SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to __________
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Commission File Number: 0-15938
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Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
81 Church Street, East Hartford, CT 06108-3728
(Address of principal executive offices) (Zip Code)
(203) 282-0010
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's $.001 par value Common Stock
was 21,238,676 shares as of March 31, 1996
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Operations - Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
PART I
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except number of shares) 1996 1995
- -----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 283 $ 622
Accounts receivable, less allowance for doubtful accounts 2,815 2,691
Inventories 2,348 1,946
Other current assets 598 139
--------------------
Total current assets 6,044 5,398
Property and equipment, net of accumulated depreciation and
amortization 449 256
Investment in unconsolidated subsidiary 189 201
Other assets 131 54
--------------------
Total assets $ 6,813 $ 5,909
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 1,862 $ 1,452
Accounts payable 1,219 1,053
Accrued expenses and other current liabilities 394 398
--------------------
Total current liabilities 3,475 2,903
--------------------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares
authorized; 21,238,676 shares issued and outstanding 21 21
Additional paid-in capital 8,431 8,431
Accumulated deficit (5,114) (5,446)
--------------------
Total stockholders' equity 3,338 3,006
--------------------
Total liabilities and stockholders' equity $ 6,813 $ 5,909
====================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Net sales and service revenues $ 4,122 $ 3,713
Cost of revenues 2,916 2,543
-------------------
Gross profit 1,206 1,170
-------------------
Operating expenses:
Selling, general and administrative expenses 1,085 1,142
Research and development expenses 34 6
-------------------
Total operating expenses 1,119 1,148
-------------------
Operating income 87 22
Interest expense (30) (14)
Equity in loss of unconsolidated subsidiary (12) -
Other income 292 4
-------------------
Income before income taxes 337 12
Provision for income taxes 5 6
-------------------
Net income $ 332 $ 6
===================
Net income per share $ .02 $ *
===================
Weighted average common and common equivalent
shares 21,425 20,677
===================
<FN>
- -------------------
<F1> * Less than one-half cent.
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 332 $ 6
Adjustments to reconcile net income to net cash flows
used in operating activities:
Depreciation and amortization 30 34
Equity in undistributed loss of unconsolidated
subsidiary 12
Changes in operating assets and liabilities:
Increase in accounts receivable (124) (148)
Increase in inventories (402) (487)
Increase in other assets (537) (59)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 162 (80)
---------------
Net cash used in operating activities (527) (734)
---------------
Cash flows from investing activities:
Purchases of property and equipment (222) (41)
---------------
Net cash used in investing activities (222) (41)
---------------
Cash flows from financing activities:
Proceeds from short-term borrowings 410 172
Repayments of short-term borrowings and capital
lease obligation - (6)
Proceeds from sales of common stock, net - 4
---------------
Net cash provided by financing activities 410 170
---------------
Net decrease in cash and cash equivalents (339) (605)
Cash and cash equivalents at beginning of period 622 904
---------------
Cash and cash equivalents at end of period $ 283 $ 299
===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 30 $ 13
Income taxes 5 4
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim financial statements for 1996 are presented on a consolidated
basis (see Note 3), consisting of the accounts of Farmstead Telephone Group,
Inc. and its majority-owned subsidiaries (the "Company"). The interim financial
statements presented herein are unaudited, however in the opinion of management
reflect all adjustments, consisting of adjustments that are of a normal
recurring nature, which are necessary for a fair statement of results for the
interim periods. For further information, refer to the financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995.
Beginning in 1996, the Company has changed the presentation format of the
Consolidated Statement of Operations to provide more detailed information for
the readers of this statement. Comparative amounts for 1995 have also been
conformed to this presentation format.
NOTE 2. OTHER ASSETS
As part of a class action lawsuit settlement in 1995, AT&T was required to
issue approximately 4.2 million $50 face value coupons to the class action
members. The coupons are freely transferable and are redeemable against the cost
of certain specified AT&T telephone system products or maintenance services
purchased during the period May 1, 1995 through June 1, 1997. In 1996, the
Company began purchasing coupons in the marketplace at a discount to their face
value and redeeming them with AT&T subject to a maximum discount of 20% of the
purchase price up to a $2,500 maximum discount per transaction. The Company's
accounting policy is to record income in the period in which it can determine
the amount of rebate it has earned, in an amount equal to the excess of the face
value of the coupons used over the acquisition cost of the coupons. During the
three months ended March 31, 1996, the Company recorded $280,000 as other income
from the application of coupons to prior period purchases. Rebates earned on
current year purchases are recorded in cost of sales after the related products
are sold. Included in other assets at March 31, 1996 are rebates receivable in
the total amount of $381,000.
NOTE 3. FORMATION OF SUBSIDIARY
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC") for a purchase price of $250,000.
Prior to its closing in January 1996, the ARC primarily operated to service AT&T
affiliates in the orderly disposition, by way of consignment sales arrangements,
of excess, overstocked and end-of-life telecommunications, computer and data
transmission equipment. The assets acquired consisted primarily of warehouse
equipment, vehicles, computer and office equipment, and inventory. The Company
concurrently formed a subsidiary corporation, Farmstead Asset Management
Services, LLC ("FAMS"), which will use the purchased assets to start up a
similar operation in Piscataway, New Jersey. The Company intends to attempt to
re-establish certain of the relationships that the ARC enjoyed, however, no
assurances can be given that it will be able to do so. The Company believes that
the operations of FAMS will provide it with an opportunity to develop new
sources of equipment for resale to its existing customers, as well as to other
wholesalers in the telephone, data and computer secondary markets, and
internationally.
NOTE 4. SUBSEQUENT EVENT
On April 22, 1996, the Company entered into a letter of intent with an
underwriter which, as presently structured, contemplates the issuance and public
sale of one million Units, each Unit to consist of one share of Common Stock,
one Redeemable A Warrant and one Redeemable B Warrant (collectively the
"Securities" or the "Units"). For a thirty day period following the Offering
Record Date as defined below, the Company's stockholders (the "Eligible
Stockholders") will be given a non-transferable preferential right (the "Right")
to purchase Units in an amount equivalent to their proportional ownership of the
Company's common stock as of the Offering Record Date. Eligible Stockholders are
defined as all stockholders of record on the date of the issuance of a
Prospectus describing the offering of the Securities (the "Offering Record
Date"). Eligible Stockholders will also have the right to indicate their
interest to purchase additional Units, subject to availability. All Units not
purchased in the rights offering will be offered, on a firm commitment basis, by
the underwriter.
As a prerequisite for the proposed public offering, the underwriter is
requiring that prior to the Effective Date of the offering, the Company obtain
stockholder approval and implement a 1 for 10 reverse stock split. If the
Company obtains stockholder approval at its June 13, 1996 annual meeting of
stockholders, the Board of Directors will be authorized to implement a reverse
split in any desired amount such as, for example, one for five, one for fifteen,
et cetera.
Any reverse split would be implemented in the discretion of the Board of
Directors irrespective of whether the underwriter for the offering is the
current underwriter with whom the Company is presently working with or any other
underwriter which requires a reverse split as a prerequisite to an offering. If
the application of the ratio causes any stockholder to have a fractional share
of stock, such share will be rounded up to the next highest whole share.
The Company intends to use the proceeds of this proposed offering to
expand the Company's business, both domestically and internationally, which
could include the acquisition of other businesses. Until specific opportunities
are presented, the Company cannot determine in any greater detail how the
proceeds of any offering will be used. No assurance can be given that the final
terms and structure of the proposed offering will be as described
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Sales and service revenues for the three months ended March 31, 1996 were
$4,122,000, representing an increase of $409,000 or 11% from the comparable 1995
period. The increase was attributable to the Company's telephone equipment
products and services, which were up by 25% over the comparable prior year
period, partially offset by a 34% decrease in sales of voice processing products
and services due to the expiration of the Company's contract with AT&T in
February 1996. Revenues from telephone equipment sales and services accounted
for 84% of consolidated revenues for the three months ended March 31, 1996 (74%
in the comparable 1995 period), while revenues from voice processing product
sales and services accounted for 15% of consolidated revenues in 1996 (26% in
1995). The Company's newly formed subsidiary, FAMS, began partial operations in
February 1996 , and its sales of used telecommunications and computer equipment
accounted for 1% of consolidated first quarter 1996 revenues. This new operation
is expected to contribute a higher percentage of consolidated revenues as it
becomes fully operational during the second quarter of 1996.
Gross profit for the three months ended March 31, 1996 was 29% of revenues
as compared to 32% of revenues for the comparable prior year period. The
decrease was attributable to product sales mix, and to increased product
acquisition costs on certain telephone system parts. As a re-seller of used
telephone equipment, the nature of the Company's business is such that product
acquisition costs continually fluctuate based upon the source of supply,
availability of such equipment in the marketplace and on market demand, as well
as on the mix of products sold during the reporting period. The Company is not
aware of any market conditions which would cause gross profit margins to
significantly fluctuate from current levels.
Selling, general & administrative expenses for the three months ended
March 31, 1996 were $1,085,000 (26% of revenues) as compared to $1,142,000 (31%
of revenues) for the comparable 1995 period. The decrease was attributable to
(i) international market development costs of approximately $100,000 which were
incurred solely in the 1995 period pursuant to certain joint venture agreements
which were terminated in November 1995 and (ii) approximately $98,000 of costs
associated with the 1995 operation of an in-house service bureau and the
marketing of the new VTS-1000/2000 product line, both of which were discontinued
by the end of 1995. These decreases were offset by the operating expenses of
FAMS which began operations in February 1996, and by higher salaries and sales
commissions, bad debt expenses and other operating costs associated with the
Company's increased business volume.
Other income for the three months ended March 31, 1996 was $292,000 as
compared to $4,000 for the comparable 1995 period. Included in other income for
1996 was $280,000 of rebates from AT&T as more fully described in Note 2.
Liquidity and Capital Resources
Net working capital at March 31, 1996 was $2,569,000, a 3% increase over
the $2,495,000 of net working capital at December 31, 1995. The working capital
ratio at March 31, 1996 was 1.7 to 1 as compared to 1.9 to 1 at December 31,
1995.
Operating activities used $527,000 of cash during the three months ended
March 31, 1996, principally as a result of (i) a $537,000 increase in other
assets, of which amount $381,000 represents rebates receivable from product
purchases (see Note 2), and (ii) a 21% increase in inventories as the Company
increased its stocking levels on certain telephone products.
Investing activities used $222,000 of cash during the three months ended
March 31, 1996, principally in the purchase of warehouse equipment, vehicles,
computer and office equipment for use by FAMS in its business operations.
Financing activities provided $410,000 of cash during the three months
ended March 31, 1996 attributable to borrowings under the Company's revolving
credit line.
The Company has thus far satisfied its 1996 cash requirements through the
use of existing cash and through borrowings under its revolving credit facility.
The average and highest amounts borrowed under this credit facility during the
three months ended March 31, 1996 was $1,043,000 and $1,864,000, respectively.
The Company's borrowings are dependent upon the continuing generation of
collateral, subject to its $2 million credit line.
The Company believes that it has sufficient capital resources to satisfy
the working capital requirements of its present level of operations, but may
require additional sources of capital in order to significantly expand its
operations. As more fully described in Note 4 of the Notes to Consolidated
Financial Statements contained herein, on April 22, 1996, the Company entered
into a letter of intent with a prospective underwriter which, as presently
structured, contemplates the issuance and public sale of one million Units, each
Unit to consist of one share of Common Stock, one Redeemable A Warrant and one
Redeemable B Warrant. For a thirty day period following the Offering Record
Date, the Company's Eligible Stockholders will be given a non-transferable
preferential Right to purchase Units in an amount equivalent to their
proportional ownership of the Company's common stock as of the Offering Record
Date. All Units not purchased in the rights offering will be offered, on a firm
commitment basis, by the underwriter. The public offering price of the Units
will be equal to the average closing bid price over the preceding ten day period
(as adjusted for a reverse stock split as further described in Note 4) of the
Company's common stock as shown on the Nasdaq SmallCap MarketSM on the Effective
Date of the Registration Statement of the offering.
Since the Unit Price will be based upon the market price of the common
stock just prior to the Effective Date, the offering proceeds cannot be
presently determined; however, based upon current price levels the Company
expects to raise a minimum of $3 million from sales of Units. The Company
intends to use the proceeds of this public offering to finance and expand the
Company's business, both domestically and internationally, which could include
the acquisition of other businesses. Until specific opportunities are presented,
the Company cannot determine in any greater detail how the proceeds of any
offering will be used.
Inflation has not been a significant factor in the Company's operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibit is filed herewith:
11. Statement Re: Computation of Per Share Earnings.
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: May 9, 1996 /s/ Robert G. LaVigne
---------------------------------------
Robert G. LaVigne
Vice President - Finance and
Administration, Chief Financial Officer
EXHIBIT 11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
Three Months Ended March 31, 1996 and 1995
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months
ended March 31
-------------------
PRIMARY: 1996 1995
-------------------
<S> <C> <C>
Weighted average shares outstanding 21,239 20,399
Net effect of dilutive stock options and warrants
based on the treasury stock method using average
market price 186 278
------------------
Total weighted average shares 21,425 20,677
==================
Net income $ 332 $ 6
==================
Per share amount $ .02 $ *
==================
<FN>
- -------------------
<F1> * Less than one-half cent.
</FN>
</TABLE>
Fully diluted earnings per share is not presented because it is immaterial and
anti-dilutive in both periods.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 283
<SECURITIES> 0
<RECEIVABLES> 2,815
<ALLOWANCES> 0
<INVENTORY> 2,348
<CURRENT-ASSETS> 6,044
<PP&E> 449
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,813
<CURRENT-LIABILITIES> 3,475
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 3,317
<TOTAL-LIABILITY-AND-EQUITY> 6,813
<SALES> 4,122
<TOTAL-REVENUES> 4,122
<CGS> 2,916
<TOTAL-COSTS> 2,916
<OTHER-EXPENSES> 34
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 337
<INCOME-TAX> 5
<INCOME-CONTINUING> 332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
