AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1996
Registration No. 333-5103
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------------------
FARMSTEAD TELEPHONE GROUP, INC.
(Name of Small Business Issuer in its charter)
DELAWARE 3661 06-1205743
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
-------------------------------
81 Church Street
East Hartford, Connecticut 06108
(860) 282-0010
(Address and Telephone Number of Registrant's Principal
Executive Offices and Principal Place of Business)
-------------------------------
ROBERT G. LAVIGNE
81 Church Street
East Hartford, Connecticut 06108
(860) 282-0010
(Name, Address and Telephone Number,
of Agent for Service)
------------------------------------
Copies to:
RICHARD F. HOROWITZ, ESQ. WILLIAM M. PRIFTI, ESQ.
IRVING ROTHSTEIN, ESQ. 220 Broadway, Suite 204
Heller, Horowitz & Feit, P.C. Lynnfield, MA 01940
292 Madison Avenue Telephone: (617)593-4525
New York, New York 10017 Facsimile: (617)598-5222
Telephone: (212)685-7600
Facsimile: (212)696-9459
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this registration statement.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
PROPOSED
MAXIMUM PROPOSED
OFFERING MAXIMUM
TITLE OF EACH CLASS AMOUNT PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE TO BE PER OFFERING REGISTRA-
REGISTERED REGISTERED SECURITY PRICE (1) TION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units 1,150,000 $ 4.6875 $ 5,390,625.00 $ 1,858.69
Common Stock, $.001 par value per
share 1,150,000 --- --- ---
Class A Redeemable Common Stock
Purchase Warrants 1,150,000 --- --- ---
Class B Redeemable Common Stock
Purchase Warrants 1,150,000 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per
share (2) 2,300,000 $ 6.5625 $15,093,750.00 $ 5,204.33
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants (3) 100,000 $ .001 $ 100.00 $ .03
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Units (4) 100,000 $ 6.5625 $ 656,250.00 $ 226.28
Common Stock, $.001 par value per
share 100,000 --- --- ---
Class A Redeemable Common Stock
Purchase Warrants 100,000 --- --- ---
Class B Redeemable Common Stock
Purchase Warrants 100,000 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per share (5)
200,000 $ 6.5625 $ 1,312,500.00 $ 452.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total $22,453,225.00 $ 7,741.88
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933. Based upon closing
price of $.46875 on May 27, 1996 and adjusted for the anticipated reverse
split. Includes 150,000 Units for the Underwriter's overallotment option.
(2) Issuable upon exercise of the Class A and Class B Redeemable Common Stock
Purchase Warrants included in the Units and in the overallotment option.
(3) Issued to the Underwriter entitling the Underwriter to purchase one Unit
(consisting of one share of Common Stock, one Class A Redeemable Common
Stock Purchase Warrant and one Class B Redeemable Common Stock Purchase
Warrant) for each ten Units it underwrites in the public offering.
(4) Issuable upon exercise of the Underwriter's Warrants.
(5) Issuable upon exercise of the Class A and Class B Redeemable Common Stock
Purchase Warrants included in the Underwriter's Warrants purchasable by the
Underwriter.
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
FARMSTEAD TELEPHONE GROUP, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED
THEREIN BY ITEMS 1 THROUGH 23 OF FORM SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT PROSPECTUS CAPTION
ITEM AND HEADING OR LOCATION
---------------- -----------
<S> <C>
1. Front of Registration Statement and Outside Front Cover of
Prospectus .......................................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus ............................. Inside Front/Outside Back Cover Page
3. Summary Information and Risk Factors ................................................ Prospectus Summary, The Company,
Risk Factors
4. Use of Proceeds ..................................................................... Use of Proceeds
5. Determination of Offering Price ..................................................... Not Applicable
6. Dilution ............................................................................ Not Applicable
7. Selling Security Holders ............................................................ Not Applicable
8. Plan of Distribution ................................................................ Underwriting
9. Legal Proceedings ................................................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control Persons ........................ Management
11. Security Ownership of Certain Beneficial Owners and Management ...................... Principal Stockholders
12. Description of Securities ........................................................... Description of Securities
13. Interests of Named Experts and Counsel .............................................. Not Applicable
14. Disclosure of Commission Position onIndemnification for Securities
Act Liabilities ..................................................................... Management
15. Organization Within Last Five Years ................................................. Not Applicable
16. Description of Business ............................................................. Business
17. Management's Discussion and Analysis or Plan of Operation ........................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property ............................................................. Business
19. Certain Relationships and Related Transactions ...................................... Not Applicable
20. Market for Common Equity and Related Stockholders Matters ........................... Price Range for listed Securities and
Dividend Policy
21. Executive Compensation .............................................................. Management
22. Financial Statements ................................................................ Financial Statements
23. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ................................................................ Not Applicable
</TABLE>
PROSPECTUS
- ----------
FARMSTEAD TELEPHONE GROUP, INC.
[LOGO]
1,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK,
ONE CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
AND ONE CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANT
Farmstead Telephone Group, Inc. (the "Company") hereby offers 1,000,000
Units (the "Units"), each Unit consisting of one share of common stock, $.001
par value per share (the "Common Stock"), one Class A Redeemable Common Stock
Purchase Warrant (the "Class A Warrants") and one Class B Redeemable Common
Stock Purchase Warrant (the "Class B Warrants" and collectively with the Class A
Warrants, the "Warrants"). The shares of Common Stock and Warrants comprising
the Units shall be separately tradeable, only upon the determination of the
Underwriter. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at a price of $5.28 per share and each Class B Warrant entitles the
holder to purchase one share of Common Stock at a price of $6.09 at any time
commencing August 13, 1996, until August 12, 2001. The Warrants are redeemable
by the Company at a redemption price of $.10 per Warrant at any time commencing
September 13, 1997, on 30 days' prior written notice, provided that the reported
closing price of the Common Stock equals or exceeds $6.09 for the Class A
Warrants and $6.90 for the Class B Warrants, for a period of 20 consecutive
trading days ending five days prior to the notice of redemption. See
"Description of Securities."
The Units will be offered first to the Company's Stockholders upon the
exercise of "Rights" distributed herewith (the "Rights Offering"). The
Stockholders will have 30 days to exercise their Rights, which shall be
distributed on a pro rata basis, based upon the number of shares of Common Stock
owned by each stockholder. To the extent Rights are not exercised, they may, at
the discretion of the Underwriter, be purchased by other stockholders who
indicate an interest to exercise more rights than their pro rata allocation. All
Units not purchased in the Rights Offering will be offered, on a firm commitment
basis by the Underwriter. See "Underwriting."
Prior to this offering, there has been no public market for the Units or
the Warrants and there can be no assurance that such a market will develop after
the completion of this offering or, that if developed, that it will be
sustained. The Common Stock is traded on the National Association of Securities
Dealers, Inc., Automated Quotation System ("Nasdaq") SmallCap Market under the
symbol "FONE." It is anticipated that the Units, Class A Warrants and Class B
Warrants will also be included under the symbols "FONEL", "FONEZ" and "FONEM",
respectively. On August 9, 1996, the closing price of the Company's Common Stock
was $.4375 prior to the implementation of a 1 for 10 reverse stock split
effective August 12, 1996. The Company intends to attempt to have the Units and
Warrants listed on either the American Stock Exchange or The Boston Stock
Exchange. For information regarding the factors considered in determining the
public offering price and terms of the Units, see "Risk Factors" and
"Underwriting."
____________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS."
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Unit $4.06 $.3654 $3.6946
- --------------------------------------------------------------------------------
Total $4,060,000 $365,400 $3,694,600
================================================================================
(1) Does not include additional compensation to Schneider Securities, Inc.
(the "Underwriter") in the form of a non-accountable expense allowance
in the amount of 2.5% of the gross amount of Units sold by the
Underwriter. In addition, see "Underwriting" for information concerning
indemnification and other compensation payable to the Underwriter.
Discounts and commissions and the Underwriter's expense allowance will
only be payable upon those Units actually underwritten by the
Underwriter. However, the Underwriter will receive a fee based upon the
gross amount of Units purchased in the Rights Offering as described in
"Underwriting."
(2) Before deducting estimated expenses of $222,875 payable by the Company,
including the non-accountable expense allowance payable to the
Underwriter. See "Use of Proceeds."
____________________
The Units being offered by the Underwriter, are subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
this offering and to reject any order in whole or in part. It is expected that
delivery of the securities offered hereby will be made against payment at the
offices of Schneider Securities, Inc., Providence, Rhode Island on or about
September 23, 1996.
SCHNEIDER SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of its Regional
Offices located at: 7 World Trade Center, 13th Floor, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the Commission.
This material can be found at http://www.sec.gov.
2
PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before making
any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors." In addition, prospective investors should consult their own
advisors in order to understand fully the consequences of an investment in the
Company. Unless otherwise specified, all information in this Prospectus assumes
no exercise of (i) the Underwriter's Warrants or the overallotment option, or
(ii) other outstanding options and warrants to purchase an aggregate of
5,397,862 shares of Common Stock.
The following summary does not purport to be complete and is qualified by
more detailed information and financial statements appearing elsewhere in this
Prospectus. Effective on the date of this Prospectus, the Company is
implementing a 1:10 reverse split of its outstanding securities (the "Reverse
Split"). Unless otherwise specifically stated, no adjustments have been made
herein to account for the Reverse Split.
THE COMPANY
Farmstead Telephone Group, Inc. (the "Company") is engaged in the Customer
Premise Equipment ("CPE") segment of the telecommunications industry,
principally as a secondary market reseller of used and/or refurbished AT&T
business telephone parts and systems, and as a designer, manufacturer and
supplier of proprietary voice (or "call") processing systems that provide
automated call handling, voice and fax messaging, interactive voice response,
automated call distribution and message notification functionality. The Company
also provides equipment repair and refurbishing, inventory management, and other
related value-added services. The Company sells its products and services to
corporate end users, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
The Company was incorporated in Delaware in 1986 and became a public
company in May 1987 following the completion of its initial public offering. In
January 1994, the Company acquired certain operating assets of Cobotyx
Corporation, Inc. ("CCI"), a designer, manufacturer and supplier of voice
processing systems, and expanded its entry into this marketplace through the
formation of a voice processing products division ("Cobotyx Division").
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to over 1,400 customers during 1995 ranging
from small companies to large, multi-location corporations, and including
equipment wholesalers, dealers, distributors and government agencies and
municipalities. The Company believes its customers are generally (i) existing
AT&T equipment users that require piece parts to upgrade, expand, or maintain
their existing telephone system, (ii) cost-conscious businesses that desire to
save money by purchasing used or refurbished equipment instead of new equipment,
but still retain AT&T installation and maintenance support for these products,
and (iii) businesses that may have no current need for AT&T's latest and most
technically advanced product offerings. Businesses also look to the Company, and
to other secondary market resellers, to meet their immediate equipment delivery
requirements. The Company is also pursuing the sale of its products
internationally, such as in the People's Republic of China ("PRC"), the Republic
of the Philippines, and in other countries which have underdeveloped
telecommunications systems and may have limited financial resources.
The Company distributes its voice processing products domestically and
internationally to approximately an additional 500 customers, primarily
independent dealers and distributors, end-users, and through arrangements with
several manufacturers of telephone systems and business equipment.
The Company's objective is to significantly expand its revenues and
profitability through a strategy based on:
Domestic Expansion - The Company is seeking to expand its revenues and
customer base in the domestic secondary telephone equipment marketplace by
increasing its sales force, establishing business in other geographic areas
of the U.S. and by continuing to provide quality refurbished products,
superior customer service and support, and other value-added services as
required by its customers. The Company is also attempting to become a more
strategic partner to AT&T, by specializing in the resale of AT&T products
and through the establishment of distribution rights to new AT&T equipment
as allowed by AT&T. The Company may also seek to acquire similar businesses
in other geographic areas of the U.S., as opportunities arise, in order to
increase its share of this market.
3
New Voice Processing Products and Services - The Company plans to continue
its expansion into this marketplace by utilizing or developing current
technologies to produce state-of-the-art products that provide basic voice
and call processing functionality while also providing flexibility and
expandability. The Company plans to adapt its technology to emerging
industry standards, and plans to provide custom computer telephone
integration solutions for its customers
International Expansion - The Company's strategy includes developing and/or
providing products and technologies to assist developing countries which
have inadequate telecommunications infrastructures by providing low-cost,
reliable telecommunications equipment and services. The Company plans to
seek and develop relationships with internationally-based partners and
enter into marketing and/or distribution agreements with established
overseas businesses in the countries that the Company has targeted to
penetrate, including the PRC, the Republic of the Philippines, and other
countries.
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC"). Prior to its closing in January
1996, the ARC primarily operated to service AT&T affiliates in the orderly
disposition, by way of consignment sales arrangements, of excess, overstocked
and end-of-life telecommunications, computer and data transmission equipment.
The assets acquired consisted primarily of warehouse equipment, vehicles,
computer and office equipment, and inventory. The Company concurrently formed a
subsidiary corporation, Farmstead Asset Management Services, LLC ("FAMS"), which
is using the purchased assets to start up a similar operation in Piscataway, New
Jersey. The Company intends to attempt to re-establish certain of the
relationships that the ARC enjoyed, however, no assurances can be given that it
will be able to do so. The Company believes that the operations of FAMS will
provide it with an opportunity to develop new sources of equipment for resale to
its existing customers, as well as to other wholesalers in the telephone, data
and computer secondary markets, and internationally.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................. 1,000,000 Units, each Unit consisting of one share of Common Stock, one
Class A Warrant and one Class B Warrant. The Units and its components will
not be affected by the Reverse Split.
Common Stock Outstanding
Before Offering.................... 2,123,868 shares (1)
Common Stock Outstanding
After Offering..................... 3,123,868 shares (2)
Warrants:
Number to be outstanding after the
Offering........................... 2,000,000 Warrants(3)
Exercise Price..................... The exercise price of each Class A and Class B Warrant is
$5.28 per share and $6.09 per share, respectively. See
"Description of Securities."
Exercise Period.................... The exercise period of the Warrants will commence on the
date of this Prospectus and will expire at 5:00 p.m. New
York City local time on August 12, 2001. See "Description
of Securities."
Redemption......................... The Warrants are redeemable by the Company, in whole or
in part, at the option of the Company, at a price of $.10
per Warrant at any time commencing September 13, 1997,
4
upon 30 days' prior written notice, provided that the reported
closing price of the Common Stock equals or exceeds $6.09
for the Class A Warrants and $6.90 for the B Warrants for
a period of 20 consecutive trading days ending five days
prior to the notice of redemption. See "Description of
Securities."
Use of Proceeds..................... To expand domestically and internationally, to develop
new voice processing products, and working capital
generally. See "Use of Proceeds."
Risk Factors....................... The securities offered hereby involve a high degree of
risk including the fact that the Company has a history of
losses and low earnings, that it will be subject to all
the vagaries of attempting to open up an international
market, and that it operates in a market subject to
extremely rapid technological change. See "Risk Factors."
NASDAQ Symbol
Units ........................... FONEL
Common Stock..................... FONE
Class A Warrants ................ FONEZ
Class B Warrants ................ FONEM
</TABLE>
- -----------------------------------
(1) Represents 21,238,676 shares prior to adjusting for the Reverse Split.
(2) Represents the additional shares offered hereby after adjusting the
outstanding stock for the Reverse Split, but without adjusting for
rounding fractional shares. Excludes (as adjusted for the Reverse Split)
(i) up to 2,000,000 shares of authorized but unissued Common Stock
reserved for issuance upon exercise of the Warrants included in the
Offering; (ii) up to 100,000 shares of authorized but unissued Common
Stock issuable upon exercise by the Underwriter of the Underwriter's
Warrants; (iii) up to an additional 200,000 shares of authorized but
unissued Common Stock issuable upon exercise of the Warrants contained
in the Underwriter's Warrants; (iv) up to 183,573 shares of Common Stock
issuable upon exercise of currently outstanding Public Warrants at an
adjusted exercise price of $5.00; (v) up to 66,273 shares of Common
Stock reserved for issuance to the underwriters of the Company's initial
public offering at a weighted average exercise price of $6.30; (vi)
306,941 shares of authorized but unissued Common Stock reserved for
issuance under options already granted pursuant to the Company's Stock
Option Plans and agreements at a weighted average exercise price of
$4.30; (vii) 3,414,067 shares of authorized but unissued shares of
Common Stock reserved for issuance under the Company's Stock Option
plans and agreements; and (viii) up to 450,000 shares of Common Stock
issuable as a result of the Underwriter's overallotment option. See
"Description of Securities," "Underwriting" and "Executive
Compensation-Stock Plans."
(3) Includes both the Class A and Class B Warrants. Excludes 200,000
Warrants included in the Units reserved for issuance upon exercise of
the Underwriter's Warrants and the Underwriter's overallotment option.
See "Underwriting."
5
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial data of the Company for
the five years ended December 31, 1995 and for the three-month periods ended
March 31, 1995 and 1996. Data relating to the years ended December 31, 1991,
1992, 1993, 1994 and 1995 are derived from audited financial statements. The
balance sheet at December 31, 1994 and 1995 and the related statements of
operations and cash flows for the two years ended December 31, 1995 and notes
thereto appear elsewhere herein. The selected financial data as of March 31,
1996 and for the three months ended March 31, 1995 and 1996, have been derived
from unaudited financial statements; however, in the opinion of management, such
data include all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data. The results of operations for the
three month period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the full year. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and
service revenues $ 5,263 $ 6,227 $ 6,291 $ 11,787 $ 15,317 $ 3,713 $ 4,122
Cost of goods and
services sold 3,558 4,373 4,870 8,230 10,645 2,543 2,916
Selling, general and
administrative expenses 1,878 1,580 2,445 3,183 4,835 1,142 1,085
Research and
development expenses 0 0 91 217 99 6 34
Interest expense 146 98 61 40 99 14 30
Equity in unconsolidated
Subsidiary -- -- -- -- 197 -- 12
Other income (31) (12) (19) (58) (14) (4) (292)
Total costs and expenses 5,551 6,039 7,448 11,612 15,861 3,701 3,785
Income (loss) before
provision for income taxes (288) 188 (1,157) 175 (544) 12 337
Provision for
income taxes 11 8 9 3 9 6 5
Net income (loss) (299) 180 (1,166) 172 (553) 6 332
Net income (loss)
per share (1) (.03) .01 (.06) .01 (.03) * .02
Weighted average number of
common shares outstanding (2) 9,475 12,978 18,088 21,608 20,842 20,677 21,425
BALANCE SHEET DATA:
AS OF MARCH 31, 1996
--------------------
PRO FORMA,
ACTUAL AS ADJUSTED(3)
------ --------------
Working capital ....................................................................................... $2,569 $ 5,878
Total Assets .......................................................................................... 6,813 10,122
Total Liabilities ..................................................................................... 3,475 3,475
Stockholders' equity .................................................................................. 3,338 6,647
</TABLE>
- ----------
* Less than one-half cent.
(1) After adjusting for the Reverse Split(all other factors remaining) these
figures would be, from left to right: (.32), .14, (.64), .08, (.27), *,
.15.
(2) After adjusting for the Reverse Split(all other factors remaining) these
figures would be, from left to right: 948, 1,298, 1,809, 2,161, 2,084,
2,068, 2,143.
(3) Gives effect to the issuance of 1,000,000 Units at a Unit price of $4.06
and application of the estimated net proceeds therefrom. Assumes that
all Units are sold by the Underwriter, and that no over-allotment Units
are sold. See "Use of Proceeds."
6
THE COMPANY
Farmstead Telephone Group, Inc. was incorporated in Delaware on October 8,
1986 (the "Company"). The Company's predecessor, The Farmstead Group, Inc., was
in business from 1984 to 1987. The Company is principally engaged in the resale
of used AT&T business telephone parts and systems, and in the manufacture and
distribution of voice processing systems. The Company additionally provides AT&T
telephone equipment repair, refurbishing, rental and inventory management and
other value-added services. The Company's corporate office is located at 81
Church Street, East Hartford, Connecticut 06108 at which its telephone number is
(860) 282-0010.
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY REPRESENT A SPECULATIVE INVESTMENT AND
A HIGH DEGREE OF RISK. THEREFORE, PROSPECTIVE INVESTORS SHOULD THOROUGHLY
CONSIDER ALL OF THE RISK FACTORS DISCUSSED BELOW AND SHOULD UNDERSTAND THAT THEY
COULD LOSE ALL OR PART OF THEIR INVESTMENT. NO PERSON SHOULD CONSIDER INVESTING
WHO CANNOT AFFORD TO LOSE A SUBSTANTIAL PART OR ALL OF HIS INVESTMENT OR WHO IS
IN ANY WAY DEPENDENT UPON THE FUNDS THAT HE IS INVESTING.
HISTORY OF LOSSES AND LOW EARNINGS; ACCUMULATED DEFICIT. The Company
sustained a loss of $299,000 during 1991, earned $180,000 during 1992, lost
$1,166,000 during 1993, earned $172,000 during 1994 and lost $553,000 during
1995. At December 31, 1995, the Company had an accumulated deficit of
$5,446,000. There can be no assurance that the Company's future activities will
be successful or profitable. See "Selected Financial Data" and "Financial
Statements."
COMPANY STILL DEVELOPING ITS VOICE PROCESSING PRODUCTS AND INTERNATIONAL
EXPANSION. Potential investors should be aware of the risks, problems, delays,
expenses and difficulties encountered by an enterprise in an early stage of
development such as the Company with regard to its voice processing business and
international expansion, especially in view of the intense competition that the
Company has, and will assuredly continue to, encounter. Such matters include the
complications inherent in consistent and timely trans-Pacific shipping, currency
exchange fluctuations, political policies, cultural biases and retention of
qualified personnel. See "Management's Discussion and Analysis and Results of
Operations."
EXPECTEDRELIANCE ON STRATEGIC PARTNERS FOR INTERNATIONAL EXPANSION. One
element of the Company's strategy is to form alliances with strategic partners
to assist the Company in identifying, developing and exploiting opportunities in
international markets. The Company has only recently entered into alliances with
some strategic partners and it is premature to determine whether such alliances
will be successful. There can be no assurance that the Company will be able to
locate additional strategic partners or that such strategy ultimately will be
successful. The Company's success will also depend, in part, upon its ability to
provide its international customers, either directly or through others,
technical support and customer service for its products. The Company does not
presently have the personnel to provide such services and initially intends to
rely on its strategic partners to provide such services. There can be no
assurance that such services can be negotiated on acceptable terms, if at all.
Failure to provide such technical support and customer services could have a
material adverse effect on the Company's ability to expand into international
markets. See "Business."
CONTINUING NEED FOR AT&T'S SUPPORT OF THE SECONDARY MARKET. Since 1985,
AT&T has provided support to the secondary market by continuing to offer
installation, maintenance, repair, reconditioning and certification services for
its products purchased by end-users through equipment resellers (such as the
Company). AT&T also generally provides a one year warranty for products
purchased from AT&T for resale, provided it performs the installation. Should
AT&T decide no longer to provide such support to the secondary market, the
business of the Company could be materially adversely affected. See
"Business-The Company's Telephone Equipment Products-Relationship with AT&T."
UNCERTAINTY CAUSED BY RESTRUCTURING OF AT&T. In September 1995, AT&T
initiated a restructuring of its businesses by splitting its operations into
three separate companies. While the Company's contract with AT&T was assigned to
one of these new companies, Lucent Technologies, Inc., and the business
relationship has not been affected, no assurance can be given that AT&T's
restructuring will not cause a disturbance in the Company's relationship going
forward. See "Business."
7
COMPANY MAY BE SUBJECT TO SIGNIFICANT COMPETITION. The market for used
telephone parts and systems and for voice processing products is highly
competitive. Many of the companies which now offer or may be expected to offer
products with which the Company will compete are more established, benefit from
greater market recognition and have significantly greater financial,
technological, manufacturing and marketing resources than the Company. The
Company's telephone equipment competitors include AT&T, other secondary market
AT&T resellers and other telephone equipment manufacturers. The Company's voice
processing systems competitors also include major telecommunications equipment
manufacturers and telephone companies as well as independent call processing
equipment manufacturers. As the industry evolves to further integrate telephones
with PCs, the Company anticipates that it will encounter a broader variety of
competitors, including new entrants from related computer and communication
industries. There can be no assurance that the Company will be able to develop
more technologically advanced products or that even if it is able to develop, or
acquire rights to incorporate into its products, the next generation of
technology, that such products will perform as well as competitor's products or
that such products will be accepted by the market or that the Company will see
any financial benefit therefrom. See "Business-Competition."
DEPENDENCE ON SUPPLIERS. The Company's voice processing products
incorporate certain component parts and subassemblies produced or assembled by
third parties. The Company's reliance on third parties to manufacture and
subassemble certain components involves significant risks, including reduced
control over delivery schedules, the inability to ship its product under
"just-in-time" arrangements and quality assurance, which may have a material
adverse effect on the Company's business. As a result, the Company may be
required to devote significant amounts of capital to inventory, and may be
dependent on timely supply of purchased inventory. Failure to obtain an adequate
supply of components on a timely basis could have a material adverse effect on
the Company. See "Business."
TECHNOLOGICAL CHANGES. The technology underlying the telecommunications
industry generally and voice processing products in particular is subject to
extremely rapid change, including potential introduction of new products and
technologies which may have a materially adverse impact on the Company's
products. The Company will need to maintain an on-going research, development
and engineering program and its success, if any, will depend in part on its
ability to respond quickly to technological advances by developing and
introducing new products or features. Alternatively, the Company can attempt to
purchase new technologies as they become available. There can be no assurance
that the Company will be able to foresee and respond to such advances in a
timely manner, if at all. In addition, there can be no assurance that the
development of technologies and products by competitors will not render the
Company's products non-competitive or obsolete. See "Business."
CURRENT PROSPECTUS AND STATE "BLUE SKY" REGISTRATION REQUIRED TO EXERCISE
THE WARRANTS. Upon the determination of the Underwriter, the Warrants which are
part of the Units offered hereby will be separately tradeable. Purchasers of the
Warrants will have the right to exercise them to purchase shares of Common Stock
only if a current prospectus relating to such shares is then in effect and only
if the shares are qualified for sale under the securities laws of the state in
which the purchaser resides. The Company has undertaken to maintain the
effectiveness of the Registration Statement of which this Prospectus forms a
part which permits the purchase and sale of the Common Stock underlying the
Warrants, but there can be no assurance that the Company will be able to do so.
The Warrants may be deprived of any value if a current prospectus covering the
shares issuable upon the exercise thereof is not kept effective. Although the
Units will not knowingly be sold to purchasers in jurisdictions in which the
Units are not registered or otherwise qualified for sale, purchasers may buy
Units in the aftermarket or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Warrants are not so registered or
qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue the shares of Common Stock to those persons
desiring to exercise their Warrants unless and until the shares of Common Stock
could be qualified for sale in the jurisdictions in which such purchasers
reside, or unless an exemption to such qualification exists in such
jurisdictions. No assurance can be given that the Company will be able to effect
or maintain any required registration or qualification. See "Description of
Securities."
8
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
success may depend in part on its ability to obtain patents, maintain trade
secrets and operate without infringing on the proprietary rights of others, both
in the U.S. and in other countries. The patent positions of software companies
can be highly uncertain and involve complex legal and factual questions, and
therefore the breadth and enforceability of claims allowed in software patents
cannot be predicted. There can be no assurance that any issued or pending
patents will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection or competitive advantages
to the Company.
The commercial success of the Company also will depend, in part, on the
Company not infringing patents issued to others and not breaching the technology
licenses upon which any Company products are based. It is uncertain whether any
third-party patents will require the Company to alter its products or processes,
obtain licenses or cease certain activities. In addition, if patents are issued
to others which contain dominating claims, and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such licenses on commercially favorable terms, if at all. The Company's breach
of an existing license or failure to obtain a license to any technology that it
may require to commercialize its products may have a material adverse impact on
the Company. Litigation, which could result in substantial costs to the Company,
may also be necessary to enforce any patents licensed or issued to the Company
or to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the U.S. that
claim technology also claimed by the Company, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial costs to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using such technology.
The Company also relies on secrecy to protect its technology, especially
where patent protection is not believed to be appropriate or obtainable. There
can be no assurance that the Company's trade secrets will not become known or be
independently discovered by competitors. See "Business-Patents, Licenses and
Trademarks."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time after thirteen months from the date hereof
at a price of $.10 per Share on 30 days' prior written notice, provided that the
closing trading price of the Common Stock for the twenty (20) consecutive
trading days ending five (5) days prior to the giving of notice of redemption,
equals or exceeds $6.09 for the Class A Warrants and $6.90 for the Class B
Warrants. Notice of redemption of the Warrants could force the Warrant holders
to exercise the Warrants at a time when it might be disadvantageous for the
holders to do so or to sell the Warrants at their then current market price when
the holders might otherwise wish to hold the Warrants for possible appreciation.
Alternatively, the holders may accept the redemption price, when it is likely to
be substantially less than the market value of the Warrants at the time of
redemption. Any holders who do not exercise their Warrants prior to their
redemption, will forfeit the right to purchase the shares of Common Stock
underlying the Warrants. While the Company may legally be permitted to give
notice to redeem the Warrants at a time when a current prospectus is not
available thereby leaving the Warrant holders no opportunity to exercise their
Warrants prior to redemption, the Company does not intend to redeem the Warrants
unless a current prospectus is available at the time of redemption. See
"DESCRIPTION OF SECURITIES."
UNDERWRITER'S WARRANTS. In connection with this Offering, the Company will
sell to the Underwriter for a nominal amount, warrants to purchase up to 100,000
Units. The Underwriter's Warrants will be exercisable commencing one year from
the effective date of this Prospectus and will continue to be exercisable until
five years from the date hereof at an exercise price equalling 165% of the
public offering price of the Units. For the life of the Underwriter's Warrants,
the holders thereof will be given the opportunity to profit from a rise in the
market price of the Common Stock or Warrants with a resulting dilution in the
interest of the Company's other stockholders. The terms on which the Company
could obtain additional capital during the life of the Underwriter's Warrants
may be adversely affected
9
because the holders of the Underwriter's Warrants might be expected to exercise
them if the Company were able to obtain any needed additional capital in a new
offering of securities at a price greater than the exercise price in the
Underwriter's Warrant. See "Underwriting."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. After the Reverse Split and this Offering, the Company
will have an aggregate of approximately 23,155,279 shares of Common Stock
authorized but unissued and not reserved for specific purposes and an additional
4,720,853 shares of Common Stock unissued but reserved for issuance pursuant to
(i) the Company's Stock Option Plans and agreements, (ii) exercise of the
currently outstanding Public Warrants and (iii) exercise by the Underwriter of
the Underwriter's Warrants and the overallotment option and the exercise of the
underlying Warrants. All of such shares may be issued without any action or
approval by the Company's stockholders. Other than approximately 525,000 stock
options to be granted following the Reverse Split, there are no other present
plans, agreements, commitments or undertakings with respect to the issuance of
additional shares of Common Stock, or securities convertible into any such
shares by the Company. Any shares issued would further dilute the percentage
ownership of the Company held by the public stockholders. See "Management --
Stock Option Plans" and "Description of Securities."
RELIANCE UPON MANAGEMENT. The Company is and will be substantially
dependent, for the foreseeable future, upon its Chairman of the Board, President
and Chief Executive Officer, George J. Taylor, Jr., who currently devotes his
full time and efforts to the management of the Company pursuant to the terms of
an Employment Agreement in effect until November 28, 1997. If the Company were
to lose the services of Mr. Taylor for any significant period of time, its
business may be materially adversely affected. While the Company owns key man
life insurance in face amount of $500,000 on the life of Mr. Taylor, there can
be no assurance that the insurance proceeds would adequately compensate the
Company for the loss of Mr. Taylor. See "MANAGEMENT."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. As of March 31, 1996, Mr.
Taylor beneficially owned approximately 12.9% of the outstanding stock of the
Company (8.8% after completion of the Offering), and all directors and officers
as a group beneficially own approximately 17.2% of the outstanding stock (11.9%
after completion of the Offering) taking into account currently exercisable
stock options held by them. Mr. Taylor, as the Company's largest stockholder,
may still continue to be able to elect all of its Directors and to control the
Company's business and affairs. In addition, the Company is subject to
provisions of the General Corporation Law of the State of Delaware respecting
business combinations which could, under certain circumstances, also hinder or
delay a change in control. See "Principal Stockholders."
UNSPECIFIED ACQUISITIONS. The Company may engage in acquisitions of other
companies and businesses and may use its stock as consideration therefor. This
may result in a dilution of the percentage of the equity to be owned by the
investors in this Offering. In addition, such acquisitions may involve
speculative and risky undertakings by the Company. Under Delaware law,
acquisitions do not require stockholder approval; however, acquisitions
accomplished by merger or consolidation where the Company either does not
survive or pays out in excess of 20% of its assets do require stockholder
approval. The Company does not, in general, intend to submit acquisitions to
stockholder vote except where required by Delaware Law. The Company does not
currently have any plans, arrangements or understandings regarding future
material business acquisitions.
DILUTION. Certain stockholders of the Company acquired their interests in
the Company at an average cost per share which is significantly lower than that
which purchasers of the Units offered hereby will pay for their stockholdings.
Accordingly, purchasers of the Units in this Offering will experience immediate
and substantial dilution in net tangible book value of the shares of Common
Stock comprising the Units.
NO PAYMENT OF DIVIDENDS ON COMMON STOCK. The Company has not paid any
dividends on its Common Stock. For the foreseeable future, the Company
anticipates that all earnings, if any, that may be generated from the Company's
operations will be used to make payments to finance the growth of the Company
and that cash dividends will not be paid to holders of the Common Stock. In
addition, as a condition of doing business, the maker of the Company's revolving
line of credit has the right of prior approval of the declaration of any
dividends. See "Price Range for Listed Securities and Dividend Policy."
10
LIMITED MARKET FOR SECURITIES. The Company's securities currently trade on
the NASDAQ market and trading volume generally is not at a high level. As a
result, there is a limited market in the Company's securities, and there can be
no assurance that a more active market will develop. Accordingly, any
investments in the Company's securities may be highly illiquid. See "Price Range
for Listed Securities and Dividend Policy."
POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES AND SALES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF OPTIONS AND/OR WARRANTS. As of April 30, 1996,
1,781,811 unregistered shares of the Company's Common Stock (178,181 after
adjusting for the Reverse Split) are held by George J. Taylor, Jr. the Company's
Chairman, President and Chief Executive Officer. Under Rule 144 of the
Securities Act of 1933, all of such shares can currently be publicly sold or
otherwise transferred, subject to volume restriction. In addition, approximately
5,567,862 shares of Common Stock (556,786 after adjusting for the Reverse Split)
are issuable by the Company pursuant to currently outstanding options and/or
warrants with exercise prices ranging from $.01-$1.18 and averaging $.48 ($.10 -
$11.80 and averaging $4.80 after adjusting for Reverse Split. Any such issuances
could have a depressive effect on the market price for the Common Stock. See
"DESCRIPTION OF SECURITIES -- Shares Eligible for Future Sale."
MAINTENANCE REQUIREMENTS FOR NASDAQ SECURITIES. It is anticipated that the
Units and the Warrants will be approved for inclusion in NASDAQ. An issuer
seeking continued inclusion of its securities in NASDAQ is required to meet
certain criteria including (i) total assets of at least $2,000,000; (ii) capital
and surplus of at least $1,000,000; and (iii) a minimum bid price of $1.00 per
share unless the market value of its public float is at least $1,000,000 and it
has at least $2,000,000 in capital and surplus. Upon completion of this
Offering, the Company anticipates that it will satisfy the criteria for
continued inclusion of its securities in NASDAQ. However, there can be no
assurance that the Company will continue to satisfy such criteria and for how
long. See "Prospectus Summary-Summary Financial Information" and
"Capitalization." If the Company became unable to meet the continued quotation
criteria of NASDAQ and was suspended therefrom, the Company's securities could
be subject to a rule that imposes additional sales practice requirements on
certain broker/dealers who sell such securities to persons other than
established customers and accredited investors. Consequently, an investor would
likely find it more difficult to dispose of, or to obtain accurate quotations as
to the value of, the Company's securities.
REQUIRED DISCLOSURE CONCERNING TRADING OF PENNY STOCKS OR LOW-PRICED
SECURITIES. The Securities and Exchange Commission ("SEC") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as defined) of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. Effective July 15,
1992, for any transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to the transaction, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Commencing January 1,
1993, the broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
While many NASDAQ-listed securities would be covered by the definition of
penny stock, transactions in a NASDAQ-listed security would be exempt from all
but the sole market-maker provision for (i) issuers who have $2,000,000 in
tangible assets ($5,000,000 if the issuer has not been in continuous operation
for three years), (ii) transactions in which the customer is an institutional
accredited investor, and (iii) transactions that are not recommended by the
broker-dealer. In addition, transactions in a NASDAQ security directly with a
NASDAQ market-maker for such securities would be subject only to the sole
market-maker disclosure, and the disclosure with respect to commissions to be
paid to the broker-dealer and the registered representative. Finally, all NASDAQ
securities would be exempt if NASDAQ raised its requirements for continued
listing so that any issuer with less than $2,000,000 in net tangible assets or
stockholders' equity would be subject to delisting. These criteria are more
stringent than the current NASDAQ maintenance requirements. Consequently, these
rules may restrict the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers to sell the Company's
securities in the secondary market.
11
USE OF PROCEEDS
<TABLE>
<CAPTION>
ALL SOLD IN
RIGHTS OFFERING ALL SOLD BY UNDERWRITER
--------------- -----------------------
APPROX. APPROX.
APPROX. % OF NET APPROX. % OF NET
$ AMOUNT PROCEEDS $ AMOUNT PROCEEDS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic Business
Expansion ............................................ 1,700,000 45.94% 1,600,000 48.36%
Product Development and
Marketing ............................................ 850,000 22.97% 775,000 23.42%
International Business
Expansion ............................................ 425,000 11.48% 385,000 11.64%
Facility Renovation/
Relocation ........................................... 425,000 11.48% 425,000 12.84%
Working Capital & General Corporate
Purposes ............................................. 300,625 8.13% 123,725 3.74%
------- ---- ------- ----
Total ................................................ $3,700,625 100.00% 3,308,725 100.00%
========== ====== ========= ======
</TABLE>
The foregoing table represents the Company's best estimate of the
allocation of the proceeds of this Offering (excluding the Underwriter's
overallotment option), based upon the Unit Offering Price of $4.06, and is based
upon the current state of the Company's development, its current plans and
current economic and industry conditions, and is subject to reapportionment of
proceeds among the categories listed above or to new categories. The Company
cautions the investor that it is likely that a portion of the Units will be sold
in the Rights Offering and the balance by the Underwriter. Accordingly, the
actual allocation will probably be between the ranges shown.
Domestic business expansion includes increasing the sales force, opening
geographically dispersed offices and/or acquiring other businesses and
maintaining increased inventory stocking levels as a result of increased product
lines and higher projected sales volume. Product development and marketing
includes expanding the product line through developing new voice processing
technologies, and expanding the Company's product marketing program.
International business expansion includes developing relationships with
internationally-based partners and equipment compatible within the localities.
The Company plans to either relocate a part of its operations to a new facility
or renovate its current facility in order to accommodate its projected expanded
level of operations.
The expenses incurred in developing and implementing the Company's business
plans cannot be predicted with any degree of certainty. Specific allocations of
proceeds will ultimately depend on the progress and timing of the aforementioned
projects. Although the Company has no specific acquisition plans at the time, if
an opportunity presents itself, the Company may use certain of the proceeds to
fund acquisitions.
Until used, the Company intends to invest the proceeds of this Offering in
government securities, certificates of deposit, money market securities,
commercial paper or other short-term, investment grade, income-producing
investments, or, may use the funds to temporarily reduce the outstanding balance
of its banking line of credit.
12
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the Reverse Split and the sale of the
1,000,000 Units offered hereby and the application of the estimated net proceeds
therefrom:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
ACTUAL ADJUSTED
------ --------
(IN THOUSANDS)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 30,000,000 shares authorized;
Issued and outstanding 21,238,676 at March 31, 1996, and
3,123,868 as adjusted (1) $ 21 $ 3
Preferred stock, $.001 par value, 2,000,000 shares authorized;
No Shares issued and outstanding at March 31, 1996 0 0
Additional paid-in capital 8,431 11,758
Accumulated deficit (5,114) (5,114)
------ ------
Total stockholders' equity $ 3,338 $ 6,647
======= =======
</TABLE>
- --------------------
(1) Based upon a Unit price of $4.06, and assumes that all Units are sold by the
Underwriter, and that no over-allotment Units are sold. Excludes (as
adjusted for the Reverse Split) (i) up to 2,000,000 shares of authorized but
unissued Common Stock reserved for issuance upon exercise of the Warrants
included in the Offering; (ii) up to 100,000 shares of authorized but
unissued Common Stock issuable upon exercise by the Underwriter of the
Underwriter's Warrants; (iii) up to an additional 200,000 shares of
authorized but unissued Common Stock issuable upon exercise of the Warrants
contained in the Underwriter's Warrants; (iv) up to 183,573 shares of Common
Stock issuable upon exercise of currently outstanding Public Warrants; (v)
up to 66,273 shares of Common Stock reserved for issuance to the
underwriters of the Company's initial public offering; (vi) 3,721,008 shares
of authorized but unissued Common Stock reserved for issuance under the
Company's Stock Option Plans and agreements; and (vii) up to an additional
450,000 shares of Common Stock issuable as a result of the Underwriter's
overallotment option. See "DESCRIPTION OF SECURITIES," "UNDERWRITING" and
"EXECUTIVE COMPENSATION -- Stock Plans."
13
PRICE RANGE FOR LISTED SECURITIES AND DIVIDEND POLICY
The Company's currently registered Common Stock, Warrants and Units trade
on The Nasdaq SmallCap Market under the symbols "FONE," "FONEW" and "FONEU,"
respectively. The quarterly high and low sales prices for these securities
during the first quarter of 1996 and each of the fiscal quarters of the years
ended December 31, 1995 and 1994 are presented below.
COMMON STOCK:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.59 $.19 $ .63 $ .34 $1.53 $ .72
June 30 .59 .31 .69 .38 1.03 .69
September 30 .56 .44 1.03 .56
December 31 .41 .28 .78 .50
</TABLE>
There were 21,238,676 shares outstanding at March 31, 1996, and 21,238,676
and 20,398,947 shares outstanding at December 31, 1995 and 1994, respectively,
before giving effect to the Reverse Split.
WARRANTS:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.19 $.03 $ .22 $ .09 $ .94 $ .47
June 30 .19 .06 .19 .03 .56 .31
September 30 .13 .03 .53 .25
December 31 .03 .03 .31 .13
</TABLE>
There were 1,835,727 warrants outstanding at March 31, 1996, and 1,835,727
and 2,675,456 warrants outstanding at December 31, 1995 and 1994, respectively,
before giving effect to the Reverse Split. Effective May 31, 1996, the Board of
Directors extended the warrants until July 1, 1997 and reduced the exercise
price to $0.50. The trigger price of the Common Stock for redemption of the
warrants was also lowered to $1.125 from $3.00.
UNITS (1):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.75 $.38 $ .75 $ .41 $2.38 $1.50
June 30 (2) (2) .81 .44 1.50 1.06
September 30 .69 .69 1.44 .84
December 31 .25 .25 .94 .75
</TABLE>
(1) Units of the Company's securities consist of one share of Common Stock
and a detachable warrant to purchase one share of Common Stock.
(2) No Units were traded.
There were 691 record holders of the common stock as of April 30, 1996,
representing an estimated 4,500 beneficial stockholders.
The Company intends to attempt to have the Units, Common Stock and the
Warrants listed on either the American Stock Exchange or the Boston Stock
Exchange. No assurance can be given that such listing(s) will be obtained or,
even if obtained, if they will enhance stockholder values.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company intends to use any earnings which it may generate to finance the growth
of its business for the foreseeable future. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time by the
Company's Board of Directors. Furthermore, under the Delaware General
Corporation Law, dividends may be paid only out of legally available funds as
proscribed by statute. Moreover, pursuant to a Commercial Revolving Loan and
Security Agreement entered into with Affiliated Business Credit Corporation
("ABCC"), the Company is prohibited from declaring or paying any dividends or
making any other distribution on any of the shares of its capital stock, without
the prior consent of the lender.
14
SELECTED FINANCIAL DATA
The following table presents certain selected financial data for the
Company for each of the years in the five-year period ended December 31, 1995
and for the three-month periods ended March 31, 1995 and 1996. The selected
financial data presented below at and for each of the fiscal years ended
December 31, 1994 and 1995 have been derived from, and are qualified by
reference to, financial statements audited by Deloitte & Touche, LLP.,
independent auditors. The selected financial data presented below at and for
each of the three years ended December 31, 1993 have been derived from audited
financial statements. The selected financial data as of March 31, 1996 and for
the three months ended March 31, 1995 and 1996, have been derived from unaudited
financial statements; however, in the opinion of management, such data include
all adjustments, consisting only of normal recurring adjustments, necessary for
fair presentation of such data. The results of operations for the three month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the full year. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales and
services revenue .......... $ 5,263 $ 6,227 $ 6,291 $ 11,787 $ 15,317 $ 3,713 $ 4,122
Cost of goods and
services sold ............. 3,558 4,373 4,870 8,230 10,645 2,543 2,916
Selling, general and
administrative expenses ... 1,878 1,580 2,445 3,183 4,835 1,142 1,085
Research and
development expenses ...... 0 0 91 217 99 6 34
Interest expense ............ 146 98 61 40 99 14 30
Equity in unconsolidated
Subsidiary ............... -- -- -- -- 197 -- 12
Other income ................ (31) (12) (19) (58) (14) (4) (292)
Total costs and expenses .... 5,551 6,039 7,448 11,612 15,861 3,701 3,785
Income (loss) before
provisions for income taxes (288) 188 (1,157) 175 (544) 12 337
Provision for
income taxes .............. 11 8 9 3 9 6 5
Net income (loss) ........... (299) 180 (1,166) 172 (553) 6 332
Net income (loss)
per share (1).............. (.03) .01 (.06) .01 (.03) * .02
Weighted average number of
common shares outstanding(2) 9,475 12,978 18,088 21,608 20,842 20,677 21,425
BALANCE SHEET DATA:
As of March 31, 1996
--------------------
Pro Forma,
Actual as Adjusted(3)
------ --------------
Working capital ................................................................................... $2,569 $ 5,878
Total Assets ...................................................................................... 6,813 10,122
Total Liabilities ................................................................................. 3,475 3,475
Stockholders' equity .............................................................................. 3,338 6,647
</TABLE>
- ---------------
* Less than one-half cent.
(1) After adjusting for the Reverse Split(all other factors remaining) these
figures would be, from left to right: (.32), .14, (.64), .08, (.27), *,
.15.
(2) After adjusting for the Reverse Split(all other factors remaining) these
figures would be, from left to right: 948, 1,298, 1,809, 2,161, 2,084,
2,068, 2,143.
(3) Gives effect to the issuance of 1,000,000 Units at a Unit price of $4.06
and application of the estimated net proceeds therefrom. Assumes that
all Units are sold by the Underwriter, and that no over-allotment Units
are sold. See "USE OF PROCEEDS."
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by the
following items for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ ---------
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and service revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods and services sold 69.5 69.8 70.8 68.5
Selling, general and administrative expenses 31.6 27.0 26.3 30.7
Research and development expenses .6 1.8 .8 .2
Interest expense .6 .3 .7 .4
Equity in unconsolidated subsidiary 1.3 -- .3 --
Other income (.1) (.4) (7.1) (.1)
--- --- ---- ---
Income (loss) before income taxes (3.5) 1.5 8.2 .3
Provision for income taxes .1 -- .1 .1
-- -- -- --
Net income (loss) (3.6) 1.5 8.1 .2
==== === === ==
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996, AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995.
Sales and service revenues for the three months ended March 31, 1996 were
$4,122,000, representing an increase of $409,000 or 11% from the comparable 1995
period. The increase was attributable to the Company's telephone equipment
products and services, which were up by 25% over the comparable prior year
period, partially offset by a 34% decrease in sales of voice processing products
and services due to the expiration of the Company's equipment manufacturing
contract with AT&T in February 1996. Revenues from telephone equipment sales and
services accounted for 84% of consolidated revenues for the three months ended
March 31, 1996 (74% in the comparable 1995 period), while revenues from voice
processing product sales and services accounted for 15% of consolidated revenues
in 1996 (26% in 1995). The Company's newly formed subsidiary, FAMS, began
partial operations in February 1996, and its sales of used telecommunications
and computer equipment accounted for 1% of consolidated first quarter 1996
revenues. This new operation is expected to contribute a higher percentage of
consolidated revenues as it becomes fully operational during the second quarter
of 1996.
Gross profit for the three months ended March 31, 1996 was 29% of revenues
as compared to 32% of revenues for the comparable prior year period. The
decrease was attributable to product sales mix, and to increased product
acquisition costs on certain telephone system parts. As a re-seller of used
telephone equipment, the nature of the Company's business is such that product
acquisition costs continually fluctuate based upon the source of supply,
availability of such equipment in the marketplace and on market demand, as well
as on the mix of products sold during the reporting period. The Company is not
aware of any market conditions which would cause gross profit margins to
significantly fluctuate from current levels. Rebates earned from AT&T on current
period purchases are recorded in cost of sales in the period in which the
related products are sold. During the three months ended March 31, 1996, rebates
credited to the cost of sales amounted to $55,000 which had the effect of
increasing the Company's gross profit margin from 28% to 29%.
Selling, general & administrative expenses for the three months ended March
31, 1996 were $1,085,000 (26% of revenues) as compared to $1,142,000 (31% of
revenues) for the comparable 1995 period. The decrease was attributable to (i)
international market development costs of approximately $100,000 which were
incurred solely in the 1995 period pursuant to certain joint venture agreements
which were terminated in November 1995 and (ii) approximately $98,000 of costs
associated with the 1995 operation of
16
an in-house service bureau and the marketing of the new VTS-1000/2000 product
line, both of which were discontinued by the end of 1995. These decreases were
offset by the operating expenses of FAMS which began operations in February
1996, and by higher salaries and sales commissions, bad debt expenses and other
operating costs associated with the Company's increased business volume.
Other income for the three months ended March 31, 1996 was $292,000 as
compared to $4,000 for the comparable 1995 period. Included in other income for
1996 was $280,000 of rebates from AT&T. The rebates relate to coupons issued by
AT&T in 1995 in settlement of a lawsuit and are freely transferrable and can be
used to pay for the cost of AT&T products and services purchased from May 1995
through May 1997. In 1996, the Company began purchasing coupons at a discount to
their $50 face value and redeeming them with AT&T for the full face value.
Accordingly, the Company is recording as other income the difference between the
face value of the coupons and their acquisition cost. The Company expects to
continue to take advantage of the coupon redemption program through its
scheduled expiration date of June 1, 1997. However, the Company is unable to
predict the program's effect on future operating results since (i) the supply of
coupons in the aftermarket is limited, (ii) the Company's acquisition cost for
the coupons can fluctuate, (iii) beginning June 1, 1996 rebates are restricted
to systems and maintenance services sold (previously, component parts were also
included in the program), and (iv) in any event, the Company cannot reasonably
estimate its future sales activity relating to the coupon program. See Note 2 of
the Notes to Consolidated Financial Statements (Unaudited), included elsewhere
herein.
YEAR ENDED DECEMBER 31, 1995, AS COMPARED TO THE YEAR ENDED DECEMBER 31,1994.
The Company recorded a net loss of $553,000 for the year ended December 31,
1995, as compared to net income of $172,000 for the year ended December 31,
1994. The loss for 1995 was primarily attributable to the Company's efforts to
expand its business and products domestically and internationally. Domestically,
the Company incurred approximately $645,000 of net expenses during 1995, arising
from new sales and technical personnel, product marketing expenses, equipment
and other overhead and operating costs, in connection with the new VTS 1000/2000
product line, and in the operation of an in-house service bureau. Due to
insufficient revenues and a change in marketing strategy, these products were
discontinued by the end of 1995.
The Company's international business development activities, which were
centered principally in the PRC, negatively impacted operating results by
approximately $774,000 for the year ended December 31, 1995, and by
approximately $541,000 for the year ended December 31, 1994. These activities,
as also described in Notes 8 and 11 of the Notes to Financial Statements
included herein, principally focused on (i) the acquisition of a 50% interest in
Beijing Antai Communication Equipment Company, Ltd. ("ATC"), located in Beijing,
PRC, 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. Included
in the above amount for 1995 were expenses of approximately $450,000 from the
Company's funding of voice processing product development and marketing
operations in China pursuant to its obligations under the Interim Agreement and
JV Agreement (defined below, see "Business-International Voice Processing
Markets"), consisting of working capital provided, project management consulting
fees, travel costs and demonstration products provided by the Company. These
agreements were terminated in November, 1995 due to a lack of funds with which
to capitalize the proposed joint venture. Also included were net expenses of
approximately $244,000, consisting primarily of facility, personnel and other
operating costs incurred in connection with the domestic acquisition, testing
and storage of product slated for export to the PRC and other international
markets.
In conjunction with the termination of the Interim and JV Agreements, the
Company reduced the scope of other international projects and, until such time
as additional financing can be obtained, the Company expects to incur
significantly reduced international business development expenditures.
The Company's 1995 net loss also includes $81,000 of legal fees and related
expenses incurred in connection with a proposed underwriting of securities which
was terminated during the third quarter of 1995.
17
Sales and service revenues for the year ended December 31, 1995 were
$15,317,000, representing an increase of $3,530,000 or 30% from the comparable
1994 period. Telephone equipment sales and service revenues increased by
$3,372,000 or 38% over 1994, resulting from (i) increased end user and wholesale
sales levels, attributable to wider acceptance of the Company's products, and a
larger and more experienced sales force, and (ii) $475,000 in equipment sales to
ATC. Voice processing product sales and service revenues increased by $158,000
or 5% from 1994.
Gross profit for the year ended December 31, 1995 increased by $1,115,000
to $4,672,000 (30.5% of revenues) from $3,557,000 (30.2% of revenues) in 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.
Selling, general and administrative expenses for the year ended December
31, 1995 increased by $1,652,000 to $4,835,000 (32% of revenues) from $3,183,000
(27% of revenues) for the year ended December 31, 1994. Approximately 27% of the
increase was attributable to international voice processing product market
development activities pursuant to the JV and Interim Agreements (as more fully
described in Note 11 of the Notes to Financial Statements), including working
capital provided, 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 45% of the
increase was related to personnel costs attributable to (i) increased personnel
and related costs associated with the start up of the service bureau and
VTS-1000/2000 product offerings which were discontinued by the end of 1995, and
(ii) increased compensation expenses, including increased sales commissions as a
result of higher sales levels. Product marketing expenses increased by 6%
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. In connection with the termination of a proposed underwriting of
additional securities (see Note 7), the Company also charged $81,000 of legal
fees and related expenses to SG&A in 1995. The Company currently projects that
SG&A will represent a lower percentage of revenues in fiscal 1996.
Research and development expenses ("R&D") for the year ended December 31,
1995 were $99,000, down 54% from $217,000 incurred in 1994. 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 year ended December 31, 1995 was $99,000, up 148%
from $40,000 incurred in 1994, due to higher average debt levels and higher
weighted average interest rates on the Company's outstanding debt.
YEAR ENDED DECEMBER 31, 1994, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
The following table sets forth the percentage of revenue represented by the
following items for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Sales and service revenues...................... 100.0% 100.0%
Cost of goods and services sold................. 69.8 77.4
Selling, general and administrative expenses.... 27.0 38.9
Research and development expenses............... 1.8 1.4
Interest expense................................ .3 1.0
Other income.................................... (.4) (.3)
--- ---
Income (loss) before income taxes............... 1.5 (18.4)
Provision for income taxes...................... - .1
--- ---
Net income (loss)............................... 1.5% (18.5)%
===== =====
</TABLE>
18
Sales and service revenues for the year ended December 31, 1994, were
$11,787,000, representing an increase of $5,496,000 or 87% from 1993 revenues.
Sales of voice processing products accounted for $2,728,000 of the increase,
attributable to the establishment of the Cobotyx Division. Telephone equipment
sales revenues also increased by 44% over 1993 sales revenues, as end-user sales
increased by $2,139,000 or 43%, and wholesale sales increased by $339,000 or
55%. The Company attributes these results to wider acceptance of the Company's
products, a better trained sales force, and expanded wholesale sales efforts.
Service revenues increased by $290,000 or 58%, primarily attributable to the
Company's receipt of $204,000 from a local distribution plant study it conducted
for the Romanian Ministry of Communications, under a grant from the U.S. Trade
and Development Agency. Excluding revenues from this contract, service revenues
otherwise increased by $86,000 or 17%, primarily attributable to increased
repair and refurbishing revenues.
Gross profit for the year ended December 31, 1994, increased by $2,136,000
to $3,557,000 (30.2% of revenues) from $1,421,000 (22.6% of revenues) for the
year ended December 31, 1993. The increase was primarily attributable to the
increase in voice processing products sales (which generate higher gross profit
margins than telephone equipment sales) following the CCI acquisition, and the
allocation of overhead costs over a larger revenue base. Excluding voice
processing equipment sales, gross profit margins were otherwise 27% in 1994, up
from 23% in 1993, principally due to the allocation of overhead costs over a
larger sales base.
Selling, general and administrative expenses ("SG&A") for the year ended
December 31, 1994, were $3,183,000, representing an increase of $738,000 or 30%
from 1993 SG&A. The increase consisted of (i) personnel, office and product
marketing costs in the amount of $894,000 incurred in connection with the
Company's entry into the voice processing products marketplace through the
formation and staffing of the Cobotyx Division in January 1994 and (ii) $156,000
of incremental international market development costs, principally in personnel,
consulting, and travel costs, partially offset by (iii) a $257,000 reduction in
investor relations expenses and (iv) a $55,000 net reduction in all other
expense categories. Investor relations expense in 1993 included a $313,000
non-cash charge resulting from the issuance of discounted stock options to two
investor relations service companies which were engaged to increase investor
awareness of the Company's products and services. Excluding this non-cash
expense, investor relations expenses were otherwise $56,000 higher in 1994 than
in 1993. SG&A decreased as a percentage of revenues to 27% in 1994 from 38.9% in
1993, due principally to the Company's 1994 revenue growth and resulting
favorable operating economies of scale.
Research and development expenses ("R&D") for the year ended December 31,
1994, were $217,000, representing an increase of $126,000 or 138% from 1993 R&D.
The increase was attributable to the salaries of newly hired technicians and
engineers and the costs of equipment to support the Cobotyx Division's product
development efforts.
Interest expense for the year ended December 31, 1994, was $40,000
representing a $21,000 or 34% decrease from 1993 interest expense, as a result
of lower average debt levels and lower weighted average interest rates.
Net income for the year ended December 31, 1994, was, as a result of the
foregoing, $172,000 as compared to a net loss of $1,166,000 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31, 1996
Working capital at March 31, 1996 was $2,569,000, a 3% increase over the
$2,495,000 of working capital at December 31, 1995. The working capital ratio at
March 31, 1996 was 1.7 to 1 as compared to 1.9 to 1 at December 31, 1995.
Operating activities used $516,000 of cash during the three months ended
March 31, 1996, principally as a result of (i) a $526,000 increase in other
assets, of which amount $381,000 represents rebates receivable from product
purchases (see Note 2 of the Notes to Consolidated Financial Statements
(Unaudited), included elsewhere herein), and (ii) a 21% increase in inventories
as the Company increased its stocking levels on certain telephone products.
19
Investing activities used $233,000 of cash during the three months ended
March 31, 1996, principally in the purchase of warehouse equipment, vehicles,
computer and office equipment for use by FAMS in its business operations.
Financing activities provided $410,000 of cash during the three months
ended March 31, 1996 attributable to borrowings under the Company's revolving
credit line.
The Company has thus far satisfied its 1996 cash requirements through the
use of existing cash and through borrowings under its revolving credit facility.
The average and highest amounts borrowed under this credit facility during the
three months ended March 31, 1996 was $1,043,000 and $1,864,000, respectively.
The Company's borrowings are dependent upon the continuing generation of
collateral, subject to its $2 million credit line.
The Company believes that it has sufficient capital resources to satisfy
the working capital requirements of its present level of operations, but may
require additional sources of capital in order to significantly expand its
operations. Accordingly, the Company intends to use the proceeds of this
Offering to finance and expand the Company's business, both domestically and
internationally, which could include the acquisition of other businesses. See
"Use of Proceeds."
On March 13, 1996, the Company's newly formed subsidiary, Farmstead Asset
Management Services, LLC, entered into a two year lease for approximately 70,100
square feet of warehouse and office space in Piscataway, New Jersey at a monthly
rent of $24,827 commencing in April 1996. This facility is used for the
remarketing of used AT&T telephone and computer equipment, and for the provision
of asset storage and management services. The Company estimates that the
start-up costs of this new operation, consisting principally of the $250,000
asset purchase price plus relocation and other operating costs, will approximate
$350,000. See Note 12 of the Notes to Financial Statements.
Inflation has not been a significant factor in the Company's operations.
YEAR ENDED DECEMBER 31, 1995
Net working capital at December 31, 1995 was $2,495,000, a decrease of
$278,000 from the $2,773,000 of net working capital at December 31, 1994. The
working capital ratio at December 31, 1995 was 1.9 to 1 as compared to 2.2 to 1
at December 31, 1994. The decrease in working capital and the related ratio was
principally due to the operating loss and the increase in bank borrowings.
Operating activities used $1,122,000 of cash in 1995, principally due to
the operating loss, and increases in both accounts receivable and inventories in
support of the Company's increased sales levels.
Investing activities used $432,000 of cash in 1995, principally due to the
Company's acquisition of a 50% ownership of ATC which required a $390,000
capital contribution.
Financing activities provided $1,272,000 of cash in 1995, principally due
to borrowings under the Company's revolving loan facility, and to proceeds from
the exercise of warrants. On June 5, 1995, the Company entered into a one year
renewable Commercial Loan and Security Agreement (the "Loan Agreement") with
Affiliated Business Credit Corporation replacing the Fleet Agreement, which
provided for a $1.5 million revolving line of credit. Under the terms of the
Loan 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 Loan
Agreement are repayable upon demand, and are secured by all of the Company's
assets. As of December 31, 1995, the unused credit line was approximately
$48,000. The average and highest amounts borrowed under all credit facilities
during the year ended December 31, 1995 was $880,000 and $1,479,000,
respectively. The Company's borrowings are dependent upon the continuing
generation of collateral, subject to its credit limit.
20
On March 11, 1996, the Loan Agreement was extended to May 31, 1997, and the
amount of the credit line was increased from $1.5 million to $2.0 million. The
Loan Agreement was further amended to (i) temporarily increase the Eligible
Inventory advance rate from 25% to 40% until May 31, 1996, followed by a gradual
decline ranging from 2% to 1% per month, to return to 25% by February 1, 1997,
(ii) temporarily increase the maximum inventory advance amount to $425,000
through May 31, 1996, followed by a gradual decline ranging from $25,000 to
$12,500 per month, to return to $300,000 by February 1, 1997, and (iii) increase
the minimum assumed monthly loan balance to $700,0000.
During 1995, the Company consumed a significant amount of its capital
resources on the ATC acquisition, as well as on the pursuit of other
international business development activities. As further described in Note 11
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 is has
sufficient capital resources to satisfy the working capital requirements of its
current operations. The Company's intent, however, is to continue to seek
opportunities to expand its business and product lines both domestically and
internationally. The Company has recently reduced the scope of certain
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. The Company may also require additional external sources
of financing in order to further expand its domestic business.
Inflation has not been a significant factor in the Company's operations.
21
BUSINESS
GENERAL
Farmstead Telephone Group, Inc. (the "Company") is engaged in the Customer
Premise Equipment ("CPE") segment of the telecommunications industry,
principally as a secondary market reseller of used and/or refurbished AT&T
business telephone parts and systems, and as a designer, manufacturer and
supplier of proprietary voice (or "call") processing systems that provide
automated call handling, voice and fax messaging, interactive voice response,
automated call distribution and message notification functionality. The Company
also provides equipment repair and refurbishing, inventory management, and other
related value-added services. The Company sells its products and services to
corporate end users, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
The Company was incorporated in Delaware in 1986 and became a public
company in May 1987 following the completion of its initial public offering. In
January 1994, the Company acquired certain operating assets of Cobotyx
Corporation, Inc. ("CCI"), a designer, manufacturer and supplier of voice
processing systems, and expanded its entry into this marketplace through the
formation of a voice processing products division ("Cobotyx Division").
CUSTOMERS AND TARGET MARKETS
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to over 1,400 customers during 1995 ranging
from small companies to large, multi-location corporations, and including
equipment wholesalers, dealers, distributors and government agencies and
municipalities. The Company believes its customers are generally (i) existing
AT&T equipment users that require piece parts to upgrade, expand, or maintain
their existing telephone system, (ii) cost-conscious businesses that desire to
save money by purchasing used or refurbished equipment instead of new equipment,
but still retain AT&T installation and maintenance support for these products,
and (iii) businesses that may have no current need for AT&T's latest and most
technically advanced product offerings. Businesses also look to the Company, and
to other secondary market resellers, to meet their immediate equipment delivery
requirements. The Company is also pursuing the sale of its products
internationally, such as in the People's Republic of China ("PRC"), the Republic
of the Philippines, and in other countries which have underdeveloped
telecommunications systems and may have limited financial resources.
The Company distributes its voice processing products domestically and
internationally to approximately an additional 500 customers, primarily
independent dealers and distributors, end-users, and through arrangements with
several manufacturers of telephone systems and business equipment.
During the two years ended December 31, 1995, no single customer accounted
for more than 5% of revenues, except for AT&T, which accounted for 5.4% (6.6% in
1994). The Company's business is not considered seasonal, although historically
revenues during the third quarter ended September 30 have often (but not during
1995) been lower than the other quarters of the year, which the Company
attributes to a slowdown of customer purchasing activity during the summer
months of July and August.
STRATEGY
The Company's objective is to significantly expand its revenues and
profitability through a strategy based on:
Domestic Expansion - The Company is seeking to expand its revenues and
customer base in the domestic secondary telephone equipment marketplace by
increasing its sales force, establishing business in other geographic areas
of the U.S. and by continuing to provide quality refurbished products,
superior customer service and support (see "Customer Services"), and other
value-added services as required by its customers. The Company is also
attempting to become a more strategic partner to AT&T, by specializing in
the resale of AT&T products and through the
22
establishment of distribution rights to new AT&T equipment as allowed by
AT&T. The Company may also seek to acquire similar businesses in other
geographic areas of the U.S., as opportunities arise, in order to increase
its share of this market.
New Voice Processing Products and Services - The Company plans to continue
its expansion into this marketplace by utilizing or developing current
technologies to produce state-of-the-art products that provide basic voice
and call processing functionality while also providing flexibility and
expandability. The Company plans to adapt its technology to emerging
industry standards, and plans to provide custom computer telephone
integration solutions for its customers.
International Expansion - The Company's strategy includes developing and/or
providing products and technologies to assist developing countries which
have inadequate telecommunications infrastructures by providing low-cost,
reliable telecommunications equipment and services. The Company plans to
seek and develop relationships with internationally-based partners and
enter into marketing and/or distribution agreements with established
overseas businesses in the countries that the Company has targeted to
penetrate, including the PRC, the Republic of the Philippines, and other
countries.
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC"). Prior to its closing in January
1996, the ARC primarily operated to service AT&T affiliates in the orderly
disposition, by way of consignment sales arrangements, of excess, overstocked
and end-of-life telecommunications, computer and data transmission equipment.
The assets acquired consisted primarily of warehouse equipment, vehicles,
computer and office equipment, and inventory. The Company concurrently formed a
subsidiary corporation, Farmstead Asset Management Services, LLC ("FAMS"), which
is using the purchased assets to start up a similar operation in Piscataway, New
Jersey. The Company intends to attempt to re-establish certain of the
relationships that the ARC enjoyed, however, no assurances can be given that it
will be able to do so. The Company believes that the operations of FAMS will
provide it with an opportunity to develop new sources of equipment for resale to
its existing customers, as well as to other wholesalers in the telephone, data
and computer secondary markets, and internationally. While operational for less
than one full month, for the first quarter of 1996, FAMS contributed 1% of the
Company's revenue during its initial start up phase.
INDUSTRY BACKGROUND
According to reports published in 1993 and 1994 (the latest available) by
The Telecom Library, Inc., a communications industry publishing company, the
telephone equipment secondary market is one of the fastest growing sectors of
the telecommunications industry, with gross sales estimated to reach $704
million in 1994, representing an increase of 22% from $577 million in 1993. Of
the total 1994 gross sales, 66% represented sales of parts (as opposed to
complete systems). In addition, sales to end-users represented 65% of total
sales. AT&T equipment comprised the largest brand name segment of the
marketplace, with 25% of 1994 sales (23% in 1993). The 1994 report forecasts an
annual growth rate of 20% for 1995 and for 1996, and through the end of the
decade, annual growth rates are estimated to be in the thirty percentile range
and higher, driven by increases in the replacement rate of equipment in the
installed base, due to technical innovations in the equipment.
According to Vanguard Communications Corp., an independent consulting firm
specializing in the voice processing industry, the domestic market for voice
processing systems recorded aggregate end-user revenues of approximately $2.1
billion in 1994, with approximately 74,000 systems estimated to have been sold.
The marketplace is further divided into two main categories: voice messaging
equipment, in which the Company's products primarily compete (with 1994 end user
revenues of $1.3 billion, 63,000 systems shipped), and voice response equipment
(with end user revenues of $853 million, 11,000 systems shipped). Major
manufacturers of voice processing systems include switch suppliers (such as
AT&T, Northern Telecom, Inc. and Rolm Co.), independent manufacturers of
proprietary systems (such as Centigram Communications Corporation and Octel
Communications Corporation), and independent manufacturers of personal computer
("PC") based, open architecture systems (such as Active Voice, Inc. and Applied
Voice Technologies, Inc.). The open system, standard architecture suppliers
often buy board level technology from a few core voice technology suppliers, and
then use standard operating systems and programming languages, and PCs, to
create proprietary voice processing solutions.
23
THE COMPANY'S TELEPHONE EQUIPMENT PRODUCTS
PRODUCT DESCRIPTION
The Company sells used and/or refurbished telephone parts and systems
manufactured by AT&T. Parts sold primarily include digital and analog telephone
sets, circuit packs, and other system accessories, such as headsets, consoles,
speakerphones and paging systems. Telephone systems are generally categorized as
key systems and PBX systems. Key systems are generally used by small businesses,
and are characterized by telephones which have multiple buttons permitting the
user to select outgoing or incoming telephone lines directly. PBXs are private
telephone switching systems usually located on a customer's premises, with an
attendant console, and are designed for use by larger businesses. Because most
of the features of a PBX are stored in the switch, and not on the telephone, a
PBX can provide more features and flexibility than a key system.
AT&T key systems sold by the Company, in both piece parts and complete
systems, and their capacities include: Merlin(R) and Merlin Legend(R) (2 lines,
6 telephones to 80 lines, 144 telephones); Spirit(R) (3 lines, 8 telephones to
24 lines, 48 telephones) and Partner(R) (6 lines, 12 telephones to 24 lines, 48
telephones).
AT&T PBX equipment sold by the Company, primarily in piece parts, and their
capacities include: System 25 (any combination of lines and telephones up to a
maximum of 256), System 75 (200 lines, 800 telephones); System 85 (16,000 lines,
50,000 telephones); Definity(R) G1 (400 lines, 1,600 telephones); Definity(R) G2
(32,000 lines, 100,000 telephones); Definity(R) G3 (4,000 lines, 10,000
telephones); and Dimension(R) (2,968 lines, 7,232 telephones), an older
technology, manufacturer-discontinued product which the Company offers for sale
in the PRC and other foreign countries.
Telephone equipment sales and service revenues accounted for 79% of total
Company revenues in 1995 (75% in 1994). Sales of PBX equipment and associated
telephones and accessories comprised approximately 88% (83% in 1994) of
equipment sales, while key equipment parts and system sales comprised
approximately 12% (17% in 1994) of equipment sales.
RELATIONSHIP WITH AT&T
Since 1985, AT&T has provided support to the secondary market by continuing
to offer installation, maintenance, repair, reconditioning and certification
services for its products purchased by end-users through equipment resellers.
Equipment resellers such as the Company may also, with various restrictions,
utilize AT&T documentation, technical information and software. AT&T also
generally provides a one year warranty for products purchased from AT&T for
resale, provided that AT&T performs the installation.
The installation and maintenance of AT&T equipment is generally provided by
AT&T. The Company does, however, coordinate the installation scheduling directly
with AT&T if requested to do so by its customer. The Company also has agreements
with a number of installation and maintenance companies covering the New England
and New York geographic areas who can also provide such services.
Since 1991, the Company has been an "AT&T Authorized Distributor of
Selected AT&T - Remanufactured Products" ("AT&T Agreement"), under a program
with AT&T which currently includes only eight other secondary market companies
in different geographic areas of the country. The AT&T Agreement does not
provide the Company with an exclusive sales territory. Under the program, the
Company is authorized to sell domestically specified AT&T remanufactured
products, currently including certain Merlin(R), Spirit(R) and System 25(R)
products. The Company is also required to purchase all of such included products
directly from AT&T. On March 5, 1996, the AT&T Agreement was renewed for another
one year term, although it can contractually be canceled by either party without
cause upon 90 days notice.
In September, 1995, AT&T announced that it was to be split into three
publicly-traded companies: a telecommunications equipment and technology company
called Lucent Technologies, Inc. ("Lucent"), a business computing company called
NCR, and a communications services company
24
which will retain the name AT&T (for purposes of this report, all entities are
collectively referred to as "AT&T"). On February 1, 1996, the AT&T Agreement was
assigned to Lucent. The Company believes that its relationship with AT&T is
satisfactory and has no indication that AT&T has any intention of canceling the
AT&T Agreement with the Company or of severing its relationship with the Company
when the current agreement expires. In the event that the AT&T Agreement is
terminated, the Company does not believe that it would have a material effect on
the Company's business, since it could acquire like products from other sources
at comparable prices. The Company's business is not expected to be adversely
impacted by AT&T's reorganization. It may, however, be materially adversely
affected should AT&T decide no longer to provide installation and maintenance
services on used and/or refurbished products sold by the Company.
In May 1996, the Company entered into a new one year renewable distributor
agreement with Lucent (the "Lucent Agreement") giving the Company the right to
sell new Merlin Legend(R) and Partner(R) Communications Systems in the State of
Connecticut and certain parts of New York, Massachusetts and Vermont. In June
1996, the Company also entered into an agreement with Lucent becoming a
distributor of Classic Definity(R) equipment in Connecticut, Rhode Island,
Western Massachusetts and certain parts of New York. The Company believes that
these agreements with Lucent have expanded the Company's product offerings and
based upon industry growth projected by The Telecom Library, Inc., a
communications industry research firm, and further based upon AT&T's portion of
the secondary market and the Company's growing portion of AT&T's market share,
the Company projects that its revenues could significantly increase over the
next several years.
MARKETING AND CUSTOMERS
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to more than 1,400 customers during 1995
ranging from small companies to large, multi-location corporations, and
including equipment wholesalers, dealers, distributors and government agencies
and municipalities. Approximately 58% (56% in 1994) of the Company's 1995
telephone equipment sales and service revenues were to customers located in New
England, New York and New Jersey. End-user sales accounted for approximately 85%
(88% in 1994) of telephone equipment sales in 1995, while sales to resellers
accounted for approximately 15% (12% in 1994). The Company markets Dimension(R)
PBX equipment in the People's Republic of China ("PRC") to businesses,
government agencies and local telephone service providers through its 50% owned
affiliate, Beijing Antai Communication Equipment Company, Ltd. ("ATC") located
in Beijing, PRC.
INTERNATIONAL MARKETS FOR TELEPHONE EQUIPMENT
The Company has been pursuing expansion of its business internationally, to
date principally in the Asia-Pacific region. The Company has focused on the
development of proprietary Chinese system software, proprietary digital and
analog interfaces, and a proprietary billing system, the combination of which
would allow the Company's refurbished PBX equipment to be reconfigured in the
PRC to act as a central office (a telephone company facility where subscriber's
lines are joined to switching equipment for connecting other subscribers to each
other, locally and long distance). This product, which has been designed for use
in the rural areas of the PRC, can also be used in other developing countries
that require modern equipment but cannot afford the price of new, digital
central office equipment being offered by the major telephone equipment
manufacturers. In addition to the PRC, the Company plans, in the future, to
market this equipment in the Republic of the Philippines, Eastern Europe,
Mexico, Central and South America and other countries in the Asia-Pacific
region. Its ability to do so may be dependent, among other things, upon
obtaining adequate financing for these projects, and satisfying technical and
governmental certification and licensing requirements in such countries.
On December 31, 1994, the Company entered into an agreement to purchase
D.W. International, Ltd.'s ("DWI") 50% ownership interest in ATC for a purchase
price of $100. The purchase transaction was completed effective May 30, 1995
upon receipt of Chinese government approvals. ATC 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 serves as General Manager of ATC. ATC, previously a
distributor for the Company in the PRC, markets, assembles, manufactures,
installs and services the Company's central office, PBX and
25
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 also made a $390,000 capital contribution to
ATC to complete the $500,000 original capital contribution requirement of the
foreign party to the joint venture.
THE COMPANY'S VOICE PROCESSING PRODUCTS
PRODUCT DESCRIPTION
Voice (or "call") processing encompasses various types of computer
assistance to facilitate interaction over the telephone, between a caller, one
or more persons, and a computer. With call processing technology, telephone
users can utilize voice and touchtones to manipulate calls, interact with
computer databases, and access and respond to messages or data from voice or
other electronic media, thereby making internal and external communications more
efficient. The three most common call processing features are: (1) Voice Mail -
allows a caller to store voice messages and replies in a computer, and thereby
conduct a dialogue with any person without having to be on the same line at the
same time; (2) Automated Attendant - allows a caller to direct the computer to
switch the call to a telephone extension different from the one dialed, without
the manual intervention of an operator; and (3) Interactive Voice Response -
allows a caller to obtain information in voice form (for example, selecting
announcements from a list of options) from a local or non-local database.
During 1993, the Company decided to expand its product offerings to its
existing telephone equipment customers, and entered into distribution agreements
with manufacturers of voice processing products. These agreements provided the
Company with a basic voice processing product line enabling it to meet the
system requirements of customers in the 2 to 8 port (i.e. capable of
simultaneously handling from 2 to 8 telephone calls) segment of the CPE market.
This sized system was typical of the "branch office" locations of many of the
large corporations already served by the Company. In January 1994, the Company
acquired certain assets of CCI, and established the Cobotyx Division to be
responsible for ongoing voice processing equipment business and strategy. The
assets acquired from CCI included technology and know-how, inventories, property
and equipment, all trademarks, tradenames, and patents. Certain key engineering,
technical and support personnel of CCI were subsequently hired by the Company to
staff this operation. Through its Cobotyx Division, the Company designs,
integrates, manufactures, distributes and supports a family of proprietary call
processing systems. In addition to proprietary hardware design, software
programs and applications procedures, the Company uses component technology
licensed from other suppliers. Products currently marketed include:
COBOTTM Plus Receptionist - a single port, solid state, fully-featured
automated attendant with Rotary Dial Detection, for PBXs, Key systems or Centrex
(a business telephone service offered by a local telephone company, providing
custom calling features such as call forwarding, call transfer, least cost
routing and speed calling) applications.
COBOTTM Plus Digital Announcer - a single port, solid state, fully-featured
announcer for PBXs, Key systems or Centrex applications.
COBOTTM Plus Secretary - an automated attendant and voice mail system, with
a 2 - 8 port, 500 mailbox capacity.
KASSIE - a PC-based automated attendant and voice mail system, with a 2 -
24 port, 10,000 mailbox capacity, that can be optioned to support advanced
applications like fax and interactive voice response.
SOHO ("small office, home office") SECRETARY - a low cost, but
fully-featured automated attendant and voice mail system, with a 2 - 4 port
capacity, designed for the small office, branch office market.
26
VOICE PROCESSING MARKETING AND CUSTOMERS
The Company distributes its voice processing products domestically and
internationally to approximately 500 customers, consisting primarily of a
nationwide network of independent dealers and distributors, end-users, and
through arrangements with several manufacturers of telephone systems and
business equipment. A typical dealer is a small business operator who primarily
sells telephone systems to small and medium size businesses. Most dealers also
sell competing call processing systems. The Company attempts to maintain
relationships with a large number of dealers and, because of the potential for
dealer turnover, considers it advantageous not to become overly dependent upon a
few dealers. Approximately 66% of the Company's voice processing sales and
service revenues in 1995 were from dealers and distributors (51% in 1994), and
26% (28% in 1994) were from sales to AT&T pursuant to an OEM (Original Equipment
Manufacturer) contract. Approximately 30% (25% in 1994) of the Company's voice
processing sales and service revenues in 1995 were international, principally to
customers in Mexico, Central and South America. Voice processing sales and
service revenues accounted for 21% of total revenues in 1995 (25% in 1994).
Although the above OEM contract was not formally extended by its February
28, 1996 expiration date, under its terms the Company is obligated to supply
product for an additional year, and parts for an additional five years, should
AT&T request it. The Company cannot estimate the amount of future orders which
may be generated from the post-expiration contract provisions, however, based
upon projected growth in revenues from its other business activities, the
Company believes that the non-renewal of the AT&T OEM contract will not have a
material adverse impact on the Company.
INTERNATIONAL VOICE PROCESSING MARKETS
International voice processing product sales to date have primarily been in
Mexico, Central and South America.
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") was the manufacture,
assembly and marketing in the PRC and other international markets of voice
processing equipment and software, including all of the Company's current voice
processing products. 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. For the year ended December 31, 1995, the Company incurred expenses
pursuant to these agreements of approximately $450,000, consisting of working
capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company.
As a result of the Company's inability to fund the $1 million initial
capital contribution requested by Taikang in order to start the joint venture,
on November 1, 1995 the Company and Taikang agreed to terminate both the JV
Agreement and the Interim Agreement.
CUSTOMER SERVICES
The Company is committed to respond to its customers' service or
project-oriented telecommunications needs. While each type of service is not
material to the Company's operations as a whole, the Company believes they help
differentiate the Company from its competitors, as well as contribute to longer-
lasting customer relationships and incremental sales. The Company provides the
following services:
Repair and Refurbishing: The Company performs fee-based repair and
refurbishing services for its customers through its in-house facilities and
use of subcontract repair shops. For telephone equipment, the in-house work
is generally limited to the cleaning, buffing and minor repair of
single-line telephone sets. The Company outsources the repair of circuit
boards and digital telephone sets locally. The Cobotyx Division has the
technical equipment and personnel to repair voice processing equipment down
to the circuit board level.
27
Inventory Management: The Company provides inventory storage, accounting,
and distribution services, acting as a centralized depot for its customers'
idle telecommunications equipment.
Other Services: The Company's technical staff currently provide
engineering, configuration, technical "hot line" telephone support and
limited on-site installation services. The Company rents out equipment on a
month-to-month basis, servicing those customers that have temporary,
short-term equipment needs. For two companies in the television broadcast
industry the Company provides telecommunications coordination services for
broadcast sports and other events throughout the country. The Company's
Cobotyx Division also provides custom computer telephone interface
solutions for its customers. During 1994 the Company performed a local
plant distribution study in Romania under a contract with the Romanian
Ministry of Communications and the U.S. Trade and Development Agency. The
objective of the study was to identify available technologies to support
the rapid growth of telephone service in Romania, and to perform cost
analysis for these technologies.
The Company's combined service revenues accounted for 4% of revenues in
1995 and 6.7% of revenues in 1994.
COMPETITION
The marketplace for the Company's telephone equipment products is highly
competitive. The Company competes with AT&T and other secondary market AT&T
equipment resellers, of which the Company estimates there are approximately 100
nationwide, principally on the basis of timeliness of delivery, customer service
and price. The growth in the number of these dealers has resulted in more
competitive sales pricing, and in higher equipment acquisition costs. The
Company also competes with AT&T and other new equipment manufacturers and
distributors as consumers decide whether to buy new versus used equipment.
The portion of the industry that supplies call processing systems to small
and medium sized businesses is extremely competitive. In the domestic dealer and
original equipment manufacturer channels, the Company competes on the basis of
price, system features, ease of installation and use, sales and technical
support, and product reliability. Principal competitors at present fall into
three categories: (a) telephone equipment manufacturers that offer their own
call processing systems (for example, AT&T, Northern Telecom, Inc., Rolm Co. and
Toshiba America Information Systems, Inc.); (b) independent call processing
system manufacturers whose products integrate with multiple telephone systems
and are either based on proprietary hardware (for example Centigram
Communications Corporation, Comverse Technology, Inc. and Octel Communications
Corporation), or are PC-based like the Company's products (for example, Active
Voice, Inc., Applied Voice Technologies, Inc. and Compass Technology, Inc., now
a division of Octel Communications Corporation) and (c) large telephone
companies. For both telephone and voice processing products, the Company
anticipates intensified competition from larger companies having substantially
greater technical, financial and marketing resources, as well as larger customer
bases and name recognition than the Company. As the industry evolves to further
integrate telephones with PCs, the Company anticipates that it will encounter a
broader variety of competitors, including new entrants from related computer and
communication industries. There can be no assurance that the Company will be
able to develop more technologically advanced products or that even if it is
able to develop, or acquire rights to incorporate into its products, the next
generation of technology, that such products will perform as well as
competitor's products or that such products will be accepted by the market or
that the Company will see any financial benefit therefrom.
SUPPLIERS
The Company obtains its telephone equipment parts for resale from a variety
of sources, depending upon price and availability at the time of purchase. These
sources include AT&T, other secondary market equipment dealers and distributors,
leasing companies and end-users. In accordance with the
28
AT&T Agreement and the Lucent Agreement, the Company is required to purchase
certain products only from AT&T or Lucent. On March 5, 1996, the AT&T Agreement
was renewed for another one year term, although it can contractually be canceled
by either party without cause upon 90 days notice. The Company believes that if
the AT&T Agreement were to be canceled or not renewed, it could obtain similar
product from other suppliers. The Company is not otherwise dependent upon any
single supplier for telephone equipment.
The Company believes that product availability in the marketplace is
presently sufficient to allow the Company to meet its customers' delivery
requirements.
The Company's solid state call processing products, namely the COBOTTM Plus
Digital Announcer and the COBOTTM Plus Receptionist are manufactured and
assembled for the Company by DOVatron Manufacturing East, a division of
DOVatron, Inc. ("DOVatron"). DOVatron, which is a contract electronics
manufacturer, procures all of the materials, consisting of printed circuit
boards, electronic components and cabinets. Once assembled and tested, the
completed units are either shipped to the Company or directly to its customer.
While the Company plans to continue using DOVatron in the manufacture and
assembly of these products, management believes that it could readily engage
other assembly houses if it were necessary to do so. For its other voice
processing products, the Company purchases electronic components, IBM-compatible
486 PCs and voice and fax boards from multiple vendors. The products are
assembled, configured to customer specifications, tested and/or installed by the
Company or alternatively, the Company can purchase certain products complete to
the Company's specifications. Because the Company's product platforms consist
principally of standard electronic and PC components, the Company is not
dependent upon any single supplier.
The Company utilizes in certain of its products software obtained under
license agreements with vendors. The Company believes that the functionality
provided by the licensed software can be obtained from multiple software
suppliers, and is therefore not dependent upon any single supplier.
PATENTS, LICENSES AND TRADEMARKS
No patent or trademark is considered material to the Company's overall
operations. The manufacture and sale of certain of the Company's products
involves the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products sold by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
The Company also relies upon unpatented trade secrets, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to its unpatented trade secrets.
The Company's ability to sell, through ATC, its central office and PBX
products in certain provinces of the PRC will be dependent upon obtaining
product certification from the provincial telephone service agencies, and may
also be dependent upon the grant of a network license by the Ministry of Post
and Telecommunications. The Company is presently attempting to obtain
certification to sell its products in a certain province in the PRC, which it
hopes to obtain within the next few months. At that time it also plans to apply
for a national network license. No assurances can be given that the Company will
achieve certification of its products, or a network license, and a failure to
receive either
29
may adversely impact the Company's ability to sell its products in the PRC,
either directly or through ATC. Similar certification and licensing procedures
may also apply in other foreign countries in which the Company is seeking to
market its products.
The Company was granted permission to utilize certain AT&T designated
trademarks, insignia and symbols in the Company's advertising and promotion of
products furnished under the AT&T Agreement.
RESEARCH AND DEVELOPMENT
The Company's telephone equipment research and development ("R&D")
activities have been principally focused on the PRC, for which marketplace the
Company has been developing central office and PBX systems with proprietary
software and interface capabilities to match the local digital and analog
networks, and a Chinese character and currency billing system for use by local
PRC telephone companies and businesses. The Company believes that certain of
these technologies will also have uses in other international markets. R&D in
connection with the development of proprietary software is principally conducted
by an outside engineering firm on an as needed basis. R&D in connection with the
development of interfaces and the billing system have been conducted through
ATC. R&D expense related to the above projects was $44,000 and $78,000 during
1995 and 1994, respectively.
R&D expense in connection with the development of new voice processing
products and technologies was $55,000 and $139,000 during 1995 and 1994,
respectively, consisting principally of the salaries of in-house engineers and
technicians.
EMPLOYEES
As of March 31, 1996, the Company had 80 full-time and 3 part-time
employees, including 24 in sales and customer support positions. The Company
believes that its relations with its employees are satisfactory. The Company's
employees are not represented by any organized labor union and are not covered
by any collective bargaining agreements.
DESCRIPTION OF PROPERTY
The Company occupies approximately 29,000 square feet of office and
warehouse space in East Hartford, Connecticut, which it uses for its principal
executive and administrative offices and its telephone equipment operations, and
6,000 square feet of office space in Danbury, Connecticut, which it uses for its
voice processing products division. These facilities are currently rented on a
month-to-month basis for $12,100 and $5,000 per month, respectively. The Company
believes that its facilities are adequate for its present needs and suitable for
their intended uses. However, if the Company's operations continue to expand, it
will likely require to either obtain another facility (through purchase or long
term lease) or expand and renovate its current facility. If new or additional
space is required, the Company believes that adequate facilities are available
at competitive prices in the immediate areas of current operations. See "Use of
Proceeds."
On March 13, 1996, the Company's newly formed subsidiary, Farmstead Asset
Management Services, LLC, entered into a two year lease for approximately 70,100
square feet of warehouse and office space in Piscataway, New Jersey at a monthly
rent of $24,827 commencing in April 1996. This facility is used in the
remarketing of used computer, data transmission and telephone equipment,
primarily of AT&T manufacture, and it provides asset storage and management
services.
LEGAL PROCEEDINGS
The Company is not a party to any pending material proceedings and no such
proceedings are known to be contemplated by others.
30
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name and age of each director and each
executive officer, other than such directors, and the positions held by them
with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- ---------------------------- ---- ---------------------------------------------------------
<S> <C> <C>
DIRECTORS
George J. Taylor, Jr. (2) 53 Chairman of the Board, President, Chief Executive Officer
and Director
Robert G. LaVigne 45 Vice President-Finance & Administration, Chief Financial
Officer, Secretary, Treasurer and Director
Harold L. Hansen (1)(2) 66 Director
Hugh M. Taylor (1)(2) 52 Director
Joseph J. Kelley(1)(2) 56 Director
OTHER EXECUTIVE OFFICERS
Alexander E. Capo 45 Vice President-Marketing and Sales
Joseph A. Novak, Jr. 53 Vice President-Operations; General Manager, FAMS
Neil R. Sullivan 45 General Manager and Assistant Secretary
John G. Antonich 55 General Manager, Cobotyx Division
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
George J. Taylor, Jr. has been Chairman of the Board of Directors and Chief
Executive Officer of the Company (including its predecessors) since 1984, and
President since 1989. He was a director of FIC Acquisition Corporation (formerly
Farmstead International Corporation) from 1988 until 1992, and was also the
President of Lease Solutions, Inc. (formerly Farmstead Leasing, Inc.), a
business products and automobile leasing company, from 1981 until it was
dissolved in 1993. From 1977 to 1981, Mr. Taylor was Vice President - Marketing
and Sales for National Telephone Company. He was one of the founders of the
National Association of Telecommunication Dealers, has been a member of, or
advisor to, its Board of Directors since its inception in 1986, and for two
years served as its President and Chairman. Mr. Taylor is also a Director of the
Company's 50 % owned affiliate, Beijing Antai Communication Equipment Company,
Ltd. ("ATC"). Mr. Taylor is the brother of Mr. Hugh M. Taylor.
Robert G. LaVigne was employed by the Company in March 1988 and has served
in the capacities indicated above since July 1988. In addition, from January
1994 until October 1994 he served as General Manager of the Company's domestic
telephone equipment business unit. From 1985 to 1988 he was the Controller of
Economy Electric Supply, Inc., a distributor of electrical supplies and
fixtures. From 1982 to 1985 he was the Corporate Controller of Hi-G, Inc., a
manufacturer of electronic and electromechanical components. Mr. LaVigne is a
Certified Public Accountant, and was associated with the accounting firm of
Arthur Young and Company from 1977 to 1982. Mr. LaVigne is also a Director of
ATC.
Harold L. Hansen, a director of the Company since 1992, is currently, and
always has been, the President of Hansen Associates, a management and financial
consulting firm founded by him in 1983. From November 1994 to April 1995 he was
also the President of H2O Environmental, Inc., an environmental and geotechnical
services company. Prior to 1983 Mr. Hansen served in various corporate executive
capacities including Executive Vice President and Chief Operating Officer of
Gestetner Corporation, Vice President and General Manager of the Office Products
Division of Royal Business Machines and Vice President and General Manager of
the Business Products Group of Saxon Industries.
31
Hugh M. Taylor has been a director of the Company since July 1993. Since
June 1994 he has served as a Managing Director of Newbury, Piret & Co., an
investment banking firm located in Boston, MA. From 1993 to June 1994 he was the
CEO, President and a director of the Berlin City Bank, Berlin, New Hampshire.
From 1992 to 1993 he was the Executive Vice President of Fleet Bank of
Massachusetts. From 1990 to 1992 he was the Executive Vice President and Chief
Operating Officer of Fleet Bank of Boston. From 1973 to 1990 he was employed by
the New England Merchants Bank, later the Bank of New England, where he held
various executive management positions within the Commercial Banking Division,
and the bank's venture capital subsidiary. Mr. Taylor is the brother of Mr.
George J. Taylor, Jr.
Joseph J. Kelley has been a director of the Company since April 1995. He
has been involved in the telecommunications industry since 1963. From 1994 to
the present he has been President of East Haven Associates of Wellesley, in
Wellesley, Massachusetts, which provides executive and technical support for
European and Asian based communication companies seeking to expand market share
in the U.S., as well as for U.S. companies seeking to expand internationally.
During 1994, he was Group Vice President of NYNEX, responsible for operations in
the Commonwealth of Massachusetts. From 1985 to 1994 he served in various
executive level positions with NYNEX, or associated companies including Vice
President - Operations of New England Telephone (1991 - 1993), Vice President -
New England Telephone, Network Department (1990 - 1991), Corporate Director of
Business Development, NYNEX Marketing (1988 - 1990) and Vice President of New
England Telephone - Maine (1985 - 1988).
Alexander E. Capo has been involved in the telephone industry since 1972.
He has held the position of Vice President - Marketing and Sales since 1987.
From 1985 to 1987 he was the Director of Sales for The Farmstead Group, Inc.
Prior thereto he was a Sales Manager with the National Telephone Company.
Joseph A. Novak, Jr. was employed by the Company in January 1990. He was
appointed Vice President -- Operations in July 1993, and since August 1995 has
been in charge of warehouse and technical operations for the Company's
international telephone equipment business. From 1990 to 1993 he was in charge
of warehouse and technical operations for the domestic telephone equipment
business unit. Prior to 1990, he was employed by AT&T for 28 years, serving in
various operational and sales management capacities. Mr. Novak is also Vice
General Manager and a Director of ATC. In March 1996 he was also appointed
General Manager of FAMS. The approximate allocation of Mr. Novak's time between
the Company, FAMS and ATC is 20%, 70% and 10%, respectively.
Neil R. Sullivan was employed by the Company in October 1994 as Corporate
Controller (until May 1996) and as General Manager of the Company's domestic
telephone equipment business unit, and in December 1994 was also appointed
Assistant Secretary of the Company. From 1981 to 1994 he was employed by Zero
Corporation ("Zero"), a manufacturer of cabinets, cooling equipment and
containers for the electronics industry. Mr. Sullivan was Controller of various
divisions of Zero from 1981 to 1991, and was Vice President/General Manager of
the Zero-East division from 1991 to 1994.
John G. Antonich was employed by the Company as Director of Sales in July
1993. In February 1996, he was appointed General Manager of the Cobotyx voice
processing products division. From January 1991 to April 1993 he was an Account
Executive with Quodata, a software manufacturer. For two years prior thereto he
was a part owner of Accurate Data, a computer systems dealer.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued by the
Company for services rendered during the three years ended December 31, 1995 to
the Chief Executive Officer ("CEO") and to each executive officer whose total
annual compensation exceeded $100,000 in 1995 (the "Named Officers"):
32
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS (2)
NAME AND PRINCIPAL FISCAL SALARY($) BONUS ALL OTHER
POSITION YEAR (1) ($) OPTIONS (#) COMPENSATION
- --------------------------------- ---------- ------------ ----------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
CEO:
George J. Taylor, Jr. 1995 150,000 30,000 600,000 5,135(4)
1994 114,723 8,595 250,000 3,077(5)
1993 110,685 - - 2,556(6)
Named Officers:
Alexander E. Capo 1995 182,055 - - 3,900(7)
1994 123,481 - 50,000 -
1993 141,011 - - -
Robert G. LaVigne 1995 84,000 16,800 - -
1994 83,635 16,154 275,000 -
1993 70,000 - - -
Peter S. Buswell (3) 1995 113,539 - 300,000 7,294(8)
1994 112,616 - - -
1993 - - 100,000 -
</TABLE>
- ----------
(1) Includes base salary and sales commissions if applicable.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARS") or make any long-term incentive plan payments during the
fiscal years presented.
(3) Mr. Buswell joined the Company in 1994, and resigned as an employee and
Director of the Company on September 11, 1995. During 1993, Mr. Buswell
provided marketing and technical consulting services to the Company in
connection with the start up of the Company's voice processing product
lines, for which he earned an aggregate of $52,375 in 1993. In 1993, Mr.
Buswell received a non-qualified option grant to purchase 100,000 shares of
common stock under the 1992 Stock Option Plan.
(4) Consists of $3,478 of insurance premiums and $1,657 as a car allowance.
(5) Consists of $2,386 of insurance premiums and $691 as a car allowance.
(6) Consists solely of insurance premiums.
(7) Consists solely of a car allowance.
(8) Consists solely of accrued vacation and sick pay benefits paid upon
termination.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
options to purchase shares of the Company's Common Stock made to each Named
Officer during the year ended December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) (1) EXPIRATION DATE
---- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
George J. Taylor, Jr. 600,000 53% .52 8/8/00
Peter S. Buswell 300,000 27% .42 5/19/05
</TABLE>
- -----------
(1) The exercise price for Mr. Taylor represented 110% of the fair market value
of the common stock on the grant date. The exercise price for Mr. Buswell
represented the fair market value of the common stock on the grant date.
33
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information on the number and value of
unexercised options held at December 31, 1995, by each Named Officer.
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FY-END (#) FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- -------------------------
<S> <C> <C> <C> <C>
George J. Taylor, Jr. .... - - 250,000 600,000 - -
Alexander E. Capo ........ - - 50,000 - - -
Robert G. LaVigne ........ - - 290,000 160,000 11,025 -
Peter S. Buswell ......... - - 90,000 310,000 - -
</TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR:
None.
COMPENSATION OF DIRECTORS
Non-employee directors receive $500 for each attended board meeting, plus a
non-qualified option to purchase 10,000 shares of Common Stock upon election to
the Board. Directors are reimbursed for their expenses for each meeting attended
and, beginning June 14, 1996, each non-employee director will receive $1,000 for
each Board meeting attended and $250 for each Committee meeting attended.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
Mr. George J. Taylor, Jr. has a three year employment agreement, expiring
November 28, 1997, which provides for an annual base salary of $150,000, and
which may be revised upward on an annual basis by the Board of Directors. The
agreement also provides for (i) a bonus of up to 50% of base salary if the
Company attains its annual revenue and earnings objectives set by the Board of
Directors beginning with fiscal year 1995, and (ii) an additional award equal to
7 1/2 % of earnings in excess of said earnings objective. Mr. Taylor was also
granted an option to purchase 600,000 shares of the Company's Common Stock. The
agreement also provides for severance payments equal to two years' salary plus
incentives in the event the Company terminates this agreement without cause or
Mr. Taylor terminates the agreement with good reason, and severance payments
equal to one year's salary plus incentives in the event the agreement is not
renewed. The agreement also contains provisions regarding confidentiality and a
non-compete covenant which prohibits him from competing with the Company during
his employment and for up to two years thereafter. Mr. Taylor's compensation
agreements were established by the Compensation Committee and approved by the
Board of Directors.
Mr. Capo's compensation arrangements for fiscal 1995 consisted of a base
salary of $30,000, a $3,900 car allowance and sales commissions of $152,055. Mr.
Capo's sales commissions were calculated based upon a pre-determined percentage
of the gross profit on sales generated from his direct selling efforts.
Commencing in May 1995, Mr. Buswell entered into a three year employment
agreement consisting principally of (i) a base salary of $120,000 per year, (ii)
a bonus of 5% of the annual after-tax earnings of the Cobotyx division in excess
of the board-approved operating budget for that business unit, (iii)
participation in a bonus pool established and administered by the Compensation
Committee of the Board of Directors, up to a maximum of 50% of salary, and (iv)
an option to purchase up to 300,000 shares of Common Stock at an exercise price
equal to the fair market value of the Company's Common Stock on the grant date.
Mr. Buswell resigned from the Company on September 11, 1995 and his employment
agreement was terminated.
Mr. LaVigne does not have an employment agreement with the Company. At the
discretion of the Compensation Committee, Mr. LaVigne is eligible to participate
in a bonus pool up to a maximum of 50% of salary.
34
STOCK OPTION PLANS
The Company's 1986 and 1987 Key Employees and Key Personnel Stock Option
Plans (the "Earlier Plans"), which are virtually identical, provide for the
issuance, pursuant to the exercise of stock options granted thereunder, of a
maximum of 400,000 and 750,000 shares, respectively, of Common Stock of the
Company. These plans may grant both Incentive and Non-qualified Stock Options to
officers and employees of the Company, and Non-qualified Stock Options only to
directors (who are not also employees), and consultants of the Company.
The Company's 1992 Stock Option Plan (the "1992 Plan") which, in most
material respects, is similar to the Earlier Plans, permits options to purchase
up to 3,500,000 shares of Common Stock to be granted to officers, employees,
directors, consultants and others who perform beneficial services to the
Company. The Company intends the 1992 Plan to enable the Company to issue
Incentive Stock Options (as defined in Section 422 of the Internal Revenue Code
of 1986, as amended) to its officers, key employees and directors (who are also
employees.) These persons may, however, also be granted Non-qualified Stock
Options. All other persons will only be granted Non-qualified Stock Options.
The purpose of the Earlier Plans and the 1992 Plan is to provide incentive
to the Company's officers, key employees, directors, consultants and others to
continue to serve the Company, to continue their beneficial relationship to the
Company, and to give them a greater interest, as stockholders, in the success of
the Company.
The 1992 Plan is administered by a committee of two directors appointed by
the Board of Directors. The persons eligible to receive options are such key
officers, employees, directors and consultants of the Company and others as the
committee shall select, provided that any persons who own, directly or
indirectly, more than 10% of the outstanding stock of the Company may not
receive options at an exercise price less than 110% of the fair market value of
the company's Common Stock as defined in the Plan.
The committee designates the persons to receive the options, the number of
shares to be optioned and the terms of the options, including the option price
and the duration of each option, subject to certain limitations. The committee
also fixes the time or times when, and the extent to which, an option is
exercisable, provided that no option will be exercisable later than ten years
after the date of grant (or five years in the case of a 10% stockholder). The
option is payable in cash. However, the committee may permit the option price to
be paid in shares of the Company's Common Stock at the then current fair market
value, as defined in the 1992 Plan.
As of June 30, 1996, and as adjusted for the Reverse Split, an aggregate of
181,850 and 3,224,217 options were available for future grant pursuant to the
Earlier Plans and the 1992 Plan, respectively. Following the implementation of
the Reverse Split, the Company currently intends to issue an aggregate of
approximately 525,000 stock options to its employees and non-employee directors.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of the Company's Certificate of Incorporation
contains provisions relating to the indemnification of directors and officers,
to the full extent permitted by Delaware law.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Small Business Issuer pursuant to the
foregoing provisions, or otherwise, the Small Business Issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable.
35
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock, $.001 par value per share, as of June
30, 1996 (without adjusting for the Reverse Split), by (i) each person known by
the Company to own beneficially more than five percent of the Company's
outstanding shares of Common Stock, (ii) all directors of the Company and (iii)
all directors and executive officers of the Company as a group. In addition to
being a beneficial owner of more than five percent of the Company's outstanding
shares of Common Stock, Mr. George J. Taylor, Jr. is a director of the Company.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED COMMON STOCK
- --------------------------------------- ------------------ ------------
<S> <C> <C>
FIVE PERCENT STOCKHOLDERS:
George J. Taylor, Jr. ............ 2,788,011(2) 12.9%
Saudi American Bank............... 1,300,000 6.1%
P.O. Box 833
Riyadh, Saudi Arabia
Martin H. Meyerson and
M.H. Meyerson & Co., Inc.
80 Montgomery Street
Jersey City, New Jersey........... 1,172,105(3) 5.5%
OTHER DIRECTORS:
Robert G. LaVigne................. 385,000(4) 1.8%
Harold L. Hansen.................. 65,000(5) *
Hugh M. Taylor.................... 102,370(6) *
Joseph J. Kelley.................. 10,000(5) *
OTHER NAMED EXECUTIVE OFFICERS:
Alexander E. Capo................. 62,800(7) *
ALL DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (9 PERSONS).................. 3,848,181(8) 17.2%
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each of the Company's directors and executive officers is
c/o the Company, 81 Church Street, East Hartford, CT 06108. Except as
otherwise indicated, the Company believes each person named in the table
has sole voting and investment power with respect to all shares
beneficially owned by him. Information with respect to beneficial ownership
is based upon information furnished by such stockholder.
(2) Includes 450,000 shares issuable upon exercise of currently exercisable
stock options and 1,000 shares issuable upon exercise of warrants. Also
includes 180,000 shares held by his children, and an aggregate of 200
shares, for which Mr. Taylor is sole custodian, held for the benefit of his
children under the Uniform Gift to Minors Act.
(3) Reported on Schedule 13G as of December 31, 1995. Mr. Meyerson owns 305,000
shares directly. Additionally, Mr. Meyerson, as a controlling person of
M.H. Meyerson & Co., Inc. ("MHMC"), a broker-dealer which makes a market in
the securities of the Company, may be deemed to exercise sole voting and
dispositive power with respect to the shares held by MHMC. As of December
31, 1995, MHMC held 867,105 share equivalents consisting of 281,879 shares
of Common Stock plus 75,500 warrants to purchase 75,500 shares of Common
Stock, plus 254,863 underwriters options to
36
purchase 254,863 units, each unit consisting of one share of Common Stock
plus one warrant to purchase one share of Common Stock. The foregoing does
not include 771,800 shares of Common Stock plus 46,000 warrants to purchase
46,000 shares of Common Stock owned by other persons associated with MHMC
and family members of such associated persons.
(4) Includes 330,000 shares issuable upon exercise of currently exercisable
stock options.
(5) Consists of shares issuable upon exercise of currently exercisable stock
options.
(6) Includes 73,500 shares issuable upon exercise of currently exercisable
stock options and 15,000 shares held by his children.
(7) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options, and 2,900 shares issuable upon exercise of warrants.
(8) Includes 1,158,500 shares issuable upon exercise of currently exercisable
stock options and 3,900 shares issuable upon exercise of warrants.
Pursuant to individual agreements with the Underwriter, all of the shares
and share equivalents listed above except those held by MHMC and The Saudi
American Bank, are restricted from transfer for thirteen months from the date of
this Prospectus without the prior consent of the Underwriter.
37
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Common Stock, one Class A Warrant and
one Class B Warrant. The shares of Common Stock and the Warrants will be
separately tradeable following the Underwriter's decision to separate the Units.
COMMON STOCK
The Company has 30,000,000 authorized shares of Common Stock, $.001 par
value per share. As of March 31, 1996, 21,238,676 shares of Common Stock were
outstanding (2,123,868 after adjusting for the Reverse Split, but without
adjusting for rounding fractional shares). The Company obtained approval from
its stockholders, at the Annual Meeting of Stockholders held on June 13, 1996,
to amend the Company's Certificate of Incorporation to implement a reverse stock
split of the Company's outstanding securities.
Each share of Common Stock entitles the holder thereof to one vote, either
in person or by proxy, at meetings of stockholders. The holders are not
permitted to vote their shares cumulatively. Accordingly, the holders of more
than fifty percent (50%) of the issued and outstanding shares of Common Stock
can elect all of the Directors of the Company.
All shares of Common Stock are entitled to participate ratably in dividends
when and as declared by the Company's Board of Directors out of the funds
legally available therefor. Any such dividends may be paid in cash, property or
additional shares of Common Stock. The Company has not paid any dividends since
its inception and presently anticipates that all earnings, if any, will be
retained for development of the Company's business and that no dividends on the
shares of Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the operating and
financial condition of the Company, its capital requirements, general business
conditions and other pertinent facts. Moreover, pursuant to the terms of a
Commercial Revolving Loan and Security Agreement entered into with ABCC, the
Company is prohibited from declaring or paying any dividends or making any other
distribution on any shares of capital stock without the prior consent of the
bank. Therefore there can be no assurance that any dividends on the Common Stock
will be paid in the future.
Holders of Common Stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of the
dissolution, whether voluntary or involuntary, of the Company, each share of
Common Stock is entitled to share ratably in any assets available for
distribution to holders of the equity of the Company after payment of creditors
and the holders for shares of any class or series of preferred stock then
outstanding to the extent the then existing terms of the outstanding preferred
stock as set forth in the Company's Certificate of Incorporation grant them
priority over holders of Common Stock. All outstanding shares of Common Stock
are, and the shares of Common Stock included in the Units, when issued against
payment therefor, and the shares of Common Stock underlying the Warrants, when
issued in accordance with the terms of the Warrants, will be, validly authorized
and issued, fully paid and non-assessable.
TRANSFER AGENT
The Company has engaged Oxford Transfer & Registrar ("Oxford"), 1130 S.W.
Morrison, Suite 250, Portland, Oregon 97205, to act as transfer agent for the
Company's Common Stock.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and Oxford as
Warrant Agent (the "Warrant Agent"). The following summary of the provisions of
the Warrants is qualified by reference to the Warrant Agreement, a copy of which
is filed as an exhibit to the registration statement of which this Prospectus is
a part.
38
Each Warrant will be separately transferable once the Underwriter decides
to separate the Units and will entitle the registered holder thereof to purchase
one share of Common Stock at $5.28 per share for the Class A Warrants and $6.09
per share for the Class B Warrants (subject to adjustment as described below)
for a period of five years commencing on the date of this Prospectus. A holder
of Warrants may exercise such Warrants by surrendering the certificate
evidencing such Warrants to the Warrant Agent, together with the form of
election to purchase on the reverse side of such certificate attached thereto
properly completed and executed and the payment of the exercise price and any
transfer tax. If less than all of the Warrants evidenced by a Warrant
certificate are exercised, a new certificate will be issued for the remaining
number of Warrants.
For a holder of a Warrant to exercise the Warrants, there must be a current
registration statement on file with the United States Securities and Exchange
Commission and various state securities commissions. The Company will be
required to file post-effective amendments to the Registration Statement when
events require such amendments and to take appropriate action under state
securities laws. While it is the Company's intention to file post-effective
amendments when necessary and to take appropriate action under state securities
laws, there is no assurance that the Registration Statement will be kept
effective or that such appropriate action under state securities laws will be
effected. If the Registration Statement is not kept current for any reason, the
Warrants will not be exercisable, and holders thereof may be deprived of value.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable. Warrant
holders will not have any voting or other rights as shareholders of the Company
unless and until Warrants are exercised and shares issued pursuant thereto. The
exercise price and the number of shares of Common Stock issuable upon the
exercise of each Warrant are subject to adjustment in the event of a stock
split, stock dividend, recapitalization, merger, consolidation or certain other
events. While not always predictable in advance, the standard adjustment would
revise both the exercise price and the number of securities to be received upon
exercise so as to place the holder in a status quo following the transaction.
For example, in a 1:10 reverse split, the exercise price would be increased
tenfold and the number of securities to be received upon exercise would be the
pre-transaction amount divided by ten.
At any time after 13 months from the date of this Prospectus, any or all of
the Warrants may be redeemed by the Company at a price of $.10 per Warrant, upon
the giving of 30 days' written notice, provided that the closing price of the
Common Stock equals or exceeds $6.09 for the Class A Warrants and $6.90 for the
Class B Warrants for a period of 20 consecutive trading days ending five days
prior to the notice of redemption. The right to purchase the Common Stock
represented by the Warrants noticed for redemption will be forfeited unless the
Warrants are exercised prior to the date specified in the notice of redemption.
While the Company may legally be permitted to give notice to redeem the Warrants
at a time when a current prospectus is not available thereby leaving the Warrant
holders no opportunity to exercise their Warrants prior to redemption, the
Company does not intend to redeem the Warrants unless a current prospectus is
available at the time of redemption.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering (which will occur after consummation of
the Reverse Split), the Company will have 3,123,868 shares of Common Stock
outstanding, assuming no other transactions involving the Common Stock. Assuming
conversion of the Warrants offered hereby, 5,123,868 shares of Common Stock will
be outstanding. Of these shares, the 2,000,000 shares of Common Stock issued
upon conversion of the Warrants sold in this offering and 2,945,687 shares
currently outstanding will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company) which will be subject to the limitations of Rule 144 adopted
under the Securities Act. The remaining 178,181 shares of Common Stock are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act.
39
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate of the
Company), who has owned restricted shares beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class (approximately 51,239 shares if all Warrants offered herein are
exercised and no other shares of Common Stock are issued) or the average weekly
trading volume of the Company's Common Stock on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. A person who has not been an affiliate of
the Company for at least the three months immediately preceding the sale and who
has beneficially owned shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
All officers and directors of the Company have agreed with the Underwriter
that for thirteen months from the date of this Prospectus they will not sell
publicly any shares of Common Stock without the Underwriter's prior approval.
Also, except in connection with acquisitions or pursuant to warrants and options
outstanding immediately prior to the Closing of this Offering, the Company will
not, without the Underwriter's prior written consent, which will not be
unreasonably withheld, sell or offer to sell, either publicly or privately, any
shares of Common Stock, other equity, debt or converible securities for thirteen
(13) months after the Closing of this Offering with the exception of employees'
options and outside directors' options.
40
UNDERWRITING
RIGHTS OFFERING
Promptly after the date hereof, the Company will distribute to its
stockholders of record on August 12, 1996 (the "Record Date"), a notice
informing them that over the next thirty (30) days they have the opportunity to
participate, on a pro rata basis, in an offering of the Units. Each stockholder
will have the "right" to purchase the number of Units equal to the percentage
his stockholdings on the Record Date bears to the total number of shares
outstanding on the Record Date, after accounting for the Reverse Split. For
example, based upon 2,123,868 shares outstanding, a stockholder owning 1,000
shares (equivalent to .047%) would have the right to purchase 470 Units.
Computations resulting in fractional Units will be rounded to the nearest whole
Unit. The notice will also provide an opportunity for the stockholders to
indicate if they have any interest in purchasing additional Units. The Company
with the consent of the Underwriter, reserves the right to offer Units not
purchased by stockholders to these other stockholders who indicate an interest
in exercising additional "rights."
STANDBY UNDERWRITING
The Underwriter is committed to purchase all of the Units offered hereby
that are not sold in the Rights Offering, if any of such securities are
purchased. The Underwriting Agreement provides that the obligations of the
Underwriter are subject to conditions precedent specified therein.
The Company has been advised by the Underwriter that it proposes initially
to offer the Units to the public at the public offering price set forth on the
cover page of this Prospectus and may allow certain dealers concessions of not
in excess of $____ per Unit. Such dealers may reallow a concession not in excess
of $____ per Unit to other dealers. After the commencement of the offering, the
public offering price, concession and reallowance may be changed by the
Underwriter. The Underwriter has informed the Company that it does not expect
sales to discretionary accounts to exceed five percent of the securities offered
by the Company hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter (i) an expense allowance on a
non-accountable basis equal to two and one-half (2.5%) of the gross proceeds
derived from the sale of the Units underwritten, of which $25,000 has been paid
to date, (ii) a 5% Warrant solicitation fee for all Warrants exercised after 12
months from the date of this Prospectus, (iii) $108,000 at Closing as an advance
payment for a 36 month consulting fee, and (iv) an option to purchase, during
the forty five day period following the date hereof, up to 150,000 Units to
satisfy overallotments. In addition the Underwriter will receive a structuring
fee from the Company which is on a sliding scale basis. This fee is dependent
upon the dollar amount of shares sold by the company during the rights offering
and as so graduated would result in a structuring fee to the Underwriter of
$130,000 if gross proceeds to the Company amounted to $2,500,000 or higher and a
$55,000 fee if gross proceeds to the Company are $1,000,000 or less. The
Underwriter acting on a firm commitment standby basis is required to purchase
any securities not purchased by those holders of rights in this rights offering.
The table below reflects the graduated structuring fee:
GROSS PROCEEDS STRUCTURING FEE
FROM RIGHTS OFFERING TO UNDERWRITER
-------------------- ----------------
$2,500,000 $130,000
$2,000,000 $110,000
$1,500,000 $ 85,000
$1,000,000 or less $ 55,000
The Company's officers and directors have agreed not to, directly or
indirectly, offer, offer to sell, contract to sell, sell, transfer, assign,
encumber, grant an option to purchase, pledge or otherwise dispose of any
beneficial interest in such securities for a period of 13 months following the
date of this Prospectus without the prior written consent of the Underwriter.
Also, except in connection with acquisitions or pursuant to warrants and options
outstanding immediately prior to the Closing of this Offering, the Company will
not, without the Underwriter's prior written consent, which will not be
unreasonably withheld, sell or offer to sell, either publicly or privately, any
shares of Common Stock, other equity, debt or convertible securities for
thirteen (13) months after the Closing of this Offering with the exception of
employees' options and outside director's options.
41
In connection with this offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, warrants (the "Underwriter's Warrants")
to purchase from the Company an amount of Units equal to no more than 10% of the
Units underwritten including the 2,000 options issued to Mr. Dorfman. The
Underwriter's Warrants are initially exercisable at a price of $6.70 per Unit
for a period of four years commencing one year from the effective date of this
Prospectus and are restricted from sale, transfer, assignment or hypothecation
for a period of twelve months from the date hereof, except to officers of the
Underwriter. The Units issuable upon exercise of the Underwriter's Warrants are
identical to those offered hereby except that the exercise price of the Class A
and Class B warrants shall be $8.71 and $10.05 respectively. The Underwriter's
Warrants grant to the holders thereof certain rights of registration for the
securities issuable upon exercise of the Underwriter's Warrants.
The Company has agreed to pay the Representative a 5% solicitation fee for
the exercising of the Warrants, commencing and applicable only to warrant
exercises made after one year from the effective date of the present Offering
subject to NASD rules. The Company has agreed not to solicit Warrant exercises
other than through the Representative, unless the Representative refuses or
fails to make such solicitation. Upon exercise of the Warrants after the first
anniversary of the effective date of this Prospectus, the Company will pay to
the Representative a solicitation fee equal to 5% of the aggregate exercise
price for warrant exercises solicited by the Representative or its
representatives and agents, subject to the relevant NASD rules and regulations.
Such Warrant solicitation fee will be paid to the Representative if: (i) the
market price of the Common Stock on the date the Warrant is exercised is equal
to or greater than the exercise price of the Warrant; (ii) the exercise of this
Warrant was solicited by an NASD member firm; (iii) prior specific written
approval for exercise is received from the customer if the Warrant is held in a
discretionary account; (iv) disclosure of this compensation management is made
prior to or upon the exercise of the Warrant; (v) solicitation of the exercise
is not in violation of Rule 10b-6 of the Exchange Act; and (vi) solicitation of
the exercise is in compliance with NASD Notice to Members 81-38.
Rule 10b-6 may prohibit the Underwriters from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Representative of the exercise of Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Representative may have to receive a
fee for the exercise of Warrants following such solicitation. As a result, the
Underwriters may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable.
Robert S. Dorfman Company received 20,000 unregistered warrants to purchase
a like number of shares of Common Stock at an exercise price of $.01 per share
(equivalent to 2,000 shares at $.10 following the Reverse Split) as a finders
fee in connection with this Offering. On July 19, 1996, these warrants were
cancelled and 20,000 stock options (equivalent to 2,000 shares following the
Reverse Split) were issued to Mr. Dorfman in their place. Mr. Dorfman's option
is non-exercisable for one year from the effective date of the offering and
restricted from sale, transfer, pledge and hypothication for the same one year
period and is exercisable at 165% of the public offering price. In addition, Mr.
Dorfman will receive a $20,000 payment from the Underwriter's compensation.
The public offering price for the Units has been determined by negotiations
between the Company and the Underwriter and is not necessarily related to the
Company's asset value, net worth or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which the
Company competes, an assessment of the Company's management, the prospects of
the Company, its capital structure and certain other factors as were deemed
relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York,
New York. Certain legal matters for the Underwriter have been reviewed by
William M. Prifti, Esq., Lynnfield, Massachusetts, in connection with this
Offering.
42
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the two years in the period ended December 31, 1995 included in this Prospectus
and elsewhere in the registration statement have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report with respect
thereto, and have been so included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 (the "Registration Statement") under the Act
with respect to the Units. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
or the Units, reference is hereby made to such Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof may be obtained from such office
upon payment of the prescribed fees.
43
FARMSTEAD TELEPHONE GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Deloitte & Touche LLP.............................................F-2
Balance Sheets -- December 31, 1995 and 1994................................F-3
Statements of Operations
Years Ended December 31, 1995 and 1994 .....................................F-4
Statements of Changes in Stockholders' Equity
Two Years Ended December 31, 1995...........................................F-5
Statements of Cash Flows
Years Ended December 31, 1995 and 1994 .....................................F-6
Notes to Financial Statements...............................................F-7
Consolidated Balance Sheets -- March 31, 1996 (Unaudited)
and December 31, 1995.......................................................F-15
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1996 and 1995..................................F-16
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1996 and 1995..................................F-17
Notes to Consolidated Financial Statements (Unaudited)......................F-18
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Farmstead Telephone Group, Inc.
We have audited the accompanying balance sheets of Farmstead Telephone
Group, Inc. as of December 31, 1995 and 1994, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 opinions.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Farmstead Telephone Group, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
East Hartford, Connecticut
March 8, 1996
F-2
FARMSTEAD TELEPHONE GROUP, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
1995 1994
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2) $ 622 $ 904
Accounts receivable, less allowance for doubtful
accounts of $121 in 1995 and $87 in 1994 2,691 2,242
Inventories 1,946 1,696
Other current assets 139 211
-------- --------
Total current assets 5,398 5,053
Property and equipment, net of accumulated depreciation and
amortization of $326 in 1995 and $187 in 1994 (Note 3) 256 266
Investment in unconsolidated subsidiary (Note 8) 201 -
Other assets 54 105
-------- --------
Total assets $ 5,909 $ 5,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank Borrowings (Note 4) $ 1,452 $ 578
Accounts payable 1,053 1,406
Accrued expenses and other current liabilities 398 296
-------- --------
Total current liabilities 2,903 2,280
Other liabilities - 10
-------- --------
Total liabilities 2,903 2,290
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares authorized;
21,238,676 and 20,398,947 shares issued and outstanding in 1995
and 1994, respectively 21 20
Additional paid-in capital 8,431 8,045
Stock subscriptions receivable (Note 7) - (38)
Accumulated deficit (5,446) (4,893)
-------- --------
Total stockholders' equity 3,006 3,134
-------- --------
Total liabilities and stockholders' equity $ 5,909 $ 5,424
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales and service revenues $ 15,317 $ 11,787
--------- ---------
Costs and expenses:
Cost of goods and services sold 10,645 8,230
Selling, general and administrative expenses 4,835 3,183
Research and development expenses 99 217
Interest expense 99 40
Equity in unconsolidated subsidiary (Note 8) 197 -
Other income (14) (58)
--------- ---------
Total costs and expenses 15,861 11,612
--------- ---------
Income (loss) before income taxes (544) 175
Provision for income taxes 9 3
--------- ---------
Net income (loss) $ (553) $ 172
========= =========
Net income (loss) per share $ (.03) $ .01
========= =========
Weighted average common and common equivalent shares 20,842 21,608
========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCK SUB- ACCUM-
----------------------- PAID-IN SCRIPTIONS ULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
--------- --------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 19,251 $ 19 $ 7,625 $ - $ (5,065) $ 2,579
Stock options exercised 29 - 7 - - 7
Warrants exercised 119 - 59 - - 59
Private placements of stock 1,000 1 354 (38) - 317
Net income - - - - 172 172
--------- --------- ------------ ------------ ---------- ----------
Balance at December 31, 1994 20,399 20 8,045 (38) (4,893) 3,134
Warrants exercised 840 1 419 - - 420
Private placements of stock - - (33) 38 - 5
Net loss - - - - (553) (553)
--------- --------- ------------ ------------ ---------- ----------
Balance at December 31, 1995 21,239 $ 21 $ 8,431 $ - $ (5,446) $ 3,006
========= ========= ============ ============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (553) $ 172
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 158 114
Gross profit deferred on sales to unconsolidated subsidiary 171 -
Equity in undistributed loss of unconsolidated subsidiary 20 -
Changes in operating assets and liabilities, net of effects
from assets purchased from CCI in 1994:
Increase in accounts receivable (449) (1,420)
Increase in inventories (250) (80)
Decrease in other assets 16 140
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities (235) 955
-------- --------
Net cash used in operating activities (1,122) (119)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (108) (194)
(Increase) decrease in short-term investments 75 (75)
Investment in unconsolidated subsidiary (Note 8) (399) -
-------- --------
Net cash used in investing activities (432) (269)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of asset purchase obligation (Note 5) - (375)
Proceeds from short-term and long-term borrowings 874 -
Repayments of short-term and long-term borrowings and
capital lease obligation (27) (189)
Proceeds from exercise of stock options and warrants, net 420 66
Proceeds from sales of common stock, net 5 317
-------- --------
Net cash provided by (used in) financing activities 1,272 (181)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (282) (569)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 904 1,473
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 622 $ 904
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Sale of common stock for subscription receivable $ - $ 38
Allocation of asset purchase obligation to assets acquired:
Inventories - 350
Fixed assets - 25
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 102 36
Income taxes 4 3
</TABLE>
See accompanying notes to financial statements.
F-6
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Farmstead Telephone Group, Inc. (the "Company") is engaged in the Customer
Premise Equipment ("CPE") segment of the telecommunications industry,
principally as a secondary market reseller of used and/or refurbished AT&T
business telephone parts and systems, and as a designer, manufacturer and
supplier of proprietary voice (or "call") processing systems that provide
automated call handling, voice and fax messaging, interactive voice response,
automated call distribution and message notification functionality. The Company
also provides equipment repair and refurbishing, inventory management, and other
related value-added services. The Company sells its products and services to
corporate end users, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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. Actual results could differ from those estimates.
Investment In Unconsolidated Subsidiary
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.
Revenue
Product sales revenues are recognized upon shipment. Revenues from other
provided services are recognized as the service is provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on an average basis, which approximates the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
which range from three to five years. Maintenance, repairs and minor renewals
are charged to operations as incurred.
Income Taxes
The Company provides for income taxes under the asset and liability
method, under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective
F-7
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
shares outstanding during each period. Fully diluted per share amounts are not
shown for the periods in which the effect is immaterial or antidilutive. In
calculating weighted average shares outstanding, all securities convertible into
common stock, such as stock options, warrants, and units, are excluded if their
effect on net income (loss) per share is antidilutive.
Reclassifications
Certain December 31, 1994 balance sheet accounts have been reclassified in
order to conform with the December 31, 1995 presentation.
New Accounting Pronouncement
The Company has not adopted the recently issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," ("SFAS
123") which is required to be adopted in the first quarter of 1996. The Company
currently records compensation based on the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
SFAS 123. The Company is continuing to evaluate whether or not it will change to
the recognition provisions of SFAS 123.
NOTE 2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1995 and 1994 includes $100,000,
invested in a money market fund, which has been pledged as collateral with Fleet
Bank N.A. in connection with a letter of credit issued to one of the Company's
vendors. The letter of credit expires March 31, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
As of December 31, the components of property and equipment were as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
At cost:
Equipment $ 402 $ 274
Furniture and fixtures 76 74
Leasehold improvements 46 47
Leased equipment under capital lease (a) 58 58
-------- --------
582 453
Less accumulated depreciation and amortization (326) (187)
-------- --------
$ 256 $ 266
======== ========
</TABLE>
- ----------
(a) The Company leased computer equipment under a noncancelable lease contract
which expired in February 1996.
F-8
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. BANK BORROWINGS
In August 1993, the Company entered into a $750,000 Revolving Credit and
Security Agreement ("Fleet Agreement") with Fleet Bank, N.A. for an initial term
of twenty-two months expiring June 1995. Borrowings under the Fleet Agreement
bore interest at 1% over the Prime Rate, were based upon 80% of eligible
receivables (principally domestic receivables less than 90 days old) and 30% of
eligible inventory (up to a maximum inventory advance of $225,000 or 30% of all
outstanding borrowings). The Fleet Agreement was secured by the Company's assets
and by the guarantee of the Connecticut Development Authority to the extent of
24% of the outstanding borrowings up to a maximum of $225,000. The Fleet
Agreement contained covenants which, among other things, required the Company to
maintain a minimum of $1 million of working capital, plus maintain specific
liquidity and solvency ratios. The Company was in compliance with all covenants
of the Credit Agreement at December 31, 1994, except that it did not meet its
required debt service ratio of a minimum of 1.2 to 1, because it had negative
cash flow from operations in 1994. In March 1995, the Company was granted a
waiver of this covenant by the Bank. The Fleet Agreement also contained a
$100,000 compensating balance requirement.
On June 5, 1995, the Company entered into a one year renewable Commercial
Loan and Security Agreement (the "Loan Agreement") with Affiliated Business
Credit Corporation, replacing the Fleet Agreement, which provided for a $1.5
million revolving line of credit. Under the terms of the Loan 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 Loan Agreement are
repayable upon demand, and are secured by all of the Company's assets. As of
December 31, 1995, the unused credit line was approximately $48,000. The average
and highest amounts borrowed under all credit facilities during the year ended
December 31, 1995 was $880,000 and $1,479,000, respectively, as compared to
$406,000 and $686,000, respectively, for 1994. The Company's borrowings are
dependent upon the continuing generation of collateral, subject to its credit
limit. The weighted average interest rate on the Company's outstanding debt was
11.0% for 1995 and 8.8% for 1994.
On March 11, 1996, the Loan Agreement was extended to May 31, 1997, and
the amount of the credit line was increased from $1.5 million to $2.0 million.
The Loan Agreement was further amended to (i) temporarily increase the Eligible
Inventory advance rate from 25% to 40% until May 31, 1996, followed by a gradual
decline ranging from 2% to 1% per month, to return to 25% by February 1, 1997,
(ii) temporarily increase the maximum inventory advance amount to $425,000
through May 31, 1996, followed by a gradual decline ranging from $25,000 to
$12,500 per month, to return to $300,000 by February 1, 1997, and (iii) increase
the minimum assumed monthly loan balance to $700,000.
NOTE 5. ACQUISITION
As of January 24, 1994, the Company acquired certain assets of Cobotyx
Corporation, Inc. ("CCI"), a designer, manufacturer and supplier of voice
processing systems which was in proceedings for the reorganization of its
business under Chapter 11 of the United States Bankruptcy Code, for a purchase
price of $375,000. The assets acquired included technology and know-how,
inventories, property and equipment, executory contract rights, the name
"Cobotyx,"and any other trademarks, tradenames, service marks, patents, patent
applications, copyrights and other intangible property, and contractual rights
relating thereto.
Under the purchase method of accounting, the Company assigned a value of
$350,000 to the inventories acquired from CCI, and $72,000 (which amount
includes $47,000 of other direct acquisition costs, principally legal and
accounting costs) to fixed assets. The allocation of the acquisition costs was
based upon the fair value of the assets acquired. Because this transaction was
made close to the beginning of 1994, pro forma results for 1994 were not
considered necessary.
F-9
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. STOCK OPTIONS
The 1986 Key Employees and Key Personnel Stock Option Plan (amended in June
1988) permits the granting of options to purchase up to 400,000 shares of common
stock. The options may be granted at no less than market value at the time of
granting except, for a 10% or more stockholder, the exercise price shall not be
less than 110% of market value. The plan terminates in October 1996. Options
granted under this plan expire on various dates through 2002.
The 1987 Key Employees and Key Personnel Stock Option Plan permits the
granting of options to purchase up to 750,000 shares of common stock. The terms
of this plan are the same as the 1986 Plan. The 1987 Plan terminates in March
1997. Options granted expire on various dates through 2000.
The 1992 Stock Option Plan permits the granting of options to purchase up
to 3,500,000 shares of common stock. The terms of this plan are essentially the
same as the 1986 Plan. The Plan terminates in 2002, and options currently
granted expire on various dates through 2005.
A summary of transactions for these plans for each of the two years in the
period ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1986 PLAN 1987 PLAN
----------------------------- --------------------------
NUMBER OPTION NUMBER OPTION
OF PRICE OF PRICE
SHARES RANGE SHARES RANGE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 43,000 $ .18 - 1.00 116,000 $ .16
Granted - - - -
Exercised (5,000) .22 (16,000) .16
Canceled or lapsed (1,500) .18 - -
----------- ------------ ----------- ------
Outstanding at December 31, 1994 36,500 $ .16 - 1.00 100,000 $ .16
Granted - - - -
Exercised - - - -
Canceled or lapsed (5,000) .22 - -
----------- ------------ ----------- ------
Outstanding at December 31, 1995 31,500 $ .16 - 1.00 100,000 $ .16
=========== ============ =========== ======
As of December 31, 1995:
Exercisable 31,500 $ .16 - 1.00 100,000 $ .16
Available for future grant 25,000 45,000
</TABLE>
<TABLE>
<CAPTION>
1992 PLAN
-----------------------------
NUMBER OPTION
OF PRICE
SHARES RANGE
----------- ------------
<S> <C> <C>
Outstanding at December 31, 1993 624,500 $ .48 - 1.47
Granted 925,000 .63 - 1.61
Exercised (7,500) .48
Canceled or lapsed (40,000) .86 - 1.47
----------- ------------
Outstanding at December 31, 1994 1,502,000 .48 - 1.61
Granted 1,160,000 .25 - .52
Exercised - -
Canceled or lapsed (145,000) .38 - 1.34
----------- ------------
Outstanding at December 31, 1995 2,517,000 $ .25 - 1.18
=========== ============
As of December 31, 1995:
Exercisable 949,500 $ .38 - 1.18
Available for future grant 955,917
</TABLE>
F-10
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. STOCK OPTIONS -- (CONTINUED)
On June 7, 1995, the Company's Board of Directors amended the exercise
price of all outstanding options granted to employees and directors as of that
date. The exercise prices, if higher, were reduced to $.42 per share,
representing the fair market value of the common stock on that date. For owners
of 10% or more of the common stock, the exercise price was reduced to 110% of
the fair market value.
An officer of the Company has an exercisable option to purchase 75,000
shares of common stock at $.156 per share pursuant to a 1990 grant outside of
the above listed option plans.
In 1989, an option to purchase 100,000 shares of common stock at $1.00 per
share was granted to Chancellor Corporation as consideration for entering into a
lease financing and remarketing agreement. During 1993, options for 46,875
shares were exercised. The remaining options expired in March 1994.
In June 1992, the Company granted a five year option to purchase up to
290,909 shares of common stock to The Wall Street Group, Inc. in conjunction
with a public relations service agreement. The exercise price was $.34 per
share, which represented the fair market value of the common stock at the grant
date. No options have been exercised, and the options are fully exercisable as
of December 31, 1995.
NOTE 7. STOCKHOLDERS' EQUITY
In 1986, 416,663 warrants were issued in conjunction with the formation of
the Company, each warrant entitling the holder to purchase one-half share of
common stock at a price of $2.00 per share, expiring April 30, 1992 (which were
further modified and extended as noted below).
In May 1987, the Company sold 3,313,630 units in its initial public
offering, each unit consisting of one share of common stock and a detachable
unit warrant (together with the warrants issued in 1986, hereinafter referred to
as "Public Warrants") entitling the holder to purchase one-half share of common
stock at a price of $2.00 per share, expiring April 30, 1992. Pursuant to the
underwriting agreement the Company issued to its underwriters options
("Underwriters Options") to purchase 331,363 of the Company's units, exercisable
at $1.68 per unit through April 13, 1992.
Since May 1987, the Company has periodically extended and modified both
the Public Warrants and the Underwriters Options. Currently, both are due to
expire on June 30, 1996. The Public Warrants are exercisable at $2.00 per share,
and entitle the holder to acquire one share of common stock for each warrant
tendered. They are subject to redemption by the Company on thirty days written
notice at a price of $.05 per warrant, if the bid price for the common stock is
$3.00 or higher per share for ten consecutive business days. The Underwriters
Option is exercisable at $1.68 per unit, entitling the holder to acquire one
share of common stock and a warrant, exercisable at $2.00 per share, to purchase
one share of common stock.
During the year ended December 31, 1995, 839,729 Public Warrants were
exercised, raising approximately $420,000. As of December 31, 1995, there were
1,835,727 Public Warrants outstanding.
On April 18, 1994, the Company entered into agreements with Universal
Solutions, Inc. ("USI") and Pyramid Holdings, Inc. ("PHI"), both of which are
unaffiliated with the Company, pursuant to which each company subscribed for the
purchase of 500,000 shares of the Company's common stock at a subscription price
of $0.65 per share. By further agreement dated as of May 20, 1994, the
subscription agreements were amended to fix the price per share at 57.8 percent
of the average of the high and low bid price of the Company's common stock as of
the date the registration of the purchased stock is declared effective by the
Securities and Exchange Commission, subject to a minimum price of $0.45 and a
maximum price of $0.75 per share. On February 3, 1995, the registration of these
shares was declared
F-11
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. STOCKHOLDERS' EQUITY -- (CONTINUED)
effective, and a $0.45 per share subscription price was
determined. As of December 31, 1994, the Company had received an aggregate of
$375,000, and was holding the restricted shares in escrow, pending a
determination of the final subscription price and full payment thereof. In March
1995 the Company made a business decision to reduce the $75,000 balance owed for
the shares by $37,500 in consideration of the length of the registration
process, and the further deterioration of the Company's stock price. Included in
stockholders' equity at December 31, 1994 is a subscriptions receivable balance
of $37,500, representing the adjusted remaining subscription price receivable,
which was paid in full in March 1995.
On October 31, 1995 the Company entered into an agreement ("Financing
Agreement") with the Robert S. Dorfman Company, Inc. ("Dorfman") to provide
investment banking services for the Company. In connection therewith, Dorfman
was granted a warrant to purchase 20,000 shares of common stock at $.01 per
share. In addition, Dorfman will be issued warrants to purchase up to an
additional 80,000 shares of common stock at $.01 per share contingent upon the
completion of certain financing proposals as specified in the Financing
Agreement.
NOTE 8. 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
Chinese government approvals. 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 serves as General
Manager of ATC. ATC, previously a distributor for the Company in the PRC,
markets, assembles, manufactures, installs and services 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 also made a
$390,000 capital contribution to ATC to complete the $500,000 original capital
contribution requirement of the foreign party to the joint venture. The
acquisition costs exceeded the underlying equity in the net assets of ATC by
approximately $190,000 which will be amortized on a pro rata basis over the
remaining 17 year term of the joint venture.
Summarized financial information on ATC for 1995 from the date of the
Company's acquisition is as follows ($000's):
Sales revenues $ 15
Gross profit 8
Net loss (41)
The following table shows the changes in the Company's investment in
unconsolidated subsidiary ($000's):
Investment at December 31, 1994 $ -
Capital contribution, including other direct
acquisition costs 399
Equity in unconsolidated subsidiary:
Deferred gross profit on sales to subsidiary (171)
Equity in net losses (20)
Amortization of excess of cost over equity
in net assets (6)
------
Investment at December 31, 1995 $201
======
F-12
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
The Company leases, on a month-to-month basis, (i) approximately 29,000
square feet of office and warehouse space in East Hartford, Connecticut which it
uses for its principal executive and administrative offices and its telephone
equipment operations and (ii) approximately 6,000 square feet of office space in
Danbury, Connecticut, which it uses for its voice processing products division.
Rent expense was $ 201,000 in 1995 and $185,000 in 1994.
On March 13, 1996, the Company's newly formed subsidiary, Farmstead Asset
Management Services, LLC, entered into a two year lease for approximately 70,100
square feet of warehouse and office space in Piscataway, New Jersey at a monthly
rent of $24,827 commencing in April 1996. This facility will be used for the
remarketing of used AT&T telephone and computer equipment, and for the provision
of asset storage and management services.
NOTE 10. INCOME TAXES
Current income tax expense attributable to income from continuing
operations consists of state tax expense of $ 9,000 in 1995 and $3,000 in 1994.
There was no deferred federal or state tax expense in either of those years.
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income from continuing
operations as a result of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (185) $ 45
Increase (reduction) in income taxes
resulting from:
Amortization of goodwill 10 10
State and local income taxes, net of federal
income tax benefit 6 2
Unutilized loss of foreign subsidiary 7 28
(Realized) Unrealized benefit of operating loss carryforwards 164 (91)
Other 7 9
------- -------
$ 9 $ 3
======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 65 $ 27
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 77 19
Net operating loss and capital loss carryforwards 1,301 1,417
Other 32 28
-------- --------
Total gross deferred tax assets 1,475 1,491
Less valuation allowance (1,475) (1,491)
-------- --------
Net deferred tax assets $ - $ -
======== ========
Deferred tax liabilities $ - $ -
======== ========
</TABLE>
F-13
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES -- (CONTINUED)
The valuation allowance is considered necessary due to the Company's past
history of operating losses. The remaining net deferred tax assets have been
reduced to the amount which management believes is more likely than not to be
realized.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $3,594,000 of which approximately $550,000 is subject
to an annual limitation imposed by the Tax Reform Act of 1986, due to the change
in ownership which occurred during 1987. No federal income tax provision has
been made in the accompanying financial statements because of the presence of
net operating loss carryforwards. These carryforwards expire on various dates
through 2009.
NOTE 11. 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") was to 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. 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. For the year ended December 31, 1995, the Company incurred expenses
pursuant to these agreements of approximately $450,000, consisting of working
capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company.
As a result of the Company's inability to 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.
NOTE 12. SUBSEQUENT EVENTS
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC") for a purchase price of $250,000.
Prior to its closing in January 1996, the ARC primarily operated to service AT&T
affiliates in the orderly disposition, by way of consignment sales arrangements,
of excess, overstocked and end-of-life telecommunications, computer and data
transmission equipment. The assets acquired consisted primarily of warehouse
equipment, vehicles, computer and office equipment, and inventory. The Company
concurrently formed a subsidiary corporation, Farmstead Asset Management
Services, LLC ("FAMS"), which will use the purchased assets to start up a
similar operation in Piscataway, New Jersey. The Company intends to attempt to
re-establish certain of the relationships that the ARC enjoyed, however, no
assurances can be given that it will be able to do so. The Company believes that
the operations of FAMS will provide it with an opportunity to develop new
sources of equipment for resale to its existing customers, as well as to other
wholesalers in the telephone, data and computer secondary markets, and
internationally.
F-14
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 283 $ 622
Accounts receivable, less allowance for doubtful accounts 2,815 2,691
Inventories 2,348 1,946
Other current assets 598 139
-------- ---------
Total current assets 6,044 5,398
Property and equipment, net of accumulated depreciation
and amortization 449 256
Investment in unconsolidated subsidiary 189 201
Other assets 131 54
-------- ---------
Total assets $ 6,813 $ 5,909
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank Borrowings $ 1,862 $ 1,452
Accounts payable 1,219 1,053
Accrued expenses and other current liabilities 394 398
--------- ---------
Total current liabilities 3,475 2,903
--------- ---------
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;
21,238,676 shares issued and outstanding 21 21
Additional paid-in capital 8,431 8,431
Accumulated deficit (5,114) (5,446)
--------- ---------
Total stockholders' equity 3,338 3,006
--------- ---------
Total liabilities and stockholders' equity $ 6,813 $ 5,909
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales and service revenues $ 4,122 $ 3,713
Cost of revenues 2,916 2,543
--------- ---------
Gross profit 1,206 1,170
--------- ---------
Operating expenses:
Selling, general and administrative expenses 1,085 1,142
Research and development expenses 34 6
--------- ---------
Total operating expenses 1,119 1,148
--------- ---------
Operating income 87 22
Interest expense (30) (14)
Equity in loss of unconsolidated subsidiary (12) -
Other income 292 4
--------- ---------
Income before income taxes 337 12
Provision for income taxes 5 6
--------- ---------
Net income $ 332 $ 6
========= =========
Net income per share $ .02 $ *
========= =========
Weighted average common and common equivalent shares 21,425 20,677
========= =========
</TABLE>
- ---------------------------
* Less than one-half cent.
See accompanying notes to consolidated financial statements.
F-16
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 332 $ 6
Adjustments to reconcile net income to net cash flows
used in operating activities:
Depreciation and amortization 30 34
Equity in undistributed loss of unconsolidated subsidiary 12
Changes in operating assets and liabilities:
Increase in accounts receivable (124) (148)
Increase in inventories (402) (487)
Increase in other assets (526) (59)
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 162 (80)
------ ------
Net cash used in operating activities (516) (734)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (222) (41)
Purchases of redeemable coupons (389) -
Redemptions of coupons 378 -
------ ------
Net cash used in investing activities (233) (41)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 410 172
Repayments of short-term borrowings and
capital lease obligation - (6)
Proceeds from sales of common stock, net - 4
------ ------
Net cash provided by financing activities 410 170
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (339) (605)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 622 904
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $283 $299
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $30 $13
Income taxes 5 4
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim financial statements for 1996 are presented on a consolidated
basis (see Note 3), consisting of the accounts of Farmstead Telephone Group,
Inc. and its majority-owned subsidiaries (the "Company"). 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, 1995.
Beginning in 1996, the Company has changed the presentation format of the
Consolidated Statement of Operations to provide more detailed information for
the readers of this statement. Comparative amounts for 1995 have also been
conformed to this presentation format.
NOTE 2. OTHER ASSETS
As part of a class action lawsuit settlement in 1995, AT&T was required to
issue approximately 4.2 million $50 face value coupons to the class action
members. The coupons are freely transferable and are redeemable against the cost
of certain specified AT&T telephone system products or maintenance services sold
by the Company during the period May 1, 1995 through June 1, 1997. In 1996, the
Company began purchasing coupons in the marketplace at a discount to their $50
face value and redeeming them with AT&T subject to a maximum discount of 20% of
the sales price up to a $2,500 maximum discount per transaction. The Company's
accounting policy is to record income in an amount equal to the excess of the
face value of the coupons redeemed over the acquisition cost of the coupons, in
the period in which it can calculate the amount of rebate it has earned. During
the three months ended March 31, 1996, the Company recorded $280,000 as other
income from the application of coupons to prior period purchases. Rebates earned
on current year purchases are recorded in cost of sales after the related
products are sold. Included in other assets at March 31, 1996 are rebates
receivable in the total amount of $381,000, representing cash due the Company
from tendered redeemable coupons. The Company believes it will be able to
utilize all of the unused rebate coupons it has purchased before their June 1,
1997 expiration.
NOTE 3. FORMATION OF SUBSIDIARY
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC") for a purchase price of $250,000.
Prior to its closing in January 1996, the ARC primarily operated to service AT&T
affiliates in the orderly disposition, by way of consignment sales arrangements,
of excess, overstocked and end-of-life telecommunications, computer and data
transmission equipment. The assets acquired consisted primarily of warehouse
equipment, vehicles, computer and office equipment, and inventory. The Company
concurrently formed a subsidiary corporation, Farmstead Asset Management
Services, LLC ("FAMS"), which will use the purchased assets to start up a
similar operation in Piscataway, New Jersey. The Company intends to attempt to
re-establish certain of the relationships that the ARC enjoyed, however, no
assurances can be given that it will be able to do so. The Company believes that
the operations of FAMS will provide it with an opportunity to develop new
sources of equipment for resale to its existing customers, as well as to other
wholesalers in the telephone, data and computer secondary markets, and
internationally.
NOTE 4. SUBSEQUENT EVENT
On April 22, 1996, the Company entered into a letter of intent with an
underwriter which, as presently structured, contemplates the issuance and sale
of one million Units, each Unit to consist of one share of Common Stock, one
Redeemable A Warrant and one Redeemable B Warrant (collectively the "Securities"
or the "Units").
F-18
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
For a thirty day period following the Offering Record Date as defined
below, the Company's stockholders (the "Eligible Stockholders") will be given a
non-transferable preferential right (the "Right") to purchase Units in an amount
equivalent to their proportional ownership of the Company's common stock as of
the Offering Record Date. Eligible Stockholders are defined as all stockholders
of record on the date of the issuance of a Prospectus describing the offering of
the Securities (the "Offering Record Date"). Eligible Stockholders will also
have the right to indicate their interest to purchase additional Units, subject
to availability. All Units not purchased in the rights offering will be offered,
on a firm commitment basis, by the underwriter.
As a prerequisite for the proposed public offering, the underwriter is
requiring that prior to the Effective Date of the offering, the Company obtain
stockholder approval and implement a 1 for 10 reverse stock split. The Company
obtained stockholder approval at its June 13, 1996 annual meeting of
stockholders, and the Board of Directors is authorized to implement a reverse
split in any desired amount such as, for example, one for five, one for fifteen,
et cetera.
Any reverse split would be implemented in the discretion of the Board of
Directors irrespective of whether the underwriter for the offering is the
current underwriter with whom the Company is presently working with or any other
underwriter which requires a reverse split as a prerequisite to an offering. If
the application of the ratio causes any stockholder to have a fractional share
of stock, such share will be rounded up to the next highest whole share. The
reverse split will be implemented effective on the date of this Prospectus. The
effects of the reverse split are not reflected in the accompanying consolidated
financial statements.
The Company intends to use the proceeds of this proposed offering to
expand the Company's business, both domestically and internationally, which
could include the acquisition of other businesses. Until specific opportunities
are presented, the Company cannot determine in any greater detail how the
proceeds of any offering will be used. No assurance can be given that the final
terms and structure of the proposed offering will be as described.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board issued in October 1995, Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires companies to either (i) expense
the fair value of stock-based awards on the date of grant as compensation cost
or (ii) continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations, provided that new proforma disclosures are made of net income
and earnings per share determined as if the fair value method under SFAS 123 had
been adopted. The Company has elected to continue to account for stock-based
compensation in accordance with APB 25 and therefore SFAS 123 has no effect on
the 1996 financial statements of the Company. The financial statements to be
presented for the year ended December 31, 1996 will include SFAS 123 disclosures
which are required on an annual basis. Under APB 25, the Company does not
recognize compensation expense for its stock option plans as options are granted
at an exercise price equal to, or greater than, the market price of the
underlying stock on the date of grant. Should the exercise price be below the
market price, the Company would then recognize compensation expense in an amount
equal to the excess of the market value of the underlying stock over the
exercise price of the stock option.
F-19
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
________________
TABLE OF CONTENTS
Page
----
Available Information...................................................... 2
Prospectus Summary......................................................... 3
The Company................................................................ 7
Risk Factors............................................................... 7
Use of Proceeds............................................................ 12
Capitalization............................................................. 13
Price Range of Listed Securities
and Dividend Policy..................................................... 14
Selected Financial Data.................................................... 15
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................................... 16
Business................................................................... 22
Management ................................................................ 31
Principal Stockholders..................................................... 36
Description of Securities.................................................. 38
Underwriting............................................................... 41
Legal Matters.............................................................. 42
Experts.................................................................... 43
Additional Information..................................................... 43
Index to Financial Statements.............................................. F-1
UNTIL ____________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
[LOGO]
FARMSTEAD
TELEPHONE GROUP,
INC.
1,000,000 UNITS
EACH UNIT CONSISTING
OF ONE SHARE OF
COMMON STOCK, ONE CLASS A
REDEEMABLE COMMON
STOCK PURCHASE
WARRANT AND ONE CLASS B
REDEEMABLE COMMON STOCK
PURCHASE WARRANT
________________
PROSPECTUS
________________
SCHNEIDER
SECURITIES, INC.
August 12, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Registrant to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions, Article 9 of the Registrant's Certificate of
Incorporation contains provisions relating to the indemnification of directors
and officers, to the full extent permitted by Delaware law.
The Registrant may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
The Underwriting Agreement provides for indemnification by the Underwriter
of directors, officers, and controlling persons of the Company for certain
liabilities, including certain liabilities under the Securities Act of 1933
under certain circumstances.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the offering described in the Registration Statement (other than underwriting
discounts and commissions), all of which will be borne by the Registrant.
Securities and Exchange Commission Fee .................... $ 7,742
NASD Fee................................................... 2,745
NASDAQ Fee ................................................ 7,500
Boston Stock Exchange Fee.................................. 15,000
Accountants' Fees and Expenses ............................ 6,000
Legal Fees and Expenses ................................... 35,000
Blue Sky Qualification, Fees and Expenses.................. 25,000
Printing and Engraving .................................... 20,000
Miscellaneous ............................................. 2,388
--------
TOTAL ................................................. $121,375
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On April 18, 1994, the Company entered into agreements with Universal
Solutions, Inc. ("USI") and Pyramid Holdings, Inc. ("PHI"), both of which are
unaffiliated with the Company, pursuant to which each company subscribed for the
purchase of 500,000 shares of the Company's Common Stock at a subscription price
of $0.65 per share. By further agreement dated as of May 20, 1994, the
subscription agreements were amended to fix the price per share at 57.8 percent
of the average of the high and low bid price of the Company's Common Stock as of
the date the registration of the purchased stock is declared effective by the
Securities and Exchange Commission, subject to a minimum price of $0.45 and a
maximum price of $0.75 per share. As of December 31, 1994, the Company had
received an aggregate of $375,000, and was holding the restricted shares in
escrow, pending a determination of the final subscription price and full payment
thereof. On February 3, 1995, the registration statement for these shares was
declared effective, and a $0.45 per share subscription price was determined,
leaving a balance due of $75,000. Subsequently, USI and PHI requested a
reduction of their outstanding balance in consideration of the length of the
registration process and the further deterioration of the Company's
II-1
stock price. While the Company believed that no reduction was contractually
required, in March 1995 the Company made a business decision to reduce the
balance owed for the shares to $37,500, which was subsequently paid. Included in
stockholders' equity at December 31, 1994, is a subscription receivable balance
of $37,500, representing the adjusted remaining subscription price receivable.
On October 31, 1995 the Company entered into an agreement ("Financing
Agreement") with the Robert S. Dorfman Company, Inc. ("Dorfman") to provide
investment banking services for the Company. In connection therewith, Dorfman
was granted a warrant to purchase 20,000 shares of common stock at $.01 per
share (equivalent to 2,000 shares at $.10 per share following the Reverse
Split). On July 19, 1996, these warrants were cancelled and 20,000 stock options
(equivalent to 2,000 shares following the Reverse Split) were issued to Mr.
Dorfman in their place. Mr. Dorfman's option is non-exercisable for one year
from the effective date of the offering and restricted from sale, transfer,
pledge and hypothication for the same one year period and is exercisable at 165%
of the public offering price. In addition, Mr. Dorfman will receive a $20,000
payment from the Underwriter's compensation. This offering was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 27. EXHIBITS
Registrant hereby incorporates by reference the following documents filed
as part of the S-18 Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B).
3(a) Certificate of Incorporation.
3(b) By-Laws.
4(a) Form of Unit Warrant.
4(b) Amended Form of Underwriter's Option.
4(c) 1986 Key Employees and Key Personnel Stock Option Plan.
4(d) 1987 Key Employees and Key Personnel Stock Option Plan.
10(i) Agreement between the Company and AT&T.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1988, on
Form 10-K:
10.5 Amendment to the 1986 Key Employees and Key Personnel Stock Option
plan previously filed as Exhibit No. 4(c) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc. declared
effective on April 3, 1987.
10.6 Amendment to the 1987 Key Employees and Key Personnel Stock Option
Plan previously filed as Exhibit No. 4(d) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc. declared
effective on April 13, 1987.
Registrant hereby incorporates by reference the following exhibits filed as
part of the S-3 Registration Statement of the Company's securities declared
effective on July 3, 1991 (File No. 33-41442):
4 Form of Private Placement Warrant
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1991, on
Form 10-K:
10.12 Certificate of Amendment of Certificate of Incorporation of Farmstead
Telephone Group, Inc. dated July 10, 1991.
Registrant hereby incorporates by reference the following exhibits filed
with the Form S-3 Registration Statement of the Company's securities declared
effective on October 29, 1992 (Registration No. 33-50432):
4(a) Resolutions adopted by Unanimous Written Consent of the Company's
Board Of Directors dated as of July 9, 1992, amending terms of
Warrants and Underwriter's Options.
10(e) Agreement dated June 25, 1992, between the Company and The Wall
Street Group, Inc.
II-2
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992:
4(e) 1992 Stock Option Plan.
Registrant hereby incorporates by reference the following exhibits filed as
part of the Form S-8 Registration Statement filed May 13, 1993 (Registration No.
33-62574):
4.1 Consulting Agreement between Farmstead Telephone Group, Inc. and
Universal Solutions, Inc. dated as of March 30, 1993.
4.2 Consulting Agreement between Farmstead Telephone Group, Inc. and
Investors Resource Services, Inc. dated as of March 30, 1993.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 10-Q for the quarter ended September 30, 1993:
10.16 Revolving Credit and Security Agreement between Fleet Bank, N.A. and
Farmstead Telephone Group, Inc. dated August 27, 1993.
10.17 Revolving Credit Note dated August 27, 1993, in the principal amount
of $750,000.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 8-K dated February 9, 1994:
2.1 Asset Purchase Agreement dated January 24, 1994, by and between
Farmstead Telephone Group, Inc. and Cobotyx Corporation, Inc.
2.2 Promissory Note dated January 24, 1994, payable to Cobotyx
Corporation, Inc.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-K for the year ended December 31,
1993:
10.20 Summary compensation arrangements for named executives.1
Registrant hereby incorporates by reference the following exhibits filed as
part of Amendment No. 1, dated March 28, 1994, to Form 8-K dated February 9,
1994:
2.3 Cobotyx Corporation, Inc. Financial Statements as of December 31,
1992 and 1991, Together With Auditors' Report.
2.4 Cobotyx Corporation, Inc. Financial Statements as of December 31,
1991, Together With Auditors' Report.
Registrant hereby incorporates by reference the following exhibits filed as
part of the Form SB-2 Registration Statement dated December 8, 1994
(Registration No. 33-87134):
10.1 Subscription Agreement between Farmstead Telephone Group, Inc. and
Universal Solutions, Inc., dated April 18, 1994 ("USI Agreement").
10.1.1 Amendment No. 1 to USI Agreement.
10.2 Subscription Agreement between Farmstead Telephone Group, Inc. and
Pyramid Holdings, Inc. dated April 18, 1994 ("PHI Agreement").
10.2.1 Amendment No. 1 to PHI Agreement.
10.3 Agreement between Farmstead Telephone Group, Inc. and HIA Ltd. dated
April 19, 1994. (Terminated)
- ------------
1 Confidential information is omitted and identified by a * and filed
separately with the SEC.
II-3
Registrant hereby incorporates by reference to following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995:
10.1 Letter Agreement dated March 11, 1996 amending the Commercial
Revolving Loan and Security Agreement dated June 5, 1995 between
Farmstead Telephone Group, Inc. and Affiliated Business Credit
Corporation
10.4 Employment Contract for George J. Taylor, Jr.
21 Subsidiaries of Small Business Issuer.
Registrant hereby incorporates by reference the following exhibits filed as
part of Amendment No. 1 to Form SB-2 Registration Statement dated January 21,
1995 (Registration No. 33-87134):
10.5 Consulting Agreements with Hansen Associates.
10.6 Agreement between Farmstead Telephone Group, Inc. and Taikang
Telecommunication Technology Company, dated November 15, 1994.
10.7 Stock Purchase Agreement between Farmstead Telephone Group, Inc. and
DW International Ltd., dated December 31, 1994.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1994:
10.1 Agreement dated March 8, 1995, by and among Farmstead Telephone
Group, Inc., Taikang Telecommunication Technology Company of
Planning and Research Institute of the Ministry of Posts and
Telecommunications, Comprehensive Service Development Center of
Great Hall of the People, and Asia-Pacific Services, Inc.
(Terminated)
10.2 Letter of Intent dated March 8, 1995, by and among Farmstead
Telephone Group, Inc., Taikang Telecommunication Technology Company
of Planning and Research Institute of the Ministry of Posts and
Telecommunications, Comprehensive Service Development Center of the
Great Hall of the People, and Asia-Pacific Services, Inc.
(Terminated)
10.3 Summary compensation arrangements for Named Executive.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 10-QSB for the quarter ended June 30, 1995:
10.1 Employment Agreement for Peter S. Buswell dated May 19, 1995.
(Terminated)
10.2 Commercial Revolving Loan and Security Credit Agreement dated June
5, 1995, between Farmstead Telephone Group, Inc. and Affiliated
Business Credit Corporation.
10.3 Contract for Beijing Antai Communication Equipment Corporation Ltd.,
dated September 23, 1992.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995:
10.1 Letter Agreement dated March 11, 1996, amending the Commercial
Revolving Loan and Security Agreement dated June 5, 1995 between
Farmstead Telephone Group, Inc. and Affiliated Business Credit
Corporation.
11 Earnings per share calculation.
21 Subsidiaries of Small Business Issuer.
II-4
Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996:
11 Earnings per share calculation.
Registrant hereby incorporates by reference the following exhibits filed as
part of SB-2 Registration Statement dated June 3, 1996 (Registration No.
333-5103):
1.1 Form of Standby Underwriting Agreement.
1.2 Form of Selected Dealers Agreement.
4.2 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant.
5 Opinion re: legality.
10.1 Form of Underwriter's Consulting Agreement
23(b) Consent of Heller, Horowitz & Feit, P.C. (included in the Opinion
filed as Exhibit 5.1).
Registrant hereby incorporates by reference the following exhibit filed as
part of Amendment No. 1 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103):
10.2 Letter of Agreement dated June 3, 1996 between Farmstead Telephone
Group, Inc. and Lucent Technologies, Inc.
The following exhibits are filed herewith:
3(a) Amendment of Certificate of Incorporation.
4.1 Form of Warrant Certificate.
4.3 Form of Warrant Agreement.
4.4 Form of Unit Certificate.
23(a) Consent of Deloitte & Touche LLP.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in form of
prospectus filed with the Commission pursuant to Rule 424(b)(ss.
230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
II-5
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred paid
by a director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For determining any liability under the Securities Act, the small business
issuer will treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
II-6
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS OF FILING ON FORM SB-2 AND HAS AUTHORIZED THIS REGISTRATION
STATEMENT OR AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF EAST HARTFORD AND STATE OF CONNECTICUT ON THE 31ST DAY OF JULY, 1996.
FARMSTEAD TELEPHONE GROUP, INC.
By:/s/ George J. Taylor, Jr.
--------------------------------------
George J. Taylor, Jr., Chairman,
Chief Executive Officer and
President (Principal Executive Officer)
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT WAS SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES STATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/George J. Taylor, Jr. Chairman, Chief Executive July 31, 1996
- ------------------------- ------------
George J. Taylor, Jr. Officer, and President
(Principal Executive Officer)
/s/Robert G. LaVigne Vice President-Finance July 31, 1996
- ------------------------- ------------
Robert G. LaVigne Secretary and Director
(Principal Financial
and Accounting Officer)
/s/Harold L. Hansen Director July 31, 1996
- ------------------------- ------------
Harold L. Hansen
/s/Hugh M. Taylor Director July 31, 1996
- ------------------------- ------------
Hugh M. Taylor
/s/Joseph J. Kelley Director July 31, 1996
- ------------------------- ------------
Joseph J. Kelley
II-7
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FARMSTEAD TELEPHONE GROUP, INC.
It is hereby certified that:
1. The present name of the corporation (the "Corporation") is
Farmstead Telephone Group, Inc.
2. The Certificate of Incorporation of the Corporation is
hereby amended by adding Article 4(c) which reads as follows:
"4.(c) At the effective time of this amendment, each
security of the Corporation outstanding on the record
date set by the Board of Directors shall be split and
changed into one-tenth of such security. Any
fractional shares resulting from this reverse split
will be rounded up to the next highest whole share."
3. The foregoing Amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, FARMSTEAD TELEPHONE GROUP, INC. has caused this
Certificate of Amendment to be signed by its Chairman of the Board, Chief
Executive Officer and President, under penalty of perjury, this first day of
August, 1996.
/s/ GEORGE J. TAYLOR, JR.
------------------------------
George J. Taylor, Jr.
Chairman of the Board, Chief
Executive Officer and President
NO. _________ Class A Warrants
CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON ___________ , 2001
FARMSTEAD TELEPHONE GROUP, INC.
CUSIP 311565 12 1
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Common Stock Purchase Warrants (the "Class A Warrants") specified above.
Each Class A Warrant initially entitles the Registered Holder to purchase,
subject to the terms and conditions set forth in this Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value, of Farmstead Telephone Group, Inc., a
Delaware corporation (the "Company") of the Company at any time prior to the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Purchase Form on the reverse hereof duly
executed, at the corporate office of Oxford Transfer & Registrar as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$_______ (the "Purchase Price") in lawful money of the United States of America
in cash or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Class A Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
August 7, 1996 between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Class A Warrant represented hereby are
subject to modification or adjustment.
Each Class A Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be issued.
In the case of the exercise of less than all the Class A Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Class A Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York City time) on
___________ , 2001, or such earlier date as stated in a notice advising that the
Warrants shall be redeemed. If such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York City time) the next following day which in
the State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Class A Warrant unless a registration statement under
the Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while
1 of 4
any of the Class A Warrants are outstanding. This Class A Warrant shall not be
exercisable by a Registered Holder in any state where such exercise would be
unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class A Warrants, each of such new Warrant Certificates to
represent such number of Class A Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment with any
tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.10 per Warrant at any time after ___________, 199__ ,
provided the market price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall exceed $ _______ per
share for twenty consecutive business days as reported on the Nasdaq Stock
Market, Inc. or such other primary exchange upon which the Common Stock is
traded. Notice of redemption shall be given not later than the ____________ day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.10 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class A Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New Jersey.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ____________
Countersigned: FARMSTEAD TELEPHONE GROUP, INC.
OXFORD TRANSFER & REGISTRAR
(Portland, Oregon)
as Warrant Agent ATTEST: By:
SECRETARY PRESIDENT
2 of 4
NO. _________ CLASS B WARRANTS
CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANT
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON ___________ , 2001
FARMSTEAD TELEPHONE GROUP, INC.
CUSIP 311565 13 9
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Common Stock Purchase Warrants (the "Class B Warrants") specified above.
Each Class B Warrant initially entitles the Registered Holder to purchase,
subject to the terms and conditions set forth in this Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value, of Farmstead Telephone Group, Inc., a
Delaware corporation (the "Company") of the Company at any time prior to the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Purchase Form on the reverse hereof duly
executed, at the corporate office of Oxford Transfer & Registrar as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$_______ (the "Purchase Price") in lawful money of the United States of America
in cash or by official bank or certified check made payable to the Company.
This Warrant Certificate and each Class B Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
August 7, 1996 between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Class B Warrant represented hereby are
subject to modification or adjustment.
Each Class B Warrant represented hereby is exercisable at the option of
the Registered Holder, but no fractional shares of Common Stock will be issued.
In the case of the exercise of less than all the Class A Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Class B Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York City time) on
___________ , 2001, or such earlier date as stated in a notice advising that the
Warrants shall be redeemed. If such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York City time) the next following day which in
the State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Class B Warrant unless a registration statement under
the Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the Class
B Warrants are outstanding. This Class B Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
3 of 4
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Class B Warrants, each of such new Warrant Certificates to
represent such number of Class B Warrants as shall be designated by such
Registered Holder at the time of such surrender. Upon due presentment with any
tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Class B Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
This Warrant may be redeemed at the option of the Company, at a
redemption price of $.10 per Warrant at any time after ___________, 199__ ,
provided the market price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall exceed $ _______ per
share for twenty consecutive business days as reported on the Nasdaq Stock
Market, Inc. or such other primary exchange upon which the Common Stock is
traded. Notice of redemption shall be given not later than the ____________ day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption, the Registered Holder shall have no
rights with respect to this Warrant except to receive the $.10 per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Class B Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New Jersey.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ____________
Countersigned: FARMSTEAD TELEPHONE GROUP, INC.
OXFORD TRANSFER & REGISTRAR
(Portland, Oregon)
as Warrant Agent ATTEST: By:
PRESIDENT SECRETARY
4 of 4
WARRANT AGREEMENT
(CLASS A AND CLASS B WARRANTS)
--------------------------------------------------
FARMSTEAD TELEPHONE GROUP, INC.
AND
OXFORD TRANSFER & REGISTRAR (OTR, INC.)
WARRANT AGENT
DATED AUGUST 7, 1996
--------------------------------------------------
THIS AGREEMENT (the "Agreement") is dated as of August 7, 1996 between
FARMSTEAD TELEPHONE GROUP, INC., a Delaware corporation (the "Company") and
OXFORD TRANSFER & REGISTRAR (the "Warrant Agent").
WHEREAS, the Company will issue Warrant Certificates in connection with
a Rights Offering/Standby Underwriting of 1,000,000 Units, each Unit consisting
of 1 share of $.001 Par Value Common Stock, 1 Class A Warrant and 1 Class B
Warrant, (the Class A and Class B Warrants will hereinafter be referred to as
"Warrants") as further described as follows:
(a) Class A Warrant - will entitle the holder to purchase one share of
Common Stock at a price of $_______ per Share and will expire on
August __, 2001 at 5:00 p.m., New York City Time.
(b) Class B Warrant - will entitle the holder to purchase one share of
Common Stock at a price of $_______ per Share and will expire on
August __, 2001, at 5:00 p.m., New York City Time.
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer and exchange of Warrant Certificates and,
thereafter, exercise of the Warrants.
NOW THEREFORE, in consideration of the promises and the mutual
agreements hereinafter set forth, it is agreed that:
1. WARRANTS/WARRANT CERTIFICATES. Each Warrant shall entitle the holder
(the "Registered Holder" or, in the aggregate the "Registered Holders") in whose
name the Warrant Certificate shall be registered on the books maintained by the
Warrant Agent to purchase one share of Common Stock of the Company on exercise
thereof, subject to modification and adjustment as provided in Section 7.
Warrant Certificates representing the right to purchase Warrant Shares shall be
executed by the Company's President, attested to by the Company's Secretary, and
delivered to the Warrant Agent upon execution of this Agreement. Such Warrant
Certificates shall be attached certificates representing an aggregate of the
Shares of Common Stock of the Company to be issued under the Plan and
distributed to their rightful owners by the Warrant Agent.
Subject to the provisions of Sections 3, 5, and 6, the Warrant Agent
shall deliver Warrant Certificates in the required whole number denominations to
the Registered Holders in connection with any transfer or exchange permitted
under this Agreement. Except as provided in Section 6 hereof, no Warrant
Certificates shall be issued except (i) Warrant Certificates initially issued
hereunder, (ii) Warrant Certificates issued on or after the initial issuance
date, upon the exercise of any Warrants, to evidence the unexercised Warrants
held by the exercising Registered Holder, and (iii) Warrant Certificates issued
after the initial issuance date, upon any transfer or exchange of Warrant
Certificates or replacements of lost or mutilated Warrant Certificates.
2. FORM AND EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates
shall be substantially in the form attached hereto as Exhibits A and B. The
Warrant Certificates shall be dated as of the date of their issuance, whether or
initial issuance, transfer or exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates.
1
Each such Warrant Certificate shall be numbered serially in accordance
with the Common Stock initially attached thereto with the letter "WA" appearing
on each "A" Warrant Certificate, and "WB" appearing on each "B" Warrant
Certificate. The Warrant Certificates may immediately be detached, and, in such
event, the Warrant Certificates may be issued by number preceded by the letter
"W-A", "W-B", etc. without regard to the number of the certificate representing
the Common Stock initially attached thereto.
The Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. In the
event any officer of the Company who executed the Warrant Certificates shall
cease to be an officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature and delivery by the Warrant Agent, such
Warrant Certificates may be countersigned, issued and delivered by the Warrant
Agent with the same force and effect as though the person who signed such
Warrant Certificates had not ceased to be an officer of the Company.
3. EXERCISE. Subject to the provisions of Sections 4 and 7, the
Warrants when evidenced by a Warrant Certificate, may be exercised in whole or
in part at any time during the period (the "Exercise Period") commencing on
________, 1996 (the "Exercise Date") until _________, 2001, unless extended by a
majority vote of the Company's Board of Directors, but in no event after such
extended expiration date. The Company shall promptly notify the Warrant Agent
and the Registered Holders via press release or other form of public
dissemination of any such extension of the Exercise Period. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
date (the "Exercise Date") of the surrender for exercise of the Warrant
Certificate. The exercise form shall be executed by the Registered Holder
thereof or his attorney duly authorized in writing and shall be delivered,
together with payment therefor, to the Company at its corporate offices located
at 81 Church Street, East Hartford, CT 06108 or to the Warrant Agent at its
corporate offices located at 317 SW Alder, Suite 1120, Portland, Oregon, 97204,
in cash or be official bank or certified check, in any amount equal to the
aggregate Exercise Price, in lawful money of the United States of America.
Unless Warrant Shares may not be issued as provided herein, the person
entitled to receive the number of Warrant Shares deliverable on such exercise
shall be treated for all purposes as the holder of such Warrant shares as of the
close of business on the Exercise Date. In addition, the Warrant Agent shall
also, at such time, verify that all of the conditions precedent to the issuance
of Warrant Shares set forth in Section 4 have been satisfied as of the Exercise
Date. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. Computations resulting in the issuance
of fractional shares will be rounded to the nearest whole share.
Within thirty (30) days after the Exercise Date and in any event prior
to the Expiration Date, the Warrant Agent shall cause to be issued and delivered
to the person or persons entitled to receive the same, a certificate or
certificates for the number of Warrant Shares deliverable on such exercise. No
adjustment shall be made in respect of cash dividends, if any, on Warrant Shares
delivered on exercise of any Warrant.
The Company may deem and treat the Registered Holders of the Warrants
as the absolute owners thereof for all purposes, and the Company shall not be
affected by any notice to the contrary. The Warrants shall not entitle the
holders thereof to any of the rights of shareholders or to any dividends
declared on the Common Stock unless the registered Holder shall have exercised
the Warrants and purchased Shares of Common Stock prior to the record date fixed
by the Board of Directors of the Company for the determination of holders of
Common Stock entitled to any such dividend or other rights.
2
4. RESERVATION OF SHARES AND PAYMENT OF TAXES. The Company covenants
that it will at all times reserve and have available from its authorized Common
Stock such number of shares as shall then be issuable upon the exercise of all
outstanding Warrant Certificates. The Company covenants that all Warrant Shares
which shall be so issuable shall be duly and validly issued, fully paid,
non-assessable, and free from all taxes, liens and charges of whatsoever nature
with respect to the issuance thereof.
The Company and the Warrant Agent acknowledge that the Company will be
required, pursuant to the Securities Act of 1933, as amended (the "Act"), to
file a registration statement covering the Warrants and the underlying Common
Stock, and that no Warrants may be exercised nor may Warrant Shares be issued by
the Warrant Agent unless, on the Exercise Date: the Company has an effective
registration statement covering the issuance of the Warrant Shares under the Act
or issuance is exempt from registration under the applicable state and federal
securities laws, rules and regulations of the state in which such Registered
Holder resides.
If any shares of Common Stock to be reserved for the purpose of
exercise of Warrant Certificates hereunder require any other registration with
or approval of any government authority under any federal or state law before
such shares may be validly issued or delivered, then the Company covenants that
it will, in good faith and as expeditiously as possible, endeavor to secure such
registration or approval, as the case may be. No Warrant Shares shall be issued
unless and until any such registration requirements have been satisfied if and
when required.
The Registered Holder shall pay all documentary, stamp, or similar
taxes and other government charges that may be imposed with respect of the
issuance of the Warrants, or the issuance, transfer or delivery of any Warrant
Shares on exercise of the Warrants. In the event the Warrant Shares are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate, no such delivery shall be made unless the person requesting the
same has paid to the Warrant Agent the amount of any such taxes or charges
incident thereto.
In the event the Warrant Agent ceases to also serve as the stock
transfer agent for the Company, the Warrant Agent is irrevocably authorized to
requisition the Company's new transfer agent from time to time for Certificates
of Warrant Shares required upon exercise of the Warrants, and the Company will
authorize such transfer agent to comply with all such requisitions. The Company
will file with the Warrant Agent a statement setting forth the name and address
of its new transfer agent for Shares of Common Stock or other capital stock
issuable upon exercise of the Warrants and of each successor transfer agent
appointed by the Company during the term of the Agreement.
5. REGISTRATION OF TRANSFER. The Warrant Certificates may be
transferred in whole or in part. Warrant Certificates to be exchanged shall be
surrendered to the Company at its Corporate Office. The Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate (s) which the Registered Holder making the transfer
shall be entitled to receive.
The Warrant Agent shall keep transfer records of all such transactions
at its corporate offices which shall register Warrant Certificates and any
transfers thereof. On due presentment for registration of transfer of any
Warrant Certificate, the Company shall execute and the Warrant Agent shall issue
and deliver to the transferee or transferees' a new Warrant Certificate(s)
representing an equal aggregate number of Warrants. All Warrant Certificates
presented for registration of transfer or exercise shall be duly endorsed or
accompanied by a written instrument or instruments of transfer in form
satisfactory to the
3
Company and the Warrant Agent. The Company may require payment of a sum
sufficient to cover any tax or other government charge that may be imposed in
connection therewith.
All Warrant Certificates so surrendered, or surrendered for exercise,
or for exchange in case of mutilated Warrant Certificates, shall be promptly
canceled by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of the agency created by this Agreement. Prior to due presentment
for registration of transfer thereof, the Company and the Warrant Agent may
treat the registered Holder of any of any Warrant Certificate as the absolute
owner thereof (notwithstanting any notations of ownership or writing thereon
made by anyone other than the Company or the Warrant Agent), and the parties
hereto shall not be affected by any notice to the contrary.
6. LOSS OR MUTILATION. On receipt by the Company and the Warrant Agent
of evidence satisfactory as to the ownership of and the loss, theft, destruction
or mutilation of any Warrant Certificate, the Company shall execute, and the
Warrant Agent shall countersign and deliver in lieu thereof, a new Warrant
certificate representing an equal aggregate number of Warrants. In the case of
loss, theft or destruction of any Warrant Certificate, the individual requesting
issuance of a new Warrant Certificate shall be required to indemnify the Company
and the Warrant Agent in an amount satisfactory to each of them. In the event a
Warrant Certificate is mutilated, such Certificate shall be surrendered and
canceled by the Warrant Agent prior to delivery of a new Warrant Certificate.
Applicants for a new Warrant Certificate shall also comply with such other
regulations and pay such other reasonable charges as the Company may prescribe.
7. (1) ADJUSTMENTS OF EXERCISE PRICE. If the Company should at any time
or from time to time after the issuance of this Warrant issue or sell any shares
of Common Stock (other than the Warrant Stock) without consideration or for a
consideration per share less than the Exercise Price in effect immediately prior
to the time of such issue or sale, then forthwith upon such issue or sale, the
Exercise Price shall be adjusted to a price (computed to the nearest cent)
determined by dividing (i) the sum of (x) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the Exercise
Price in effect immediately prior to such issue or sale, and (y) the
consideration, if any, received by the Company upon such issue or sale, by (ii)
the total number of shares of Common Stock outstanding immediately after such
issue or sale. For purposes of this subsection (f)(1), the following provisions
(A) to (F) shall also be applicable:
(A) OPTIONS. In case the Company shall in any manner grant any right to
subscribe for or to purchase, or any option for the purchase of Common Stock or
any stock or other securities convertible into or exchangeable for Common Stock
(such convertible or exchangeable stock or securities being hereinafter referred
to as "Convertible Securities") other than the Warrants, and the minimum price
per share for which Common Stock is issuable, pursuant to such rights or options
or upon conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the Company as
consideration for the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of such rights or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable pursuant to such rights or options or
upon the conversion or exchange of the total maximium amount of such Convertible
Securities issuable upon the exercise of such rights or options) shall be less
than the Exercise Price in effect immediately prior to the time of the granting
of such rights or options, then the total maximum number of shares of Common
Stock issuable pursuant to such rights or options or upon conversion or exchange
of the total maximum amount of such Convertible
4
Securities issuable upon the exercise of such rights or options shall (as of the
date of granting of such rights or options) be deemed to be outstanding and to
have been issued for said price per share as so determined; PROVIDED, that no
further adjustment of the Exercise Price shall be made upon the actual issue of
Common Stock so deemed to have been issued; and FURTHER PROVIDED, that, upon the
expiration of such rights (including rights to convert or exchange) or options,
(a) the number of shares of Common Stock deemed to have been issued and
outstanding by reason of the fact that they were issuable pursuant to such
rights or options (including rights to convert or exchange) that were not so
issued, shall no longer be deemed to be issued and outstanding, and (b) the
Exercise Price shall forthwith be adjusted to the price which would have
prevailed had all adjustments been made on the basis of the issue only of the
shares of Common Stock actually issued upon the exercise of such rights or
options or upon conversion or exchange of such Convertible Securities.
(B) CONVERTIBLE SECURITIES. In case the Company shall in any manner
issue or sell any Convertible Securities, and the minimum price per share for
which Common Stock is issuable upon conversion or exchange of such Convertible
Securities (determined by dividing (i) the total amount received or receivable
by the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the Exercise
Price in effect immediately prior to the time of such issue or sale, then the
total maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall (as of the date of the issue
or sale of such Convertible Securities) be deemed to be outstanding and to have
been issued for said price per share as so determined; PROVIDED, that no further
adjustment of the Exercise Price shall be made upon the actual issue of Common
Stock so deemed to have been issued; and, FURTHER PROVIDED, that if any such
issue or sale of such Convertible Securities is made upon exercise of any right
to subscribe for or to purchase or any option to purchase any such Convertible
Securities for which an adjustment of the Exercise price has been or is to be
made pursuant to other provisions of this subsection (f)(1) no further
adjustment of the Exercise Price shall be made by reason of such issue or sale;
and, FURTHER PROVIDED, that, upon the termination of the right to convert or to
exchange such Convertible Securities for Common Stock, (a) the number of shares
of Common Stock deemed to have been issued and outstanding by reason of the fact
that they were issuable upon conversion or exchange of any such Convertible
Securities, which were not so issued, shall no longer be deemed to be issued and
outstanding, and (b) the Exercise Price shall forthwith be adjusted to the price
which would have prevailed had all adjustments been made on the basis of the
issue only of the number of shares of Common Stock actually issued upon
conversion or exchange of such Convertible Securities.
(C) Upon the happening of any of the following events, namely, if (A)
the purchase price provided for in any right, option or warrant granted by the
Company to subscribe for or to purchase additional stock or convertible
securities, (B) the additional consideration, if any, payable upon the
conversion or exchange of any convertible securities or (C) the rate at which
any convertible securities are convertible into or exchangeable for additional
stock shall change in any manner and at any time (other than under or by reason
of provisions designed to protect against dilution), the Exercise Price in
effect at the time of such event shall forthwith be adjusted or readjusted to
the Exercise Price which would have been in effect at such time had such rights,
options or convertible securities still outstanding provided for such changed
purchase price, additional consideration or rate of conversion or exchange, as
the case may be, at the time initially granted, issued or sold. On the
expiration of any option or right granted by the Company to subscribe for or to
purchase additional stock or convertible securities or the termination of any
right to convert or exchange such convertible securities, the Exercise Price
then in effect hereunder shall forthwith
5
be adjusted to the Exercise Price which would have been in effect at the time of
such expiration or termination had such right, option or convertible securities,
to the extent outstanding immediately prior to such expiration or termination,
never been issued, and the additional stock issuable thereunder shall be no
longer be deemed to be outstanding.
(D) DETERMINATION OF ISSUE PRICE. In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such stock or
securities shall be issued for cash the consideration received therefor, before
deducting therefrom any commission or other expenses paid or incurred by the
Company for any underwriting of, or otherwise in connection with, the issuance
thereof, shall be deemed to be the amount received by the company, therefore. In
case any shares of Common Stock or Convertible Securities or any rights or
options to purchase any such stock or securities shall be issued for a
consideration part or all of which shall be other than cash, then, for the
purpose of this subsection (f)(1), the Board of Directors of the Company shall
determine the fair value of such consideration, irrespective of accounting
treatment, and such Common Stock, Convertible Securities, rights or options
shall be deemed to have been issued for an amount of cash equal to the value so
determined by the Board of Directors. The reclassification of securities other
than Common Stock into securities including Common Stock shall be deemed to
involve the issuance for a consideration other than cash of such Common Stock
immediately prior to the close of business on the date fixed for the
determination of security holders entitled to receive such Common Stock. In case
any shares of Common Stock or Convertible Securities or any rights or options to
purchase any such stock or other securities shall be issued together with other
stock or securities or other assets of the Company for a consideration which
includes both, the Board of Directors of the Company shall determine what part
of the consideration so received is to be deemed to be consideration for the
issue of such shares of such Common Stock, convertible Securities, rights or
options.
(E) DETERMINATION OF DATE OF ISSUE. In case the Company shall take a
record of the holders of any Common Stock for the purpose of entitling them (i)
to receive a dividend or other distribution payable in Common Stock or in
Convertible Securities, or (ii) to subscribe for or purchase Common Stock or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the share of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(F) TREASURY SHARES. For the purpose of this subsection (f)(1) shares
of Common Stock at any relevant time owned or held by, or for the account of,
the Company shall not be deemed outstanding.
(2) ADJUSTMENT OF EXERCISE PRICE. Anything in this Section (f) to the
contrary notwithstanding, in case the Company shall at any time issue Common
Stock or Convertible Securities by way of dividend or other distribution on any
stock of the Company or subdivide or combine the outstanding shares of Common
Stock, the Exercise Price shall be proportionately decreased in the case of such
issuance (on the day following the date fixed for determining shareholders
entitled to receive such dividend or other distribution) or decreased in the
case of such subdivision, or increased in the case of such combination (on the
date that such transactions shall become effective).
(3) NO ADJUSTMENT FOR SMALL AMOUNTS. Anything in this Section (f) to
the contrary notwithstanding, the Company shall not be required to give effect
to any adjustment in the Exercise Price unless and until the net effect of one
or more adjustments, determined as above provided, shall have required a change
of the Exercise Price by at least ten cents, but when the cumulative net effect
of more
6
than one adjustment so determined shall be to change the actual Exercise Price
by at least ten cents, such change in the Exercise Price shall thereupon be
given effect.
(4) NUMBER OF SHARES ADJUSTED. Upon any adjustment of the Exercise
Price after the date of issuance hereof, the holder of this Warrant shall
thereafter (until another such adjustment) be entitled to purchase, at the new
Exercise Price, the number of shares, calculated to the nearest full share,
obtained by multiplying the number of shares of Common Stock initially issuable
upon exercise of this Warrant by the Exercise Price in effect on the date hereof
and dividing the product so obtained by the new Exercise Price.
(5) COMMON STOCK DEFINED. Whenever reference is made in this Section
(f) to the issue or sale of shares of Common Stock, the term "Common Stock"
shall mean the Common Stock of the Company of the class authorized as of the
date hereof and any other class of stock ranking on a parity with such Common
Stock, but shall not include stock to be issued to employees and consultants of
the Company as described in the Company's Prospectus dated August __, 1996.
However, shares issuable upon exercise hereof shall include only shares of the
class designated as Common Stock of the Company as of the date hereof.
(g) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding and unexercised (i) if the Company shall pay any dividend or make
any distribution upon the Common Stock or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of stock
of any class or any other rights or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, or any sale, lease or
transfer of all or substantially all of the property and assets of the Company
to another corporation, or voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be effected, then, in any such case, the Company
shall cause to be delivered to the Holder, at least as early as such notice is
given to the Company's shareholders, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any, has been fixed, as of which the holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(h) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of the Company's
outstanding securities (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of an issuance
of Common Stock by way of dividend or other distribution or of a subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with a subsidiary in which merger
the Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the Company shall cause
effective provision to be made so that the holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance receivable upon any such event by a holder of the number of
shares of common stock purchasable upon exercise of this Warrant. Any such
provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing
7
provisions of this Section (i) shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances. In the event
that in any such capital reorganization or reclassification, consolidation,
merger, sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for or of a
security of the Company other than Common Stock, any such issue shall be treated
as an issue of Common Stock covered by the provisions of subsection (f)(1)
hereof with the amount of the consideration received upon the issue thereof
being determined by the Board of Directors of the company, such determination to
be final and binding on the holder.
(8) REDEMPTION OF WARRANTS.
(A) REDEMPTIONS. On not less than 30 days written notice given
as described below, the Warrant may be redeemed, in whole or in part, at the
option of the Company, at any time following such 30 day period, at a redemption
price of $.10 per share of Common Stock issuable upon exercise of this Warrant
(the "Redemption Price"), provided the Market Price of the Common Stock shall
exceed $ ______ and $ ______, per share for the Class A and Class B Warrants,
respectively (the "Target Price"), subject to adjustment as set forth in Section
(8)(E) below. "Market Price" for the purpose of this Section (8) shall mean (x)
the closing bid price for twenty (20) consecutive business days as reported by
the National Association of Securities Dealers, Inc. Automated Quotation
("NASDAQ") System or National Market System or (y) the average of the last
reported sale price for twenty (20) consecutive business days on the primary
exchange on which the Common Stock is traded, if the Common Stock is traded on a
national securities exchange, ending in either case five (5) days before the
notice is given.
(B) MAILING OF NOTICE. In case the Company shall desire to
exercise its right to redeem the Warrants, it shall mail a notice of redemption
to each Holder of the Warrants, first class, postage prepaid, at least 30 days
prior to the date fixed for redemption, at their last address as shall appear on
the records of the Company. Any notice mailed in the manner provided herein
shall be conclusively presumed to have been duly given whether or not the Holder
receives such notice.
(C) TERMINATION OF EXERCISE RIGHTS. Any right to exercise a
Warrant shall terminate on the date fixed in the notice (the "Redemption Date").
On and after the Redemption Date, holders of the Warrants shall have no further
rights except to receive, upon surrender of the Warrant, the Redemption Price.
(D) REDEMPTION PRICE. From and after the Redemption Date, the
Company shall, at the place specified in the notice of redemption, upon
presentation and surrender to the Company by or on behalf of the holder thereof
of one or more Warrants to be redeemed, deliver or cause to be delivered to or
upon the written order of such holder a sum in cash equal to the Redemption
Price of each share of Common Stock issuable upon exercise of such Warrant.
(E) ADJUSTMENT TO TARGET PRICE. If the shares of the Company's
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, the Target Price shall be proportionately adjusted by
the ratio which the total number of shares of Common Stock outstanding
immediately prior to such event bears to the total number of shares of Common
Stock to be outstanding immediately after such event.
9. DUTIES, COMPENSATION AND TERMINATION OF WARRANT AGENT. The Warrant
Agent shall act hereunder as agent and in a ministerial capacity for the
company, and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not, by issuing and delivering Warrant Certificates or by
8
any other act hereunder, be deemed to make any representations as to the
validity, value or authorization of the Warrant Certificates or the Warrants
represented thereby or of the Common Stock or other property delivered on
exercise of any Warrant. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of the Warrant certificates to make or
cause to be made any adjustment of the Exercise Price or to determine whether
any fact exists which may require any such adjustment.
The Warrant Agent shall not (1) be liable for any recital or statement
of fact contained herein or for any action taken or omitted by it in reliance on
any Warrant Certificate or other document or instrument believed by it in good
faith to be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement
except for its own negligence or willful misconduct.
The Company agrees to indemnify the Warrant Agent against any and all
losses, expenses and liabilities which the Warrant Agent may incur in connection
with the exercise of any Warrants as set forth in Section 4 except as a result
of the Warrant Agent's negligence or willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to
it (which may be counsel for the Company) and shall incur no liability or
responsibility for any action taken or omitted by it in good faith in accordance
with the opinion or advice of such counsel. Any notice, statement, instruction,
request, direction, order or demand of the Company shall be sufficiently
evidenced by an instrument signed by its President and attested to by its
Secretary or Assistant Secretary. The Warrant Agent shall not be liable for any
action taken or omitted by it in accordance with such notice, statement,
instruction, request, order or demand except as a result of the Warrant Agent's
negligence or willful misconduct.
The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse the Warrant Agent for its reasonable
expenses. The Company further agrees to indemnify the Warrant Agent against any
and all losses, expenses and liabilities arising except as a result of the
Warrant Agent's negligence or willful misconduct.
The Warrant Agent may resign its duties or the Company may terminate
the Warrant Agent and the Warrant Agent shall be discharged from all further
duties and liabilities hereunder (except liabilities arising as a result of the
Warrant Agent's own negligence or willful misconduct), on thirty days' prior
written notice to the other party. At least fifteen days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate. On such resignation or termination, the Company shall appoint a new
Warrant Agent. if the Company shall fail to make such appointment within a
period of thirty days after it has been notified in writing of the resignation
by the Warrant Agent, then the Registered Holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
Warrant Agent.
After acceptance in writing of an appointment of a new Warrant Agent is
received by the Company, such new Warrant Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
herein as the Warrant Agent, without any further assurance, conveyance, act or
deed; provided, however, if it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed. The
Company shall file a notice of appointment of a new Warrant Agent with the
resigning Warrant Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
9
Any corporation into which the Warrant Agent or any new Warrant Agent
may be converted or merged, or any corporation resulting from any consolidation
to which the Warrant Agent or any new Warrant Agent shall be a party, or any
corporation succeeding to the corporate trust business of the Warrant Agent
shall be a successor to the Warrant Agent under the provisions of the preceding
paragraph. Any such successor Warrant Agent shall promptly cause notice of its
succession as Warrant Agent to be mailed to the Company and to the Registered
Holder of each Warrant Certificate. No further action shall be required for
establishment and authorization of such successor Warrant Agent.
The Warrant Agent, its officers or directors and its subsidiaries or
affiliates may buy, hold or sell Warrants or other securities of the Company and
otherwise deal with the Company in the same manner and to the same extent and
with like effect as though it were not Warrant Agent. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company of
for any other legal entity.
10. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company may,
be supplemental agreement, make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or mistake or error herein contained; or
(ii) that they may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Warrant Certificates; provided, however,
this Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the consent in writing of the Registered Holders of Warrant
Certificates representing not less than 51`% of the Warrants outstanding.
Additionally, except as provided in Section 7, no change in the number or nature
of the Warrant Shares purchasable on exercise of a Warrant, the Exercise Price
therefor, or the Expiration Date of a Warrant shall be made without the consent
in writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are specifically prescribed or allowed by
this Agreement.
11. NOTICES. All notices, demands, elections, opinions or requests
(however characterized or descried) required or authorized hereunder shall be
deemed given sufficiently if in writing and sent by registered or certified
mail, return receipt requested and postage prepaid, or by tested telex, telegram
or cable to, in the case of the Company:
Farmstead Telephone Group, Inc.
81 Church Street
East Hartford, CT 06108
Attention: Chief Financial Officer
with a copy to: Heller, Horowitz & Feit, P. C.
292 Madison Avenue
New York, NY 10017
and in the case of the Warrant Agent:
Oxford Transfer & Registrar, Inc.
317 SW Alder, Suite 1120
Portland, Oregon 97204
and if to the Registered Holder of a Warrant Certificate, at the address of such
holder as set forth on the records maintained by the Warrent Agent and the
Company.
10
12. BINDING AGREEMENT. This Agreement shall be binding upon and inure
to the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the Holders of the Warrant Certificates. Nothing in this
Agreement is intended or shall be construed to confer upon any other person any
fright, remedy or claim or to impose on any other person any duty, liability or
obligation.
13. FURTHER INSTRUMENTS. The parties shall execute and deliver any and
all such instruments and shall take any and all other actions as may be
reasonably necessary to carry out the intention of this Agreement.
14. SEVERABILITY. If any provision of this Agreement shall be held,
declared or pronounced void, voidable, invalid, unenforceable or inoperative for
any reason by any court of competent jurisdiction, government authority or
otherwise, such holding, declaration or pronouncement shall not affect adversely
any other provision of this Agreement, which shall otherwise remain in full
force and effect and be enforced in accordance wit its terms and the effect of
such holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
15. WAIVER. All the rights and remedies of either party under this
Agreement are cumulative and not exclusive of any other rights and remedies as
provided by law. No delay or failure on the part of either party in the exercise
of any right or remedy arising from a breach of this Agreement shall operate as
a waiver of any subsequent right or remedy arising from a subsequent breach of
this Agreement. The consent of any party where required hereunder to act or
occurrence shall not be deemed to be a consent to any other action or
occurrence.
16. GENERAL PROVISIONS. This Agreement shall be construed and enforced
in accordance with, and governed by, the laws of the state of New Jersey. Except
as otherwise expressly stated herein, time is of the essence in performing
hereunder. This Agreement embodies the entire agreement and understanding
between the parties and supersedes all prior agreements and understandings
relating to the subject matter hereof, and this Agreement may not be modified or
amended or any term or provisions hereof waived or discharged except in writing
signed by the party against who such amendment, modification, waiver or
discharge is sought to be enforced. The headings of this Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
OXFORD TRANSFER & REGISTRAR FARMSTEAD TELEPHONE GROUP, INC.
By: /s/Lori Livingston By: /s/ Robert G. LaVigne
------------------ ---------------------
Authorized Officer Authorized Officer
Title: President Title: Vice President - Finance
---------------- ------------------------
11
[FORM OF UNIT CERTIFICATE]
FARMSTEAD TELEPHONE GROUP, INC.
Incorporated under the laws of the State of Delaware
for value received, is the owner of
CUSIP __________
Each Unit ("Unit) consists of one share of Common Stock, par value
$.001, one Redeemable Class A Common Stock Purchase Warrant (the "Class A
Warrants") and one Redeemable Class B Common Stock Purchase Warrant (the "Class
B Warrants and collectively with the Class A Warrants, the "Warrants"). The
Warrants can only be redeemed if a current prospectus covering the Warrants and
the Shares of Common Stock issuable thereunder is then in effect. The Warrants
will remain exercisable for at least 30 days after notice. The terms of the
Warrants are governed by a Warrant Agreement dated as of August 9, 1996 (the
"Warrant Agreement") between the Company and Oxford Transfer & Registrar, as
Warrant Agent (the "Warrant Agent") and are subject to the terms and provisions
contained therein and on the face of the Warrant Certificate, to all of which
terms and provisions the holder of this Unit Certificate consents by acceptance
hereof. Copies of the Warrant Agreement are on file at the office of the Warrant
Agent at 1130 S.W. Morrison, Suite 250, Portland, Oregon 97205 and are available
to any Warrant holder on written request and without cost. The Warrant shall be
void unless exercised before 5:00 p.m. New York Time, on ,2001 or its redemption
date, whichever is earlier.
This certificate is not valid unless countersigned and registered by
the Transfer Agent and the Registrar of the Company.
DATED: FARMSTEAD TELEPHONE GROUP, INC.
BY:
SECRETARY PRESIDENT
[CORPORATE SEAL]
Exhibit 23 (a)
Independent Auditors' Consent
We consent to the use in this Amendment No. 2 to this Registration
Statement on Form SB-2 (No. 333-5103) of Farmstead Telephone Group, Inc. of our
report dated March 8, 1996 appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/S/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
August 8, 1996
