UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 0-15938
FARMSTEAD TELEPHONE GROUP, INC.
(Name of small business issuer in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
81 Church Street, East Hartford, CT 06108-3728
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (860) 282-0010
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $15,317,000
As of February 26, 1996, the aggregate market value of the Common Stock of the
registrant held by non-affiliates, based upon the last sale price of the
registrant's Common Stock on such date, was approximately $ 8,228,700.
As of February 26, 1996, the registrant had 21,238,676 shares of its $0.001
par value Common Stock outstanding.
Transitional Small Business Format: Yes [ ] No [X]
TABLE OF CONTENTS TO FORM 10-KSB
PART I
Page
----
Item 1. Description of Business...................................... 3
Item 2. Description of Property...................................... 11
Item 3. Legal Proceedings............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..... 12
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
Item 7. Financial Statements......................................... 17
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures......................... 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act... 17
Item 10. Executive Compensation....................................... 20
Item 11. Security Ownership of Certain Beneficial Owners
and Management............................................... 20
Item 12. Certain Relationships and Related Transactions............... 20
Item 13. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES.............................................................. 21
INDEX TO EXHIBITS....................................................... 34
PART I
Item 1. Description of 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 are marketed domestically through
the Company's in-house sales staff to approximately 1,500 active customers
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 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,
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.
* 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 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.
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.
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[registered trademark] and Merlin
Legend[registered trademark] (2 lines, 6 telephones to 80 lines, 144
telephones); Spirit[registered trademark] (3 lines, 8 telephones to 24 lines,
48 telephones) and Partner[registered trademark] (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[registered trademark] G1 (400
lines, 1,600 telephones); Definity[registered trademark] G2 (32,000 lines,
100,000 telephones); Definity[registered trademark] G3 (4,000 lines, 10,000
telephones); and Dimension[registered trademark] (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% (77% 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[registered
trademark], Spirit[registered trademark] and System 25 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 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 to no longer
provide installation and maintenance services on used and/or refurbished
products sold by the Company.
Marketing and Customers
Telephone parts, systems and services are marketed domestically through
the Company's in-house sales staff to more than 1500 active customers 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[registered trademark] 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 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:
COBOT[TRADEMARK] 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.
COBOT[TRADEMARK] Plus Digital Announcer - a single port, solid
state, fully-featured announcer for PBXs, Key systems or
Centrex applications.
COBOT[TRADEMARK] 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.
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.
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 AT&T
Agreement, the Company is required to purchase certain products only 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. 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
COBOT[TRADEMARK] Plus Digital Announcer and the COBOT[TRADEMARK] 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 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 December 31, 1995, the Company had 53 full-time and 2 part-time
employees, consisting of 5 executive officers, 23 in operations, 18 in sales
and sales support, and 9 in administration. 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.
Item 2. 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. 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.
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.
Item 3. Legal Proceedings
The Company is not a party to any pending material proceedings and no
such proceedings are known to be contemplated by others.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock, Warrants and Units trade on The Nasdaq
SmallCap Market[SM] ("Nasdaq") tier of The Nasdaq Stock Market[SM] under the
symbols "FONE," "FONEW" and "FONEU," respectively. The following table sets
forth the range of quarterly high and low sales prices for these securities,
as reported by Nasdaq, for the two years ended December 31, 1995:
Common Stock:
<TABLE>
<CAPTION>
1995 1994
---------- -------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<C> <C> <C> <C> <C>
March 31..................... $.63 $.34 $1.53 $ .72
June 30...................... .69 .38 1.03 .69
September 30................. .56 .44 1.03 .56
December 31.................. .41 .28 .78 .50
</TABLE>
There were 21,238,676 and 20,398,947 shares outstanding at December 31,
1995 and 1994, respectively.
Warrants:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<C> <C> <C> <C> <C>
March 31..................... $.22 $.09 $ .94 $ .47
June 30...................... .19 .03 .56 .31
September 30................. .13 .03 .53 .25
December 31.................. .03 .03 .31 .13
</TABLE>
There were 1,835,727 and 2,675,456 public warrants outstanding at
December 31, 1995 and 1994, respectively.
Units (1):
<TABLE>
<CAPTION>
1995 1994
---------- -----------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
<C> <C> <C> <C> <C>
March 31..................... $.75 $.41 $2.38 $1.50
June 30...................... .81 .44 1.50 1.06
September 30................. .69 .69 1.44 .84
December 31.................. .25 .25 .94 .75
- -------------------
<F1> Units of the Company's securities consist of one share of common stock and
a detachable warrant to purchase one share of common stock at an
exercise price of $2.00 per share. For further information see the Notes
to Financial Statements.
<Fb> There were 686 record holders of the common stock as of December 31, 1995,
representing approximately 4,900 beneficial stockholders.
<Fc> The Company has paid no dividends and does not expect to pay dividends in
the foreseeable future as it intends to retain earnings to finance the
growth of its operations. Pursuant to a Commercial Loan and Security
Agreement with Affiliated Business Credit Corporation, 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.
</TABLE>
Item 6. 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 in Item 7 of this Report.
Results of Operations
The following table sets forth the percentage of revenue represented by
the following items for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Sales and service revenues.................... 100.0% 100.0%
Cost of goods and services sold............... 69.5 69.8
Selling, general and administrative expenses.. 31.6 27.0
Research and development expenses............. .6 1.8
Interest expense.............................. .6 .3
Equity in unconsolidated subsidiary........... 1.3 -
Other income.................................. (.1) (.4)
----- -----
Income (loss) before income taxes............. (3.5) 1.5
Provision for income taxes.................... .1 -
----- -----
Net income (loss)............................. (3.6)% 1.5%
===== =====
</TABLE>
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 ATC, which was completed in May 1995, and (ii) developing strategic
business relationships in China for the marketing of its voice processing
products through the contemplated formation of a second joint venture company.
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, 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.
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
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 product 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
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.
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.
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. The
Company estimates that the start-up costs of this new operation will
approximate $350,000. See Note 12 of the Notes to Financial Statements.
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 it 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.
Item 7. Financial Statements
The following report and financial statements of the Company are
contained on the pages indicated:
Page
----
Report of Deloitte & Touche LLP...................................... 22
Balance Sheets - December 31, 1995 and 1994.......................... 23
Statements of Operations - Years Ended December 31, 1995 and 1994.... 24
Statement of Changes in Stockholders' Equity - Years Ended
December 31, 1995 and 1994.......................................... 24
Statements of Cash Flows - Years Ended December 31, 1995 and 1994.... 25
Notes to Financial Statements........................................ 26
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year, except for the following:
<TABLE>
<CAPTION>
Year First
Name Age Elected Position(s) Held
- ---- --- ---------- ----------------
<S> <C> <C> <C>
Directors:
- ----------
George J. Taylor, Jr.(2).......... 53 1984 Chairman of the Board, President, Chief
Executive Officer and Director
Robert G. LaVigne................. 44 1988 Vice President - Finance & Administration,
Chief Financial Officer, Secretary, Treasurer,
Director
Harold L. Hansen(1)(2)(3)......... 66 1992 Director
Hugh M. Taylor(1)(2)(3)........... 52 1993 Director
Joseph J. Kelley(1)(2)(3)......... 56 1995 Director
Other Executive Officers:
- -------------------------
Alexander E. Capo................. 45 1987 Vice President - Marketing & Sales
Joseph A. Novak, Jr............... 53 1993 Vice President - Operations
Neil R. Sullivan.................. 45 1994 Corporate Controller, General Manager,
Assistant Secretary
John G. Antonich.................. 55 1996 General Manager, Cobotyx Division
- -------------------
<F1> Member of the Audit Committee.
<F2> Member of the Compensation Committee.
<F3> Member of the Stock Option Committee.
</TABLE>
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
the brother of Mr. Hugh M. Taylor. Mr. Taylor is also a Director of ATC.
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 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 the
President of Hansen Associates, a management and financial consulting firm
founded by him in 1983. From November 1994 to April 1995 he was the President
of H2O Environmental, Inc., an environmental and geotechnical services
company. During 1993 and 1994 he was the President of Hansen Associates. 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.
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. He is
currently President of East Haven Associates of Wellesley, in Wellesley,
Massachusetts. The Company 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 the State of Massachusetts operations. 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.
Neil R. Sullivan was employed by the Company in October 1994 as
Corporate Controller and as General Manager of the 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.
Item 10. Executive Compensation
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within 120
days after the close of its fiscal year.
PART IV
Item 13. Exhibits and Reports on Form 8-K
Exhibits: See Index to Exhibits on page 34.
Reports on Form 8-K: The registrant did not file any reports on Form 8-K
during the fourth quarter of 1995.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ George J. Taylor, Jr.
George J. Taylor, Jr.
Chairman of the Board, Chief
Executive Officer and President
Date: March 18, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George J. Taylor, Jr. Chairman of the Board, March 18, 1996
- ------------------------- Chief Executive Officer,
George J. Taylor, Jr. and President
(Principal Executive Officer)
/s/ Robert G. LaVigne
- ------------------------- Vice President - Finance and March 18, 1996
Robert G. LaVigne Administration, Chief Financial
Officer and Director (Principal
Financial and Accounting Officer)
/s/ Harold L. Hansen Director March 18, 1996
- -------------------------
Harold L. Hansen
/s/ Hugh M. Taylor Director March 18, 1996
- -------------------------
Hugh M. Taylor
/s/ Joseph J. Kelley Director March 18, 1996
- -------------------------
Joseph J. Kelley
</TABLE>
REPORT OF DELOITTE & TOUCHE LLP
Deloitte &
Touche LLP
- ------------ -----------------------------------------------------
City Place Telephone: (203) 280-3000
185 Asylum Street
Hartford, Connecticut 06103-3402
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Farmstead Telephone Group, Inc.
East Hartford, Connecticut
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
March 8, 1996
FARMSTEAD TELEPHONE GROUP, INC.
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except number of shares) 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.
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 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
outstanding (000's) 20,842 21,608
==================
</TABLE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Stock sub- Accum-
----------------- paid-in scriptions ulated
(In thousands) 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.
FARMSTEAD TELEPHONE GROUP, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands) 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.
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 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
====================
<Fa> The Company leased computer equipment under a noncancelable lease
contract which expired in February 1996.
</TABLE>
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.
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 of Shares Option Price Range Number of Shares Option Price Range
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 43,000 $.18 - 1.00 116,000 $.16 - .17
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 of Shares Option Price 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>
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 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):
<TABLE>
<S> <C>
Sales revenues $ 15
Gross profit 8
Net loss (41)
</TABLE>
The following table shows the changes in the Company's investment in
unconsolidated subsidiary ($000's):
<TABLE>
<S> <C>
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
=====
</TABLE>
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>
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.
INDEX TO 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.
Registrant hereby incorporates by reference the following exhibit
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 exhibit
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 Form SB-2 , 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)
10.4 Employment Contract for George J. Taylor, Jr.
Registrant hereby incorporates by reference the following exhibits
filed as part of Form SB-2 , Amendment No. 1, 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. (Terminated)
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 exhibit
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 the 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 with the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1995:
10.1 Employment Agreement dated May 19, 1995, between Farmstead
Telephone Group, Inc. and Peter Buswell
10.2 Commercial Revolving Loan and Security Agreement dated
June 5, 1995, between Farmstead Telephone Group, Inc. and
Affiliated Business Credit Corporation
10.3 Contract for Beijing Antai Communication Equipment Company
Ltd., dated September 23, 1992
The following exhibits are filed herewith:
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 Statement re: Computation of per share earnings.
21 Subsidiaries of Small Business Issuer
Exhibit 10.1
March 11, 1996
Affiliated Business Credit Corporation
72 Queen Street
Southington, CT 06489
Gentlemen:
This letter sets forth our agreements with respect to the
obligations described below of Farmstead Telephone Group, Inc. (the
"Borrower") to Affiliated Business Credit Corporation ("ABCC").
The Borrower acknowledges that it is unconditionally indebted to
ABCC with respect to the demand revolving loan (the "Revolving Loan")
extended by ABCC to Borrower in the original principal amount of
$1,500,000 which is evidenced by, among other things, a Commercial
Revolving Loan and Security Agreement (the "Loan Agreement") and a
$1,500,000 Revolving Promissory Note, each dated June 5, 1995 (the
"Revolving Promissory Note"), the current principal balance of which as of
March 1, 1996 is $1,361,138.28, plus interest accrued and accruing thereon
and costs and expenses of collection, including without limitation,
attorneys' fees (collectively, the "Indebtedness"). Additionally, the
Borrower acknowledges that it has no defense, offset or counterclaim to
its obligations with respect to the Indebtedness and further that it has
no other claim whatsoever against ABCC (whether arising in contract, tort
or otherwise) with respect to the Indebtedness or any other matter
whatsoever.
The Borrower has requested that ABCC: (i) increase the maximum
aggregate amount of advances permitted to be outstanding at any one time
under the Revolving Loan from $1,500,000 to $2,000,000; (ii) extend the
Term to May 31, 1997; (iii) temporarily increase the percentage of
Eligible Inventory included in the Borrowing Base from 25% to 40%,
followed by a gradual reduction back to 25%; and (iv) consent to the
investment of $250,000 by the Borrower in a new limited liability company
owned by the Borrower (the "LLC"), which investment was used by the LLC to
purchase from AT&T Systems Leasing Corporation ("AT&T") assets located at
AT&T's facility in Piscataway, New Jersey (collectively, the
"Accommodations"). Capitalized terms used herein that are not defined
herein have the meanings ascribed to them in the Loan Agreement.
ABCC has agreed to extend the Accommodations but only on the
following terms and conditions:
1. As an inducement to and in consideration of ABCC's agreements
contained herein, the Borrower represents, warrants and acknowledges to
ABCC that (a) all representations and warranties contained in the Loan
Agreement and in the other documents executed in connection with the
Indebtedness (collectively, including the Loan Agreement, the "Loan
Documents") are true and correct on and as of the date hereof (except as
set forth on revised schedules to the Loan Agreement to be delivered by
the Borrower to ABCC within seven (7) days of the date hereof) and are
incorporated herein by reference and hereby remade; (b) the resolutions
previously adopted by the Board of Directors of the Borrower and provided
to ABCC have not in any way been rescinded or modified and are now in full
force and effect, except to the extent that they have been modified or
supplemented to authorize this Agreement and the transactions described
herein; (c) no event of default has occurred or is continuing under any of
the Loan Documents and no condition exists which would constitute an event
of default thereunder but for the giving of notice or passage of time, or
both; and (d) the consummation of the transactions contemplated hereby is
not prevented or limited by, nor does it conflict with or result in a
breach of the terms, conditions or provisions of, any evidence of
indebtedness, agreement or instrument of whatever nature to which the
Borrower is a party or by which it is bound, does not constitute a default
under any of the foregoing, and does not violate any federal, state or
local law, regulation or order of any court or agency which is binding
upon the Borrower.
2. The Loan Agreement is hereby amended as follows:
(a) by deleting all references in the Loan Agreement to
"$1,500,000" in their entirety and substituting "$2,000,000"
therefor;
(b) by deleting the definition of Borrowing Base and
substituting therefor the following definition: "Borrowing Base"
shall mean an amount equal to the lesser of: (i) TWO MILLION DOLLARS
($2,000,000), or (ii) an amount equal to the aggregate of (1)
seventy-five percent (75%) of Eligible Accounts and (2) the lesser
of (A) the Inventory Advance Percentage of Eligible Inventory, or
(B) Maximum Inventory Advance Amount.
(c) by adding the following definitions:
"Inventory Advance Percentage" shall mean 40% during March, April
and May, 1996; 38% during June, 1996; 37% during July, 1996; 35% during
August, 1996; 34% during September, 1996; 32% during October, 1996; 31%
during November, 1996; 29% during December, 1996; 28% during January,
1997; and 25% from and at all times after February 1, 1997.
"Maximum Inventory Advance Amount" shall mean $425,000 during March,
April and May, 1996; $412,500 during June, 1996; $400,000 during July,
1996; $387,500 during August, 1996; $375,000 during September, 1996;
$362,500 during October, 1996; $350,000 during November, 1996; $337,500
during December, 1996; $325,000 during January, 1997; and $300,000 from
and at all times after February 1, 1997.
(d) by deleting clause (ii) of Section 3.1(a) and
substituting the following clause (ii): "(ii) a minimum assumed
monthly loan balance of (A) prior to May 31, 1996, $600,000, and (B)
on and after May 31, 1996, $700,000 (the "Minimum Balance").".
Lender agrees that it will consider a modification of the Minimum
Balance. Any such reduction in the Minimum Balance will be at the
Lender's discretion and shall be based, upon other things, Lender's
receipt of evidence that Borrower has raised additional equity;
(e) by deleting the reference to "May 31, 1996" in Section
12.1(a) and substituting "May 31, 1997" therefor;
(f) by adding the following Section 13.14 to the end of the
Loan Agreement:
"Section 13.14 Provisions Relating to Investment in LLC.
Notwithstanding any other provision hereof, the Borrower may invest
up to $450,000 in Farmstead Asset Management Services, LLC, a
Delaware limited liability company (the "LLC"). The Borrower hereby
covenants and agrees that (a) the Borrower and its affiliates will
continue at all times until the termination of this Agreement to own
100% of the equity interests in the LLC; (b) the inventory of the
LLC shall be maintained separate from any inventory of the Borrower;
(c) all accounts receivable of the LLC will be billed and invoiced
under the LLC's name, and there will be no reference to the Borrower
in such bills or invoices unless such bills or invoices clearly
state that the Borrower and the LLC are separate and distinct
corporations; (d) no borrowing certificate, report or other
information provided by the Borrower to Lender will list or include
any inventory or accounts receivable of the LLC; and (e) the
Borrower will not transfer any asset to the LLC or make any loan to
or investment in the LLC, except for an investment of $450,000 in
the LLC in connection with its purchase of assets from AT&T as
referred to above and except for purchases by the Borrower, for fair
consideration, of inventory from the LLC in the ordinary course of
the LLC's business (it being expressly agreed and understood that,
without limiting Lender's discretion, no such inventory shall be
Eligible Inventory unless Borrower provides to Lender evidence
satisfactory to Lender that (1) Borrower has (A) filed a Notice of
Business Activities Report with the appropriate office or agency for
New Jersey in the then current year, or (B) received a Certificate
of Authority to do business and is in good standing in New Jersey,
(2) title to such inventory is held by Borrower, and (3) such
inventory is subject to Lender's perfected first security interest
and to no other lien or security interest)."
3. Contemporaneously herewith, the Borrower shall execute and
deliver to ABCC: (i) a $2,000,000 Amended and Restated Revolving
Promissory Note in form and content satisfactory to ABCC (the "Amended and
Restated Revolving Promissory Note"), which shall supersede and replace
the Revolving Promissory Note.
4. All references in the Loan Agreement to the Revolving Promissory
Note are hereby deleted and replaced with "Amended and Restated Revolving
Promissory Note". The copy of the Revolving Promissory Note attached to
the Loan Agreement as Exhibit A is hereby deleted and a copy of the
Amended and Restated Revolving Promissory Note attached hereto is attached
in lieu thereof.
5. Contemporaneously herewith, the Borrower shall pay to ABCC a
commitment fee of $15,000 in consideration of the amendments set forth
herein.
6. Contemporaneously herewith, the LLC shall execute (a) an
unconditional guaranty, in form and substance acceptable ABCC, of all
indebtedness of the Borrower to ABCC, now existing or hereafter arising,
(b) a security agreement, in form and substance acceptable to ABCC,
pursuant to which the LLC shall grant a lien to ABCC on all of its assets
as collateral for such guaranty, and (c) financing statements for filing
in New Jersey and Connecticut.
7. Contemporaneously herewith, the Borrower shall execute financing
statements for filing in New Jersey and Connecticut.
8. The Borrower acknowledges and agrees that all indebtedness,
liabilities and obligations of the Borrower to ABCC, including without
limitation, the Indebtedness evidenced by the Amended and Restated
Revolving Promissory Note shall continue to be secured by a first lien on
and security interest in all of the Borrower's assets.
9. This Agreement and the other Loan Documents constitute the
entire understanding and agreement among the parties hereto and supersede
any prior or contemporaneous oral understanding with respect to the
subject matter hereof. Except as expressly modified herein, the Loan
Documents remain unmodified and in full force and effect in accordance
with their terms. To the extent that there is a conflict between this
Agreement and the Loan Documents, the terms of this Agreement shall
prevail.
If the foregoing is in accordance with your agreement, please
indicate the same by signing below.
WITNESSED: Very truly yours,
__________________________________ FARMSTEAD TELEPHONE GROUP, INC.
__________________________________ By: /s/ Robert G. LaVigne
Its Vice Predident-Finance & Admin.
Reviewed and Agreed to:
AFFILIATED BUSINESS CREDIT CORPORATION
By: /s/ Paul F. Buzzelli
Its Vice President
EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Years ended December 31, 1995 and 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PRIMARY: 1995 1994
-----------------
<S> <C> <C>
Weighted average shares outstanding 20,842 20,004
Net effect of dilutive stock options and warrants
based on the treasury stock method using average
market price - 1,604
-----------------
Total weighted average shares 20,842 21,608
=================
Net income (loss) $ (553) $ 172
=================
Per share amount $ (.03) $ .01
=================
</TABLE>
In calculating weighted average shares, all securities convertible
into common stock are excluded if their inclusion would have the effect
of increasing the earnings per share amount or decreasing the loss per
share amount otherwise computed. Fully diluted earnings (loss) per share
is not presented because it is anti-dilutive.
EXHIBIT 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
<TABLE>
<CAPTION>
Percent State or other jurisdiction of
Name Owned incorporation or organization
- ---------------------------------------------------------------------------------------------------
<S> <C> <S>
Beijing Antai Communication Equipment Company, Ltd. 50% Peoples Republic of China
GlobalFONE of Romania(1) 100% Romania
Farmstead Asset Management Services, LLC(2) 98% Delaware
FTG Venture Corporation(3) 100% Delaware
<FN>
- -------------------
<F1> Inactive
<F2> Formed February 23, 1996
<F3> Incorporated February 23, 1996 ( 2% owner of Farmstead Asset Management Services, LLC)
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 622
<SECURITIES> 0
<RECEIVABLES> 2,812
<ALLOWANCES> 121
<INVENTORY> 1,946
<CURRENT-ASSETS> 5,398
<PP&E> 582
<DEPRECIATION> 326
<TOTAL-ASSETS> 5,909
<CURRENT-LIABILITIES> 2,903
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 2,985
<TOTAL-LIABILITY-AND-EQUITY> 5,909
<SALES> 15,317
<TOTAL-REVENUES> 15,317
<CGS> 10,645
<TOTAL-COSTS> 10,645
<OTHER-EXPENSES> 5,117
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99
<INCOME-PRETAX> (544)
<INCOME-TAX> 9
<INCOME-CONTINUING> (553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (553)
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>