Selling, general and administration expenses decreased by $2,990,000 (18%)
from $16,556,000 to $13,566,000 from 1996 compared to 1995. This decrease is due
to the elimination of the expenses as related to the fiber optics business unit
and the Company's continuing efforts to reduce costs and expenses.
Research and development expenses decreased by $2,255,000 (37%) from
$6,103,000 to $3,848,000 from 1996 compared to 1995. This reduced cost reflects
the Company's efforts to streamline its operations by focusing on those projects
with the highest potential for success and to a lesser extent, the elimination
of expenses related to fiber optics business unit.
The sale of the fiber optics business benefited the Company by allowing it
to close two facilities, with a resultant decrease in personnel and overhead
costs. Moreover, the sale also enabled the Company to amend and extend its
agreement with its senior lender, Foothill Capital Corp. ("Foothill") and make a
significant payment to Foothill, which reduced its ongoing interest costs as
described below.
As a result of the above, the Company had operating income of $3,982,000
in 1996 versus an operating loss of $19,884,000 in 1995. The Company's operating
improvement for 1996, when compared to 1995, was the result of its continuing
efforts to bring its costs and expenses in line with its current level of sales
and the sale of the fiber optics business unit.
Interest expense decreased for 1996 by $3,156,000 from $8,484,000 for 1995
to $5,328,000 in 1996. This change is attributable primarily to a decrease in
interest expense related to the exchange of the Company's 6% Debentures and
repayment of principal to the Company's senior lender from the proceeds of the
sale of the fiber business and the sale of common stock received in respect of
the sale of its discontinued Israeli operations described in the next paragraph.
18
Results of Operations (continued)
During 1996, the Company received $3,456,000 from the sale of common stock
the settlement of the insolvensy proceeding involving the purchaser of the
discontinued Israeli operations. The sale of such stock resulted in a gain of
$2,264,000 which is reflected as a gain on the sale of assets. During 1995, the
Company recorded a $3,500,000 loss from the sale of this discontinued Israeli
operation.
During 1996, the Company recorded a $3,922,000 extraordinary gain from the
early extingushment of approximately 94% of its Debentures. During 1995, the
Company recorded an extraordinary gain of $1,756,000 arising from the Company's
repurchase and retirement of $3,900,000 of its Debentures.
As the result of the foregoing, the Company generated net income of
$5,174,000, $2.37 per basic share ($0.94 per diluted share), for 1996, compared
with a net loss of $31,041,000, $21.25 per share (basic and diluted), for 1995.
Basic earnings (loss) per share are based on the weighted average number of
shares outstanding. Diluted earnings (loss) per share are based on weighted
average number of shares outstanding plus dilutive potential common shares. The
calculation of the diluted earnings per share for the year ended December 31,
1996, assumes the conversion of the Notes which are dilutive. For 1995, no
dilutive potential shares of common stock were added to compute diluted loss per
share because the effect is anti-dilutive.
The significant improvement in the operations of the Company in 1996 is
the result of several factors including: the sale of the non-profitable fiber
optics business unit, amendment and extension of the Company's loan and security
arrangement with its senior lender, restructuring of the management team, as
well as, overall greater efficiencies in the Company's manufacturing operations.
Liquidity and Capital Resources
At December 31, 1997 the Company had cash and cash equivalents of
$5,091,000 compared with $2,584,000 at December 31, 1996. The Company's working
capital at December 31, 1997 was $6,254,000, compared to $4,115,000 at December
31, 1996. The improvement in working capital from December 31, 1996 to December
31, 1997 reflects the effects of positive cash flow generated from the Company's
operations as well as the conversion of $23,400,000 of debt into equity and the
amendment and extension of the Company's agreement with Foothill.
As of November 30, 1997, the Company's loan and security agreement with
its senior secured lender, Foothill, was amended and extended. Pursuant to the
amendment, the loan and security agreement was extended from November 1998 to
August 1999, and the Company's availability under its revolving line of credit
and its letter of credit facility was combined to total $9,000,000. During 1997,
the Company repaid $2,707,000 to Foothill. Subsequent to December 31, 1997, the
Company repaid Foothill an additional $2,950,000 from the proceeds of its 12 %
Subordinated Note private placement as described below.
As of December 31, 1997, the Company had remaining outstanding $1,758,000
of the 6% Debentures, net of original issue discount of $137,000. The face
amount of the outstanding 6% Debentures was $1,895,000. Subsequent to December
31, 1997, the Company issued approximately 388,000 shares of common stock in
exchanged for cancellation of $1,510,000 of principal amount of Debentures and
accrued interest.
19
Liquidity and Capital Resources (continued)
The interest accrued on the 6% Debentures is payable on July 1 of each
year and as of December 31, 1997 was $398,000. At December 31, 1997, the Company
has failed to make the interest payments due in 1997, 1996 and 1995.
Accordingly, the 6% Debentures are classified as a current liability at December
31, 1997 and 1996.
During 1997, the Company amended the terms of its Zero Coupon Notes due
January 2, 1998 (the "Notes") by reducing the conversion price to $3.65 per
share from $6.55 per share and issuing additional shares under certain
circumstances. The amended terms became effective on November 13, 1997. As of
December 31, 1997, Notes in the principal amount of approximately $23,400,000
were converted into approximately 6,412,000 shares of common stock. The
conversion of the Notes into common stock reduced debt by $23,400,000, increased
equity by $34,049,000 and resulted in a primarily non-cash charge to earnings of
$11,458,000. As of December 31, 1997, $2,796,000 of the Notes remained
outstanding, which were paid on the January 2, 1998 maturity date (See Notes to
Consolidated Financial Statements, Note 8).
In January 1998, the Company raised $6,000,000 from the private placement
of 60 units at $100,000 per unit. Each unit consisted of (a) the Company's 12 %
Subordinated Note due January 3, 2000 (a "12% Note), in the principal amount of
$100,000, and (b) a Series B Common Stock Purchase Warrant (a "Series B
Warrant") to purchase 10,000 shares of Common Stock at $3.00 per share through
December 31, 2002. The proceeds from the sale of the Units was used principally
to pay the remaining $2,796,000 principal amount of Notes which had not been
converted (See Notes to Consolidated Financial Statements, Note 8) and to reduce
the Company's senior debt to Foothill by approximately $2,950,000 (See Notes to
Consolidated Financial Statements, Note 7). The balance of such proceeds was
added to working capital.
The Company believes that its current cash position, internally generated
cash flow and its loan facility will be sufficient to satisfy the Company's
anticipated operating needs for at least the ensuing twelve months.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
a date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. This
is refered to the as the "Year 2000 Issue." Management has initiated a Company
wide program to prepare the Company's computer systems and applications for year
2000 compliance. The Company expects to incur internal staff costs as well as
other expenses necessary to prepare its systems for the year 2000. The Company
expects to both replace some systems and upgrade others. Maintenance or
modification costs will be expensed as incurred. The total cost of this effort
is still being evaluated, but is not expected to be material to the Company.
20
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, 1997.
21
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
A current report on form 8-K (Item 5), dated January 2, 1998, was filed.
(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 10K 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 10K 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
10K 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.
22
Exhibits (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
4.2.1 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.
4.2.2 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.
4.3 Warrant issued to Aspen Grove Financial Corporation to Purchase
87,500 Shares of Common Stock dated as of June 13, 1994,
incorporated by reference to Exhibit 4(d) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994.
4.4 Warrant issued to Banque Scandinave en Suisse to Purchase
100,000 shares of Common Stock dated as of June 13, 1994,
incorporated by reference to Exhibit 4(f) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994.
4.5 Stock Option Agreement dated as of May 15, 1994 between the
Company and Stanley Kreitman, incorporated by reference to
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994.
4.6 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.
4.7 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.
4.7.1 Letter Agreement dated as of February 13, 1995, incorporated by
reference to Exhibit 4.7.1 of the Company's Annual Report on
Form 10K for the year ended December 31, 1995.
4.7.2 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.
4.8 Secured Promissory Note dated November 28, 1994 made by the
Company in favor of Foothill Capital Corporation, incorporated
by reference to Exhibit 4 to the Company's Current Report on
Form 8-K dated November 30, 1994.
23
Exhibits (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
4.9 Amended and Restated Secured Promissory Note dated February 13,
1995, incorporated by reference to Exhibit 4.9 of the Company's
Annual Report on Form 10K for the year ended December 31, 1995.
4.10 Deferred Funding Fee Note dated November 28, 1994 made by the
Company in favor of Foothill Capital Corporation, incorporated
by reference to Exhibit 5 to the Company's Current Report on
Form 8-K dated November 30, 1994.
4.11 Amendment Number Three to Amended and Restated Loan and Security
Agreement dated March 12, 1996, between the Company and Foothill
Capital Corporation, incorporated by reference to Exhibit 4.11
of the Company's Annual Report on Form 10K for the year ended
December 31, 1995.
4.12 Warrant to Purchase Common Stock of the Company dated November
28, 1994 executed by the Company in favor of Foothill Capital
Corporation, incorporated by reference to Exhibit 6 to the
Company's Current Report on Form 8-K dated November 30, 1994.
4.12.1 Amendment Number One to Warrant to Purchase Common Stock of the
Company dated as of February 13, 1995 executed by the Company in
favor of Foothill Capital Corporation, incorporated by reference
to Exhibit 4.12.1 of the Company's Annual Report on Form 10K for
the year ended December 31, 1995.
4.13 Assignment of Loans, Liens and Loan Documents dated November 28,
1994 between Chemical Bank, The Bank of New York, Foothill
Capital Corporation, the Company and certain of the subsidiaries
of the Company, incorporated by reference to Exhibit 3 to the
Company's Current Report on Form 8-K dated November 30, 1994.
4.14 Warrant to Purchase Common Stock of the Company dated November
28, 1994 executed by the Company in favor of Chemical Bank,
incorporated by reference to Exhibit 12 to the Company's Current
Report on Form 8-K dated November 30, 1994.
4.15 Warrant to Purchase Common Stock of the Company dated November
28, 1994 executed by the Company in favor of The Bank of New
York, incorporated by reference to Exhibit 13 to the Company's
Current Report on Form 8-K dated November 30, 1994.
4.16 Indenture dated as of July 1, 1992 between the Company and the
Bank of New York as trustee, incorporated by reference to
Exhibit 4(a) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992.
4.17 Form of Warrant to Purchase Common Stock of the Company dated as
of June 1, 1993 between the Company and Mallory Factor,
incorporated by reference to Exhibit 4(f) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1993.
24
Exhibits (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
4.18 Form of Warrant Agreement dated as of August 12, 1993 between
the Company and Berenson Minella & Company, incorporated by
reference to Exhibit 4(e) of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993.
4.19 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.
4.20 Security Agreement, dated as of July 16, 1993, made by Woo Shin
Electro-Systems Company to Chemical Bank, incorporated by
reference to Exhibit 4(b)(iv) of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993.
4.21 Indenture dated as of November 30, 1995, between the Company and
American Stock Transfer & Trust Company, incorporated by
reference to Exhibit 4.21 of the Company's Annual Report on Form
10K for the year ended December 31, 1995.
4.22 Supplemental Indenture dated as of October 10, 1997 between the
Company and American Stock Transfer & Trust Company,
incorporated by reference to Exhibit 4.22 of the Company's Form
8-K dated October 10, 1997.
4.23 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.
10.1 Form of Split Dollar Agreement--more than ten years,
incorporated by reference to Exhibit 19(d) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1985.
10.2 Form of Split Dollar Agreement--less than ten years,
incorporated by reference to Exhibit 19(e) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1985.
10.3 Form of Amendment No. 1 to Split Dollar Agreement--less than ten
years--Acceleration upon change of control, incorporated by
reference to Exhibit 10.3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1988.
10.4 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.
10.5 Agreement dated as of January 1, 1990 between the Company and
Alpha Risk Management, Inc., incorporated by reference to
Exhibit 10(k) of the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
25
Exhibits (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
10.6 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.
10.6.1 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.
10.7 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.
10.8 Asset Purchase Agreement dated as of March 6, 1996 by and among
Augat Inc., Porta Systems Corp. and certain of its subsidiaries,
incorporated by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10K for the year ended December 31, 1995.
10.9 Form of Employment Contract dated October 2, 1995 between the
Company and KPMG BayMark Strategies LLC's Crisis Management
Group, incorporated by reference to Exhibit 10.9 of the
Company's Annual Report on Form 10K for the year ended December
31, 1995.
10.9.1 Amendment dated December 18, 1996 between the Company and KPMG
BayMark Strategies LLC's Crisis Management Group.
10.10 Form of Employment Contract dated October 16, 1995 between the
Company and Edward B. Kornfeld, incorporated by reference to
Exhibit 10.10 of the Company's Annual Report on Form 10K for the
year ended December 31, 1995.
10.11 (Deleted)
10.12 Form of Executive Salary Continuation Agreement dated October
16, 1995 between the Company and Edward B. Kornfeld,
incorporated by reference to Exhibit 10.12 of the Company's
Annual Report on Form 10K for the year ended December 31, 1995.
10.13 Form of Employment Contract dated October 9, 1996 between the
Company and Seymour Joffe.
10.14 1996 Stock Option Plan filed as Exhibit A to the Proxy Statement
for the 1996 Annual Meeting to Stockholders and incorporated
herein by reference.
10.15 Form of subscription agreement for Units, including the form of
12% Note, Series B Warrant and Series C Warrant, incorporated by
reference to Exhibit 10.15 of the Company's Form 8-K dated
January 2, 1998.
26
Exhibits (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
10.16 Agreement dated January 26, 1998, among the Company and Henley
Group, Ltd., Woodstead Associates, L.P., Lake Trust and Smith
Management Company, Inc. incorporated by reference to Exhibit
10.16 of the Company's Form 8-K dated January 2, 1998.
22.1 Subsidiaries of the Company, incorporated by reference to
Exhibit 22.1 of the Company's Annual Report on Form 10K for the
year ended December 31, 1995.
23 Consent of Independent Auditors.
27
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 17, 1998 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 17, 1998
- ------------------------------ Chief Executive Officer
William V. Carney and Director (Principal
Executive Officer)
/s/Edward B. Kornfeld Senior Vice President and March 17, 1998
- ------------------------------ Chief Financial Officer
Edward B. Kornfeld (Principal Financial and
Accounting Officer)
/s/Seymour Joffe Director March 17, 1998
- ------------------------------
Seymour Joffe
/s/Michael A. Tancredi Director March 17, 1998
- ------------------------------
Michael A. Tancredi
/s/Howard D. Brous Director March 17, 1998
- ------------------------------
Howard D. Brous
/s/Warren H. Esanu Director March 17, 1998
- ------------------------------
Warren H. Esanu
/s/Herbert H. Feldman Director March 17, 1998
- ------------------------------
Herbert H. Feldman
/s/Stanley Kreitman Director March 17, 1998
- ------------------------------
Stanley Kreitman
/s/Lloyd I. Miller, III Director March 17, 1998
- ------------------------------
Lloyd I. Miller, III
/s/Robert Shreiber Director March 17, 1998
- ------------------------------
Robert Shreiber
28
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, 1997 and 1996 F-3
Consolidated Statements of Operations,
Years Ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders'
Equity (Deficit), Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1997,
1996 and 1995 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.:
We have audited the accompanying consolidated balance sheets of Porta Systems
Corp. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Porta Systems Corp.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
---------------------------
BDO SEIDMAN, LLP
Mitchel Field, New York
March 9, 1998
F-2
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in thousands)
Assets 1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 5,091 2,584
Accounts receivable - trade, less allowance for
doubtful accounts of $1,058 in 1997 and $1,550
in 1996 14,891 16,034
Inventories 8,159 7,424
Prepaid expenses and other current assets 1,266 782
Other receivables -- 531
-------- ------
Total current assets 29,407 27,355
-------- ------
Property, plant and equipment, net 4,667 5,457
Deferred computer software, net 543 1,676
Goodwill, net of amortization of $3,301 in 1997 and
$2,503 in 1996 12,059 12,522
Other assets 4,324 4,650
-------- ------
Total assets $ 51,000 51,660
======== ======
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Convertible subordinated debentures $ 1,758 2,096
Current portion of senior debt 1,900 750
Accounts payable 5,796 6,056
Accrued expenses 8,656 9,004
Accrued interest payable 398 583
Accrued commissions 2,444 2,708
Accrued deferred compensation 1,228 1,232
Income taxes payable 853 780
Short-term loans 120 31
-------- ------
Total current liabilities 23,153 23,240
-------- ------
Senior debt 12,978 16,835
Zero coupon senior subordinated convertible notes 2,796 25,885
Notes payable net of current maturities 3,084 3,084
Income taxes payable 649 802
Other long-term liabilities 487 653
Minority interest 1,040 863
-------- ------
Total long-term liabilities 21,034 48,122
-------- ------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, no par value; authorized
1,000,000 shares, none issued -- --
Common stock, par value $.01; authorized
20,000,000 and 40,000,000 shares, issued
8,644,304 and 2,223,861 shares in 1997 and
1996, respectively 86 22
Additional paid-in capital 70,926 36,561
Foreign currency translation adjustment (4,027) (3,012)
Accumulated deficit (57,799) (50,900)
-------- ------
9,186 (17,329)
Treasury stock, at cost, 33,340 shares (2,066) (2,066)
Receivable for employee stock purchases (307) (307)
-------- ------
Total stockholders' equity (deficit) 6,813 (19,702)
-------- ------
Total liabilities and stockholders'
equity (deficit) $ 51,000 51,660
======== ======
See accompanying notes to consolidated financial statements.
F-3
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)
1997 1996 1995
---- ---- ----
Sales $ 62,230 57,987 61,181
Cost of sales 37,950 36,591 56,444
-------- ------ ------
Gross profit 24,280 21,396 4,737
-------- ------ ------
Selling, general and administrative expenses 12,818 13,566 16,556
Research and development expenses 5,361 3,848 6,103
Litigation settlement -- -- 1,100
Write-down of net assets held for sale to net
realizable value -- -- 862
-------- ------ ------
Total expenses 18,179 17,414 24,621
-------- ------ ------
Operating income (loss) 6,101 3,982 (19,884)
Interest expense (3,379) (5,328) (8,484)
Interest income 259 136 87
Gain on sale of assets -- 2,264 --
Other income (expense), net 1,047 402 (884)
Debt conversion expense (11,458) -- --
-------- ------ ------
Income (loss) from continuing operations
before income taxes and minority interest (7,430) 1,456 (29,165)
Income tax expense (benefit) (585) 100 30
Minority interest 176 104 102
-------- ------ ------
Income (loss) before discontinued operations (7,021) 1,252 (29,297)
Provision for loss on disposal of discontinued
operations -- -- (3,500)
-------- ------ ------
Income (loss) before extraordinary item (7,021) 1,252 (32,797)
Extraordinary gain on early extinguishment
of debt 122 3,922 1,756
-------- ------ ------
Net income (loss) $ (6,899) 5,174 (31,041)
======== ====== ======
Basic per share amounts:
Continuing operations $ (2.26) 0.57 (20.05)
Discontinued operations -- -- (2.40)
Extraordinary item 0.04 1.80 1.20
-------- ------ ------
Net income (loss) per share
of common stock $ (2.22) 2.37 (21.25)
======== ====== ======
Weighted average shares of common stock
outstanding 3,111 2,184 1,461
======== ====== ======
Diluted per share amounts:
Continuing operations $ (2.26) 0.23 (20.05)
Discontinued operations -- -- (2.40)
Extraordinary item 0.04 0.71 1.20
-------- ------ ------
Net income (loss) per share
of common stock $ (2.22) 0.94 (21.25)
======== ====== ======
Weighted average shares of common stock
outstanding 3,111 5,528 1,461
======== ====== ======
See accompanying notes to consolidated financial statements.
F-4
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1996 and 1995
(In thousands)
Receivable Total
Common Stock Foreign Retained for Stock-
------------------- Additional Currency Earnings Employee holders'
No. of Par Value Paid-in Translation (Accumulated Treasury Stock Equity/
Shares Amount Capital Adjustment Deficit) Stock Purchases (Deficit)
------ ------ ------- ---------- -------- ----- --------- ---------
Balance at December 31, 1994 1,492 15 32,948 (4,031) (25,033) (1,938) (436) 1,525
Net loss 1995 - - - - (31,041) - - (31,041)
Warrants issued - - 360 - - - - 360
Write off of receivable for
employee stock purchases - - - - - (128) 129 1
Foreign currency translation
adjustment - - - (168) - - - (168)
----- --- ------- ------- -------- ------- ----- --------
Balance at December 31, 1995 1,492 15 33,308 (4,199) (56,074) (2,066) (307) (29,323)
Net income 1996 - - - - 5,174 - - 5,174
Stock issued 732 7 2,873 - - - - 2,880
Warrants issued - - 380 - - - - 380
Foreign currency translation
adjustment - - - 1,187 - - - 1,187
----- --- ------- ------- -------- ------- ----- --------
Balance at December 31, 1996 2,224 $22 $36,561 $(3,012) $(50,900) $(2,066) $(307) $(19,702)
Net loss 1997 - - - - (6,899) - - (6,899)
Stock issued 6,420 64 34,001 - - - - 34,065
Warrants issued - - 364 - - - - 364
Foreign currency translation
adjustment - - - (1,015) - - - (1,015)
----- --- ------- ------- -------- ------- ----- --------
Balance at December 31, 1997 8,644 $86 $70,926 $(4,027) $(57,799) $(2,066) $(307) $ 6,813
===== === ======= ======= ======== ======= ===== ========
See accompanying notes to consolidated financial statements
F-5
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 23)
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (6,899) 5,174 (31,041)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of discontinued operations -- -- 3,500
Gain on sale of assets -- (2,264) --
Gain on extinguishment or refinancing of indebtedness (122) (3,922) (1,756)
Non-cash debt conversion expense 10,646 -- --
Non-cash financing costs 274 2,280 2,698
Realized gain on litigation settlement (229) (174) --
Depreciation and amortization 3,040 3,941 7,015
Write off of employee notes receivable -- -- 1
Amortization of discount on convertible subordinated debentures 40 104 603
Minority interest (176) 104 102
Changes in operating assets and liabilities:
Accounts receivable 1,143 (3,408) 1,338
Inventories (735) 1,555 9,700
Prepaid expenses (484) (123) (773)
Other receivables 31 -- --
Other assets (122) (743) 1,916
Accounts payable, accrued expenses and other liabilities (999) (1,788) 4,167
----- ----- ------
Net cash provided by (used in) operating activities 5,408 736 (2,530)
----- ----- -----
Cash flows from investing activities:
Proceeds from disposal of assets held for sale, net 500 7,393 --
Proceeds from sale of assets -- 3,456 --
Capital expenditures, net (409) (125) (1,749)
----- ----- -----
Net cash provided by (used in) investing activities 91 10,724 (1,749)
----- ------ -----
Cash flows from financing activities:
Proceeds from senior debt 306 1,343 5,781
Repayments of senior debt (3,013) (10,403) (2,500)
Proceeds (Repayments) of notes payable/short-term loans 89 (337) --
----- ----- -----
Net cash provided by (used in) financing activities (2,618) (9,397) 3,281
----- ----- -----
Effect of exchange rate changes on cash (374) (588) (225)
Increase (decrease) in cash and cash equivalents 2,507 1,475 (1,223)
Cash and equivalents - beginning of year 2,584 1,109 2,332
----- ----- -----
Cash and equivalents - end of year $ 5,091 2,584 1,109
======== ===== =====
See accompanying notes to consolidated financial statements.
F-6
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation
Porta Systems Corp. (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. The Company'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 Systems Corp. (the "Company") and its majority-owned or controlled
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
Revenue Recognition
Revenue, from other than 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 the Company to
concentrations of credit risk, consist principally of cash and accounts
receivable. At times such cash in banks are in excess of the FDIC
insurance limit.
As discussed in note 19, substantial portions of the Company's sales are to
customers in foreign countries. The Company's credit risk with respect to
these customers is mitigated by obtaining letters of credit for a
substantial portion of the contract price, and by monitoring credit
exposure with 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.
(Continued)
F-7
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
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
$1,133,000, $1,551,000 and $3,171,000 in 1997, 1996, and 1995,
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 20 to 40
years. At December 31, 1997, $9,892,000 of the goodwill is being amortized
over approximately 20 years and $2,167,000 is being amortized over 40
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 enacted 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 15).
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at year-end
rates of exchange, and revenues and expenses are translated at the average
rates of exchange for the year. Gains and losses resulting from
translation are accumulated in a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than the functional
currency) are included in net income or loss.
(Continued)
F-8
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Earnings (Loss) Per Share
In 1997 the Company adopted the FASB issued Statement of Financial
Accounting Standard No. 128, "Earnings Per Share." This pronouncement
provides for the calculation of Basic and Diluted earnings per share.
Earnings per share presented for 1996 and 1995 have been restated to
reflect the adoption of this pronouncement.
Basic earnings (loss) per share are based on the weighted average number of
shares outstanding. Diluted earnings (loss) per share are 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
diluted earnings per shares for the year ended December 31, 1996, assumes
the conversion of the Zero coupon senior subordinated convertible notes
which are dilutive. For 1997 and 1995, no dilutive potential common shares
were added to compute diluted loss per share because the effect is
anti-dilutive.
All share and per share information have been restated to give effect to the
one for five reverse stock split effective August 2, 1996.
Reclassifications
Certain reclassifications have been made to conform prior years'
consolidated financial statements to the 1997 presentation.
Accounting for Stock-Based Compensation
The Company follows the Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation". The Company 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". The Company believes that there is no
impairment of its long-lived assets.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Among the more significant estimates included
in these consolidated financial statements are the estimated allowance for
doubtful accounts receivable, inventory reserves, percentage of completion
for long-term contracts, and the deferred tax asset valuation allowance.
Actual results could differ from those and other estimates.
(Continued)
F-9
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
Statement of Financial Standards (SFAS) No. 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that
public enterprises reports information about operating segments in interim
financial statements issued to the public. It also establishes standards
regarding products and services, geographic areas and major customers.
SFAS No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these
standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
(2) Accounts Receivable
Accounts receivable included approximately $0 and $900,000 at December 31,
1997 and 1996, respectively, of revenues earned but not yet contractually
billable relating to long-term contracts for specialized products. All
such amounts at December 31, 1996 were billed in 1997. The allowance for
doubtful accounts receivable was $1,058,000 and $1,550,000 as of December
31, 1997 and 1996, respectively. The allowance for doubtful accounts was
increased by provisions of $107,000, $553,000, and $864,000 and decreased
by write-offs of $599,000, $254,000, and $198,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
(Continued)
F-10
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Inventories
Inventories consist of the following:
December 31,
-----------------------
1997 1996
---- ----
Parts and components $5,349,000 4,557,000
Work-in-process 1,079,000 515,000
Finished goods 1,731,000 2,352,000
---------- ---------
$8,159,000 7,424,000
========== =========
(4) Assets Held for Sale
On March 13, 1996, the Company sold certain assets and the buyer assumed
certain liabilities and severance obligations related to the operations of
the Company's fiber optics management and component business for
$7,893,000, subject to certain adjustments. As of December 31, 1995, in
conjunction with this transaction, the Company accrued approximately
$700,000 for certain obligations in connection with the closing of its
fiber optics facility in Ireland. These obligations were settled during
1996, along with other adjustments related to the sale of the fiber
business. The net proceeds approximated the carrying value of the assets
held for sale. The difference was recorded as other expenses in the
accompanying statement of operations.
The Company received $6,793,000 at closing of the sale of the fiber business
and the remainder was placed into two escrow funds to be released over the
next year, subject to certain conditions, including a final valuation of
the net assets transferred. As of December 31, 1996, the remainder,
$531,000, has remained in escrow and is reported as an "Other receivable"
in the accompanying consolidated balance sheet. The amount was received in
1997. The proceeds were primarily used to repay long-term debt. As a
result of the transaction, the Company recorded a charge to operations in
1995 of $862,000 to write down the net assets sold to net realizable
value. Net sales of the fiber optics business approximated $447,000 and
$6,513,000 for 1996 and 1995, respectively.
(Continued)
F-11
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
------------------ Estimated
1997 1996 useful lives
---- ---- ------------
Land $ 246,000 246,000 --
Buildings 2,525,000 2,525,000 20-50 years
Machinery and equipment 7,385,000 7,575,000 3-8 years
Furniture and fixtures 3,424,000 4,332,000 5-10 years
Transportation equipment 126,000 126,000 4 years
Tools and molds 3,067,000 3,059,000 8 years
Leasehold improvements 793,000 855,000 Term of lease
----------- ----------
17,566,000 18,718,000
Less accumulated depreciation
and amortization 12,899,000 13,261,000
----------- ----------
$ 4,667,000 5,457,000
=========== ==========
Total depreciation and amortization expense for 1997, 1996 and 1995 amounted
to approximately $1,468,000, $1,746,000 and $3,610,000, respectively.
(6) Notes Payable and Line of Credit
The Company has outstanding $3,084,000 of non-interest bearing deferred
funding fee notes payable with its senior lender, included in notes
payable at December 31, 1997 and 1996, which are due on August 31, 1999
(note 7). The Company's Korean subsidiary has a line of credit bearing
interest at 11%. At December 31, 1997 and 1996 no balances were
outstanding under this line of credit.
(7) Senior Debt
On December 31, 1997 and 1996, the Company's long-term debt consisted of
senior debt under its credit facility in the amount of $14,878,000 and
$17,585,000, of which $1,900,000 and $750,000, respectively, are
classified as the current portion of senior debt. The facility consists of
a combined revolving line of credit and letter of credit availability not
to exceed $9,000,000. The balance of the facility is comprised of a term
loan. The credit facility is secured by substantially all of the Company's
assets. All obligations except undrawn letters of credit, letter of credit
guarantees and the deferred fee notes will bear interest at 12%. The
Company will incur a fee of 2% on the average balance of undrawn letters
of credit and letter of credit guarantees outstanding.
On November 30, 1997 the Company extended its Loan and Security Agreement
with its senior lender from November 30, 1998 to August 31, 1999. All
other terms of the Agreement remain unchanged.
(Continued)
F-12
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The agreement (as revised) provides for loan principal payments of $250,000
on each of June 30, 1997, September 30, 1997 and December 31, 1997, and
$325,000 commencing March 31, 1998 and on the last day of each quarter
thereafter during the term of the agreement. Commencing June 30, 1997, the
agreement also requires the Company to pay additional principal payments
if its cash flow exceeds certain amounts. In addition, the agreement
required that certain proceeds from the Company's sale of its fiber optics
business (note 4), including $6,793,000 received at closing, the first
$100,000 disbursed from escrow to the Company and 50% of any additional
amounts disbursed to the Company, be paid to the senior lender. The
$6,793,000 received at closing was paid to the senior lender to (i) pay
accrued interest through March 31, 1996, (ii) repay a $3,000,000 line of
credit and (iii) partially repay the principal balance of the term loan.
Upon the payment on March 13, 1996, the lender made available to the
Company a $2,000,000 revolving line of credit. Simultaneously, and in
accordance with the amended agreement, the revolving line of credit
maximum amount was reduced from $10,000,000 to $2,000,000 and the maximum
available for letters of credit or guarantees was reduced from $8,000,000
to $7,000,000. In addition, the Company repaid $3,456,000 of its term loan
from the proceeds of the sale of assets associated with its discontinued
Israeli operation (note 16).
Through December 31, 1997, the Company incurred the following fees, in
connection with this credit facility: In 1994, a one-time $2,474,000
deferred funding fee for the revolving line and term loan evidenced by a
non-interest bearing promissory note due and payable on November 30, 1998.
The Company incurred a $300,000 fee on February 13, 1995, evidenced by a
non-interest bearing note due November 30, 1998 and a $310,000 facility
fee on November 30, 1995, which amount has been added to the outstanding
principal balance of the deferred funding fee note and is also due
November 30, 1998. The agreement requires a monthly facility fee payment
of $50,000, commencing November 30, 1996, and continuing to the end of the
agreement. In conjunction with the November 30, 1997 Loan and Security
Agreement extension, all of the above fees have been extended to be due on
August 31, 1999.
In connection with the credit facility, in November 1994 the Company issued
warrants to its senior lender to purchase 82,500 shares of common stock,
exercisable at $17.20 per share and expiring in November 1999. In
connection with the extended agreement in March 1996, the Company granted
additional warrants to the lender to purchase 200,000 shares of common
stock at $5 per share that expire in March 2001. The value of the
warrants, as issued in March 1996 of $380,000, was recorded as deferred
financing expense and additional paid in capital in 1996.
(Continued)
F-13
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Pursuant to the November 30, 1997 extension of the credit facility, the
Company agreed to amend the terms of the warrants previously issued to its
senior lender. The 82,500 and 200,000 warrants, after adjustment for the
antidilution provisions contained in the warrant agreement, provides for
the purchase of 164,627 and 295,441 shares of common stock, respectively
and are immediately exercisable at $3.00 per share and expire on November
30, 2002. The value of the change in warrant terms is estimated to be
$45,000 and has been recorded as a deferred financing expense and
additional paid in capital in 1997.
Financial debt covenants include an interest coverage ratio measured
quarterly with limitations on the incurrence of indebtedness, limitations
on capital expenditures, and prohibitions on declarations of any cash or
stock dividends or the repurchase of the Company's stock. As of December
31, 1997, the Company was in compliance with the above covenants.
In connection with an amendment to the credit facility agreement on February
13, 1995, the Company purchased from the senior lender $3.9 million
principal amount of its 6% Subordinated Debentures for approximately $2.5
million, including accrued interest. Such payment was financed with funds
received from the senior lender as an increase in the term loan. In
connection with this transaction, the Company recorded an extraordinary
gain on the early extinguishment of the debt of $1,756,000, which gain
represented the excess of the book value over the market value of the
debt. Moreover, the $782,000 premium paid in excess of the market value of
the debt was reflected as additional borrowing costs over the remaining
term of the facility.
Maturities of the Company's long-term debt, including convertible
subordinated debentures (exclusive of $1,785,000 which are in default and
have not been exchanged as described in note 8 and are classified as a
current liability) and notes payable net of current maturities, are as
follows:
1998 $ 1,900,000
1999 15,774,000
--------------
$ 17,674,000
==============
Subsequent to December 31, 1997, the Company repaid $2,950,000 of principal
of senior debt to reduce the revolving line of credit and the term loan
from the proceeds of the 12% Subordinated Notes (note 9)
(Continued)
F-14
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) 6% Convertible Subordinated Debentures and
Zero Coupon Senior Subordinated Convertible Notes
As of December 31, 1997 and 1996 the Company had outstanding $1,758,000 and
$2,096,000 of its 6% convertible Subordinated Debentures due July 1, 2002
(the Debentures), net of original issue discount of $137,000 and $209,000,
respectively. The face amount of the outstanding Debentures was $1,895,000
and $2,305,000 at December 31, 1997 and 1996, respectively. The Debentures
are convertible at any time prior to maturity, unless previously redeemed,
into Common Stock of the Company at a conversion rate of 8.333 shares for
each $1,000 principal amount at maturity of Debentures, subject to
adjustment under certain circumstances.
The Debentures are redeemable at the option of the Company, (a) in whole or
in part, at redemption prices ranging from 89.626% of principal amount at
maturity beginning July 1, 1995 to 100% of principal amount at maturity
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 as of December 31, 1997 and 1996 amounted to $398,000 and
$387,000, respectively. As of December 31, 1997 the Company is in default
under the interest payment provisions of the Debentures.
On November 30, 1995, the Company offered the holders of its Debentures an
exchange of such debt for common stock and Zero Coupon Senior Subordinated
Convertible Notes (the Notes) due January 2, 1998. The exchange ratio is
19.4 shares of common stock and $767.22 of principal of Notes in exchange
for each $1,000 principal amount of Debentures converted. Accrued interest
on the Debentures would also be eliminated.
The Notes are unsecured and do not bear interest. There are no sinking fund
requirements for the Notes. Each Note is convertible into common stock at
a conversion price of $6.55 prior to the amendment as discussed below.
Accordingly, in addition to the 699,855 maximum common shares issuable
from the exchange of the Debentures, the maximum number of common shares
that could be issued upon conversion, if all Debentures are exchanged, is
4,225,600. The Notes are redeemable at the option of the Company at 90.32%
of the principal balance increasing periodically to 100% of the principal
balance on November 1, 1997.
As of December 31, 1996, the Company had exchanged approximately $33,770,000
principal amount of the Debentures, net of related unamortized discount
and accrued interest expense, for 655,000 shares of stock and $25,909,000
of Notes. This represents 94% of the outstanding balance of the 6%
Debentures prior to any conversion to the Notes. In addition, as of
December 31, 1996, $24,000 of Notes had been converted into 3,600 shares
of stock. As of December 31, 1996, $25,885,000 Notes were outstanding.
(Continued)
F-15
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1997, the company exchanged approximately $410,000 principal amount
of the Debentures, net of related unamortized discount and accrued
interest expense, for 8,000 shares of common stock and $315,000 of Notes.
The exchange of the Debentures for the Notes and common stock was accounted
for as a troubled debt restructuring in accordance with Statement of
Financial Accounting Standards No. 15. Since the future principal and
interest payments under the Notes is less than the carrying value of the
Debentures, the Notes were recorded for the amount of the future cash
payments, and not discounted, the common stock issued was recorded at the
market value at the time of issuance, and an extraordinary gain on
restructuring was recorded of approximately $122,000, $3,922,000, and
$1,756,000 in 1997, 1996 and 1995, respectively. Accordingly, no future
interest expense will be recorded on the Notes.
Effective November 13, 1997, the Company amended the terms of the Notes.
Under the amended terms, the conversion price of the Notes was reduced to
$3.65 from $6.55. As of December 31, 1997, approximately $23,400,000 of
principal amount of Notes were converted into approximately 6,412,000
shares of common stock. The conversion of the Notes for common stock
reduced debt by $23,400,000, increased equity by $34,049,000 and resulted
in a primarily non-cash charge of $11,458,000. The non-cash charge was
based on the difference between the shares issuable under the original
terms and the shares issued with respect to the Notes under the amended
terms. As of December 31, 1997, $2,796,000 of the Notes remain
outstanding.
Subsequent to December 31, 1997, the Company (i) repaid the remaining
balance of the Notes from the proceeds of the 12% Subordinated Notes (note
9) (ii) exchanged $250,000 additional principal amount of the Debentures
for 5,000 shares of common stock and $192,000 of Notes which were then
converted to 53,000 shares common stock based on the amended terms of the
Notes as described above and (iii) issued approximately 330,000 shares of
common stock in exchange for $1,260,000 principal amount of its Debentures
and accrued interest. The Company will record a debt conversion expense of
approximately $850,000, net of interest forgiven, in the first quarter of
1998. After giving affect to these subsequent transactions, the Company
will have no Notes and $385,000 principal amount of Debentures
outstanding.
(Continued)
F-16
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) 12% Subordinated Notes, Subsequent Event
In January 1998, the Company raised $6,000,000 from the private placement of
60 units at $100,000 per unit. Each unit consisted of (a) the Company's 12
% Subordinated Note due January 3, 2000 (a "12% Note"), in the principal
amount of $100,000, and (b) a Series B Common Stock Purchase Warrant (a
"Series B Warrant") to purchase 10,000 shares of Common Stock at $3.00 per
share through December 31, 2002. In the event that any 12% Note is
outstanding one year from the date on which such 12% Note is issued (the
"Anniversary Date of the Note"), the Company shall issue to the holder of
such 12% Note on the Anniversary Date of the Note a Series C Warrant to
purchase 25 shares of Common Stock for each $1,000 principal amount of 12%
Notes outstanding on the Anniversary Date of the Note. The Series C
Warrant will have an exercise price equal to the average closing prices of
the Common Stock on each of the five trading days preceding the
Anniversary Date of the Note with respect to which the Series C Warrant is
being issued and will expire on December 31, 2003. The proceeds from the
sale of the Units was used principally to pay the remaining principal
amount of Zero Coupon Notes which had not been converted of approximately
$2,800,000 (note 8) and to reduce the Company's senior debt by
approximately $2,950,000 (note 7). The balance of such proceeds was added
to working capital.
(10) Joint Venture
The Company entered into a joint venture agreement as of April 24, 1986 with
a Korean partner whereby each owns a 50% interest. Unless otherwise
terminated in accordance with the joint venture agreement, the joint
venture will terminate on December 31, 2010. In addition, the Company has
entered into an agreement with its joint venture partner whereby the
Company has obtained an option, exercisable for approximately $190,000, to
purchase an additional 1% interest in the joint venture, which would
increase the Company's ownership percentage to 51%. 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 as well as
receiving management assistance from the Company. The interest in the
joint venture not owned by the Company is shown as a minority interest.
(11) Stockholders' Equity
On June 6, 1996, the stockholders of the Company approved a one-for-five
reverse split (the "Reverse Split") of the Company's common stock. As a
result of the Reverse Split, each share of common stock outstanding at the
effective date of the Reverse Split, without any action on the part of the
holder thereof, became one-fifth share of common stock. The par value of
the common stock was not affected by the Reverse Split. In conjunction
with the Reverse Split, the Company has reclassified approximately $84,000
from common stock to additional paid-in capital. All share and per share
data have been restated to give effect to the Reverse Split.
(Continued)
F-17
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
During 1996, the Company settled its previously disclosed class action. The
settlement included a cash payment by the Company's insurers and issuance
by the Company of 220,000 shares of its common stock. As of December 31,
1997, approximately 73,000 shares have been issued pursuant to such
settlement. The remaining liability of $504,000 is included in accrued
expenses. Subsequent to December 31, 1997, the remaining 147,000 shares of
common stock have been issued.
During 1994, the Company issued warrants to purchase 82,500 shares of common
stock at an exercise price of $17.20 per share to its senior lender that
expire in November, 1999. In March 1996, the Company, in connection with
an agreement to amend and extend certain senior debt, issued warrants to
purchase 200,000 shares of common stock at an exercise price of $5.00 per
share that expire March, 2001. In consideration of the November 30, 1997
extension of the credit facility, the Company agreed to amend the terms of
the warrants previously issued to its senior lender. The 82,500 and
200,000 warrants, after adjustment for the antidilution provisions
contained in the warrant agreement, allow for the purchase of 164,627 and
295,441 shares of common stock, respectively and are immediately
exercisable at $3.00 per share and expire on November 30, 2002. In
connection with the change of the warrant terms, the Company recorded
deferred financing costs of $45,000 (note 7).
In 1997, as remuneration for advisory services by an investment banking
firm, the Company issued warrants to purchase 400,000 shares of common
stock of which 350,000 are immediately exercisable at $1.56 per share and
50,000 become exercisable at $1.56 on May 1, 1998, which expire in April,
2002. In addition, as remuneration for the advisory services related to
the private placement, the Company issued to its investment banking firm
120,000 shares of common stock (note 9). In 1997, in connection with these
services, the Company recorded deferred consulting and debt conversion
expense of approximately $80,000 and $580,000, respectively.
As of December 31, 1997, the Company also had outstanding warrants to
purchase (i) 25,000 shares of common stock at an exercise price of $33.10
per share expiring in August 1998, (ii) 4,000 shares of common stock at an
exercise price of $5.00 per share expiring in August 1998, (iii) 6,000
shares of common at an exercise price of $30.625 per share expiring in
June 1998, (iv) 600 shares of common stock at an exercise price of $50.00
per share expiring in May 1998 to certain consultants as partial
remuneration for services provided during 1995 and 1993. In addition, the
Company has outstanding warrants to purchase 53,000 shares of common stock
at an exercise price of $17.50 per share expiring in November 2001 to its
former lenders in return for a discount with respect to the repayment of
its debt in 1994.
(Continued)
F-18
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Stockholder Rights Plan
The Company 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
the Company 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 the Company'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 the
Company's Common Stock other than pursuant to an offer for all shares
which is fair to and otherwise in the best interests of the Company 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 the Company (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 the Company 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.
The Company 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.
(13) Employee Benefit Plans
The Company 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 1997, 1996 and 1995, the Company accrued
approximately $203,000, $180,000 and $203,000, respectively, under these
agreements.
In 1986, the Company established the Porta Systems Corp. 401(k) Savings Plan
(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%. The Company will match a participant's
contribution by an amount equal to 25% of the first six percent
contributed by the participant. A participant is 100% vested in the
balance to his credit. For the years ended December 31, 1997, 1996 and
1995, the Company's contribution amounted to $96,000, $90,000 and
$379,000, respectively.
The Company does not provide any other post-retirement benefits to any of
its employees.
(Continued)
F-19
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Incentive Plans
Under the Company's 1984 Employee Incentive Plan, the Company provided an
opportunity to acquire subordinated convertible debentures to certain
employees of the Company and its subsidiaries. This plan was suspended
when the Company's stockholders approved the Company's 1986 Stock Option
Plan. As of December 31, 1997, there is $307,000 of employee promissory
notes receivable outstanding, of which the maturity date has been extended
to April 1999.
The Company'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 was equal to the fair market value at the date of grant.
The Company's 1996 Stock Incentive Plan (1996 Plan), is authorized to issue
450,000 shares of Common Stock. Incentive stock options cannot be issued
subsequent to ten years from the date the 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. In addition, the 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.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for the 1996 and 1986
Plans. Under APB 25, no compensation cost is recognized for options
granted to employees at exercise prices equal to fair market value of the
underlying common stock at the date of grant.
The Company 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 compensation costs for
the Company's stock option plans had been determined in accordance with
the fair value method prescribed in SFAS No.123. If the Company 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
earnings (loss) per share(basic and diluted) would have been reduced to
the pro forma amounts indicated below:
(Dollars in thousands, except per share data)
1997
----
Pro forma net loss $(7,026)
Pro forma loss per share (basic and diluted) $(2.26)
The weighted-average fair value of options granted was $0.35 per share in
1997.
(Continued)
F-20
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
1997:
Dividends: $0.00 per share
Volatility: 80.00%
Risk-free interest: 6.40%
Expected term: 5 years
Such pro forma information has not been presented for 1996 and 1995 because
management has determined that the compensation costs associated with
options granted in 1996 and 1995 are not material to net income (loss) or
net income (loss) per share.
A summary of the status of the Company's 1986 stock option plan as of
December 31, 1997, 1996, and 1995, and changes during the years ending on
those dates is presented below:
1997 1996 1995
----------------------- ------------------------ -------------------------
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 16,397 $57 56,360 $58 80,775 $63
Granted -- -- 6,000 5
Exercised --
Forfeited (5) 5 (39,963) 58 (30,415) 63
------ ------ ------
Outstanding end of year 16,392 57 16,397 57 50,360 58
====== ====== ======
Options exercisable at year-end 16,392 16,397 50,360
====== ====== ======
The following table summarizes information about stock options outstanding
under the 1986 Plan at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 5 to 25 2,995 4.8 years $ 5 2,995 $ 5
25 to 75 10,600 1.7 65 10,600 65
75 to 100 2,797 1.3 86 2,797 86
------ ------
$ 5 to 100 16,392 3.2 58 16,392 58
====== ======
(Continued)
F-21
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A summary of the status of the Company's 1996 stock option plan as of
December 31, 1997 and 1996, and changes during the year is presented
below:
1997 1996
------------------- --------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
------ ----- ------ -----
Outstanding beginning of year 79,448 2.45 -0- $ 0.00
Granted 358,780 1.50 79,448 2.45
Exercised -- --
Forfeited (240) 2.00 --
------- ---- ------
Outstanding end of year 437,988 1.67 79,448 2.45
======= ======
Options exercisable at year-end 333,488 63,050
======= ======
The following table summarizes information about stock options outstanding
under the 1996 Plan at December 31, 1997:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Range of Outstanding Remaining Weighted-average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$1 to 5 437,988 8.5 years $ 1.67 333,488 $ 1.72
======= =======
(15) Income Taxes
Included in income (loss) from continuing operations is income (loss) from
foreign operations of $2,641,000, $(584,000) and $1,272,000, for 1997,
1996 and 1995, respectively.
The provision for income taxes consists of the following:
1997 1996 1995
---- ---- ----
Current Deferred Current Deferred Current Deferred
------- -------- ------- -------- ------- --------
Federal $ 40,000 (708,000) -- -- (98,000) --
State and foreign 177,000 (94,000) 100,000 -- 128,000 --
------- ------- ------- -------- ------- --------
Total $217,000 (802,000) 100,000 -- 30,000 --
======== ======== ======= ======== ====== ========
(Continued)
F-22
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of the Company'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:
1997 1996 1995
---- ---- ----
Tax expense (benefit) at statutory rate $ (2,526,000) 495000 (9,916,000)
Increase (decrease) in income tax benefit resulting from:
Increase (decrease) in valuation allowance (22,740,000) (495,000) 10,103,000
State and foreign taxes, less applicable federal benefits 83,000 100,000 132,000
Debt conversion expense not deductible for tax 3,620,000 - -
Other expenses not deductible for tax 206,000 - -
Foreign income taxed at rates lower than U.S. statutory rate (730,000) - -
Utilization of net operating loss carryforward (669,000) - -
Expiration of investment tax credit 642,000 - -
NOL in excess of 382 limitation 21,500,000 - -
Other 29,000 - (289,000)
----------- ------- -------
$ (585,000) 100,000 30,000
=========== ======= ======
The Company has unused United States tax net operating loss (NOL)
carryforwards of approximately $66,677,000 expiring at various dates
between 2004 and 2011. No tax benefit or expense was apportioned to either
the loss from discontinued operations or the extraordinary gains, as such
amounts are immaterial. In addition, the Company has NOL carryforwards
arising from acquired companies of approximately $9,878,000. The effect of
the sale of the Company's fiber optics business (note 4) in March 1996 on
the NOL carryforwards and acquired NOL carryforwards was not material. Due
to the change in ownership which resulted from the conversion of the
Company's Zero coupon subordinated convertible notes to common stock, the
Company's usage of its NOL will be limited in accordance with Internal
Revenue Code section 382. The Company's carryforward utilization of the
NOL is limited to $ 1,464,000 per year. The carryforward amounts are
subject to review by the Internal Revenue Service (IRS). In addition,
there are capital loss carryforwards of approximately $11,396,000 and
investment, research and development and job tax credit carryforwards of
approximately $658,000 expiring at various dates between 1998 and 2001.
The Company's net operating loss carryforwards, limited by section 382,
expire in the following years:
2007 $ 11,503,000
2008 6,065,000
2009 1,464,000
2010 1,464,000
2011 1,464,000
-------------
$ 21,960,000
=============
(Continued)
F-23
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The components of the deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Inventory $1,634,000 2,064,000
Allowance for doubtful accounts receivable 307,000 457,000
Benefits of tax loss carryforwards 7,525,000 27,233,000
Benefit plans 1,007,000 869,000
Accrued Commissions 941,000 1,043,000
Other 422,000 128,000
Benefits of tax loss carryforwards of acquired business 930,000 3,479,000
Benefit of investment tax credit carryforwards 658,000 1,300,000
Benefit of capital loss carryforwards 4,387,000 4,387,000
---------- ---------
17,811,000 40,960,000
Valuation allowance (16,704,000) (39,444,000)
---------- ----------
1,107,000 1,516,000
---------- ----------
Deferred tax liabilities:
Capitalized software costs (240,000) (1,479,000)
Depreciation (65,000) (37,000)
---------- ---------
(305,000) (1,516,000)
---------- ---------
$ 802,000 --
========== =========
Deferred taxes result from temporary difference between tax basis 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 the Company's US tax losses in 1995 and 1996, a valuation
allowance for the deferred tax asset was provided due to the uncertainty
as to future realization. During the year ended December 31, 1997, the
valuation allowance was reduced to reflect a net deferred tax asset equal
to the anticipated tax benefit of the temporary differences which are
expected to be realized within one year based on the Company's 1998
projected US taxable income.
The income tax returns of the Company 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 the Company's net operating losses. The
settlement amounted to approximately $953,000. The Company 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 the Company, including interest on the unpaid
amounts at a current rate of 7%, is $240,000 in 1998. As of December 31,
1997, the Company has made all the required payments through that date
under the settlement and approximately $920,000 remains outstanding.
(Continued)
F-24
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) Discontinued Operations
In 1992 the Company sold its network communications business. As a result of
an insolvency procedure involving the purchaser of this business, the
Company reduced its receivable due from the purchaser of $4,500,000 to
$1,000,000 in 1995, and recorded an additional provision for loss on
disposal of discontinued operations of $3,500,000. Pursuant to the sale of
the business out of receivership, the Company's receivable was represented
shares of common stock of the entity which acquired the discontinued
operation. In 1996, the Company sold such shares for $3,456,000 and
recorded a gain of $2,264,000. The gain represented an adjustment in the
estimated value of the shares previously received and accordingly was
reflected in continuing operations. As part of an agreement with the
Company's senior lender, the net proceeds from the sale were applied to
reduce the outstanding principal balance of the Company's term loan. In
1997, the Company received $700,000 representing a final payment resulting
from the insolvency procedure. Such payment is included in other income.
(17) Leases
AtDecember 31, 1997, the Company and its subsidiaries leased manufacturing
and administrative facilities, equipment and automobiles under a number of
operating leases. The Company is required to pay increases in real estate
taxes on the facilities in addition to minimum rents. Total rent expense
for 1997, 1996, and 1995 amounted to approximately $827,000, $871,000 and
$1,277,000, respectively. Minimum rental commitments, exclusive of future
escalation charges, for each of the next five years are as follows:
1998 488,000
1999 388,000
2000 289,000
2001 0
2002 0
(18) Contingencies
At December 31, 1997, the Company was contingently liable for outstanding
letters of credit aggregating approximately $6,800,000 as security for the
performance of certain long-term contracts.
The Company is a party to various lawsuits 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 22).
(Continued)
F-25
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(19) Major Customers
During the years ended December 31, 1997, 1996 and 1995, the Company's five
largest customers accounted for sales of $30,633,000, or approximately 49%
of sales, $27,807,000, or approximately 48% of sales, and $ 31,517,000, or
approximately 52% of sales, respectively. The Company's largest customer
is BT. Sales to BT for the year ended December 31, 1997, 1996 and 1995
amounted to $13,876,000, $11,308,000 and $17,252,000, respectively, or
approximately 22%, 20% and 28%, respectively, of the Company's sales for
such years. Therefore, any significant interruption or decline in sales to
BT may have a materially adverse effect upon the Company's operations.
During 1996, sales to the Philippines Long Distance Telephone were
$7,034,000, or approximately 12% of sales. During 1995, sales to the Korea
Telephone Company were $7,651,000, or approximately 13% of sales. No other
customers account for 10% or more of the Company's sales for any year.
Approximately 64% and 33% of the Company's accounts receivable are due
from the five largest customers as of December 31, 1997 and 1996,
respectively.
(20) Fair Values of Financial Instruments
Cash equivalents, accounts receivable, accounts and notes payable, accrued
expenses and short-term loans are reflected in the consolidated financial
statements at fair value because of the short term maturity of these
instruments.
The carrying amount of the Company's long-term debt approximates fair value
as the extension of the Loan and Security Agreement was re-negotiated on
November 30, 1997.
The carrying amount and estimated fair value of the Company's additional
financial instruments are summarized as follows:
December 31, 1997 December 31, 1996
----------------- -----------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
6% Convertible Subordinated
Debentures $1,758,000 1,471,000 2,096,000 511,000
========== ========= ========== =======
Zero Coupon Subordinated
Convertible Notes $2,796,000 2,796,000 25,885,000 (1)
========== ========= ==========
(1) As of December 31, 1996, due to the inherent uncertainty, at that time,
regarding the conversion of the Notes or their status at maturity, it was
impractical to estimate the fair value of this financial instrument.
Management's estimated fair value of the Debentures as of December 31, 1996
is based on estimated market prices of the Company's common stock assuming
conversion as 94% of the holders of the Debentures have elected to
convert. Estimated fair value of the Debentures as of December 31, 1997 is
based on market prices of the Company's common stock price which were
issued in January 1998 for the conversion of $1,260,000 of principal
amount of the Debentures.
(Continued)
F-26
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(21) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Numerator-Basic and diluted earnings per share:
1997 1996 1995
---- ---- ----
Income (loss) from continuing operations $ (7,021,000) $ 1,252,000 $ (29,297,000)
Discontinued operations -- -- (3,500,000)
Extraordinary item 122,000 3,922,000 1,756,000
------------- ----------- --------------
Net income (loss) $ (6,899,000) $ 5,174,000 $ (31,041,000)
============= =========== ==============
Denominator:
Denominator for basic earnings per share
-weighted-average shares 3,111,000 2,184,000 1,461,000
============= =========== ==============
Effect of dilutive securities:
Zero Coupon Senior Subordinated
Convertible Notes -- 3,344,000 --
------------- ----------- --------------
Denominator for diluted earnings per share-
adjusted weighted-average shares and
assumed conversions 3,111,000 5,528,000 1,461,000
============= =========== ==============
Basic per share amounts:
Continuing operations $ (2.26) $0.57 $(20.05)
Discontinued operations -- -- (2.40)
Extraordinary item 0.04 1.80 1.20
------------- ----------- --------------
Net income (loss) per share
of common stock $ (2.22) $ 2.37 $ (21.25)
============= =========== ==============
Diluted per share amounts:
Continuing operations $ (2.26) $ 0.23 $ (20.05)
Discontinued operations -- -- (2.40)
Extraordinary item 0.04 40.71 1.20
------------- ----------- --------------
Net income (loss) per share
of common stock $ (2.22) $ 0.94 $ (21.25)
============= =========== ==============
For additional disclosure regarding the Zero Coupon Senior Subordinated
Notes see note 8.
In November 1997, the Company converted approximately 23,400,000 of the
Notes to approximately 6,412,000 shares of common stock. Had this
conversion taken place as of January 1, 1997, the denominator for the
basic earnings per share (the weighted-average shares) and the diluted
earnings per share (adjusted weighted-average shares and assumed
conversion) would have been 8,639,000 for 1997.
(Continued)
F-27
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(22) Legal Matters
In July 1996, an action was commenced against the Company and certain
present and former directors in the Supreme Court of the State of New
York, New York County by certain stockholders and warrant holders of the
Company who acquired their securities in connection with the acquisition
by the Company of Aster Corporation. The complaint alleges breach of
contract against the Company and breach of fiduciary duty against the
directors arising out of an alleged failure to register certain restricted
shares and warrants owned by the plaintiffs. The complaint seeks damages
of $413,000; however, counsel for the plaintiff have advised the Company
that additional plaintiffs may be added and, as a result, the amount of
damages claimed may be substantially greater than the amount presently
claimed. The Company believes that the defendants have valid defenses to
the claims. Discovery is proceeding.
In July 1996, the Securities and Exchange Commission (the "SEC") issued an
order (the "Order") directing a private investigation of the Company to
determine whether there has been a violation of Federal securities laws.
The SEC indicated to counsel for the Company that the investigation
relates to the position of the SEC staff that the independence of the
Company's auditors for 1995, KPMG Peat Marwick LLP ("Peat Marwick"), was
adversely impacted by certain relationships involving Peat Marwick, on one
hand, and KPMG BayMark Strategies LLC ("BayMark") and Edward R. Olson, the
President of BayMark and the Company's former interim president and chief
operating officer, on the other hand. Although the Company does not agree
with the position of the SEC staff with respect to the independence of
Peat Marwick, the Company is cooperating with the SEC's investigation. The
Company retained BDO Seidman, LLP to reaudit the Company's 1995 financial
statements, which reaudit resulted in no changes to the Company's 1995
financial statements as audited by Peat Marwick. The Company does not
believe that the investigation will result in any material liability on
the part of the Company. There has been no further activity respecting
this investigation since November 1996.
(23) Cash Flow Information
(1) Supplemental cash flow information for the years ended December 31, is
as follows:
1997 1996 1995
---- ---- ----
Cash paid for interest $2,844 2,751 2,915
====== ===== =====
Cash paid for income taxes $ 117 105 73
====== ===== =====
(Continued)
F-28
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Non cash transactions:
(i) During 1997 and 1996, the Company exchanged approximately
$410,000 and $33,770,000 principal amount of its Debentures, net of
unamortized discount and accrued interest, for 8,000 and 655,000
shares of Common stock, and $315,000 and $25,909,000 of Notes,
respectively (note 8).
(ii) During 1996, the Company issued 3,600 shares of common stock as
a result of the conversion of Notes under the original terms (note
8).
(iii) During 1997, the Company issued 6,412,000 shares of common
stock upon the conversion of Notes (note 8).
(iv) During 1996, the Company issued 73,000 shares of common stock
to satisfy a portion of the final settlement of a previously
disclosed class action lawsuit (note 11).
(v) In connection with the Company's March 1996 amendment to its
credit facility, the Company granted its senior lender warrants to
purchase 200,000 shares of common stock (note 7). The value of the
warrants was recorded as deferred financing expense and additional
paid in capital.
(vi) In connection with the November 1997 extension of the Company's
credit facility with its senior lender, the Company amended the
terms of previously issued warrants to purchase common stock. The
value of the amendment, approximately $45,000 was recorded as
deferred financing and additional paid in capital.
(vii) In connection with advisory services provided by an investment
banking firm, the Company issued 120,000 shares of common stock and
warrants to purchase 400,000 shares of common stock (notes 9 and
11).
(24) Segment Disclosure
The Company operates almost exclusively in the telecommunications
industry. Customers include telephone operating companies and others
within and outside the United States and its possessions.
In the following table, intercompany sales are accounted for at cost
plus a reasonable profit. Identifiable assets for the geographic
areas are those assets identified with the operations in each area.
Corporate assets consist principally of cash and cash equivalents,
debt issuance costs, employee loans for debentures and patents. The
Company does not allocate costs for product development, marketing
or management to each segment. Thus, the information may not be
indicative of the extent to which geographic areas contributed to
the Company's consolidated results of operations.
(Continued)
F-29
PORTA SYSTEMS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Geographic area data for the years ended December 31, 1997, 1996 and 1995
are as follows:
1997 1996 1995
---- ---- ----
Sales made from:
United States to:
U.S. customers $ 17,980,000 17,644,000 16,445,000
Foreign customers 13,684,000 18,418,000 12,875,000
Intercompany 14,906,000 16,726,000 14,849,000
------------ ---------- ----------
46,570,000 52,788,000 44,169,000
------------ ---------- ----------
Korea-to customers 4,881,000 4,749,000 7,651,000
------------ ---------- ----------
Europe-to customers 24,396,000 17,176,000 24,174,000
Intercompany 1,275,000 3,228,000 3,735,000
------------ ---------- ----------
25,671,000 20,404,000 27,909,000
Other-to customers 1,289,000 -- 36,000
Intercompany 1,951,000 1,878,000 2,410,000
------------ ---------- ----------
3,240,000 1,878,000 2,446,000
------------ ---------- ----------
Intercompany eliminations (18,132,000) (21,832,000) (20,994,000)
------------ ---------- ----------
Consolidated sales $ 62,230,000 57,987,000 61,181000
============ ========== ==========
Operating income (loss)
United States 3,312,000 4,310,000 (22,549,000)
Europe 2,294,000 (666,000) 2,279,000
Korea 363,000 236,000 288,000
Other 132,000 102,000 98,000
------------ ---------- ----------
Consolidated operating income (loss) $ 6,101,000 3,982,000 (19,884,000)
============ ========== ==========
Identifiable assets:
United States 30,729,000 33,993,000 39,600,000
Europe 10,633,000 10,184,000 11,414,000
Korea 1,300,000 2,324,000 2,540,000
Other 1,325,000 544,000 623,000
------------ ---------- ----------
Consolidated identifiable assets 43,987,000 47,045,000 54,177,000
Corporate assets 7,013,000 4,615,000 6,414,000
------------ ---------- ----------
Consolidated total assets $ 51,000,000 51,660,000 60,591,000
============ ========== ==========
F-30