SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1995
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
Exchange Act
For the transition period from _________ to __________
Commission File Number: 0-15938
Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
81 Church Street, East Hartford, CT 06108-3728
(Address of principal executive offices) (Zip Code)
(203) 282-0010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's $.001 par value Common Stock
was 21,382,907 shares as of October 31, 1995
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements:
Balance Sheets - September 30, 1995 and December 31, 1994 3
Statements of Operations - Three Months Ended September 30, 1995 and 1994 4
Statements of Operations - Nine Months Ended September 30, 1995 and 1994 5
Statements of Cash Flows - Nine Months Ended September 30, 1995 and 1994 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 15
</TABLE>
PART I
FARMSTEAD TELEPHONE GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except number of shares) 1995 1994
_________________________________________________________________________________________________
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 255 $ 904
Short-term investments - 75
Accounts receivable, less allowance for doubtful accounts 2,561 2,242
Inventories 2,100 1,696
Other current assets 237 136
_______ _______
Total current assets 5,153 5,053
Property and equipment, net of accumulated depreciation and
amortization and amortization 326 266
Investment in unconsolidated subsidiary (Note 4) 220 -
Intangible assets, net of accumulated amortization 30 52
Other assets 31 53
_______ _______
Total assets $ 5,760 $ 5,424
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings and current portion of long-term debt (Note 2) $ 1,275 $ 597
Accounts payable 1,034 1,406
Accrued expenses and other current liabilities 398 277
_______ _______
Total current liabilities 2,707 2,280
Long-term debt (Note 2) - 9
Other non-current liabilities - 1
_______ _______
Total liabilities 2,707 2,290
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares authorized;
21,382,907 and 20,398,947 shares issued and outstanding in 1995
and 1994, respectively 21 20
Additional paid-in capital 8,506 8,045
Stock subscriptions receivable (Note 3) - (38)
Accumulated deficit (5,474) (4,893)
_______ _______
Total stockholders' equity 3,053 3,134
_______ _______
Total liabilities and stockholders' equity $ 5,760 $ 5,424
======= =======
</TABLE>
See accompanying notes to financial statements
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1995 1994
_______________________________________________________________________________________________
<S> <C> <C>
Sales and service revenues $ 3,980 $ 3,018
________ ________
Costs and expenses:
Cost of goods and services sold 2,708 2,157
Selling, general and administrative expenses 1,515 846
Research and development expenses 45 70
Interest expense 31 8
Equity in unconsolidated subsidiary (Note 4) 179 -
Other (income) expense (9) 4
________ ________
Total costs and expenses 4,469 3,085
________ ________
Loss before income taxes (489) (67)
Provision for income taxes 3 3
________ ________
Net loss $ (492) $ (70)
======== ========
Net loss per share $ (.02) $ *
======== ========
Weighted average common and common equivalent shares 21,741 21,699
======== ========
____________________
<F*> Less than one-half cent.
</TABLE>
See accompanying notes to financial statements
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1995 1994
_______________________________________________________________________________________________
<S> <C> <C>
Sales and service revenues $ 11,238 $ 8,296
________ ________
Costs and expenses:
Cost of goods and services sold 7,672 5,825
Selling, general and administrative expenses 3,845 2,281
Research and development expenses 58 158
Interest expense 68 31
Equity in unconsolidated subsidiary (Note 4) 179 -
Other income (16) (18)
________ ________
Total costs and expenses 11,806 8,277
________ ________
Income (loss) before income taxes (568) 19
Provision for income taxes 13 9
Net income (loss) $ (581) $ 10
======== ========
Net income (loss) per share $ (.03) $ *
======== ========
Weighted average common and common equivalent shares 21,227 21,429
======== ========
___________________
<F*> Less than one-half cent.
</TABLE>
See accompanying notes to financial statements
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands) 1995 1994
___________________________________________________________________________________________
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (581) $ 10
Adjustments to reconcile net income to net cash flows
used in operating activities:
Depreciation and amortization 115 75
Gross profit deferred on sales to unconsolidated subsidiary 175 -
Equity in undistributed loss of unconsolidated subsidiary 4 -
Changes in operating assets and liabilities, net of effects
of assets purchased from CCI (in 1994):
Increase in accounts receivable (319) (1,185)
(Increase) decrease in inventories (404) 324
(Increase) decrease in other assets (7) 176
Increase (decrease) in accounts payable, accrued expenses
and other liabilities (292) 241
_______ _______
Net cash used in operating activities (1,309) (359)
_______ _______
Cash flows from investing activities:
Purchases of property and equipment (149) (73)
(Increase) decrease in short-term investments 75 (75)
Payment on obligation to CCI for assets purchased - (375)
Investment in unconsolidated subsidiary (Note 4) (359) -
_______ _______
Net cash used in investing activities (433) (523)
_______ _______
Cash flows from financing activities:
Proceeds from short-term and long-term borrowings 683 -
Repayments of short-term and long-term borrowings and
capital lease obligation (14) (358)
Proceeds from exercise of stock options and warrants, net 420 65
Proceeds from sales of common stock, net 4 340
_______ _______
Net cash provided by financing activities 1,093 47
_______ _______
Net decrease in cash and cash equivalents (649) (835)
Cash and cash equivalents at beginning of period 904 1,473
_______ _______
Cash and cash equivalents at end of period $ 255 $ 638
======= =======
Supplemental schedule of non-cash financing and investing activities:
Capital contribution due to unconsolidated subsidiary $ 40 $ -
Sales of common stock for notes or other receivables - 75
Allocation of asset purchase obligation to assets acquired:
Inventories - 350
Fixed assets - 25
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 71 29
Income taxes 5 8
</TABLE>
See accompanying notes to financial statements
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIALSTATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim financial statements presented herein are unaudited, however
in the opinion of management reflect all adjustments, consisting of adjustments
that are of a normal recurring nature, which are necessary for a fair statement
of results for the interim periods. For further information, refer to the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994.
Investment in an unconsolidated 50% owned subsidiary is accounted for by
the equity method. Under the equity method, the original investment is recorded
at cost and subsequently increased or decreased by the Company's share of the
subsidiary's undistributed earnings or losses, less distributions. The
investment is also reduced by the amount of any deferred gross profits on sales
to the subsidiary until such time as the related goods are resold by the
subsidiary.
NOTE 2. BANK BORROWINGS AND LONG-TERM DEBT
On June 5, 1995, the Company entered into a one year renewable
Commercial Loan and Security Agreement (the "Agreement") with Affiliated
Business Credit Corporation ("ABCC") which provides for a $1,500,000 revolving
line of credit. Under the terms of the Agreement, borrowings bear interest at
the prime rate plus 1.5% on the greater of (i) the actual monthly loan balance
or (ii) a minimum assumed monthly loan balance of $600,000. The Company may
borrow against the aggregate of (i) 75% of eligible accounts receivable
(domestic receivables less than 90 days old) and (ii) 25% of eligible
inventory (up to a maximum inventory advance of $300,000), up to the maximum
amount of the facility. Borrowings under the Agreement are repayable upon
demand, and are secured by all of the Company's assets. The Agreement replaced
the $750,000 Revolving Credit and Security Agreement with Fleet Bank, N.A. As
of September 30, 1995, outstanding borrowings were $1,261,000.
NOTE 3. STOCKHOLDERS' EQUITY
On June 20, 1995, the Company entered into an amendment to a prior non-
binding Letter of Intent ("LOI") with a prospective underwriter for a $6
million public offering of Units, each Unit consisting of shares of common
stock and warrants. On September 13, 1995, the Company and the underwriter
agreed to terminate the LOI and to release each other from all obligations
pursuant to the LOI.
On June 20, 1995, the Company's Board of Directors (i) extended the
expiration date of its publicly-traded warrants from 3:30 P.M. Eastern
Standard Time on June 30, 1995 to 3:30 P.M. Eastern Standard Time on December
31, 1995, (ii) amended the exercise price of these warrants such that from
July 1, 1995 through December 31, 1995 the exercise price will increase to
$2.00 per share and (iii) amended the warrant redemption feature such that
during this extended period the warrants will be redeemable by the Company at
a price of $0.05 per warrant if the closing sales price of the Company's
Common Stock (the "Market Price") is $3.00 or higher for ten consecutive
business days (prior to July 1, 1995 the Market Price triggering the
redemption feature was $1.125). All other terms and conditions of the public
warrants remain unchanged.
During the nine months ended September 30, 1995, 839,729 warrants were
exercised. As of September 30, 1995, there were 1,835,727 warrants
outstanding.
NOTE 4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On December 31, 1994, the Company entered into an agreement to purchase
D.W. International, Ltd.'s ("DWI") 50% ownership interest in Beijing Antai
Communication Equipment Co., Ltd. ("ATC"), for a purchase price of $100. The
purchase transaction was completed effective May 30, 1995 upon receipt of
approvals from appropriate Chinese government agencies. ATC, located in
Beijing, Peoples Republic of China ("PRC"), was formed in October 1992 as a
Joint Venture Enterprise , and is also owned 50% by Beijing Aquatic Product
Inc., a registered company in the PRC. DWI is a Delaware Corporation owned 50%
by Mr. Da Wei Wu, who is continuing his duties as General Manager of ATC. ATC,
previously a distributor for the Company in the PRC, will manufacture, install
and service the Company's central office, PBX and signaling interface products
which have been developed for use in the PRC. ATC also distributes and
installs local telecommunications transmission systems and home and business
alarm systems, however their historical operations prior to the Company's
acquisition have been insignificant.
Under Chinese laws governing equity joint ventures, the Company is
obligated to make a capital contribution to ATC of approximately $390,000 to
complete the $500,000 original capital contribution requirement of the foreign
party. As of September 30, 1995, the Company had contributed $350,000, and
expects to contribute the remaining $40,000 within the next several months.
The amount remaining has been recorded in other current liabilities at
September 30, 1995. The acquisition costs exceeded the underlying equity in
the net assets of ATC by approximately $87,000, which will be amortized on a
pro rata basis over the remaining 17 year term of the joint venture.
Summarized, unaudited financial information for this unconsolidated
subsidiary is as follows ($000's):
<TABLE>
<S> <C>
At August 31, 1995:
Total assets $ 1,280
Total liabilities 662
For the three months ended August 31, 1995:
Revenues 117
Net loss (5)
The following table shows the changes in the Company's investment in
unconsolidated subsidiary ($000's):
Beginning investment $ 399
Equity in unconsolidated subsidiary:
Deferred gross profit on sales to subsidiary (175)
Equity in net losses (3)
Amortization of excess of cost over equity in net assets (1)
_______
Investment at August 31, 1995 $ 220
=======
</TABLE>
NOTE 5. BUSINESS DEVELOPMENTS
On July 27, 1995 the Company entered into a Joint Venture Agreement ("JV
Agreement") with Asia-Pacific Services, Inc. of Atlanta, Georgia ("APSI") and
Beijing Taikang Telecommunications, Inc., owned and operated by the Planning
and Research Institute of the Ministry of Posts and Telecommunications, PRC
("Taikang"). The purpose of the joint venture ("JV") would be the assembly and
marketing in the Chinese market and certain international markets of voice
processing equipment and software, including all of the Company's current
voice processing products. Pursuant to the JV Agreement, which would be
contingent upon Chinese government approvals, the Company would have a 65%
ownership interest, Taikang 30% and APSI 5%. Although the amount of registered
capital required by the JV, which would be contributed to the JV in a
combination of cash, equipment and technology in proportion to each party's
respective ownership interest, would be determined only after the preparation
of a feasibility study, the Company's contribution to the initial registered
capital was estimated by Taikang to be approximately $1 million. The JV
Agreement replaced the previously announced Letter of Intent dated March 8,
1995 by and among the Company, the Comprehensive Service Development Center of
the Great Hall of the People ("CSDC") and APSI.
On July 27, 1995 the Company also entered into an agreement ("Interim
Agreement") with these same parties for the provision of product marketing and
other business organization activities in advance of the startup of the JV.
Under the Interim Agreement the Company would be responsible for providing
equipment, marketing, sales, technical and administrative training, and the
working capital required prior to the funding and commencement of the JV.
Taikang would be responsible for the provision of the necessary personnel,
technical assistance, and the preparation of the feasibility study. APSI would
be responsible for the overall management of the project. APSI was a sales
representative of the Company, under a one year agreement which expired
October 1995. Any net profit derived from product sales during the term of the
Interim Agreement would be shared in the same proportion as the JV, and would
serve as a part of each party's capital contribution to the JV. To date, there
have been no product sales under the Interim Agreement. The Interim Agreement
replaced the CSDC Agreement previously entered into on March 8, 1995. Through
September 30, 1995, the Company incurred expenses pursuant to this project of
$432,000, of which $190,000 was for working capital purposes under the Interim
Agreement, and the balance was expended on project management consulting fees,
travel costs and demonstration products provided by the Company.
As a result of the Company's inability to currently fund the $1 million
initial capital contribution requested by Taikang, on November 1, 1995 the
Company and Taikang agreed to terminate both the JV Agreement and the Interim
Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Losses for the Three and Nine Months Ended September 30, 1995
The Company recorded net losses of $492,000 and $581,000 for the
respective three and nine months ended September 30, 1995, as compared to a
net loss of $70,000, and net income of $10,000, for the respective three and
nine months ended September 30, 1994. During the current three and nine month
periods, the Company incurred significant start-up costs, in the form of new
sales and technical personnel, product marketing expenses, equipment and other
overhead and operating costs, in connection with its new VTS 1000/2000 product
lines, and in the operation of an in-house service bureau, both of which new
product offerings have not contributed significant revenues to date. As a
result, the operations of the Company's Cobotyx division incurred operating
losses of approximately $264,000 and $345,000 during the current three and
nine month periods, respectively. The Company is currently reevaluating these
products and the ongoing costs associated with them.
The Company's international business development activities have
resulted in net expenses charged to operations of approximately $209,000 and
$565,000 respectively, during the three and nine months ended September 30,
1995. These activities, as also described in Notes 4 and 5 of the Notes to
Financial Statements included herein, principally focused on (i) the
acquisition of a 50% interest in ATC, which was completed in May 1995, and
(ii) developing strategic business relationships in China for the marketing of
its voice processing products through the contemplated formation of a second
joint venture company. During the three and nine months ended September 30,
1995, the Company incurred expenses of $ 240,000 and $ 432,000, respectively,
as it funded voice processing product development and marketing operations in
China pursuant to its obligations under the Interim Agreement and incurred
other costs in the form of project consulting, travel, and demonstration
products contributed. In conjunction with the termination of the Interim
Agreement and JV Agreement in China, the Company has also reduced the scope of
other international projects and, until such time as additional financing can
be obtained, expects to incur significantly reduced international business
development expenditures.
The Company's current year three and nine month operating results were
also negatively impacted by $70,000 of legal fees and related expenses
incurred in connection with a proposed underwriting of securities which was
terminated during the third quarter.
Results of Operations
Sales and service revenues for the three months ended September 30, 1995
were $3,980,000, representing an increase of $962,000 or 32% from the
comparable 1994 period. Telephone equipment sales revenues increased by
$1,191,000 or 57% over 1994 sales revenues, resulting from (i) increased end
user and wholesale sales levels, attributable to wider acceptance of the
Company's products, a larger and better trained sales force, and expanded
telemarketing sales efforts, and (ii) $475,000 in equipment sales to ATC.
Voice processing product sales revenues decreased by $154,000 or 20% from 1994
attributable to decreased sales to AT&T (18% of voice processing systems sales
in 1995 versus 30% in 1994), and lower international sales. The Company
expects that voice processing product sales to AT&T will continue to decline
as its OEM contract with AT&T approaches the February 1996 expiration date,
unless the contract is renewed. Service revenues decreased by $75,000 or 41%
from 1994, due to $71,000 of revenues generated in 1994 from a consulting
project in the country of Romania which did not reoccur in the current period.
Sales and service revenues for the nine months ended September 30, 1995
were $11,238,000, representing an increase of $2,942,000 or 35% from the
comparable 1994 period. Telephone equipment sales revenues increased by
$2,801,000 or 49% over 1994 sales revenues, resulting from (i) increased end
user and wholesale sales levels, attributable to wider acceptance of the
Company's products, a larger and better trained sales force, and expanded
telemarketing sales efforts, and (ii) a $406,000 net increase in international
sales, which included $475,000 in equipment sales to ATC. Voice processing
product sales revenues increased by $228,000 or 11% over 1994 attributable to
the operation of the Cobotyx Division for a full nine months in 1995 as
compared to eight months in the 1994 period, increased sales to AT&T (29% of
voice processing product sales in 1995 versus 26% in 1994), increased
international sales and a larger and better trained sales and technical
support group. Service revenues decreased by $87,000 or 15% from 1994, due to
$204,000 of revenues generated in 1994 from a consulting project in the
country of Romania which did not reoccur in the current period, offset by
increased repair and refurbishing revenues.
Gross profit for the three months ended September 30, 1995 increased by
$411,000 to $1,272,000 (32% of revenues) from $861,000 (28.5% of revenues) for
the three months ended September 30, 1994. The increase in gross profit
dollars was attributable to the increase in sales and service revenues, while
the increased gross profit margin was attributable to a combination of higher
selling prices and lower product costs on certain products sold during the
current period, increased international sales at higher than average profit
margins, and the favorable economies of allocating overhead costs over a
larger sales base.
Gross profit for the nine months ended September 30, 1995 increased by
$1,095,000 to $3,566,000 (32% of revenues) from $2,471,000 (30% of revenues)
for the nine months ended September 30, 1994. The increase in gross profit
dollars was attributable to the increase in sales and service revenues, while
the increased gross profit margin was attributable to higher wholesale sales
margins, increased international sales at higher than average profit margins,
higher margins on voice processing systems and the favorable economies of
allocating overhead costs over a larger sales base.
Selling, general and administrative expenses for the three months ended
September 30, 1995 increased by $669,000 to $1,515,000 (38% of revenues) from
$846,000 (28% of revenues) for the three months ended September 30, 1994.
Approximately 40% of the increase was attributable to voice processing product
international market development activities which included the funding of the
Company's working capital obligations under the CSDC and Interim Agreements
(as more fully described in Note 5 of the Notes to Financial Statements),
monthly retainer fees and travel expenses of outside consultants for
international project management services, and the cost of demonstration
products contributed by the Company. Approximately 22% of the increase was
attributable to (i) increases in personnel and salaries, principally in sales
and technical support positions at the Company's Cobotyx voice processing
products division, in connection with its newly formed service bureau and VTS-
1000/2000 product offerings, and (ii) increased sales commissions as a result
of higher sales levels. Product marketing expenses increased by 9% primarily
due to expanded marketing of voice processing products, and the Company
incurred higher depreciation expense, bad debt expense and other overhead
costs associated with the Company's increased sales and operating levels and
the newly formed in-house service bureau. As a result of the termination of a
proposed underwriting of additional securities (see Note 3), the Company
wrote-off $70,000 of legal fees and related expenses to SG&A in the third
quarter ended September 30, 1995.
Selling, general and administrative expenses for the nine months ended
September 30, 1995 increased by $1,564,000 to $3,845,000 (34% of revenues)
from $2,281,000 (27% of revenues) for the nine months ended September 30,
1994. Approximately 30% of the increase was attributable to international
voice processing product market development activities which included the
funding of the Company's working capital obligations under the CSDC and
Interim Agreements (as more fully described in Note 5 of the Notes to
Financial Statements), monthly retainer fees and travel expenses of outside
consultants for international project management services, and the cost of
demonstration products contributed by the Company. Approximately 30% of the
increase was attributable to (i) increases in personnel and salaries,
principally in sales and technical support positions at the Company's Cobotyx
voice processing products division, in connection with its newly formed
service bureau and VTS-1000/2000 product offerings, and (ii) increased sales
commissions as a result of higher sales levels. Product marketing expenses
increased by 9% primarily due to expanded marketing of voice processing
products, and the Company incurred higher depreciation expense, bad debt
expense and other overhead costs associated with the Company's increased sales
and operating levels and the newly formed in-house service bureau. As a result
of the termination of a proposed underwriting of additional securities (see
Note 3), the Company also charged $70,000 of legal fees and related expenses
to SG&A.
Research and development expenses ("R&D") for the three and nine months
ended September 30, 1995 were $45,000, and $58,000, respectively, compared to
$70,000 and $158,000, respectively, for the comparable 1994 periods. During
1994 the Company was engaged more extensively in R&D in connection with
telephone systems and central office products for China, and in the
development of the KASSIE and VTS- 2000 call processing products for both
domestic and international applications. During 1995 the Company allocated a
higher percentage of its in-house technical resources to product support
functions.
Interest expense for the three and nine months ended September 30, 1995
was $31,000 and $68,000, respectively, compared to $8,000 and $31,000,
respectively, for the comparable 1994 periods due to higher average debt
levels and weighted average interest rates on the Company's outstanding debt.
Liquidity and Capital Resources
Net working capital at September 30, 1995 was $2,446,000, as compared to
$2,773,000 of net working capital at December 31, 1994. The working capital
ratio at September 30, 1995 was 1.9 to 1 as compared to 2.2 to 1 at December
31, 1994.
Operating activities used $1,309,000 of cash during the nine months
ended September 30, 1995, principally as a result of (i) the Company's net
loss, (ii) a 24% increase in inventories due to a planned increase in the
stocking level of certain high demand telephone parts, increased stocking of
the new VTS 2000 product line, and to support the Company's increased
revenues, and (iii) a 14% increase in accounts receivable as a result of the
increased sales volume.
Investing activities used $433,000 of cash during the nine months ended
September 30, 1995, principally due to the Company's expenditures in
connection with its acquisition of a 50% interest in ATC as more fully
described in Note 4 of the Notes to Financial Statements contained herein. The
Company also purchased equipment for its in-house service bureau.
Financing activities provided $1,093,000 of cash during the nine months
ended September 30, 1995 attributable to (i) higher borrowings under the
Company's larger credit facility with ABCC (see Note 2 of the Notes to
Financial Statements) and (ii) proceeds received from the exercise of
warrants.
The Company has financed its growth through the use of existing cash,
proceeds from issuance's of common stock pursuant to warrant exercises, and
through borrowings under its revolving credit facility. On June 5, 1995, the
Company entered into a one year renewable Commercial Loan and Security
Agreement (the "Agreement") with ABCC which provides for a $1,500,000
revolving line of credit. Under the terms of the Agreement, borrowings bear
interest at the prime rate plus 1.5% on the greater of (i) the actual monthly
loan balance or (ii) a minimum assumed monthly loan balance of $600,000. The
Company may borrow against the aggregate of (i) 75% of eligible accounts
receivable (domestic receivables less than 90 days old) and (ii) 25% of
eligible inventory (up to a maximum inventory advance of $300,000), up to the
maximum amount of the facility. Borrowings under the Agreement are repayable
upon demand, and are secured by the Company's assets. The Agreement replaced
the $750,000 Revolving Credit and Security Agreement with Fleet Bank, N.A. As
of September 30, 1995 the unused credit line with ABCC was approximately
$239,000, of which $161,000 was available pursuant to the Company's borrowing
formula. The average and highest amounts borrowed under all credit facilities
during the three months ended September 30, 1995 was $1,041,000 and
$1,322,000, respectively. The average and highest amounts borrowed under all
credit facilities during the nine months ended September 30, 1995 was $819,000
and $1,322,000, respectively. The Company's borrowings are dependent upon the
continuing generation of collateral, subject to its credit limit.
On June 20, 1995, the Company entered into an amendment to a prior non-
binding Letter of Intent ("LOI") with a prospective underwriter for a $6
million public offering of Units, each Unit consisting of shares of common
stock and warrants. On September 13, 1995, however, the Company and the
underwriter agreed to terminate the LOI and to release each other from all
obligations pursuant to the LOI.
The Company's recent acquisition of a 50% interest in ATC requires a
minimum capital contribution from the Company of $390,000, of which amount
$350,000 has been paid and the remaining $40,000 will be paid over the next
several months. During 1995 the Company consumed a significant amount of its
capital resources on the aforementioned acquisition, as well as on the pursuit
of other international business development activities. As further described
in Note 5 of the Notes to Financial Statements, the Company expected to
participate in the formation of another PRC joint venture company in
connection with the JV Agreement and Interim Agreement, but agreed to
terminate said agreements, due to a lack of sufficient capital resources. The
Company believes that it has sufficient capital resources to satisfy the
working capital requirements of its on-going domestic business and its ATC
obligation. The Company's intent is to continue to seek opportunities to
market its products internationally. The Company, however, has recently
reduced the scope of other international projects, as previously stated, in
order to conserve its capital resources, and such international projects will
most likely require external sources of financing in order for the Company to
proceed on the scale that it had previously pursued.
Inflation has not been a significant factor in the Company's operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
On June 20, 1995, the Company's Board of Directors (i) extended the
expiration date of its publicly-traded warrants from 3:30 P.M. Eastern
Standard Time on June 30, 1995 to 3:30 P.M. Eastern Standard Time on December
31, 1995, (ii) amended the exercise price of these warrants such that from
July 1, 1995 through December 31, 1995 the exercise price will increase to
$2.00 per share and (iii) amended the warrant redemption feature such that
during this extended period the warrants will be redeemable by the Company at
a price of $0.05 per warrant if the closing sales price of the Company's
Common Stock (the "Market Price") is $3.00 or higher for ten consecutive
business days (prior to July 1, 1995 the Market Price triggering the
redemption feature was $1.125). All other terms and conditions of the public
warrants remain unchanged.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The proposals voted upon at the Company's Annual Meeting of
Stockholders, held September 20, 1995, along with the voting results, were as
follows:
(1) Election of Directors: All nominees were elected, with the exception
of Mr. Peter S. Buswell, who resigned as a director, nominee and employee in
September, prior to the Annual Meeting. The results of balloting was as
follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
_______ _________ ______________
<S> <C> <C>
George J. Taylor, Jr. 18,469,117 450,200
Robert G. LaVigne 18,481,517 437,800
Harold L. Hansen 18,451,467 467,850
Hugh M. Taylor 18,456,717 462,600
Joseph J. Kelley 18,489,567 429,750
</TABLE>
(2) Proposal to amend the 1992 Stock Option Plan (the "Plan") to give
the administrators of the Plan broad discretion to vary the terms of
individual grants from the specific provisions of the Plan: The proposal was
approved with 16,720,794 votes for, 2,053,628 votes against, and 144,895
abstentions.
(3) Proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the year ending December 31, 1995: The
proposal was approved with 18,630,217 votes for, 164,695 votes against, and
124,405 abstentions.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibit is filed herewith:
11. Statement Re: Computation of Per Share Earnings.
(b) Reports on Form 8-K:
The Company filed a Form 8-K Current Report, dated September 13, 1995,
which stated that on June 20, 1995, the Company entered into a Letter of
Intent with a prospective underwriter for a proposed public offering of Units
of its securities, consisting of shares of common stock and warrants. On
September 13, 1995, the Company and said underwriter mutually agreed not to
proceed with the proposed public offering, and released each other from any
further obligations pursuant to the Letter of Intent. As a result of this
action, the Company's Board of Directors voted to rescind its earlier approval
of a proposed reverse split of the Company's outstanding Common Stock, which
had been approved solely as a prerequisite to completing the proposed
offering, and determined not to present the proposed reverse split for
stockholder approval at the Company's September 20, 1995 Annual Meeting of
Stockholders.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: November 10, 1995 /s/ Robert G. LaVigne
_______________________________________
Robert G. LaVigne
Vice President - Finance and
Administration, Chief Financial Officer
EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
Three and Nine Months Ended September 30, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Nine months
ended 9/30 ended 9/30
__________________ __________________
1995 1994 1995 1994
____ ____ ____ ____
<S> <C> <C> <C> <C>
PRIMARY:
Weighted average shares outstanding 21,383 20,391 20,801 19,910
Net effect of dilutive stock options and warrants based on
the treasury stock method using average market price 358 1,308 426 1,519
_______ _______ _______ _______
Total weighted average shares 21,741 21,699 21,227 21,429
======= ======= ======= =======
Net income (loss) $ (492) $ (70) $ (581) $ 10
======= ======= ======= =======
Per share amount $ (.02) $ * $ (.03) $ *
======= ======= ======= =======
____________________
<F*> Less than one-half cent.
</TABLE>
Fully diluted earnings per share is not presented because it is immaterial
and/or anti-dilutive in all periods.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 255
<SECURITIES> 0
<RECEIVABLES> 2,561
<ALLOWANCES> 0
<INVENTORY> 2,100
<CURRENT-ASSETS> 5,153
<PP&E> 326
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,760
<CURRENT-LIABILITIES> 2,707
<BONDS> 0
<COMMON> 21
0
0
<OTHER-SE> 3,032
<TOTAL-LIABILITY-AND-EQUITY> 5,760
<SALES> 11,238
<TOTAL-REVENUES> 11,238
<CGS> 7,672
<TOTAL-COSTS> 7,672
<OTHER-EXPENSES> 237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> (568)
<INCOME-TAX> 13
<INCOME-CONTINUING> (581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (581)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
