As filed with the Securities and Exchange Commission
on June 3, 1996
Registration No. 33-
-----------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------------------
FARMSTEAD TELEPHONE GROUP, INC.
(Name of Small Business Issuer in its charter)
Delaware
(State or Other Jurisdiction
of incorporation or organization)
-------------------------------
3661
(Primary Standard Industrial Classification Code Number)
06-1205743
(I.R.S. Employer Identification No.)
81 Church Street
East Hartford, Connecticut 06108
(860) 282-0010
(Address and Telephone Number of Registrant's Principal
Executive Offices and Principal Place of Business)
-------------------------------
ROBERT G. LAVIGNE
81 Church Street
East Hartford, Connecticut 06108
(860) 282-0010
(Name, Address and Telephone Number,
of Agent for Service)
------------------------------------
Copies to:
RICHARD F. HOROWITZ, ESQ. WILLIAM M. PRIFTI, ESQ.
IRVING ROTHSTEIN, ESQ. 220 Broadway, Suite 204
Heller, Horowitz & Feit, P.C. Lynnfield, MA 01940
292 Madison Avenue Telephone: (617)593-4525
New York, New York 10017 Facsimile: (617)598-5222
Telephone: (212)685-7600
Facsimile: (212)696-9459
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this registration statement.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed
Maximum Proposed
Offering Maximum
Title of Each Class Amount Price Aggregate Amount of
of Securities to be To Be Per Offering Registra-
Registered Registered Security Price (1) tion Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units 1,150,000 $ 4.6875 $ 5,390,625.00 $ 1,858.69
Common Stock, $.001 par value per
share 1,150,000 --- --- ---
Class A Redeemable Common Stock
Purchase Warrants 1,150,000 --- --- ---
Class B Redeemable Common Stock
Purchase Warrants 1,150,000 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per
share (2) 2,300,000 $ 6.5625 $15,093,750.00 $ 5,204.33
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants (3) 100,000 $ .001 $ 100.00 $ .03
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Units (4) 100,000 $ 6.5625 $ 656,250.00 $ 226.28
Common Stock, $.001 par value per
share 100,000 --- --- ---
Class A Redeemable Common Stock
Purchase Warrants 100,000 --- --- ---
Class B Redeemable Common Stock
Purchase Warrants 100,000 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per share (5)
200,000 $ 6.5625 $ 1,312,500.00 $ 452.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total $22,453,225.00 $ 7,741.88
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933. Based upon closing
price of $.46875 on May 27, 1996 and adjusted for the anticipated reverse
split. Includes 150,000 Units for the Underwriter's overallotment option.
(2) Issuable upon exercise of the Class A and Class B Redeemable Common Stock
Purchase Warrants included in the Units and in the overallotment option.
(3) Issued to the Underwriter entitling the Underwriter to purchase one Unit
(consisting of one share of Common Stock, one Class A Redeemable Common
Stock Purchase Warrant and one Class B Redeemable Common Stock Purchase
Warrant) for each ten Units it underwrites in the public offering.
(4) Issuable upon exercise of the Underwriter's Warrants.
(5) Issuable upon exercise of the Class A and Class B Redeemable Common Stock
Purchase Warrants included in the Underwriter's Warrants purchasable by the
Underwriter.
2
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
3
FARMSTEAD TELEPHONE GROUP, INC.
Cross Reference Sheet Showing Location in Prospectus of Information Required
Therein by Items 1 through 23 of Form SB-2
<TABLE>
<CAPTION>
Registration Statement Prospectus Caption
Item and Heading or Location
---------------- -----------
<S> <C>
1. Front of Registration Statement and Outside Front Cover of
Prospectus .......................................................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus ............................. Inside Front/Outside Back Cover Page
3. Summary Information and Risk Factors ................................................ Prospectus Summary, The Company,
Risk Factors
4. Use of Proceeds ..................................................................... Use of Proceeds
5. Determination of Offering Price ..................................................... Not Applicable
6. Dilution ............................................................................ Not Applicable
7. Selling Security Holders ............................................................ Not Applicable
8. Plan of Distribution ................................................................ Underwriting
9. Legal Proceedings ................................................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control Persons ........................ Management
11. Security Ownership of Certain Beneficial Owners and Management ...................... Principal Stockholders
12. Description of Securities ........................................................... Description of Securities
13. Interests of Named Experts and Counsel .............................................. Not Applicable
14. Disclosure of Commission Position onIndemnification for Securities
Act Liabilities ..................................................................... Management
15. Organization Within Last Five Years ................................................. Not Applicable
16. Description of Business ............................................................. Business
17. Management's Discussion and Analysis or Plan of Operation ........................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
4
18. Description of Property ............................................................. Business
19. Certain Relationships and Related Transactions ...................................... Not Applicable
20. Market for Common Equity and Related Stockholders Matters ........................... Price Range for listed Securities and
Dividend Policy
21. Executive Compensation .............................................................. Management
22. Financial Statements ................................................................ Financial Statements
23. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ................................................................ Not Applicable
</TABLE>
5
SUBJECT TO COMPLETION, DATED JUNE 3, 1996
PROSPECTUS
FARMSTEAD TELEPHONE GROUP, INC.
1,000,000 Units
Each Unit Consisting of One Share of Common Stock,
One Class A Redeemable Common Stock Purchase Warrant
and One Class B Redeemable Common Stock Purchase Warrant
____________________
Farmstead Telephone Group, Inc. (the "Company") hereby offers 1,000,000
Units (the "Units"), each Unit consisting of one share of common stock, $.001
par value per share (the "Common Stock"), one Class A Redeemable Common Stock
Purchase Warrant (the "Class A Warrants") and one Class B Redeemable Common
Stock Purchase Warrant (the "Class B Warrants" and collectively with the Class A
Warrants, the "Warrants"). The shares of Common Stock and Warrants comprising
the Units shall be separately tradeable, only upon the determination of the
Underwriter. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at a price of $____ per share [130% of the Unit Offering Price
which is the average closing bid price for the 10 days prior to effectiveness]
and each Class B Warrant entitles the holder to purchase one share of Common
Stock at a price of $____ [150% of the Unit Offering Price] at any time
commencing ___________, 1996 [the date of this Prospectus], until ________, 2001
[5 years after the date of this Prospectus]. The Warrants are redeemable by the
Company at a redemption price of $.10 per Warrant at any time commencing
_________, 1997 [13 months after the date of this Prospectus], on __ days' prior
written notice, provided that the reported closing price of the Common Stock
equals or exceeds $____ [150% of the Unit Offering Price] for the Class A
Warrants and $___ [170% of the Unit Offering Price] for the Class B Warrants,
for a period of 20 consecutive trading days ending five days prior to the notice
of redemption. See "Description of Securities."
The Units will be offered first to the Company's Stockholders upon the
exercise of "Rights" distributed herewith (the "Rights Offering"). The
Stockholders will have 30 days to exercise their Rights, which shall be
distributed on a pro rata basis, based upon the number of shares of Common Stock
owned by each stockholder. To the extent Rights are not exercised, they may, at
the discretion of the Underwriter, be purchased by other stockholders who
indicate an interest to exercise more rights than their pro rata allocation. All
Units not purchased in the Rights Offering will be offered, on a firm commitment
basis by the Underwriter. See "Underwriting."
Prior to this offering, there has been no public market for the Units or
the Warrants and there can be no assurance that such a market will develop after
the completion of this offering or, that if developed, that it will be
sustained. The Common Stock is traded on the National Association of Securities
Dealers, Inc., Automated Quotation System ("Nasdaq") SmallCap Market under the
symbol "FONE." It is anticipated that the Units and the Warrants will also be
included under the symbols "_____", "______" and "_________." On ______, 1996,
the closing price of the Company's Common Stock was $_____. The Company intends
to attempt to have the Units and Warrants listed on The Boston Stock Exchange.
For information regarding the factors considered in determining the public
offering price and terms of the Units, see "Risk Factors" and "Underwriting."
6
____________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE "RISK FACTORS."
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Unit $ $ $
- --------------------------------------------------------------------------------
Total $ $ $
================================================================================
(1) Does not include additional compensation to Schneider Securities, Inc.
(the "Underwriter") in the form of a non-accountable expense allowance
in the amount of 3% of the gross amount of Units sold by the
Underwriter. In addition, see "Underwriting" for information concerning
indemnification and other compensation payable to the Underwriter.
Discounts and commissions and the Underwriter's expense allowance will
only be payable upon those Units actually underwritten by the
Underwriter. However, the Underwriter will receive a fee based upon the
gross amount of Units purchased in the Rights Offering as described in
"Underwriting."
(2) Before deducting estimated expenses of $______ payable by the Company,
including the non-accountable expense allowance payable to the
Underwriter. See "Use of Proceeds."
The Units being offered by the Underwriter, are subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to
approval of certain legal matters by its counsel and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
this offering and to reject any order in whole or in part. It is expected that
delivery of the securities offered hereby will be made against payment at the
offices of Schneider Securities, Inc., Providence, Rhode Island on or about ,
1996.
Schneider Securities, Inc.
The date of this Prospectus is _________________, 1996
7
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549 and at certain of its Regional
Offices located at: 7 World Trade Center, 13th Floor, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates.
8
PROSPECTUS SUMMARY
Prospective investors should read this Prospectus carefully before making
any investment decision regarding the Company, and should pay particular
attention to the information contained in this Prospectus under the heading
"Risk Factors." In addition, prospective investors should consult their own
advisors in order to understand fully the consequences of an investment in the
Company. Unless otherwise specified, all information in this Prospectus assumes
no exercise of (i) the Underwriter's Warrants or the overallotment option, or
(ii) other outstanding options and warrants to purchase an aggregate of
5,397,862 shares of Common Stock.
The following summary does not purport to be complete and is qualified in
its entirety by more detailed information and financial statements appearing
elsewhere in this Prospectus. The Company is currently contemplating
implementing a 1:10 reverse split of its outstanding securities (the "Reverse
Split") and is requesting its stockholders to approve the Reverse Split at its
1996 Annual Meeting. Unless otherwise specifically stated, no adjustments have
been made herein to account for the Reverse Split.
THE COMPANY
Farmstead Telephone Group, Inc. (the "Company") is engaged in the Customer
Premise Equipment ("CPE") segment of the telecommunications industry,
principally as a secondary market reseller of used and/or refurbished AT&T
business telephone parts and systems, and as a designer, manufacturer and
supplier of proprietary voice (or "call") processing systems that provide
automated call handling, voice and fax messaging, interactive voice response,
automated call distribution and message notification functionality. The Company
also provides equipment repair and refurbishing, inventory management, and other
related value-added services. The Company sells its products and services to
corporate end users, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
The Company was incorporated in Delaware in 1986 and became a public
company in May 1987 following the completion of its initial public offering. In
January 1994, the Company acquired certain operating assets of Cobotyx
Corporation, Inc. ("CCI"), a designer, manufacturer and supplier of voice
processing systems, and expanded its entry into this marketplace through the
formation of a voice processing products division ("Cobotyx Division").
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to over 1,400 customers during 1995 ranging
from small companies to large, multi-location corporations, and including
equipment wholesalers, dealers, distributors and government agencies and
municipalities. The Company believes its customers are generally (i) existing
AT&T equipment users that require piece parts to
9
upgrade, expand, or maintain their existing telephone system, (ii)
cost-conscious businesses that desire to save money by purchasing used or
refurbished equipment instead of new equipment, but still retain AT&T
installation and maintenance support for these products, and (iii) businesses
that may have no current need for AT&T's latest and most technically advanced
product offerings. Businesses also look to the Company, and to other secondary
market resellers, to meet their immediate equipment delivery requirements. The
Company is also pursuing the sale of its products internationally, such as in
the People's Republic of China ("PRC"), the Republic of the Philippines, and in
other countries which have underdeveloped telecommunications systems and may
have limited financial resources.
The Company distributes its voice processing products domestically and
internationally to approximately an additional 500 customers, primarily
independent dealers and distributors, end-users, and through arrangements with
several manufacturers of telephone systems and business equipment.
The Company's objective is to significantly expand its revenues and
profitability through a strategy based on:
Domestic Expansion - The Company is seeking to expand its revenues and
customer base in the domestic secondary telephone equipment marketplace by
increasing its sales force, establishing business in other geographic areas
of the U.S. and by continuing to provide quality refurbished products,
superior customer service and support, and other value-added services as
required by its customers. The Company is also attempting to become a more
strategic partner to AT&T, by specializing in the resale of AT&T products
and through the establishment of distribution rights to new AT&T equipment
as allowed by AT&T. The Company may also seek to acquire similar businesses
in other geographic areas of the U.S., as opportunities arise, in order to
increase its share of this market.
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.
10
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC"). Prior to its closing in January
1996, the ARC primarily operated to service AT&T affiliates in the orderly
disposition, by way of consignment sales arrangements, of excess, overstocked
and end-of-life telecommunications, computer and data transmission equipment.
The assets acquired consisted primarily of warehouse equipment, vehicles,
computer and office equipment, and inventory. The Company concurrently formed a
subsidiary corporation, Farmstead Asset Management Services, LLC ("FAMS"), which
is using the purchased assets to start up a similar operation in Piscataway, New
Jersey. The Company intends to attempt to re-establish certain of the
relationships that the ARC enjoyed, however, no assurances can be given that it
will be able to do so. The Company believes that the operations of FAMS will
provide it with an opportunity to develop new sources of equipment for resale to
its existing customers, as well as to other wholesalers in the telephone, data
and computer secondary markets, and internationally.
11
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................. 1,000,000 Units, each Unit consisting of one share of
Common Stock, one Class A Warrant and one Class B Warrant.
Common Stock Outstanding
Before Offering.................... 21,238,676 shares (1)
Common Stock Outstanding
After Offering..................... 22,238,676 shares (2)
Warrants:
Number to be outstanding after the
Offering........................... 2,000,000 Warrants(3)
Exercise Price..................... The exercise price of each Class A and Class B Warrant is
$____ per share and $_____ per share, respectively. See
"Description of Securities."
Exercise Period.................... The exercise period of the Warrants will commence on the
date of this Prospectus and will expire at 5:00 p.m. New
York City local time on ________, 2001. See "Description
of Securities."
Redemption......................... The Warrants are redeemable by the Company, in whole or
in part, at the option of the Company, at a price of $.10
per Warrant at any time commencing _________, 1997, upon
__ days' prior written notice, provided that the reported
closing price of the Common Stock equals or exceeds $____
for the Class A Warrants and $____for the B Warrants for
a period of 20 consecutive trading days ending five days
prior to the notice of redemption. See "Description of
Securities."
Use of Proceeds..................... To expand domestically and internationally, to develop
new voice processing products, and working capital
generally. See "Use of Proceeds."
Risk Factors....................... The securities offered hereby involve a high degree of
risk including the fact that the Company has a history of
losses and low earnings, that it will be subject to all
the vagaries of attempting to open up an international
market, and that it operates in a market subject to
extremely rapid technological change. See "Risk Factors."
NASDAQ Symbol
Units (proposed).................
Common Stock..................... FONE
Class A Warrants (proposed)......
Class B Warrants (proposed)......
Symbol for proposed Boston
Stock Exchange Listing........
</TABLE>
12
- -----------------------------------
(1) Represents 2,123,868 shares after adjusting for the Reverse Split, but
without adjusting for rounding fractional shares.
(2) Represents 2,223,868 shares after adjusting for the Reverse Split, but
without adjusting for rounding fractional shares. Excludes (i) up to
2,000,000 shares of authorized but unissued Common Stock reserved for
issuance upon exercise of the Warrants included in the Offering; (ii) up
to 100,000 shares of authorized but unissued Common Stock issuable upon
exercise by the Underwriter of the Underwriter's Warrants; (iii) up to
an additional 200,000 shares of authorized but unissued Common Stock
issuable upon exercise of the Warrants contained in the Underwriter's
Warrants; (iv) up to 1,835,727 shares of Common Stock issuable upon
exercise of currently outstanding Public Warrants at an exercise price
of $.50; (v) up to 662,726 shares of Common Stock reserved for issuance
to the underwriters of the Company's initial public offering at a
weighted average exercise price of $.63; (vi) 2,899,409 shares of
authorized but unissued Common Stock reserved for issuance under options
already granted pursuant to the Company's Stock Option Plans and
agreements at a weighted average exercise price of $.43; (vii) 1,240,917
shares of authorized but unissued shares of Common Stock reserved for
issuance under the Company's Stock Option plans and agreements; and
(viii) up to 450,000 shares of Common Stock issuable as a result of the
Underwriter's overallotment option. See "Description of Securities,"
"Underwriting" and "Executive Compensation-Stock Plans."
(3) Includes both the Class A and Class B Warrants. Excludes 200,000
Warrants included in the Units reserved for issuance upon exercise of
the Underwriter's Warrants and the Underwriter's overallotment option.
See "Underwriting."
13
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial data of the Company for
the five years ended December 31, 1995 and for the three-month periods ended
March 31, 1995 and 1996. Data relating to the years ended December 31, 1991,
1992, 1993, 1994 and 1995 are derived from audited financial statements. The
balance sheet at December 31, 1994 and 1995 and the related statements of
operations and cash flows for the two years ended December 31, 1995 and notes
thereto appear elsewhere herein. The selected financial data as of March 31,
1996 and for the three months ended March 31, 1995 and 1996, have been derived
from unaudited financial statements; however, in the opinion of management, such
data include all adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data. The results of operations for the
three month period ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the full year. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and
service revenues $ 5,263 $ 6,227 $ 6,291 $ 11,787 $ 15,317 $ 3,713 $ 4,122
Cost of goods and
services sold 3,558 4,373 4,870 8,230 10,645 2,543 2,916
Selling, general and
administrative expenses 1,878 1,580 2,445 3,183 4,835 1,142 1,085
Research and
development expenses 0 0 91 217 99 6 34
Interest expense 146 98 61 40 99 14 30
Equity in unconsolidated
Subsidiary -- -- -- -- 197 -- 12
Other income (31) (12) (19) (58) (14) (4) (292)
Total costs and expenses 5,551 6,039 7,448 11,612 15,861 3,701 3,785
Income (loss) before
provision for income taxes (288) 188 (1,157) 175 (544) 12 337
Provision for
income taxes 11 8 9 3 9 6 5
Net income (loss) (299) 180 (1,166) 172 (553) 6 332
Net income (loss)
per share (.03) .01 (.06) .01 (.03) * .02
Weighted average number of
common shares outstanding 9,475 12,978 18,088 21,608 20,842 20,677 21,425
- ----------
* Less than one-half cent.
</TABLE>
14
BALANCE SHEET DATA:
As of March 31, 1996
--------------------
Pro Forma,
Actual as Adjusted(1)
------ --------------
Working capital ............................. $2,569
Total Assets ................................ 6,813
Total Liabilities ........................... 3,475
Stockholders' equity ........................ 3,338
(1) Gives effect to the issuance of 1,000,000 Units and application of the
estimated net proceeds therefrom. See "Use of Proceeds."
THE COMPANY
Farmstead Telephone Group, Inc. was incorporated in Delaware on October 8,
1986 (the "Company"). The Company's predecessor, The Farmstead Group, Inc., was
in business from 1984 to 1987. The Company is principally engaged in the resale
of used AT&T business telephone parts and systems, and in the manufacture and
distribution of voice processing systems. The Company additionally provides AT&T
telephone equipment repair, refurbishing, rental and inventory management and
other value-added services. The Company's corporate office is located at 81
Church Street, East Hartford, Connecticut 06108 at which its telephone number is
(860) 282-0010.
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY REPRESENT A SPECULATIVE INVESTMENT AND
A HIGH DEGREE OF RISK. THEREFORE, PROSPECTIVE INVESTORS SHOULD THOROUGHLY
CONSIDER ALL OF THE RISK FACTORS DISCUSSED BELOW AND SHOULD UNDERSTAND THAT THEY
COULD LOSE ALL OR PART OF THEIR INVESTMENT. NO PERSON SHOULD CONSIDER INVESTING
WHO CANNOT AFFORD TO LOSE A SUBSTANTIAL PART OR ALL OF HIS INVESTMENT OR WHO IS
IN ANY WAY DEPENDENT UPON THE FUNDS THAT HE IS INVESTING.
HISTORY OF LOSSES AND LOW EARNINGS; ACCUMULATED DEFICIT. The Company
sustained a loss of $299,000 during 1991, earned $180,000 during 1992, lost
$1,166,000 during 1993, earned $172,000 during 1994 and lost $553,000 during
1995. At December 31, 1995, the Company had an accumulated deficit of
$5,446,000. There can be no assurance that the Company's future activities will
be successful or profitable. See "Selected Financial Data" and "Financial
Statements."
COMPANY STILL DEVELOPING ITS VOICE PROCESSING PRODUCTS AND INTERNATIONAL
EXPANSION. Potential investors should be aware of the risks, problems, delays,
expenses and difficulties encountered by an enterprise in an early stage of
development such as the Company with regard to its voice processing business and
international expansion, especially in view of the intense competition that the
Company has, and will assuredly continue to, encounter. Such matters include the
complications inherent in consistent and timely trans-Pacific shipping, currency
exchange fluctuations, political policies, cultural biases and retention of
qualified personnel. See "Management's Discussion and Analysis and Results of
Operations."
EXPECTED RELIANCE ON STRATEGIC PARTNERS FOR INTERNATIONAL EXPANSION. One
element of the Company's strategy is to form alliances with strategic partners
to assist the Company in identifying, developing and exploiting opportunities in
international markets. The Company has only recently entered into alliances with
some strategic partners and it is premature to determine whether such alliances
will be successful. There can be no assurance that the Company will be able to
locate additional strategic partners or that such strategy ultimately will be
successful. The Company's success will also depend, in part, upon its ability to
provide its international customers, either directly or through others,
16
technical support and customer service for its products. The Company does not
presently have the personnel to provide such services and initially intends to
rely on its strategic partners to provide such services. There can be no
assurance that such services can be negotiated on acceptable terms, if at all.
Failure to provide such technical support and customer services could have a
material adverse effect on the Company's ability to expand into international
markets. See "Business."
CONTINUING NEED FOR AT&T'S SUPPORT OF THE SECONDARY MARKET. Since 1985,
AT&T has provided support to the secondary market by continuing to offer
installation, maintenance, repair, reconditioning and certification services for
its products purchased by end-users through equipment resellers (such as the
Company). AT&T also generally provides a one year warranty for products
purchased from AT&T for resale, provided it performs the installation. Should
AT&T decide no longer to provide such support to the secondary market, the
business of the Company could be materially adversely affected. See
"Business-The Company's Telephone Equipment Products-Relationship with AT&T."
UNCERTAINTY CAUSED BY RESTRUCTURING OF AT&T. In September 1995, AT&T
initiated a restructuring of its businesses by splitting its operations into
three separate companies. While the Company's contract with AT&T was assigned to
one of these new companies, Lucent Technologies, Inc., and the business
relationship has not been affected, no assurance can be given that AT&T's
restructuring will not cause a disturbance in the Company's relationship going
forward. See "Business."
COMPANY MAY BE SUBJECT TO SIGNIFICANT COMPETITION. The market for used
telephone parts and systems and for voice processing products is highly
competitive. Many of the companies which now offer or may be expected to offer
products with which the Company will compete are more established, benefit from
greater market recognition and have significantly greater financial,
technological, manufacturing and marketing resources than the Company. The
Company's telephone equipment competitors include AT&T, other secondary market
AT&T resellers and other telephone equipment manufacturers. The Company's voice
processing systems competitors also include major telecommunications equipment
manufacturers and telephone companies as well as independent call processing
equipment manufacturers. As the industry evolves to further integrate telephones
with PCs, the Company anticipates that it will encounter a broader variety of
competitors, including new entrants from related computer and communication
industries. There can be no assurance that the Company will be able to develop
more technologically advanced products or that even if it is able to develop, or
acquire rights to incorporate into its products, the next generation of
technology, that such products will perform as well as competitor's products or
that such products will be accepted by the market or that the Company will see
any financial benefit therefrom. See "Business-Competition."
DEPENDENCE ON SUPPLIERS. The Company's voice processing products
incorporate certain component parts and subassemblies produced or assembled by
third parties. The Company's reliance on third parties to manufacture and
subassemble certain components involves significant risks, including reduced
control over delivery schedules, the inability to ship its product under
"just-in-time" arrangements and quality assurance, which may have
17
a material adverse effect on the Company's business. As a result, the Company
may be required to devote significant amounts of capital to inventory, and may
be dependent on timely supply of purchased inventory. Failure to obtain an
adequate supply of components on a timely basis could have a material adverse
effect on the Company. See "Business."
TECHNOLOGICAL CHANGES. The technology underlying the telecommunications
industry generally and voice processing products in particular is subject to
extremely rapid change, including potential introduction of new products and
technologies which may have a materially adverse impact on the Company's
products. The Company will need to maintain an on-going research, development
and engineering program and its success, if any, will depend in part on its
ability to respond quickly to technological advances by developing and
introducing new products or features. Alternatively, the Company can attempt to
purchase new technologies as they become available. There can be no assurance
that the Company will be able to foresee and respond to such advances in a
timely manner, if at all. In addition, there can be no assurance that the
development of technologies and products by competitors will not render the
Company's products non-competitive or obsolete. See "Business."
CURRENT PROSPECTUS AND STATE "BLUE SKY" REGISTRATION REQUIRED TO EXERCISE
THE WARRANTS. Upon the determination of the Underwriter, the Warrants which are
part of the Units offered hereby will be separately tradeable. Purchasers of the
Warrants will have the right to exercise them to purchase shares of Common Stock
only if a current prospectus relating to such shares is then in effect and only
if the shares are qualified for sale under the securities laws of the state in
which the purchaser resides. The Company has undertaken to maintain the
effectiveness of the Registration Statement of which this Prospectus forms a
part which permits the purchase and sale of the Common Stock underlying the
Warrants, but there can be no assurance that the Company will be able to do so.
The Warrants may be deprived of any value if a current prospectus covering the
shares issuable upon the exercise thereof is not kept effective. Although the
Units will not knowingly be sold to purchasers in jurisdictions in which the
Units are not registered or otherwise qualified for sale, purchasers may buy
Units in the aftermarket or may move to jurisdictions in which the shares of
Common Stock issuable upon exercise of the Warrants are not so registered or
qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue the shares of Common Stock to those persons
desiring to exercise their Warrants unless and until the shares of Common Stock
could be qualified for sale in the jurisdictions in which such purchasers
reside, or unless an exemption to such qualification exists in such
jurisdictions. No assurance can be given that the Company will be able to effect
or maintain any required registration or qualification. See "Description of
Securities."
UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS. The Company's
success may depend in part on its ability to obtain patents, maintain trade
secrets and operate without infringing on the proprietary rights of others, both
in the U.S. and in other countries. The patent positions of software companies
can be highly uncertain and involve complex legal and factual questions, and
therefore the breadth and enforceability of claims allowed in software patents
cannot be predicted. There can be no assurance that any issued
18
or pending patents will not be challenged, invalidated or circumvented, or that
the rights granted thereunder will provide proprietary protection or competitive
advantages to the Company.
The commercial success of the Company also will depend, in part, on the
Company not infringing patents issued to others and not breaching the technology
licenses upon which any Company products are based. It is uncertain whether any
third-party patents will require the Company to alter its products or processes,
obtain licenses or cease certain activities. In addition, if patents are issued
to others which contain dominating claims, and such claims are ultimately
determined to be valid, the Company may be required to obtain licenses to these
patents or to develop or obtain alternative technology. If any licenses are
required, there can be no assurance that the Company will be able to obtain any
such licenses on commercially favorable terms, if at all. The Company's breach
of an existing license or failure to obtain a license to any technology that it
may require to commercialize its products may have a material adverse impact on
the Company. Litigation, which could result in substantial costs to the Company,
may also be necessary to enforce any patents licensed or issued to the Company
or to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the U.S. that
claim technology also claimed by the Company, the Company may have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, which could result in
substantial costs to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using such technology.
The Company also relies on secrecy to protect its technology, especially
where patent protection is not believed to be appropriate or obtainable. There
can be no assurance that the Company's trade secrets will not become known or be
independently discovered by competitors. See "Business-Patents, Licenses and
Trademarks."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time after thirteen months from the date hereof
at a price of $.10 per Share on __ days' prior written notice, provided that the
closing trading price of the Common Stock for the twenty (20) consecutive
trading days ending five (5) days prior to the giving of notice of redemption,
equals or exceeds $____ for the Class A Warrants and $____ for the Class B
Warrants. Notice of redemption of the Warrants could force the Warrant holders
to exercise the Warrants at a time when it might be disadvantageous for the
holders to do so or to sell the Warrants at their then current market price when
the holders might otherwise wish to hold the Warrants for possible appreciation.
Alternatively, the holders may accept the redemption price, when it is likely to
be substantially less than the market value of the Warrants at the time of
redemption. Any holders who do not exercise their Warrants prior to their
redemption, will forfeit the right to purchase the shares of Common Stock
underlying the Warrants. See "Description of Securities."
19
UNDERWRITER'S WARRANTS. In connection with this Offering, the Company will
sell to the Underwriter for a nominal amount, warrants to purchase up to 100,000
Units. The Underwriter's Warrants will be exercisable commencing one year from
the effective date of this Prospectus and will continue to be exercisable until
five years from the date hereof at an exercise price equalling 140% of the
public offering price of the Units. For the life of the Underwriter's Warrants,
the holders thereof will be given the opportunity to profit from a rise in the
market price of the Common Stock or Warrants with a resulting dilution in the
interest of the Company's other stockholders. The terms on which the Company
could obtain additional capital during the life of the Underwriter's Warrants
may be adversely affected because the holders of the Underwriter's Warrants
might be expected to exercise them if the Company were able to obtain any needed
additional capital in a new offering of securities at a price greater than the
exercise price in the Underwriter's Warrant. See "Underwriting."
POSSIBLE ISSUANCE OF SUBSTANTIAL AMOUNTS OF ADDITIONAL SHARES WITHOUT
STOCKHOLDER APPROVAL. After this Offering, the Company will have an aggregate of
approximately 1,372,545 shares of Common Stock authorized but unissued and not
reserved for specific purposes (26,462,255 after adjusting for the Reverse
Split) and an additional 7,388,779 shares of Common Stock (1,413,878 after
adjusting for the Reverse Split) unissued but reserved for issuance pursuant to
(i) the Company's Stock Option Plans and agreements, (ii) exercise of the
currently outstanding Public Warrants and (iii) exercise by the Underwriter of
the Underwriter's Warrants and the overallotment option and the exercise of the
underlying Warrants. All of such shares may be issued without any action or
approval by the Company's stockholders. Although there are no other present
plans, agreements, commitments or undertakings with respect to the issuance of
additional shares of Common Stock, or securities convertible into any such
shares by the Company, any shares issued would further dilute the percentage
ownership of the Company held by the public stockholders. See "Description of
Securities."
RELIANCE UPON MANAGEMENT. The Company is and will be substantially
dependent, for the foreseeable future, upon its Chairman of the Board, President
and Chief Executive Officer, George J. Taylor, Jr., who currently devotes his
full time and efforts to the management of the Company. If the Company were to
lose the services of Mr. Taylor for any significant period of time, its business
may be materially adversely affected. While the Company owns key man life
insurance in face amount of $500,000 on the life of Mr. Taylor, there can be no
assurance that the insurance proceeds would adequately compensate the Company
for the loss of Mr. Taylor. See "Management."
VOTING CONTROL; POTENTIAL ANTI-TAKEOVER EFFECT. As of March 31, 1996, Mr.
Taylor beneficially owned approximately 12.5% of the outstanding stock of the
Company (8.5% after completion of the Offering), and all directors and officers
as a group beneficially own approximately 15.9% of the outstanding stock (11%
after completion of the Offering) taking into account currently exercisable
stock options held by them. Mr. Taylor, as the Company's largest stockholder,
may still continue to be able to elect all of its Directors and to control the
Company's business and affairs. In addition, the Company is subject to
provisions of the General Corporation Law of the State of Delaware respecting
business
20
combinations which could, under certain circumstances, also hinder or delay a
change in control. See "Principal Stockholders."
UNSPECIFIED ACQUISITIONS. The Company may engage in acquisitions of other
companies and businesses and may use its stock as consideration therefor. This
may result in a dilution of the percentage of the equity to be owned by the
investors in this Offering. In addition, such acquisitions may involve
speculative and risky undertakings by the Company. Under Delaware law,
acquisitions do not require stockholder approval; however, certain acquisitions
accomplished by merger or consolidation do require stockholder approval. The
Company does not, in general, intend to submit acquisitions to stockholder vote
except where required by Delaware Law. The Company does not currently have any
plans, arrangements or understandings regarding future material business
acquisitions.
DILUTION. Certain stockholders of the Company acquired their interests in
the Company at an average cost per share which is significantly lower than that
which purchasers of the Units offered hereby will pay for their stockholdings.
Accordingly, purchasers of the Units in this Offering will experience immediate
and substantial dilution in net tangible book value of the shares of Common
Stock comprising the Units.
NO PAYMENT OF DIVIDENDS ON COMMON STOCK. The Company has not paid any
dividends on its Common Stock. For the foreseeable future, the Company
anticipates that all earnings, if any, that may be generated from the Company's
operations will be used to make payments to finance the growth of the Company
and that cash dividends will not be paid to holders of the Common Stock. In
addition, as a condition of doing business, the maker of the Company's revolving
line of credit has the right of prior approval of the declaration of any
dividends. See "Price Range for Listed Securities and Dividend Policy."
LIMITED MARKET FOR SECURITIES. The Company's securities currently trade on
the NASDAQ market and trading volume generally is not at a high level. As a
result, there is a limited market in the Company's securities, and there can be
no assurance that a more active market will develop. Accordingly, any
investments in the Company's securities may be highly illiquid. See "Price Range
for Listed Securities and Dividend Policy."
POSSIBLE DEPRESSIVE EFFECT OF RULE 144 SALES AND SALES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF OPTIONS AND/OR WARRANTS. As of April 30, 1996,
1,781,811 unregistered shares of the Company's Common Stock (178,181 after
adjusting for the Reverse Split) are held by George J. Taylor, Jr. the Company's
Chairman, President and Chief Executive Officer. Under Rule 144 of the
Securities Act of 1933, all of such shares can currently be publicly sold or
otherwise transferred, subject to volume restriction. In addition, approximately
6,638,779 shares of Common Stock are issuable by the Company pursuant to
currently outstanding options and/or warrants (663,878 after adjusting for the
Reverse Split). Any such issuances could have a depressive effect on the market
price for the Common Stock. See "Description of Securities-Shares Eligible for
Future Sale."
MAINTENANCE REQUIREMENTS FOR NASDAQ SECURITIES. It is anticipated that the
Units and the Warrants will be approved for inclusion in NASDAQ. An issuer
seeking continued
21
inclusion of its securities in NASDAQ is required to meet certain criteria
including (i) total assets of at least $2,000,000; (ii) capital and surplus of
at least $1,000,000; and (iii) a minimum bid price of $1.00 per share unless the
market value of its public float is at least $1,000,000 and it has at least
$2,000,000 in capital and surplus. Upon completion of this Offering, the Company
anticipates that it will satisfy the criteria for continued inclusion of its
securities in NASDAQ. However, there can be no assurance that the Company will
continue to satisfy such criteria and for how long. See "Prospectus
Summary-Summary Financial Information" and "Capitalization." If the Company
became unable to meet the continued quotation criteria of NASDAQ and was
suspended therefrom, the Company's securities could be subject to a rule that
imposes additional sales practice requirements on certain broker/dealers who
sell such securities to persons other than established customers and accredited
investors. Consequently, an investor would likely find it more difficult to
dispose of, or to obtain accurate quotations as to the value of, the Company's
securities.
REQUIRED DISCLOSURE CONCERNING TRADING OF PENNY STOCKS OR LOW-PRICED
SECURITIES. The Securities and Exchange Commission ("SEC") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as defined) of less than $5.00 per share or an exercise price of
less than $5.00 per share, subject to certain exceptions. Effective July 15,
1992, for any transaction involving a penny stock, unless exempt, the rules
require the delivery, prior to the transaction, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Commencing January 1,
1993, the broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
While many NASDAQ-listed securities would be covered by the definition of
penny stock, transactions in a NASDAQ-listed security would be exempt from all
but the sole market-maker provision for (i) issuers who have $2,000,000 in
tangible assets ($5,000,000 if the issuer has not been in continuous operation
for three years), (ii) transactions in which the customer is an institutional
accredited investor, and (iii) transactions that are not recommended by the
broker-dealer. In addition, transactions in a NASDAQ security directly with a
NASDAQ market-maker for such securities would be subject only to the sole
market-maker disclosure, and the disclosure with respect to commissions to be
paid to the broker-dealer and the registered representative. Finally, all NASDAQ
securities would be exempt if NASDAQ raised its requirements for continued
listing so that any issuer with less than $2,000,000 in net tangible assets or
stockholders' equity would be subject to delisting. These criteria are more
stringent than the current NASDAQ maintenance requirements. Consequently, these
rules may restrict the ability of broker-dealers to sell the Company's
securities and may affect the ability of purchasers to sell the Company's
securities in the secondary market.
22
USE OF PROCEEDS
<TABLE>
<CAPTION>
All sold in
Rights Offering All sold by Underwriter
--------------- -----------------------
Approx. Approx.
Approx. % of Net Approx. % of Net
$ Amount Proceeds $ Amount Proceeds
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic Business
Expansion ............................................ 2,000,000 46.21% 1,800,000 47.45%
Product Development &
Marketing ............................................ 1,000,000 23.11% 900,000 23.72%
International Business
Expansion ............................................ 500,000 11.55% 450,000 11.86%
Facility Renovation/
Relocation ........................................... 500,000 11.55% 500,000 13.18%
Working Capital & General Corporate
Purposes ............................................. 328,125 7.58% 143,750 3.79%
------- ---- ------- ----
Total ................................................ $4,328,125 100.00% 3,793,750 100.00%
========== ====== ========= ======
</TABLE>
The foregoing table represents the Company's best estimate of the
allocation of the proceeds of this Offering (excluding the Underwriter's
overallotment option), assuming a Unit Offering Price of $4.6875, and is based
upon the current state of the Company's development, its current plans and
current economic and industry conditions, and is subject to reapportionment of
proceeds among the categories listed above or to new categories. The Company
cautions the investor that it is likely that a portion of the Units will be sold
in the Rights Offering and the balance by the Underwriter. Accordingly, the
actual allocation will probably be between the ranges shown.
Domestic business expansion includes increasing the sales force, opening
geographically dispersed offices and/or acquiring other businesses and
maintaining increased inventory stocking levels as a result of increased product
lines and higher projected sales volume. Product development and marketing
includes expanding the product line through developing new voice processing
technologies, and expanding the Company's product marketing program.
International business expansion includes developing relationships with
internationally-based partners and equipment compatible within the localities.
The Company plans to either relocate a part of its operations to a new facility
or renovate its current facility in order to accommodate its projected expanded
level of operations.
The expenses incurred in developing and implementing the Company's business
plans cannot be predicted with any degree of certainty. Specific allocations of
proceeds will
23
ultimately depend on the progress and timing of the aforementioned projects.
Although the Company has no specific acquisition plans at the time, if an
opportunity presents itself, the Company may use certain of the proceeds to fund
acquisitions.
Until used, the Company intends to invest the proceeds of this Offering in
government securities, certificates of deposit, money market securities,
commercial paper or other short-term, investment grade, income-producing
investments, or, may use the funds to temporarily reduce the outstanding balance
of its banking line of credit.
24
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the 1,000,000 Units
offered hereby (but not the Reverse Split) and the application of the estimated
net proceeds therefrom:
(In thousands)
<TABLE>
<CAPTION>
March 31, 1996
--------------
Actual Adjusted
<S> <C> <C>
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 30,000,000 shares authorized;
Issued and outstanding 21,238,676 at March 31, 1996, and
__________ as adjusted (1) $ 21 ______
Preferred stock, $.001 par value, 2,000,000 shares authorized;
No Shares issued and outstanding at March 31, 1996 0 0
Additional paid-in capital 8,431 _______
Accumulated deficit (5,114) _______
------
Total stockholders' equity 3,338 _______
=====
</TABLE>
- --------------------
(1) Excludes (i) up to 2,000,000 shares of authorized but unissued Common
Stock reserved for issuance upon exercise of the Warrants included in
the Offering; (ii) up to 100,000 shares of authorized but unissued
Common Stock issuable upon exercise by the Underwriter of the
Underwriter's Warrants; (iii) up to an additional 200,000 shares of
authorized but unissued Common Stock issuable upon exercise of the
Warrants contained in the Underwriter's Warrants; (iv) up to 1,835,727
shares of Common Stock issuable upon exercise of currently outstanding
Public Warrants; (v) up to 662,726 shares of Common Stock reserved for
issuance to the underwriters of the Company's initial public offering;
(vi) 4,140,326 shares of authorized but unissued Common Stock reserved
for issuance under the Company's Stock Option Plans and agreements; and
(vii) up to an additional 450,000 shares of Common Stock issuable as a
result of the Underwriter's overallotment option. See "Description of
Securities," "Underwriting" and "Executive Compensation-Stock Plans."
PRICE RANGE FOR LISTED SECURITIES AND DIVIDEND POLICY
The Company's currently registered Common Stock, Warrants and Units trade
on The Nasdaq SmallCap Market under the symbols "FONE," "FONEW" and "FONEU,"
respectively. The quarterly high and low sales prices for these securities
during the first quarter of 1996 and each of the fiscal quarters of the years
ended December 31, 1995 and 1994 are presented below.
25
COMMON STOCK:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.59 $.19 $ .63 $ .34 $1.53 $ .72
June 30 .69 .38 1.03 .69
September 30 .56 .44 1.03 .56
December 31 .41 .28 .78 .50
</TABLE>
There were 21,238,676 shares outstanding at March 31, 1996, and 21,238,676
and 20,398,947 shares outstanding at December 31, 1995 and 1994, respectively,
before giving effect to the Reverse Split.
WARRANTS:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.19 $.03 $ .22 $ .09 $ .94 $ .47
June 30 .19 .03 .56 .31
September 30 .13 .03 .53 .25
December 31 .03 .03 .31 .13
</TABLE>
There were 1,835,727 warrants outstanding at March 31, 1996, and 1,835,727
and 2,675,456 warrants outstanding at December 31, 1995 and 1994, respectively,
before giving effect to the Reverse Split. Effective May 31, 1996, the Board of
Directors extended the warrants until July 1, 1997 and reduced the exercise
price to $0.50. The trigger price of the Common Stock for redemption of the
warrants was also lowered to $1.125 from $3.00.
UNITS (1):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
March 31 $.75 $.38 $ .75 $ .41 $2.38 $1.50
June 30 .81 .44 1.50 1.06
September 30 .69 .69 1.44 .84
December 31 .25 .25 .94 .75
</TABLE>
(1) Units of the Company's securities consist of one share of Common Stock
and a detachable warrant to purchase one share of Common Stock.
26
There were 691 record holders of the common stock as of April 30, 1996,
representing an estimated 4,500 beneficial stockholders.
The Company intends to attempt to have the Units, Common Stock and the
Warrants listed on the Boston Stock Exchange. No assurance can be given that
such listing(s) will be obtained or, even if obtained, if they will enhance
stockholder values.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company intends to use any earnings which it may generate to finance the growth
of its business for the foreseeable future. Any determination to pay dividends
in the future will be at the discretion of the Company's Board of Directors and
will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at that time by the
Company's Board of Directors. Furthermore, under the Delaware General
Corporation Law, dividends may be paid only out of legally available funds as
proscribed by statute. Moreover, pursuant to a Commercial Revolving Loan and
Security Agreement entered into with Affiliated Business Credit Corporation
("ABCC"), the Company is prohibited from declaring or paying any dividends or
making any other distribution on any of the shares of its capital stock, without
the prior consent of the lender.
SELECTED FINANCIAL DATA
The following table presents certain selected financial data for the
Company for each of the years in the five-year period ended December 31, 1995
and for the three-month periods ended March 31, 1995 and 1996. The selected
financial data presented below at and for each of the fiscal years ended
December 31, 1994 and 1995 have been derived from, and are qualified by
reference to, financial statements audited by Deloitte & Touche, LLP.,
independent auditors. The selected financial data presented below at and for
each of the three years ended December 31, 1993 have been derived from audited
financial statements. The selected financial data as of March 31, 1996 and for
the three months ended March 31, 1995 and 1996, have been derived from unaudited
financial statements; however, in the opinion of management, such data include
all adjustments, consisting only of normal recurring adjustments, necessary for
fair presentation of such data. The results of operations for the three month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the full year. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
27
STATEMENT OF OPERATIONS DATA:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and
services revenue .......... $ 5,263 $ 6,227 $ 6,291 $ 11,787 $ 15,317 $ 3,713 $ 4,122
Cost of goods and
services sold ............. 3,558 4,373 4,870 8,230 10,645 2,543 2,916
Selling, general and
administrative expenses ... 1,878 1,580 2,445 3,183 4,835 1,142 1,085
Research and
development expenses ...... 0 0 91 217 99 6 34
Interest expense ............ 146 98 61 40 99 14 30
Equity in unconsolidated
Subsidiary ............... -- -- -- -- 197 -- 12
Other income ................ (31) (12) (19) (58) (14) (4) (292)
Total costs and expenses .... 5,551 6,039 7,448 11,612 15,861 3,701 3,785
Income (loss) before
provisions for income taxes (288) 188 (1,157) 175 (544) 12 337
Provision for
income taxes .............. 11 8 9 3 9 6 5
Net income (loss) ........... (299) 180 (1,166) 172 (553) 6 332
Net income (loss)
per share ................. (.03) .01 (.06) .01 (.03) * .02
Weighted average number of
common shares outstanding . 9,475 12,978 18,088 21,608 20,842 20,677 21,425
</TABLE>
- ---------------
* Less than one-half cent.
BALANCE SHEET DATA:
As of March 31, 1996
--------------------
Pro Forma,
Actual as Adjusted(1)
------ --------------
Working capital ............................. $2,569
Total Assets ................................ 6,813
Total Liabilities ........................... 3,475
Stockholders' equity ........................ 3,338
- ---------------
(1) Gives effect to the issuance of 1,000,000 Units and application of the
estimated net proceeds therefrom. See "Use of Proceeds."
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto contained elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by the
following items for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ ---------
1995 1994 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales and service revenue 100.0% 100.0% 100.0% 100.0%
Cost of goods and services sold 69.5 69.8 70.8 68.5
Selling, general and administrative expenses 31.6 27.0 26.3 30.7
Research and development expenses .6 1.8 .8 .2
Interest expense .6 .3 .7 .4
Equity in unconsolidated subsidiary 1.3 -- .3 --
Other income (.1) (.4) (7.1) (.1)
--- --- ---- ---
Income (loss) before income taxes (3.5) 1.5 8.2 .3
Provision for income taxes .1 -- .1 .1
-- -- -- --
Net income (loss) (3.6) 1.5 8.1 .2
==== === === ==
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996, AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995.
Sales and service revenues for the three months ended March 31, 1996 were
$4,122,000, representing an increase of $409,000 or 11% from the comparable 1995
period. The increase was attributable to the Company's telephone equipment
products and services, which were up by 25% over the comparable prior year
period, partially offset by a 34% decrease in sales of voice processing products
and services due to the expiration of the Company's equipment manufacturing
contract with AT&T in February 1996. Revenues from telephone equipment sales and
services accounted for 84% of consolidated revenues for the three months ended
March 31, 1996 (74% in the comparable 1995 period), while revenues from voice
processing product sales and services accounted for 15% of consolidated revenues
in 1996 (26% in 1995). The Company's newly formed subsidiary, FAMS, began
partial operations in February 1996, and its sales of used telecommunications
and computer equipment accounted for 1% of consolidated first quarter 1996
revenues. This new operation is expected to contribute a higher percentage of
consolidated revenues as it becomes fully operational during the second quarter
of 1996.
Gross profit for the three months ended March 31, 1996 was 29% of revenues
as compared to 32% of revenues for the comparable prior year period. The
decrease was attributable to product sales mix, and to increased product
acquisition costs on certain
29
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. The rebates relate to coupons issued by
AT&T in 1995 in settlement of a lawsuit and are freely transferrable and can be
used to pay for the cost of AT&T products and services purchased from May 1995
through May 1997. In 1996, the Company began purchasing coupons at a discount to
their face value and redeeming them with AT&T for the full face value.
Accordingly, the Company is recording as other income the difference between the
face value of the coupons and their acquisition cost.
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
30
Notes to Financial Statements included herein, principally focused on (i) the
acquisition of a 50% interest in Beijing Antai Communication Equipment Company,
Ltd. ("ATC"), located in Beijing, PRC, which was completed in May 1995, and (ii)
developing strategic business relationships in China for the marketing of its
voice processing products through the contemplated formation of a second joint
venture company. Included in the above amount for 1995 were expenses of
approximately $450,000 from the Company's funding of voice processing product
development and marketing operations in China pursuant to its obligations under
the Interim Agreement and JV Agreement (defined below, see
"Business-International Voice Processing Markets"), consisting of working
capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company. These agreements were terminated
in November, 1995 due to a lack of funds with which to capitalize the proposed
joint venture. Also included were net expenses of approximately $244,000,
consisting primarily of facility, personnel and other operating costs incurred
in connection with the domestic acquisition, testing and storage of product
slated for export to the PRC and other international markets.
In conjunction with the termination of the Interim and JV Agreements, the
Company reduced the scope of other international projects and, until such time
as additional financing can be obtained, the Company expects to incur
significantly reduced international business development expenditures.
The Company's 1995 net loss also includes $81,000 of legal fees and related
expenses incurred in connection with a proposed underwriting of securities which
was terminated during the third quarter of 1995.
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
31
Financial Statements), including working capital provided, monthly retainer fees
and travel expenses of outside consultants for international project management
services, and the cost of demonstration products contributed by the Company.
Approximately 45% of the increase was related to personnel costs attributable to
(i) increased personnel and related costs associated with the start up of the
service bureau and VTS-1000/2000 product offerings which were discontinued by
the end of 1995, and (ii) increased compensation expenses, including increased
sales commissions as a result of higher sales levels. Product marketing expenses
increased by 6% primarily due to expanded marketing of voice processing
products, and the Company incurred higher depreciation expense, bad debt expense
and other overhead costs associated with the Company's increased sales and
operating levels. In connection with the termination of a proposed underwriting
of additional securities (see Note 7), the Company also charged $81,000 of legal
fees and related expenses to SG&A in 1995. The Company currently projects that
SG&A will represent a lower percentage of revenues in fiscal 1996.
Research and development expenses ("R&D") for the year ended December 31,
1995 were $99,000, down 54% from $217,000 incurred in 1994. During 1994 the
Company was engaged more extensively in R&D in connection with telephone systems
and central office products for China, and in the development of the KASSIE and
VTS-2000 call processing products for both domestic and international
applications. During 1995 the Company allocated a higher percentage of its
in-house technical resources to product support functions.
Interest expense for the year ended December 31, 1995 was $99,000, up 148%
from $40,000 incurred in 1994, due to higher average debt levels and higher
weighted average interest rates on the Company's outstanding debt.
YEAR ENDED DECEMBER 31, 1994, AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1993
The following table sets forth the percentage of revenue represented by the
following items for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Sales and service revenues...................... 100.0% 100.0%
Cost of goods and services sold................. 69.8 77.4
Selling, general and administrative expenses.... 27.0 38.9
Research and development expenses............... 1.8 1.4
Interest expense................................ .3 1.0
Other income.................................... (.4) (.3)
--- ---
Income (loss) before income taxes............... 1.5 (18.4)
Provision for income taxes...................... - .1
--- ---
Net income (loss)............................... 1.5% (18.5)%
===== =====
</TABLE>
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
32
wholesale sales efforts. Service revenues increased by $290,000 or 58%,
primarily attributable to the Company's receipt of $204,000 from a local
distribution plant study it conducted for the Romanian Ministry of
Communications, under a grant from the U.S. Trade and Development Agency.
Excluding revenues from this contract, service revenues otherwise increased by
$86,000 or 17%, primarily attributable to increased repair and refurbishing
revenues.
Gross profit for the year ended December 31, 1994, increased by $2,136,000
to $3,557,000 (30.2% of revenues) from $1,421,000 (22.6% of revenues) for the
year ended December 31, 1993. The increase was primarily attributable to the
increase in voice processing products sales (which generate higher gross profit
margins than telephone equipment sales) following the CCI acquisition, and the
allocation of overhead costs over a larger revenue base. Excluding voice
processing equipment sales, gross profit margins were otherwise 27% in 1994, up
from 23% in 1993, principally due to the allocation of overhead costs over a
larger sales base.
Selling, general and administrative expenses ("SG&A") for the year ended
December 31, 1994, were $3,183,000, representing an increase of $738,000 or 30%
from 1993 SG&A. The increase consisted of (i) personnel, office and product
marketing costs in the amount of $894,000 incurred in connection with the
Company's entry into the voice processing products marketplace through the
formation and staffing of the Cobotyx Division in January 1994 and (ii) $156,000
of incremental international market development costs, principally in personnel,
consulting, and travel costs, partially offset by (iii) a $257,000 reduction in
investor relations expenses and (iv) a $55,000 net reduction in all other
expense categories. Investor relations expense in 1993 included a $313,000
non-cash charge resulting from the issuance of discounted stock options to two
investor relations service companies which were engaged to increase investor
awareness of the Company's products and services. Excluding this non-cash
expense, investor relations expenses were otherwise $56,000 higher in 1994 than
in 1993. SG&A decreased as a percentage of revenues to 27% in 1994 from 38.9% in
1993, due principally to the Company's 1994 revenue growth and resulting
favorable operating economies of scale.
Research and development expenses ("R&D") for the year ended December 31,
1994, were $217,000, representing an increase of $126,000 or 138% from 1993 R&D.
The increase was attributable to the salaries of newly hired technicians and
engineers and the costs of equipment to support the Cobotyx Division's product
development efforts.
Interest expense for the year ended December 31, 1994, was $40,000
representing a $21,000 or 34% decrease from 1993 interest expense, as a result
of lower average debt levels and lower weighted average interest rates.
Net income for the year ended December 31, 1994, was, as a result of the
foregoing, $172,000 as compared to a net loss of $1,166,000 in 1993.
33
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1996 was $2,569,000, a 3% increase over the
$2,495,000 of working capital at December 31, 1995. The working capital ratio at
March 31, 1996 was 1.7 to 1 as compared to 1.9 to 1 at December 31, 1995.
Operating activities used $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 of the Notes to Consolidated Financial Statements
(Unaudited), included elsewhere herein), and (ii) a 21% increase in inventories
as the Company increased its stocking levels on certain telephone products.
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. Accordingly, the Company intends to use the proceeds of this
Offering to finance and expand the Company's business, both domestically and
internationally, which could include the acquisition of other businesses. See
"Use of Proceeds."
Inflation has not been a significant factor in the Company's operations.
34
BUSINESS
GENERAL
Farmstead Telephone Group, Inc. (the "Company") is engaged in the Customer
Premise Equipment ("CPE") segment of the telecommunications industry,
principally as a secondary market reseller of used and/or refurbished AT&T
business telephone parts and systems, and as a designer, manufacturer and
supplier of proprietary voice (or "call") processing systems that provide
automated call handling, voice and fax messaging, interactive voice response,
automated call distribution and message notification functionality. The Company
also provides equipment repair and refurbishing, inventory management, and other
related value-added services. The Company sells its products and services to
corporate end users, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
The Company was incorporated in Delaware in 1986 and became a public
company in May 1987 following the completion of its initial public offering. In
January 1994, the Company acquired certain operating assets of Cobotyx
Corporation, Inc. ("CCI"), a designer, manufacturer and supplier of voice
processing systems, and expanded its entry into this marketplace through the
formation of a voice processing products division ("Cobotyx Division").
CUSTOMERS AND TARGET MARKETS
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to over 1,400 customers during 1995 ranging
from small companies to large, multi-location corporations, and including
equipment wholesalers, dealers, distributors and government agencies and
municipalities. The Company believes its customers are generally (i) existing
AT&T equipment users that require piece parts to upgrade, expand, or maintain
their existing telephone system, (ii) cost-conscious businesses that desire to
save money by purchasing used or refurbished equipment instead of new equipment,
but still retain AT&T installation and maintenance support for these products,
and (iii) businesses that may have no current need for AT&T's latest and most
technically advanced product offerings. Businesses also look to the Company, and
to other secondary market resellers, to meet their immediate equipment delivery
requirements. The Company is also pursuing the sale of its products
internationally, such as in the People's Republic of China ("PRC"), the Republic
of the Philippines, and in other countries which have underdeveloped
telecommunications systems and may have limited financial resources.
The Company distributes its voice processing products domestically and
internationally to approximately an additional 500 customers, primarily
independent dealers and distributors, end-users, and through arrangements with
several manufacturers of telephone systems and business equipment.
35
During the two years ended December 31, 1995, no single customer accounted
for more than 5% of revenues, except for AT&T, which accounted for 5.4% (6.6% in
1994). The Company's business is not considered seasonal, although historically
revenues during the third quarter ended September 30 have often (but not during
1995) been lower than the other quarters of the year, which the Company
attributes to a slowdown of customer purchasing activity during the summer
months of July and August.
STRATEGY
The Company's objective is to significantly expand its revenues and
profitability through a strategy based on:
Domestic Expansion - The Company is seeking to expand its revenues and
customer base in the domestic secondary telephone equipment marketplace by
increasing its sales force, establishing business in other geographic areas
of the U.S. and by continuing to provide quality refurbished products,
superior customer service and support (see "Customer Services"), and other
value-added services as required by its customers. The Company is also
attempting to become a more strategic partner to AT&T, by specializing in
the resale of AT&T products and through the establishment of distribution
rights to new AT&T equipment as allowed by AT&T. The Company may also seek
to acquire similar businesses in other geographic areas of the U.S., as
opportunities arise, in order to increase its share of this market.
New Voice Processing Products and Services - The Company plans to continue
its expansion into this marketplace by utilizing or developing current
technologies to produce state-of-the-art products that provide basic voice
and call processing functionality while also providing flexibility and
expandability. The Company plans to adapt its technology to emerging
industry standards, and plans to provide custom computer telephone
integration solutions for its customers.
International Expansion - The Company's strategy includes developing and/or
providing products and technologies to assist developing countries which
have inadequate telecommunications infrastructures by providing low-cost,
reliable telecommunications equipment and services. The Company plans to
seek and develop relationships with internationally-based partners and
enter into marketing and/or distribution agreements with established
overseas businesses in the countries that the Company has targeted to
penetrate, including the PRC, the Republic of the Philippines, and other
countries.
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC"). Prior to its closing in January
1996, the ARC primarily operated to service AT&T affiliates in the orderly
disposition, by way of consignment sales arrangements, of excess, overstocked
and end-of-life telecommunications, computer and data transmission equipment.
The assets acquired consisted primarily of warehouse equipment, vehicles,
computer and office equipment, and inventory. The Company concurrently formed a
subsidiary corporation, Farmstead Asset Management Services, LLC ("FAMS"), which
is
36
using the purchased assets to start up a similar operation in Piscataway, New
Jersey. The Company intends to attempt to re-establish certain of the
relationships that the ARC enjoyed, however, no assurances can be given that it
will be able to do so. The Company believes that the operations of FAMS will
provide it with an opportunity to develop new sources of equipment for resale to
its existing customers, as well as to other wholesalers in the telephone, data
and computer secondary markets, and internationally. While operational for less
than one full month, for the first quarter of 1996, FAMS contributed 1% of the
Company's revenue during its initial start up phase.
INDUSTRY BACKGROUND
According to reports published in 1993 and 1994 (the latest available) by
The Telecom Library, Inc., a communications industry publishing company, the
telephone equipment secondary market is one of the fastest growing sectors of
the telecommunications industry, with gross sales estimated to reach $704
million in 1994, representing an increase of 22% from $577 million in 1993. Of
the total 1994 gross sales, 66% represented sales of parts (as opposed to
complete systems). In addition, sales to end-users represented 65% of total
sales. AT&T equipment comprised the largest brand name segment of the
marketplace, with 25% of 1994 sales (23% in 1993). The 1994 report forecasts an
annual growth rate of 20% for 1995 and for 1996, and through the end of the
decade, annual growth rates are estimated to be in the thirty percentile range
and higher, driven by increases in the replacement rate of equipment in the
installed base, due to technical innovations in the equipment.
According to Vanguard Communications Corp., an independent consulting firm
specializing in the voice processing industry, the domestic market for voice
processing systems recorded aggregate end-user revenues of approximately $2.1
billion in 1994, with approximately 74,000 systems estimated to have been sold.
The marketplace is further divided into two main categories: voice messaging
equipment, in which the Company's products primarily compete (with 1994 end user
revenues of $1.3 billion, 63,000 systems shipped), and voice response equipment
(with end user revenues of $853 million, 11,000 systems shipped). Major
manufacturers of voice processing systems include switch suppliers (such as
AT&T, Northern Telecom, Inc. and Rolm Co.), independent manufacturers of
proprietary systems (such as Centigram Communications Corporation and Octel
Communications Corporation), and independent manufacturers of personal computer
("PC") based, open architecture systems (such as Active Voice, Inc. and Applied
Voice Technologies, Inc.). The open system, standard architecture suppliers
often buy board level technology from a few core voice technology suppliers, and
then use standard operating systems and programming languages, and PCs, to
create proprietary voice processing solutions.
37
THE COMPANY'S TELEPHONE EQUIPMENT PRODUCTS
PRODUCT DESCRIPTION
The Company sells used and/or refurbished telephone parts and systems
manufactured by AT&T. Parts sold primarily include digital and analog telephone
sets, circuit packs, and other system accessories, such as headsets, consoles,
speakerphones and paging systems. Telephone systems are generally categorized as
key systems and PBX systems. Key systems are generally used by small businesses,
and are characterized by telephones which have multiple buttons permitting the
user to select outgoing or incoming telephone lines directly. PBXs are private
telephone switching systems usually located on a customer's premises, with an
attendant console, and are designed for use by larger businesses. Because most
of the features of a PBX are stored in the switch, and not on the telephone, a
PBX can provide more features and flexibility than a key system.
AT&T key systems sold by the Company, in both piece parts and complete
systems, and their capacities include: Merlin(R) and Merlin Legend(R) (2 lines,
6 telephones to 80 lines, 144 telephones); Spirit(R) (3 lines, 8 telephones to
24 lines, 48 telephones) and Partner(R) (6 lines, 12 telephones to 24 lines, 48
telephones).
AT&T PBX equipment sold by the Company, primarily in piece parts, and their
capacities include: System 25 (any combination of lines and telephones up to a
maximum of 256), System 75 (200 lines, 800 telephones); System 85 (16,000 lines,
50,000 telephones); Definity(R) G1 (400 lines, 1,600 telephones); Definity(R) G2
(32,000 lines, 100,000 telephones); Definity(R) G3 (4,000 lines, 10,000
telephones); and Dimension(R) (2,968 lines, 7,232 telephones), an older
technology, manufacturer-discontinued product which the Company offers for sale
in the PRC and other foreign countries.
Telephone equipment sales and service revenues accounted for 79% of total
Company revenues in 1995 (75% in 1994). Sales of PBX equipment and associated
telephones and accessories comprised approximately 88% (83% in 1994) of
equipment sales, while key equipment parts and system sales comprised
approximately 12% (17% in 1994) of equipment sales.
RELATIONSHIP WITH AT&T
Since 1985, AT&T has provided support to the secondary market by continuing
to offer installation, maintenance, repair, reconditioning and certification
services for its products purchased by end-users through equipment resellers.
Equipment resellers such as the Company may also, with various restrictions,
utilize AT&T documentation, technical information and software. AT&T also
generally provides a one year warranty for products purchased from AT&T for
resale, provided that AT&T performs the installation.
38
The installation and maintenance of AT&T equipment is generally provided by
AT&T. The Company does, however, coordinate the installation scheduling directly
with AT&T if requested to do so by its customer. The Company also has agreements
with a number of installation and maintenance companies covering the New England
and New York geographic areas who can also provide such services.
Since 1991, the Company has been an "AT&T Authorized Distributor of
Selected AT&T - Remanufactured Products" ("AT&T Agreement"), under a program
with AT&T which currently includes only eight other secondary market companies
in different geographic areas of the country. The AT&T Agreement does not
provide the Company with an exclusive sales territory. Under the program, the
Company is authorized to sell domestically specified AT&T remanufactured
products, currently including certain Merlin(R), Spirit(R) and System 25(R)
products. The Company is also required to purchase all of such included products
directly from AT&T. On March 5, 1996, the AT&T Agreement was renewed for another
one year term, although it can contractually be canceled by either party without
cause upon 90 days notice.
In September, 1995, AT&T announced that it was to be split into three
publicly-traded companies: a telecommunications equipment and technology company
called Lucent Technologies, Inc. ("Lucent"), a business computing company called
NCR, and a communications services company which will retain the name AT&T (for
purposes of this report, all entities are collectively referred to as "AT&T").
On February 1, 1996, the AT&T Agreement was assigned to Lucent. The Company
believes that its relationship with AT&T is satisfactory and has no indication
that AT&T has any intention of canceling the AT&T Agreement with the Company or
of severing its relationship with the Company when the current agreement
expires. In the event that the AT&T Agreement is terminated, the Company does
not believe that it would have a material effect on the Company's business,
since it could acquire like products from other sources at comparable prices.
The Company's business is not expected to be adversely impacted by AT&T's
reorganization. It may, however, be materially adversely affected should AT&T
decide no longer to provide installation and maintenance services on used and/or
refurbished products sold by the Company.
In May 1996, the Company announced that it had entered into a new one year
renewable distributor agreement with Lucent (the "Lucent Agreement") giving the
Company the right to sell new Merlin Legend(R) and Partner(R) Communications
Systems in the State of Connecticut. The Company believes that the Lucent
Agreement and other preliminary oral agreements with Lucent (which the Company
expects to also be reduced to written agreements) has expanded the Company's
product offerings and could potentially increase the Company's revenues by 50%
per year over the next three years.
MARKETING AND CUSTOMERS
Telephone parts, systems and services were marketed domestically through
the Company's in-house sales staff to more than 1,400 customers during 1995
ranging from small companies to large, multi-location corporations, and
including equipment wholesalers, dealers, distributors and government agencies
and municipalities. Approximately 58%
39
(56% in 1994) of the Company's 1995 telephone equipment sales and service
revenues were to customers located in New England, New York and New Jersey.
End-user sales accounted for approximately 85% (88% in 1994) of telephone
equipment sales in 1995, while sales to resellers accounted for approximately
15% (12% in 1994). The Company markets Dimension(R) PBX equipment in the
People's Republic of China ("PRC") to businesses, government agencies and local
telephone service providers through its 50% owned affiliate, Beijing Antai
Communication Equipment Company, Ltd. ("ATC") located in Beijing, PRC.
INTERNATIONAL MARKETS FOR TELEPHONE EQUIPMENT
The Company has been pursuing expansion of its business internationally, to
date principally in the Asia-Pacific region. The Company has focused on the
development of proprietary Chinese system software, proprietary digital and
analog interfaces, and a proprietary billing system, the combination of which
would allow the Company's refurbished PBX equipment to be reconfigured in the
PRC to act as a central office (a telephone company facility where subscriber's
lines are joined to switching equipment for connecting other subscribers to each
other, locally and long distance). This product, which has been designed for use
in the rural areas of the PRC, can also be used in other developing countries
that require modern equipment but cannot afford the price of new, digital
central office equipment being offered by the major telephone equipment
manufacturers. In addition to the PRC, the Company plans, in the future, to
market this equipment in the Republic of the Philippines, Eastern Europe,
Mexico, Central and South America and other countries in the Asia-Pacific
region. Its ability to do so may be dependent, among other things, upon
obtaining adequate financing for these projects, and satisfying technical and
governmental certification and licensing requirements in such countries.
On December 31, 1994, the Company entered into an agreement to purchase
D.W. International, Ltd.'s ("DWI") 50% ownership interest in ATC for a purchase
price of $100. The purchase transaction was completed effective May 30, 1995
upon receipt of Chinese government approvals. ATC was formed in October 1992 as
a Joint Venture Enterprise, and is also owned 50% by Beijing Aquatic Product
Inc., a registered company in the PRC. DWI is a Delaware Corporation owned 50%
by Mr. Da Wei Wu, who serves as General Manager of ATC. ATC, previously a
distributor for the Company in the PRC, markets, assembles, manufactures,
installs and services the Company's central office, PBX and 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.
40
THE COMPANY'S VOICE PROCESSING PRODUCTS
PRODUCT DESCRIPTION
Voice (or "call") processing encompasses various types of computer
assistance to facilitate interaction over the telephone, between a caller, one
or more persons, and a computer. With call processing technology, telephone
users can utilize voice and touchtones to manipulate calls, interact with
computer databases, and access and respond to messages or data from voice or
other electronic media, thereby making internal and external communications more
efficient. The three most common call processing features are: (1) Voice Mail -
allows a caller to store voice messages and replies in a computer, and thereby
conduct a dialogue with any person without having to be on the same line at the
same time; (2) Automated Attendant - allows a caller to direct the computer to
switch the call to a telephone extension different from the one dialed, without
the manual intervention of an operator; and (3) Interactive Voice Response -
allows a caller to obtain information in voice form (for example, selecting
announcements from a list of options) from a local or non-local database.
During 1993, the Company decided to expand its product offerings to its
existing telephone equipment customers, and entered into distribution agreements
with manufacturers of voice processing products. These agreements provided the
Company with a basic voice processing product line enabling it to meet the
system requirements of customers in the 2 to 8 port (i.e. capable of
simultaneously handling from 2 to 8 telephone calls) segment of the CPE market.
This sized system was typical of the "branch office" locations of many of the
large corporations already served by the Company. In January 1994, the Company
acquired certain assets of CCI, and established the Cobotyx Division to be
responsible for ongoing voice processing equipment business and strategy. The
assets acquired from CCI included technology and know-how, inventories, property
and equipment, all trademarks, tradenames, and patents. Certain key engineering,
technical and support personnel of CCI were subsequently hired by the Company to
staff this operation. Through its Cobotyx Division, the Company designs,
integrates, manufactures, distributes and supports a family of proprietary call
processing systems. In addition to proprietary hardware design, software
programs and applications procedures, the Company uses component technology
licensed from other suppliers. Products currently marketed include:
COBOTTM Plus Receptionist - a single port, solid state, fully-featured
automated attendant with Rotary Dial Detection, for PBXs, Key systems or Centrex
(a business telephone service offered by a local telephone company, providing
custom calling features such as call forwarding, call transfer, least cost
routing and speed calling) applications.
COBOTTM Plus Digital Announcer - a single port, solid state, fully-featured
announcer for PBXs, Key systems or Centrex applications.
COBOTTM Plus Secretary - an automated attendant and voice mail system, with
a 2 - 8 port, 500 mailbox capacity.
41
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
42
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.
43
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 and the
Lucent Agreement, the Company is required to purchase certain products only from
AT&T or Lucent. On March 5, 1996, the AT&T Agreement was renewed for another one
year term, although it can contractually be canceled by either party without
cause upon 90 days notice. The Company believes that if the AT&T Agreement were
to be canceled or not renewed, it could obtain similar product from other
suppliers. The Company is not otherwise dependent upon any single supplier for
telephone equipment.
44
The Company believes that product availability in the marketplace is presently
sufficient to allow the Company to meet its customers' delivery requirements.
The Company's solid state call processing products, namely the COBOTTM Plus
Digital Announcer and the COBOTTM Plus Receptionist are manufactured and
assembled for the Company by DOVatron Manufacturing East, a division of
DOVatron, Inc. ("DOVatron"). DOVatron, which is a contract electronics
manufacturer, procures all of the materials, consisting of printed circuit
boards, electronic components and cabinets. Once assembled and tested, the
completed units are either shipped to the Company or directly to its customer.
While the Company plans to continue using DOVatron in the manufacture and
assembly of these products, management believes that it could readily engage
other assembly houses if it were necessary to do so. For its other voice
processing products, the Company purchases electronic components, IBM-compatible
486 PCs and voice and fax boards from multiple vendors. The products are
assembled, configured to customer specifications, tested and/or installed by the
Company or alternatively, the Company can purchase certain products complete to
the Company's specifications. Because the Company's product platforms consist
principally of standard electronic and PC components, the Company is not
dependent upon any single supplier.
The Company utilizes in certain of its products software obtained under
license agreements with vendors. The Company believes that the functionality
provided by the licensed software can be obtained from multiple software
suppliers, and is therefore not dependent upon any single supplier.
PATENTS, LICENSES AND TRADEMARKS
No patent or trademark is considered material to the Company's overall
operations. The manufacture and sale of certain of the Company's products
involves the use of processes, products or information, the rights to certain of
which are owned by others. Although the Company has obtained licenses with
regard to the use of certain of such processes, products and information, there
can be no assurance that such licenses will not be terminated or expire during
critical periods, that the Company will be able to obtain licenses for other
rights which may be important to it, or, if obtained, that such licenses will be
obtained on commercially reasonable terms. If the Company is unable to obtain
such licenses, the Company may have to develop alternatives to avoid infringing
patents of others, potentially causing increased costs and delays in product
development and introduction, or precluding the Company from developing,
manufacturing or selling its proposed products. Additionally, there can be no
assurance that the patents underlying any licenses will be valid and
enforceable. To the extent any products sold by the Company are based on
licensed technology, royalty payments on the licenses will reduce the Company's
gross profit from such product sales and may render the sales of such products
uneconomical.
The Company also relies upon unpatented trade secrets, and no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to the
Company's trade secrets or disclose such
45
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 March 31, 1996, the Company had 80 full-time and 3 part-time
employees, including 24 in sales and customer support positions. The Company
believes that its relations with its employees are satisfactory. The Company's
employees are not represented by any organized labor union and are not covered
by any collective bargaining agreements.
46
DESCRIPTION OF PROPERTY
The Company occupies approximately 29,000 square feet of office and
warehouse space in East Hartford, Connecticut, which it uses for its principal
executive and administrative offices and its telephone equipment operations, and
6,000 square feet of office space in Danbury, Connecticut, which it uses for its
voice processing products division. These facilities are currently rented on a
month-to-month basis for $12,100 and $5,000 per month, respectively. The Company
believes that its facilities are adequate for its present needs and suitable for
their intended uses. However, if the Company's operations continue to expand, it
will likely require to either obtain another facility (through purchase or long
term lease) or expand and renovate its current facility. If new or additional
space is required, the Company believes that adequate facilities are available
at competitive prices in the immediate areas of current operations. See "Use of
Proceeds."
On March 13, 1996, the Company's newly formed subsidiary, Farmstead Asset
Management Services, LLC, entered into a two year lease for approximately 70,100
square feet of warehouse and office space in Piscataway, New Jersey at a monthly
rent of $24,827 commencing in April 1996. This facility is used in the
remarketing of used computer, data transmission and telephone equipment,
primarily of AT&T manufacture, and it provides asset storage and management
services.
LEGAL PROCEEDINGS
The Company is not a party to any pending material proceedings and no such
proceedings are known to be contemplated by others.
47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name and age of each director and each
executive officer, other than such directors, and the positions held by them
with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- ---------------------------- ---- ---------------------------------------------------------
<S> <C> <C>
DIRECTORS
George J. Taylor, Jr. (2) 53 Chairman of the Board, President, Chief Executive Officer
and Director
Robert G. LaVigne 45 Vice President-Finance & Administration, Chief Financial
Officer, Secretary, Treasurer and Director
Harold L. Hansen (1)(2) 66 Director
Hugh M. Taylor (1)(2) 52 Director
Joseph J. Kelley(1)(2) 56 Director
OTHER EXECUTIVE OFFICERS
Alexander E. Capo 45 Vice President-Marketing and Sales
Joseph A. Novak, Jr. 53 Vice President-Operations
Neil R. Sullivan 45 General Manager and Assistant Secretary
John G. Antonich 55 General Manager, Cobotyx Division
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
George J. Taylor, Jr. has been Chairman of the Board of Directors and Chief
Executive Officer of the Company (including its predecessors) since 1984, and
President since 1989. He was a director of FIC Acquisition Corporation (formerly
Farmstead International Corporation) from 1988 until 1992, and was also the
President of Lease Solutions, Inc. (formerly Farmstead Leasing, Inc.), a
business products and automobile leasing company, from 1981 until it was
dissolved in 1993. From 1977 to 1981, Mr. Taylor was Vice President - Marketing
and Sales for National Telephone Company. He was one of the founders of the
National Association of Telecommunication Dealers, has been a member of, or
advisor to, its Board of Directors since its inception in 1986, and for two
years served as its President and Chairman. Mr. Taylor is also a Director of the
Company's 50 % owned affiliate, Beijing Antai Communication Equipment Company,
Ltd. ("ATC"). Mr. Taylor is the brother of Mr. Hugh M. Taylor.
48
Robert G. LaVigne was employed by the Company in March 1988 and has served
in the capacities indicated above since July 1988. In addition, from January
1994 until October 1994 he served as General Manager of the Company's domestic
telephone equipment business unit. From 1985 to 1988 he was the Controller of
Economy Electric Supply, Inc., a distributor of electrical supplies and
fixtures. From 1982 to 1985 he was the Corporate Controller of Hi-G, Inc., a
manufacturer of electronic and electromechanical components. Mr. LaVigne is a
Certified Public Accountant, and was associated with the accounting firm of
Arthur Young and Company from 1977 to 1982. Mr. LaVigne is also a Director of
ATC.
Harold L. Hansen, a director of the Company since 1992, is currently 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,
which provides executive and technical support for European and Asian based
communication companies seeking to expand market share in the U.S., as well as
for U.S. companies seeking to expand internationally. During 1994, he was Group
Vice President of NYNEX, responsible for operations in the Commonwealth of
Massachusetts. From 1985 to 1994 he served in various executive level positions
with NYNEX, or associated companies including Vice President - Operations of New
England Telephone (1991 - 1993), Vice President - New England Telephone, Network
Department (1990 - 1991), Corporate Director of Business Development, NYNEX
Marketing (1988 - 1990) and Vice President of New England Telephone - Maine
(1985 - 1988).
Alexander E. Capo has been involved in the telephone industry since 1972.
He has held the position of Vice President - Marketing and Sales since 1987.
From 1985 to 1987 he
49
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 (until May 1996) and as General Manager of the Company's domestic
telephone equipment business unit, and in December 1994 was also appointed
Assistant Secretary of the Company. From 1981 to 1994 he was employed by Zero
Corporation ("Zero"), a manufacturer of cabinets, cooling equipment and
containers for the electronics industry. Mr. Sullivan was Controller of various
divisions of Zero from 1981 to 1991, and was Vice President/General Manager of
the Zero-East division from 1991 to 1994.
John G. Antonich was employed by the Company as Director of Sales in July
1993. In February 1996, he was appointed General Manager of the Cobotyx voice
processing products division. From January 1991 to April 1993 he was an Account
Executive with Quodata, a software manufacturer. For two years prior thereto he
was a part owner of Accurate Data, a computer systems dealer.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid or accrued by the
Company for services rendered during the three years ended December 31, 1995 to
the Chief Executive Officer ("CEO") and to each executive officer whose total
annual compensation exceeded $100,000 in 1995 (the "Named Officers"):
50
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS (2)
NAME AND PRINCIPAL FISCAL SALARY($) BONUS ALL OTHER
POSITION YEAR (1) ($) OPTIONS (#) COMPENSATION(3)
- --------------------------------- ---------- ------------ ----------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
CEO:
George J. Taylor, Jr. 1995 150,000 30,000 600,000 5,135
1994 114,723 8,595 250,000 3,077
1993 110,685 - - 2,556
Named Officers:
Alexander E. Capo 1995 182,055 - - 3,900
1994 123,481 - 50,000 -
1993 141,011 - - -
Robert G. LaVigne 1995 84,000 16,800 - -
1994 83,635 16,154 275,000 -
1993 70,000 - - -
Peter S. Buswell (4) 1995 113,539 - 300,000 7,294
1994 112,616 - - -
1993 - - 100,000 -
</TABLE>
(1) Includes base salary and sales commissions if applicable.
(2) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARS") or make any long-term incentive plan payments during the
fiscal years presented.
(3) Category includes insurance premiums paid by the Company, and an amount
attributable to the use of a Company automobile for Mr. Taylor, a car
allowance for Mr. Capo, and accrued vacation and sick pay paid to Mr.
Buswell.
(4) Mr. Buswell joined the Company in 1994, and resigned as an employee and
Director of the Company on September 11, 1995. During 1993, Mr. Buswell
provided marketing and technical consulting services to the Company in
connection with the start up of the Company's voice processing product
lines, for which he earned an aggregate of $52,375 in 1993. In 1993, Mr.
Buswell received a non-qualified option grant to purchase 100,000 shares of
common stock under the 1992 Stock Option Plan.
51
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
options to purchase shares of the Company's Common Stock made to each Named
Officer during the year ended December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) (1) EXPIRATION DATE
---- ----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
George J. Taylor, Jr. 600,000 53% .52 8/8/00
Peter S. Buswell 300,000 27% .42 5/19/05
</TABLE>
(1) The exercise price for Mr. Taylor represented 110% of the fair market value
of the common stock on the grant date. The exercise price for Mr. Buswell
represented the fair market value of the common stock on the grant date.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information on the number and value of
unexercised options held at December 31, 1995, by each Named Officer.
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE FY-END (#) FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- -------------------------
<S> <C> <C> <C> <C>
George J. Taylor, Jr. .... - - 250,000 600,000 - -
Alexander E. Capo ........ - - 50,000 - - -
Robert G. LaVigne ........ - - 290,000 160,000 11,025 -
Peter S. Buswell ......... - - 90,000 310,000 - -
</TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR:
None.
COMPENSATION OF DIRECTORS
Non-employee directors receive $500 for each attended board meeting, plus a
non-qualified option to purchase 10,000 shares of Common Stock upon election to
the Board. Directors are reimbursed for their expenses for each meeting
attended.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
Mr. George J. Taylor, Jr. has a three year employment agreement, expiring
November 28, 1997, which provides for an annual base salary of $150,000, and
which may be revised
52
upward on an annual basis by the Board of Directors. The agreement also provides
for (i) a bonus of up to 50% of base salary if the Company attains its annual
revenue and earnings objectives set by the Board of Directors beginning with
fiscal year 1995, and (ii) an additional award equal to 7 1/2 % of earnings in
excess of said earnings objective. Mr. Taylor was also granted an option to
purchase 600,000 shares of the Company's Common Stock. The agreement also
provides for severance payments equal to two years' salary plus incentives in
the event the Company terminates this agreement without cause or Mr. Taylor
terminates the agreement with good reason, and severance payments equal to one
year's salary plus incentives in the event the agreement is not renewed. The
agreement also contains provisions regarding confidentiality and a non-compete
covenant which prohibits him from competing with the Company during his
employment and for up to two years thereafter. Mr. Taylor's compensation
agreements were established by the Compensation Committee and approved by the
Board of Directors.
Mr. Capo's compensation arrangements for fiscal 1995 consisted of a base
salary of $30,000, a $3,900 car allowance and sales commissions of $152,055. Mr.
Capo's sales commissions were calculated based upon a pre-determined percentage
of the gross profit on sales generated from his direct selling efforts.
Commencing in May 1995, Mr. Buswell entered into a three year employment
agreement consisting principally of (i) a base salary of $120,000 per year, (ii)
a bonus of 5% of the annual after-tax earnings of the Cobotyx division in excess
of the board-approved operating budget for that business unit, (iii)
participation in a bonus pool established and administered by the Compensation
Committee of the Board of Directors, up to a maximum of 50% of salary, and (iv)
an option to purchase up to 300,000 shares of Common Stock at an exercise price
equal to the fair market value of the Company's Common Stock on the grant date.
Mr. Buswell resigned from the Company on September 11, 1995 and his employment
agreement was terminated.
Mr. LaVigne does not have an employment agreement with the Company. At the
discretion of the Compensation Committee, Mr. LaVigne is eligible to participate
in a bonus pool up to a maximum of 50% of salary.
STOCK OPTION PLANS
The Company's 1986 and 1987 Key Employees and Key Personnel Stock Option
Plans (the "Earlier Plans"), which are virtually identical, provide for the
issuance, pursuant to the exercise of stock options granted thereunder, of a
maximum of 400,000 and 750,000 shares, respectively, of Common Stock of the
Company. These plans may grant both Incentive and Non-qualified Stock Options to
officers and employees of the Company, and Non-qualified Stock Options only to
directors (who are not also employees), and consultants of the Company.
The Company's 1992 Stock Option Plan (the "1992 Plan") which, in most
material respects, is similar to the Earlier Plans, permits options to purchase
up to 3,500,000 shares of Common Stock to be granted to officers, employees,
directors,
53
consultants and others who perform beneficial services to the Company. The
Company intends the 1992 Plan to enable the Company to issue Incentive Stock
Options (as defined in Section 422 of the Internal Revenue Code of 1986, as
amended) to its officers, key employees and directors (who are also employees.)
These persons may, however, also be granted Non-qualified Stock Options. All
other persons will only be granted Non-qualified Stock Options.
The purpose of the Earlier Plans and the 1992 Plan is to provide incentive
to the Company's officers, key employees, directors, consultants and others to
continue to serve the Company, to continue their beneficial relationship to the
Company, and to give them a greater interest, as stockholders, in the success of
the Company.
The 1992 Plan is administered by a committee of two directors appointed by
the Board of Directors. The persons eligible to receive options are such key
officers, employees, directors and consultants of the Company and others as the
committee shall select, provided that any persons who own, directly or
indirectly, more than 10% of the outstanding stock of the Company may not
receive options at an exercise price less than 110% of the fair market value of
the company's Common Stock as defined in the Plan.
The committee designates the persons to receive the options, the number of
shares to be optioned and the terms of the options, including the option price
and the duration of each option, subject to certain limitations. The committee
also fixes the time or times when, and the extent to which, an option is
exercisable, provided that no option will be exercisable later than ten years
after the date of grant (or five years in the case of a 10% stockholder). The
option is payable in cash. However, the committee may permit the option price to
be paid in shares of the Company's Common Stock at the then current fair market
value, as defined in the 1992 Plan.
As of March 31, 1996, an aggregate of 35,000 and 1,125,917 options (3,500
and 112,592 adjusted for the Reverse Split) were available for future grant
pursuant to the Earlier Plans and the 1992 Plan, respectively.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Company to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Company if it is determined that such person
acted in accordance with the applicable standard of conduct set forth in such
statutory provisions. Article 9 of the Company's Certificate of Incorporation
contains provisions relating to the indemnification of directors and officers,
to the full extent permitted by Delaware law.
The Company may also purchase and maintain insurance for the benefit of any
director or officer which may cover claims for which the Company could not
indemnify such person.
54
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Small Business Issuer pursuant to the
foregoing provisions, or otherwise, the Small Business Issuer has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable.
55
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock, $.001 par value per share, as of March
31, 1996 (without adjusting for the Reverse Split), by (i) each person known by
the Company to own beneficially more than five percent of the Company's
outstanding shares of Common Stock, (ii) all directors of the Company and (iii)
all directors and executive officers of the Company as a group. In addition to
being a beneficial owner of more than five percent of the Company's outstanding
shares of Common Stock, Mr. George J. Taylor, Jr. is a director of the Company.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED COMMON STOCK
- --------------------------------------- ------------------ ------------
<S> <C> <C>
FIVE PERCENT STOCKHOLDERS:
George J. Taylor, Jr. ............ 2,688,011(2) 12.5%
Saudi American Bank............... 1,300,000 6.1%
P.O. Box 833
Riyadh, Saudi Arabia
Martin H. Meyerson and
M.H. Meyerson & Co., Inc.
80 Montgomery Street
Jersey City, New Jersey........... 1,172,105(3) 5.5%
OTHER DIRECTORS:
Robert G. LaVigne................. 380,000(4) 1.8%
Harold L. Hansen.................. 65,000(5) *
Hugh M. Taylor.................... 102,370(6) *
Joseph J. Kelley.................. 10,000(5) *
OTHER NAMED EXECUTIVE OFFICERS:
Alexander E. Capo................. 62,800(7) *
ALL DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (9 PERSONS).................. 3,546,681(8) 15.9%
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each of the Company's directors and executive officers is
c/o the Company, 81 Church Street, East Hartford, CT 06108. Except as
otherwise indicated, the Company believes each person named in the table
has sole voting and investment
56
power with respect to all shares beneficially owned by him. Information
with respect to beneficial ownership is based upon information furnished by
such stockholder.
(2) Includes 350,000 shares issuable upon exercise of currently exercisable
stock options and 1,000 shares issuable upon exercise of warrants. Also
includes 180,000 shares held by his children, and an aggregate of 200
shares, for which Mr. Taylor is sole custodian, held for the benefit of his
children under the U.G.M.A.
(3) Reported on Schedule 13G as of December 31, 1995. Mr. Meyerson owns 305,000
shares directly. Additionally, Mr. Meyerson, as a controlling person of
M.H. Meyerson & Co., Inc. ("MHMC"), a broker-dealer which makes a market in
the securities of the Company, may be deemed to exercise sole voting and
dispositive power with respect to the shares held by MHMC. As of December
31, 1995, MHMC held 867,105 share equivalents consisting of 281,879 shares
of Common Stock plus 75,500 warrants to purchase 75,500 shares of Common
Stock, plus 254,863 underwriters options to purchase 254,863 units, each
unit consisting of one share of Common Stock plus one warrant to purchase
one share of Common Stock. The foregoing does not include 771,800 shares of
Common Stock plus 46,000 warrants to purchase 46,000 shares of Common Stock
owned by other persons associated with MHMC and family members of such
associated persons.
(4) Includes 330,000 shares issuable upon exercise of currently exercisable
stock options.
(5) Consists of shares issuable upon exercise of currently exercisable stock
options.
(6) Includes 73,500 shares issuable upon exercise of currently exercisable
stock options and 15,000 shares held by his children.
(7) Includes 50,000 shares issuable upon exercise of currently exercisable
stock options, and 2,900 shares issuable upon exercise of warrants.
(8) Includes 1,008,500 shares issuable upon exercise of currently exercisable
stock options and 3,900 shares issuable upon exercise of warrants.
Pursuant to individual agreements with the Underwriter, all of the shares
and share equivalents listed above except those held by MHMC and The Saudi
American Bank, are restricted from transfer for thirteen months from the date of
this Prospectus without the prior consent of the Underwriter.
57
DESCRIPTION OF SECURITIES
UNITS
Each Unit consists of one share of Common Stock, one Class A Warrant and
one Class B Warrant. The shares of Common Stock and the Warrants will be
separately tradeable following the Underwriter's decision to separate the Units.
COMMON STOCK
The Company has 30,000,000 authorized shares of Common Stock, $.001 par
value per share. As of March 31, 1996, 21,238,676 shares of Common Stock were
outstanding (2,123,868 after adjusting for the Reverse Split, but without
adjusting for rounding fractional shares). The Company will be asking its
stockholders, at the Annual Meeting of Stockholders being held on June 13, 1996,
to approve an amendment to the Company's Certificate of Incorporation to
implement a reverse stock split of the Company's outstanding securities.
Each share of Common Stock entitles the holder thereof to one vote, either
in person or by proxy, at meetings of stockholders. The holders are not
permitted to vote their shares cumulatively. Accordingly, the holders of more
than fifty percent (50%) of the issued and outstanding shares of Common Stock
can elect all of the Directors of the Company.
All shares of Common Stock are entitled to participate ratably in dividends
when and as declared by the Company's Board of Directors out of the funds
legally available therefor. Any such dividends may be paid in cash, property or
additional shares of Common Stock. The Company has not paid any dividends since
its inception and presently anticipates that all earnings, if any, will be
retained for development of the Company's business and that no dividends on the
shares of Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the operating and
financial condition of the Company, its capital requirements, general business
conditions and other pertinent facts. Moreover, pursuant to the terms of a
Commercial Revolving Loan and Security Agreement entered into with ABCC, the
Company is prohibited from declaring or paying any dividends or making any other
distribution on any shares of capital stock without the prior consent of the
bank. Therefore there can be no assurance that any dividends on the Common Stock
will be paid in the future.
Holders of Common Stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of the
dissolution, whether voluntary or involuntary, of the Company, each share of
Common Stock is entitled to share ratably in any assets available for
distribution to holders of the equity of the Company after payment of creditors
and the holders for shares of any class or series of preferred stock then
outstanding to the extent the then existing terms of the outstanding preferred
stock as set forth in the Company's Certificate of Incorporation grant them
priority over holders of Common Stock. All outstanding shares of Common Stock
are, and the shares of Common Stock included in the Units, when issued against
payment therefor, and the shares of
58
Common Stock underlying the Warrants, when issued in accordance with the terms
of the Warrants, will be, validly authorized and issued, fully paid and
non-assessable.
TRANSFER AGENT
The Company has engaged Oxford Transfer & Registrar ("Oxford"), 1130 S.W.
Morrison, Suite 250, Portland, Oregon 97205, to act as transfer agent for the
Company's Common Stock.
WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and Oxford as
Warrant Agent (the "Warrant Agent"). The following summary of the provisions of
the Warrants is qualified in its entirety by reference to the Warrant Agreement,
a copy of which is filed as an exhibit to the registration statement of which
this Prospectus is a part.
Each Warrant will be separately transferable once the Underwriter decides
to separate the Units and will entitle the registered holder thereof to purchase
one share of Common Stock at $_____ per share [130% of the Unit Offering Price]
for the Class A Warrants and $____ per share [150% of the Unit Offering Price]
for the Class B Warrants (subject to adjustment as described below) for a period
of five years commencing on the date of this Prospectus. A holder of Warrants
may exercise such Warrants by surrendering the certificate evidencing such
Warrants to the Warrant Agent, together with the form of election to purchase on
the reverse side of such certificate attached thereto properly completed and
executed and the payment of the exercise price and any transfer tax. If less
than all of the Warrants evidenced by a Warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants.
For a holder of a Warrant to exercise the Warrants, there must be a current
registration statement on file with the United States Securities and Exchange
Commission and various state securities commissions. The Company will be
required to file post-effective amendments to the Registration Statement when
events require such amendments and to take appropriate action under state
securities laws. While it is the Company's intention to file post-effective
amendments when necessary and to take appropriate action under state securities
laws, there is no assurance that the Registration Statement will be kept
effective or that such appropriate action under state securities laws will be
effected. If the Registration Statement is not kept current for any reason, the
Warrants will not be exercisable, and holders thereof may be deprived of value.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, each share of Common Stock will be fully paid and nonassessable. Warrant
holders will not have any voting or other rights as shareholders of the Company
unless and until Warrants are exercised and shares issued pursuant thereto. The
exercise price and the number of shares of Common Stock issuable upon the
exercise of each Warrant are subject to adjustment in
59
the event of a stock split, stock dividend, recapitalization, merger,
consolidation or certain other events.
At any time after 13 months from the date of this Prospectus, any or all of
the Warrants may be redeemed by the Company at a price of $.10 per Warrant, upon
the giving of ___ days' written notice, provided that the closing price of the
Common Stock equals or exceeds $____ for the Class A Warrants and $____ for the
Class B Warrants for a period of 20 consecutive trading days ending five days
prior to the notice of redemption. The right to purchase the Common Stock
represented by the Warrants noticed for redemption will be forfeited unless the
Warrants are exercised prior to the date specified in the notice of redemption.
While the Company may legally be permitted to give notice to redeem the Warrants
at a time when a current prospectus is not available thereby leaving the Warrant
holders no opportunity to exercise their Warrants prior to redemption, the
Company does not intend to redeem the Warrants unless a current prospectus is
available at the time of redemption.
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering (which will occur after consummation of
the Reverse Split), the Company will have __________ shares of Common Stock
outstanding, assuming no other transactions involving the Common Stock. Assuming
conversion of the Warrants offered hereby, __________ shares of Common Stock
will be outstanding. Of these shares, the 2,000,000 shares of Common Stock
issued upon conversion of the Warrants sold in this offering and __________
shares currently outstanding (___________ after adjusting for the Reverse Split)
will be freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by an "affiliate" of the Company
(in general, a person who has a control relationship with the Company) which
will be subject to the limitations of Rule 144 adopted under the Securities Act.
The remaining __________ shares of Common Stock are "restricted securities," as
that term is defined under Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate of the
Company), who has owned restricted shares beneficially for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class (approximately _______ shares if all Warrants offered herein are
exercised and no other shares of Common Stock are issued) or the average weekly
trading volume of the Company's Common Stock on all exchanges and/or reported
through the automated quotation system of a registered securities association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner of sale provisions, notice requirements and the availability of current
public information about the Company. A person who has not been an affiliate of
the Company for at least the three months immediately preceding the sale and who
has beneficially owned shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
60
All officers and directors of the Company have agreed with the Underwriter
that for thirteen months from the date of this Prospectus they will not sell
publicly any shares of Common Stock without the Underwriter's prior approval.
Also, except in connection with acquisitions or pursuant to warrants and options
outstanding immediately prior to the Closing of this Offering, the Company will
not, without the Underwriter's prior written consent, which will not be
unreasonably withheld, sell or offer to sell, either publicly or privately, any
shares of Common Stock, other equity, debt or converible securities for thirteen
(13) months after the Closing of this Offering with the exception of employees'
options and outside directors' options.
UNDERWRITING
The Underwriter is committed to purchase all of the Units offered hereby
that are not sold in the Rights Offering, if any of such securities are
purchased. The Underwriting Agreement provides that the obligations of the
Underwriter are subject to conditions precedent specified therein.
The Company has been advised by the Underwriter that it proposes initially
to offer the Units to the public at the public offering price set forth on the
cover page of this Prospectus and may allow certain dealers concessions of not
in excess of $____ per Unit. Such dealers may reallow a concession not in excess
of $____ per Unit to other dealers. After the commencement of the offering, the
public offering price, concession and reallowance may be changed by the
Underwriter. The Underwriter has informed the Company that it does not expect
sales to discretionary accounts to exceed five percent of the securities offered
by the Company hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter (i) an expense allowance on a
non-accountable basis equal to three percent (3%) of the gross proceeds derived
from the sale of the Units underwritten, of which $25,000 has been paid to date,
(ii) a 5% Warrant solicitation fee for all Warrants exercised after 12 months
from the date of this Prospectus, (iii) $108,000 at Closing as an advance
payment for a 36 month consulting fee, (iv) an amount in the range of
$55,000-$130,000 as a structuring fee based upon the amount of Units the Company
sells in the Rights Offering, and (v) an option to purchase, during the forty
five day period following the date hereof, up to 150,000 Units to satisfy
overallotments.
The Company's officers and directors have agreed not to, directly or
indirectly, offer, offer to sell, contract to sell, sell, transfer, assign,
encumber, grant an option to purchase, pledge or otherwise dispose of any
beneficial interest in such securities for a period of 13 months following the
date of this Prospectus without the prior written consent of the Underwriter.
Also, except in connection with acquisitions or pursuant to warrants and options
outstanding immediately prior to the Closing of this Offering, the Company will
not,
61
without the Underwriter's prior written consent, which will not be unreasonably
withheld, sell or offer to sell, either publicly or privately, any shares of
Common Stock, other equity, debt or convertible securities for thirteen (13)
months after the Closing of this Offering with the exception of employees'
options and outside director's options.
In connection with this offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, warrants to purchase from the Company an
amount of Units equal to 10% of the amount of Units it actually underwrites (the
"Underwriter's Warrants"). The Underwriter's Warrants are initially exercisable
at a price of $____ per Unit [140% of the initial public offering price] for a
period of four years commencing one year from the effective date of this
Prospectus and are restricted from sale, transfer, assignment or hypothecation
for a period of twelve months from the date hereof, except to officers of the
Underwriter. The Units issuable upon exercise of the Underwriter's Warrants are
identical to those offered hereby. The Underwriter's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise of the Underwriter's Warrants.
The public offering price for the Units has been determined by negotiations
between the Company and the Underwriter and is not necessarily related to the
Company's asset value, net worth or other established criteria of value. The
factors considered in such negotiations, in addition to prevailing market
conditions, included the history of and prospects for the industry in which the
Company competes, an assessment of the Company's management, the prospects of
the Company, its capital structure and certain other factors as were deemed
relevant.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon for the Company by the law firm of Heller, Horowitz & Feit, P.C., New York,
New York. Certain legal matters for the Underwriter have been reviewed by
William M. Prifti, Esq., Lynnfield, Massachusetts, in connection with this
Offering.
EXPERTS
The financial statements as of December 31, 1994 and 1995 and for each of
the two years in the period ended December 31, 1995 included in this Prospectus
and elsewhere in the registration statement have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report with respect
thereto, and have been so included herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
62
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 (the "Registration Statement") under the Act
with respect to the Units. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
or the Units, reference is hereby made to such Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of all or any part thereof may be obtained from such office
upon payment of the prescribed fees.
63
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS PAGE NO.
Report of Deloitte & Touche LLP.............................................F-2
Balance Sheets -- December 31, 1995 and 1994................................F-3
Statements of Operations
Years Ended December 31, 1995 and 1994 .....................................F-4
Statements of Changes in Stockholders' Equity
Two Years Ended December 31, 1995...........................................F-4
Statements of Cash Flows
Years Ended December 31, 1995 and 1994 .....................................F-5
Notes to Financial Statements...............................................F-6
Consolidated Balance Sheets -- March 31, 1996 (Unaudited)
and December 31, 1995.......................................................F-14
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1996 and 1995..................................F-15
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1996 and 1995..................................F-16
Notes to Consolidated Financial Statements (Unaudited)......................F-17
F-1
DELOITTE &
TOUCHE LLP
- ----------- ----------------------------------------------------
City Place Telephone: (203)280-3000
185 Asylum Street Facsimile: (203)280-3051
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
- ---------------
DELOITTE TOUCHE
TOHMATSU
INTERNATIONAL
- ---------------
F-2
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.
F-3
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 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.
F-4
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.
F-5
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.
F-6
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
shares outstanding during each period. Fully diluted per share amounts are not
shown for the periods in which the effect is immaterial or antidilutive. In
calculating weighted average shares outstanding, all securities convertible into
common stock, such as stock options, warrants, and units, are excluded if their
effect on net income (loss) per share is antidilutive.
RECLASSIFICATIONS
Certain December 31, 1994 balance sheet accounts have been reclassified in
order to conform with the December 31, 1995 presentation.
NEW ACCOUNTING PRONOUNCEMENT
The Company has not adopted the recently issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," ("SFAS
123") which is required to be adopted in the first quarter of 1996. The Company
currently records compensation based on the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by
SFAS 123. The Company is continuing to evaluate whether or not it will change to
the recognition provisions of SFAS 123.
NOTE 2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1995 and 1994 includes $100,000,
invested in a money market fund, which has been pledged as collateral with Fleet
Bank N.A. in connection with a letter of credit issued to one of the Company's
vendors. The letter of credit expires March 31, 1996.
NOTE 3. PROPERTY AND EQUIPMENT
As of December 31, the components of property and equipment were as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
At cost:
Equipment $ 402 $ 274
Furniture and fixtures 76 74
Leasehold improvements 46 47
Leased equipment under capital lease (a) 58 58
-------- --------
582 453
Less accumulated depreciation and amortization (326) (187)
-------- --------
$ 256 $ 266
======== ========
</TABLE>
(a) The Company leased computer equipment under a noncancelable lease contract
which expired in February 1996.
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
F-7
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.
F-8
The 1992 Stock Option Plan permits the granting of options to purchase up
to 3,500,000 shares of common stock. The terms of this plan are essentially the
same as the 1986 Plan. The Plan terminates in 2002, and options currently
granted expire on various dates through 2005.
A summary of transactions for these plans for each of the two years in the
period ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1986 PLAN 1987 PLAN
----------------------------- --------------------------
NUMBER OPTION NUMBER OPTION
OF PRICE OF PRICE
SHARES RANGE SHARES RANGE
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 43,000 $ .18 - 1.00 116,000 $ .16
Granted - - - -
Exercised (5,000) .22 (16,000) .16
Canceled or lapsed (1,500) .18 - -
----------- ------------ ----------- ------
Outstanding at December 31, 1994 36,500 $ .16 - 1.00 100,000 $ .16
Granted - - - -
Exercised - - - -
Canceled or lapsed (5,000) .22 - -
----------- ------------ ----------- ------
Outstanding at December 31, 1995 31,500 $ .16 - 1.00 100,000 $ .16
=========== ============ =========== ======
As of December 31, 1995:
Exercisable 31,500 $ .16 - 1.00 100,000 $ .16
Available for future grant 25,000 45,000
</TABLE>
<TABLE>
<CAPTION>
1992 PLAN
-----------------------------
NUMBER OPTION
OF PRICE
SHARES RANGE
----------- ------------
<S> <C> <C>
Outstanding at December 31, 1993 624,500 $ .48 - 1.47
Granted 925,000 .63 - 1.61
Exercised (7,500) .48
Canceled or lapsed (40,000) .86 - 1.47
----------- ------------
Outstanding at December 31, 1994 1,502,000 .48 - 1.61
Granted 1,160,000 .25 - .52
Exercised - -
Canceled or lapsed (145,000) .38 - 1.34
----------- ------------
Outstanding at December 31, 1995 2,517,000 $ .25 - 1.18
=========== ============
As of December 31, 1995:
Exercisable 949,500 $ .38 - 1.18
Available for future grant 955,917
</TABLE>
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.
F-9
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.
F-10
NOTE 8. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On December 31, 1994, the Company entered into an agreement to purchase
D.W. International, Ltd.'s ("DWI") 50% ownership interest in Beijing Antai
Communication Equipment Co., Ltd. ("ATC"), for a purchase price of $100. The
purchase transaction was completed effective May 30, 1995 upon receipt of
Chinese government approvals. ATC, located in Beijing, Peoples Republic of China
("PRC"), was formed in October 1992 as a Joint Venture Enterprise , and is also
owned 50% by Beijing Aquatic Product Inc., a registered company in the PRC. DWI
is a Delaware Corporation owned 50% by Mr. Da Wei Wu, who serves as General
Manager of ATC. ATC, previously a distributor for the Company in the PRC,
markets, assembles, manufactures, installs and services the Company's central
office, PBX and signaling interface products which have been developed for use
in the PRC. ATC also distributes and installs local telecommunications
transmission systems and home and business alarm systems, however their
historical operations prior to the Company's acquisition have been
insignificant.
Under Chinese laws governing equity joint ventures, the Company also made a
$390,000 capital contribution to ATC to complete the $500,000 original capital
contribution requirement of the foreign party to the joint venture. The
acquisition costs exceeded the underlying equity in the net assets of ATC by
approximately $190,000 which will be amortized on a pro rata basis over the
remaining 17 year term of the joint venture.
Summarized financial information on ATC for 1995 from the date of the
Company's acquisition is as follows ($000's):
Sales revenues $ 15
Gross profit 8
Net loss (41)
The following table shows the changes in the Company's investment in
unconsolidated subsidiary ($000's):
Investment at December 31, 1994 $ -
Capital contribution, including other direct
acquisition costs 399
Equity in unconsolidated subsidiary:
Deferred gross profit on sales to subsidiary (171)
Equity in net losses (20)
Amortization of excess of cost over equity
in net assets (6)
------
Investment at December 31, 1995 $201
======
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.
F-11
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.
F-12
NOTE 11. BUSINESS DEVELOPMENTS
On July 27, 1995, the Company entered into a Joint Venture Agreement ("JV
Agreement") with Asia-Pacific Services, Inc. of Atlanta, Georgia ("APSI") and
Beijing Taikang Telecommunications, Inc., owned and operated by the Planning and
Research Institute of the Ministry of Posts and Telecommunications, PRC
("Taikang"). The purpose of the joint venture ("JV") was to be the assembly and
marketing in the Chinese market and certain international markets of voice
processing equipment and software, including all of the Company's current voice
processing products. On July 27, 1995 the Company also entered into an agreement
("Interim Agreement") with these same parties for the provision of product
marketing and other business organization activities in advance of the startup
of the JV. For the year ended December 31, 1995, the Company incurred expenses
pursuant to these agreements of approximately $450,000, consisting of working
capital provided, project management consulting fees, travel costs and
demonstration products provided by the Company.
As a result of the Company's inability to fund the $1 million initial
capital contribution requested by Taikang, on November 1, 1995 the Company and
Taikang agreed to terminate both the JV Agreement and the Interim Agreement.
NOTE 12. SUBSEQUENT EVENTS
Effective February 29, 1996, the Company purchased from AT&T Systems
Leasing Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC") for a purchase price of $250,000.
Prior to its closing in January 1996, the ARC primarily operated to service AT&T
affiliates in the orderly disposition, by way of consignment sales arrangements,
of excess, overstocked and end-of-life telecommunications, computer and data
transmission equipment. The assets acquired consisted primarily of warehouse
equipment, vehicles, computer and office equipment, and inventory. The Company
concurrently formed a subsidiary corporation, Farmstead Asset Management
Services, LLC ("FAMS"), which will use the purchased assets to start up a
similar operation in Piscataway, New Jersey. The Company intends to attempt to
re-establish certain of the relationships that the ARC enjoyed, however, no
assurances can be given that it will be able to do so. The Company believes that
the operations of FAMS will provide it with an opportunity to develop new
sources of equipment for resale to its existing customers, as well as to other
wholesalers in the telephone, data and computer secondary markets, and
internationally.
F-13
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(In thousands, except number of shares) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 283 $ 622
Accounts receivable, less allowance for doubtful accounts 2,815 2,691
Inventories 2,348 1,946
Other current assets 598 139
-------- ---------
Total current assets 6,044 5,398
Property and equipment, net of accumulated depreciation
and amortization 449 256
Investment in unconsolidated subsidiary 189 201
Other assets 131 54
-------- ---------
Total assets $ 6,813 $ 5,909
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank Borrowings $ 1,862 $ 1,452
Accounts payable 1,219 1,053
Accrued expenses and other current liabilities 394 398
--------- ---------
Total current liabilities 3,475 2,903
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares authorized;
21,238,676 shares issued and outstanding 21 21
Additional paid-in capital 8,431 8,431
Accumulated deficit (5,114) (5,446)
--------- ---------
Total stockholders' equity 3,338 3,006
--------- ---------
Total liabilities and stockholders' equity $ 6,813 $ 5,909
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
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
========= =========
</TABLE>
- ---------------------------
* Less than one-half cent.
See accompanying notes to consolidated financial statements.
F-15
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.
F-16
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 sale
of one million Units, each Unit to consist of one share of Common Stock, one
Redeemable A Warrant and one Redeemable B Warrant (collectively the "Securities"
or the "Units").
F-17
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.
F-18
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Underwriter.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
________________
TABLE OF CONTENTS
Page
----
Prospectus Summary.........................................................
The Company................................................................
Risk Factors...............................................................
Use of Proceeds............................................................
Capitalization.............................................................
Price Range of Listed Securities
and Dividend Policy.....................................................
Selected Financial Data....................................................
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...............................................
Business...................................................................
Management ................................................................
Principal Stockholders.....................................................
Description of Securities..................................................
Underwriting...............................................................
Legal Matters..............................................................
Experts....................................................................
Additional Information.....................................................
Index to Financial Statements..............................................
________________
Until ____________, 1996 (25 days after the date of this Prospectus) all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
[LOGO]
FARMSTEAD
TELEPHONE GROUP,
INC.
1,000,000 UNITS
EACH UNIT CONSISTING
OF ONE SHARE OF
COMMON STOCK, ONE CLASS A
REDEEMABLE COMMON
STOCK PURCHASE
WARRANT AND ONE CLASS B
REDEEMABLE COMMON STOCK
PURCHASE WARRANT
________________
PROSPECTUS
________________
SCHNEIDER
SECURITIES, INC.
, 1996
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended, authorizes
the Registrant to indemnify any director or officer under certain prescribed
circumstances and subject to certain limitations against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which such person is a party by reason of
being a director or officer of the Registrant if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions, Article 9 of the Registrant's Certificate of
Incorporation contains provisions relating to the indemnification of directors
and officers, to the full extent permitted by Delaware law.
The Registrant may also purchase and maintain insurance for the benefit of
any director or officer which may cover claims for which the Registrant could
not indemnify such persons.
The Underwriting Agreement provides for indemnification by the Underwriter
of directors, officers, and controlling persons of the Company for certain
liabilities, including certain liabilities under the Securities Act of 1933
under certain circumstances.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the offering described in the Registration Statement (other than underwriting
discounts and commissions), all of which will be borne by the Registrant.
Securities and Exchange Commission Fee .................... $ 7,742
NASD Fee..................................................... 2,745
NASDAQ Fee ................................................... 7,500
Boston Stock Exchange Fee................................... 15,000
Accountants' Fees and Expenses .............................. 6,000
Legal Fees and Expenses .................................... 35,000
Blue Sky Qualification, Fees and Expenses................... 25,000
Printing and Engraving ..................................... 20,000
Miscellaneous ............................................... 2,388
--------
TOTAL .................................................... $121,375
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On April 18, 1994, the Company entered into agreements with Universal
Solutions, Inc. ("USI") and Pyramid Holdings, Inc. ("PHI"), both of which are
unaffiliated with the Company, pursuant to which each company subscribed for the
purchase of 500,000 shares
II-1
of the Company's Common Stock at a subscription price of $0.65 per share. By
further agreement dated as of May 20, 1994, the subscription agreements were
amended to fix the price per share at 57.8 percent of the average of the high
and low bid price of the Company's Common Stock as of the date the registration
of the purchased stock is declared effective by the Securities and Exchange
Commission, subject to a minimum price of $0.45 and a maximum price of $0.75 per
share. As of December 31, 1994, the Company had received an aggregate of
$375,000, and was holding the restricted shares in escrow, pending a
determination of the final subscription price and full payment thereof. On
February 3, 1995, the registration statement for these shares was declared
effective, and a $0.45 per share subscription price was determined, leaving a
balance due of $75,000. Subsequently, USI and PHI requested a reduction of their
outstanding balance in consideration of the length of the registration process
and the further deterioration of the Company's stock price. While the Company
believed that no reduction was contractually required, in March 1995 the Company
made a business decision to reduce the balance owed for the shares to $37,500,
which was subsequently paid. Included in stockholders' equity at December 31,
1994, is a subscription receivable balance of $37,500, representing the adjusted
remaining subscription price receivable.
On October 31, 1995 the Company entered into an agreement ("Financing
Agreement") with the Robert S. Dorfman Company, Inc. ("Dorfman") to provide
investment banking services for the Company. In connection therewith, Dorfman
was granted a warrant to purchase 20,000 shares of common stock at $.01 per
share. 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. This offering was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
II-2
ITEM 27. EXHIBITS
Registrant hereby incorporates by reference the following documents filed
as part of the S-18 Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B).
3(a) Certificate of Incorporation.
3(b) By-Laws.
4(a) Form of Unit Warrant.
4(b) Amended Form of Underwriter's Option.
4(c) 1986 Key Employees and Key Personnel Stock Option Plan.
4(d) 1987 Key Employees and Key Personnel Stock Option Plan.
10(i) Agreement between the Company and AT&T.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1988, on
Form 10-K:
10.5 Amendment to the 1986 Key Employees and Key Personnel Stock Option
plan previously filed as Exhibit No. 4(c) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc. declared
effective on April 3, 1987.
10.6 Amendment to the 1987 Key Employees and Key Personnel Stock Option
Plan previously filed as Exhibit No. 4(d) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc. declared
effective on April 13, 1987.
Registrant hereby incorporates by reference the following exhibits filed as
part of the S-3 Registration Statement of the Company's securities declared
effective on July 3, 1991 (File No. 33-41442):
4 Form of Private Placement Warrant
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1991, on
Form 10-K:
10.12 Certificate of Amendment of Certificate of Incorporation of Farmstead
Telephone Group, Inc. dated July 10, 1991.
II-3
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 exhibits filed
with the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992:
4(e) 1992 Stock Option Plan.
Registrant hereby incorporates by reference the following exhibits filed as
part of the Form S-8 Registration Statement filed May 13, 1993 (Registration No.
33-62574):
4.1 Consulting Agreement between Farmstead Telephone Group, Inc. and
Universal Solutions, Inc. dated as of March 30, 1993.
4.2 Consulting Agreement between Farmstead Telephone Group, Inc. and
Investors Resource Services, Inc. dated as of March 30, 1993.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 10-Q for the quarter ended September 30, 1993:
10.16 Revolving Credit and Security Agreement between Fleet Bank, N.A. and
Farmstead Telephone Group, Inc. dated August 27, 1993.
10.17 Revolving Credit Note dated August 27, 1993, in the principal amount
of $750,000.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 8-K dated February 9, 1994:
2.1 Asset Purchase Agreement dated January 24, 1994, by and between
Farmstead Telephone Group, Inc. and Cobotyx Corporation, Inc.
2.2 Promissory Note dated January 24, 1994, payable to Cobotyx
Corporation, Inc.
II-4
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-K for the year ended December 31,
1993:
10.20 Summary compensation arrangements for named executives.1
Registrant hereby incorporates by reference the following exhibits filed as
part of Amendment No. 1, dated March 28, 1994, to Form 8-K dated February 9,
1994:
2.3 Cobotyx Corporation, Inc. Financial Statements as of December 31,
1992 and 1991, Together With Auditors' Report.
2.4 Cobotyx Corporation, Inc. Financial Statements as of December 31,
1991, Together With Auditors' Report.
Registrant hereby incorporates by reference the following exhibits filed as
part of the Form SB-2 Registration Statement dated December 8, 1994
(Registration No. 33-87134):
10.1 Subscription Agreement between Farmstead Telephone Group, Inc. and
Universal Solutions, Inc., dated April 18, 1994 ("USI Agreement").
10.1.1 Amendment No. 1 to USI Agreement.
10.2 Subscription Agreement between Farmstead Telephone Group, Inc. and
Pyramid Holdings, Inc. dated April 18, 1994 ("PHI Agreement").
10.2.1 Amendment No. 1 to PHI Agreement.
10.3 Agreement between Farmstead Telephone Group, Inc. and HIA Ltd. dated
April 19, 1994. (Terminated)
Registrant hereby incorporates by reference to following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995:
10.1 Letter Agreement dated March 11, 1996 amending the Commercial
Revolving Loan and Security Agreement dated June 5, 1995 between
Farmstead Telephone Group, Inc. and Affiliated Business Credit
Corporation
10.4 Employment Contract for George J. Taylor, Jr.
21 Subsidiaries of Small Business Issuer.
- ------------
1 Confidential information is omitted and identified by a * and filed
separately with the SEC.
II-5
Registrant hereby incorporates by reference the following exhibits filed as
part of Amendment No. 1 to Form SB-2 Registration Statement dated January 21,
1995 (Registration No. 33-87134):
10.5 Consulting Agreements with Hansen Associates.
10.6 Agreement between Farmstead Telephone Group, Inc. and Taikang
Telecommunication Technology Company, dated November 15, 1994.
10.7 Stock Purchase Agreement between Farmstead Telephone Group, Inc. and
DW International Ltd., dated December 31, 1994.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1994:
10.1 Agreement dated March 8, 1995, by and among Farmstead Telephone
Group, Inc., Taikang Telecommunication Technology Company of
Planning and Research Institute of the Ministry of Posts and
Telecommunications, Comprehensive Service Development Center of
Great Hall of the People, and Asia-Pacific Services, Inc.
(Terminated)
10.2 Letter of Intent dated March 8, 1995, by and among Farmstead
Telephone Group, Inc., Taikang Telecommunication Technology Company
of Planning and Research Institute of the Ministry of Posts and
Telecommunications, Comprehensive Service Development Center of the
Great Hall of the People, and Asia-Pacific Services, Inc.
(Terminated)
10.3 Summary compensation arrangements for Named Executive.
Registrant hereby incorporates by reference the following exhibits filed as
part of Form 10-QSB for the quarter ended June 30, 1995:
10.1 Employment Agreement for Peter S. Buswell dated May 19, 1995.
(Terminated)
10.2 Commercial Revolving Loan and Security Credit Agreement dated June
5, 1995, between Farmstead Telephone Group, Inc. and Affiliated
Business Credit Corporation.
10.3 Contract for Beijing Antai Communication Equipment Corporation Ltd.,
dated September 23, 1992.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1995:
II-6
10.1 Letter Agreement dated March 11, 1996, amending the Commercial
Revolving Loan and Security Agreement dated June 5, 1995 between
Farmstead Telephone Group, Inc. and Affiliated Business Credit
Corporation.
11 Earnings per share calculation.
21 Subsidiaries of Small Business Issuer.
Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996:
11 Earnings per share calculation.
The following exhibits are filed herewith:
1.1 Form of Standby Underwriting Agreement.
1.2 Form of Selected Dealers Agreement.
3(a) Amendment of Certificate of Incorporation.*
4.1 Specimen Warrant Certificate.*
4.2 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant.
4.3 Form of Warrant Agreement (including Form of Warrant).*
5 Opinion re: legality.
10.1 Form of Underwriter's Consulting Agreement
23(a) Consent of Deloitte & Touche LLP.
23(b) Consent of Heller, Horowitz & Feit, P.C. (included in the Opinion
filed as Exhibit 5.1).
________________
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering
II-7
range may be reflected in form of prospectus filed with the
Commission pursuant to Rule 424(b)(ss. 230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred paid
by a director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
For determining any liability under the Securities Act, the small business
issuer will treat the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement or amendment to be signed on its behalf by the undersigned, in the
City of East Hartford and State of Connecticut on the 29th day of May, 1996.
FARMSTEAD TELEPHONE GROUP, INC.
By:/s/ George J. Taylor, Jr.
--------------------------------------
George J. Taylor, Jr., Chairman,
Chief Executive Officer and
President (Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement or amendment was signed by the following persons in the
capacities and on the dates stated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/George J. Taylor, Jr. Chairman, Chief Executive May 29, 1996
- ------------------------- -----------
George J. Taylor, Jr. Officer, and President
(Principal Executive Officer)
/s/Robert G. LaVigne Vice President-Finance May 29, 1996
- ------------------------- -----------
Robert G. LaVigne Secretary and Director
(Principal Financial
and Accounting Officer)
/s/Harold L. Hansen Director May 29, 1996
- ------------------------- -----------
Harold L. Hansen
/s/Hugh M. Taylor Director May 29, 1996
- ------------------------- -----------
Hugh M. Taylor
/s/Joseph J. Kelley Director May 29, 1996
- ------------------------- -----------
Joseph J. Kelley
II-9
FARMSTEAD TELEPHONE GROUP, INC.
1,000,000 UNITS
EACH UNIT
CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE CLASS A REDEEMABLE WARRANT
ONE CLASS B REDEEMABLE WARRANT
STANDBY UNDERWRITING AGREEMENT
, 1996
SCHNEIDER SECURITIES, INC.
104 Broadway
Denver, CO 80203
DEAR SIRS:
Farmstead Telephone Group, Inc. (the "Company") a Delaware corporation,
proposes to grant to its shareholders of record, rights to purchase up to one
million units each unit consisting of one share of common stock, one class A
redeemable warrant and one class B redeemable warrant (the "Rights Offering ")
and to issue and to sell to Schneider Securities, Inc. (the "Underwriter") any
and all units not sold during the Rights Offering (the "Units") from the Company
and to resell the Units to the public. This standby underwriting agreement
describes the arrangements between the Company and the Underwriter with respect
to the purchase by the Underwriter of the Units. The Company hereby confirms the
agreement made by it with respect to the purchase of the Securities by the
Underwriter, which Securities are more fully described in the Registration
Statement referred to below.
You have advised the Company that the Underwriter desires to act on a
standby firm commitment basis to publicly offer and sell the Securities for the
Company and that you are authorized to execute this Agreement. The Company
confirms the agreement made by it with respect to the relationship with the
Underwriters as follows:
1. Filing of Registration Statement with S.E.C. and Definitions. A
Registration Statement and Prospectus on Form SB-2 (File No. ) with respect to
the Securities has been carefully and accurately prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the published rules and regulations (the "Rules and Regulations")
thereunder or under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and has been filed with the Securities and Exchange Commission
(the "Commission") and such other states that the Underwriter deems necessary in
its discretion to so file to permit a public offering and trading thereunder.
Such registration statement, including the prospectus, Part II, and all
financial schedules and exhibits thereto, as amended at the time when it shall
become effective, is herein referred to as the "Registration Statement," and the
prospectus included as part of the Registration Statement on file with the
Commission that discloses all the information that was omitted from the
prospectus on the effective date pursuant to Rule 430 A of the Rules and
Regulations with any changes contained in any prospectus filed with the
Commission by the Company with the Underwriter's consent after the effective
date of the Registration Statement, is herein referred to as the "Final
Prospectus." The prospectus included as part of the Registration Statement of
the Company and in any amendments thereto prior to the effective date of the
Registration Statement is referred to herein as a "Preliminary Prospectus."
2. Discount, Delivery, and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement, and on the basis
of the representations, warranties, and agreements herein contained, the Company
agrees to sell to, and the Underwriter agree to buy from the Company at a
purchase price of $ per Unit before any underwriter expense allowance, all the
Units agreed to be purchased upon tender to the Underwriter of all Units in
accordance with the terms of this Agreement. Each Unit will consist of one share
of Common Stock, and one Class A Reedamable Warrant and one Class B Redeemable
Warrant and will be purchased on a firm commitment basis.
It is understood that the Underwriter propose to offer the Securities to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
Subject to market and other conditions at the time of the offering, the
Underwriter anticipates that the public offering price of the units (the "Unit
Price" or the "Public Offering Price") will be equal to the average closing bid
price over the preceding 10-day period (as adjusted for the one for ten reverse
stock split) for the company's common stock as shown on the NASDAQ Small Cap
Market on the effective date of the Registration Statement of the Offering
defined herein. The Units not previously exercised by the Shareholders through
the Rights Offering will be purchased by the Underwriter at a discount purchase
price per Unit of 10% of the Unit price as described above; in addition the
Company shall pay the Underwriter a non-accountable expense allowance equal to
3% of the Unit offering price.
The Rights Offering will remain open until five o'clock (5:00 PM) on the
business day that is, or is next succeeding, the date which is thirty (30) days
after the effective date of the Company's registration with the Securities and
Exchange Commission relating to the Rights Offering (the "Expiration Date") at
which time the Rights Offering will end. The rights will not be transferable.
After the Rights Offering the Underwriter proposes to make a public offering of
the Units at the price to the public set forth in the Prospectus. Such selected
dealers will be authorized to reallow discounts upon sales to other dealers as
set forth in the prospectus. The price to the public, the discount to selected
dealers and the maximum reallowance to other dealers may be changed by the
Underwriter from time to time after the public offering.
In the event that the Company receives proceeds from the subscriptions by
its shareholders in the Rights Offering in an amount of Two Million Five Hundred
Thousand Dollars ($2,500,000) or greater, the Underwriter shall be entitled to a
structuring fee of One Hundred Thirty-Thousand ($130,000) and in the event that
the company receives proceeds from the subscriptions by its shareholders in the
Rights Offering in an amount equal to or greater than Two Million Dollars
($2,000,000) but less than Two Million Five Hundred Thousand Dollars
($2,500,00), the Underwriter shall be entitled to a structuring fee of One
Hundred Ten Thousand Dollars ($110,000) and in the event that the Company
receives proceeds from the subscriptions by its shareholders in the Rights
Offering in an amount equal to One Million Five Hundred Thousand ($1,500,000)
but less than Two Million Dollars ($2,000,000) the Underwriter shall be entitled
to a structuring fee of eighty-five thousand dollars ($85,000) and in the event
that the proceeds received by the Company from the subscriptions by its
shareholders in the Rights Offering in an amount equal to or less than One
Million Dollars ($1,000,000), the Underwriter shall be entitled to a structuring
fee of Fifty-five Thousand Dollars ($55,000).
(b) Delivery of the Securities against payment therefor shall take
place at the offices of the clearing broker for the Underwriter at New York
City, within five (5) business days after the effective date (or such other
place as may be designated by agreement between you and the Company) at 11:00
A.M., New York time or such time and date as you and the Company may agree upon
in writing, such time and date of payment and delivery for the Securities being
herein called the "Initial Closing Date."
2
The Company will make the certificates for the Units representing the shares
of Common Stock and Redeemable Warrants to be purchased by the Underwriter
hereunder available to the Underwriter for inspection and packaging at least one
(1) full business days prior to the Initial Closing Date. The certificates shall
be in such names and denominations as the Underwriter may request to the Company
in writing at least two (2) full business days prior to any Closing Date.
(c) In addition, subject to the terms and conditions of this Agreement and
on the basis of the representations, warranties and agreements herein contained,
the Company grants an option to the Underwriter to purchase up to an additional
150,000 Units ("Option Securities") at the same terms per Unit as the
Underwriters shall pay for the initial securities being sold by the Company
pursuant to the provisions of Section 2(a) hereof. This option may be exercised
from time to time, for the purpose of covering overallotments, within forty-five
(45) days after (i) the effective date of the Registration Statement if the
Company has elected not to rely on Rule 430A under the Rules and Regulations or
(ii) the date of this Agreement if the Company has elected to rely upon Rule
430A under the Rules and Regulations, upon written notice by the Underwriter
setting forth the number of Option Securities as to which the Underwriter is
exercising the option and the time and date at which such certificates are to be
delivered. Such time and date shall be determined by the Underwriter but shall
not be earlier than four (4) nor later than ten (10) full business days after
the date of the exercise of said option. Nothing herein shall obligate the
Underwriter to make any overallotment.
(d) Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriter hereunder will be delivered at the closing by the
Company to the Underwriters against payment of the purchase price by the
Underwriters by certified or bank cashier's checks or wire transfer in next day
funds payable to the order of the Company.
(e) The information set forth under "Underwriting" in any Prospectus
relating to the Securities proposed to be filed by the Company with the
Commission (states designated by the Underwriter (insofar as such information
relates to the Underwriters)) constitutes the only information furnished by the
Underwriter to the Company for inclusion therein, and you represent and warrant
to the Company that the statements made therein are correct.
(f) On the Initial Closing Date, the Company shall issue and sell to the
Underwriter, warrants (the "Underwriter's Warrants") at a purchase price of
$.001 per Underwriter's Warrant, which shall entitle the holders thereof to
purchase that the number of Units of the Company which equals ten percent (10%)
of the total number of Units purchased by the Underwriter under this Agreement
and sold to the public exclusive of the Over-allotment Units or one hundred
thousand Units, whichever is greater. The shares of Common Stock and Redeemable
Warrants issuable upon the exercise of the Underwriter's Warrants are hereafter
referred to as the "Underwriter's Securities" or "Underwriter's Warrant." The
shares of Common Stock issuable upon exercise of the Redeemable Warrants are
hereinafter referred to collectively as the "Warrant Shares". The Underwriter's
Warrants shall be exercisable for a period of four (4) years commencing one (1)
year from the effective date of the Registration Statement at a price equaling
one hundred forty percent (140%) of the initial public offering price of the
Units. The form and terms of the Underwriter's Warrant Certificate shall be
substantially in the form filed as an Exhibit to the Registration Statement.
Payment for the Underwriter's Warrants shall be made on the Initial Closing
Date.
3. Representations and Warranties of the Company.
(a) The Company represents and warrants to you as follows:
(i) The Company has prepared and filed with the Commission a registration
statement, and an amendment or amendments thereto, on Form SB-2 (No. ),
including any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the Securities, the Underwriter's Securities and the Warrant
Shares (sometimes referred to herein collectively as the "Registered
Securities"), under the Act, which registration statement and amendment or
amendments have been prepared by the Company in conformity with the requirements
of the Act, and the Rules and Regulations. The Company will promptly file a
further amendment to said registration statement in the form heretofore
delivered to the Underwriter and will not file any other amendment thereto to
which the
3
Underwriter shall have objected verbally or in writing after having been
furnished with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, schedules, exhibits and all other documents filed as a part thereof
or incorporated therein (including, but not limited to those documents or
information incorporated by reference therein) and all information deemed to be
a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the
Rules and Regulations), is hereinafter called the "Registration Statement," and
the form of prospectus in the form first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations, is hereinafter called the
"Prospectus."
(ii) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Prospectus or the Registration
Statement or any part of any thereof and no proceeding for an order suspending
the effectiveness of the Registration Statement or any of the Company's
securities has been instituted or is pending or threatened. Each such Prospectus
and/or any supplement thereto has conformed in all material respects with the
requirements of the Act and the Rules and Regulations and on its date did not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, in light of the
circumstances under which they were made; and when the Prospectus becomes
legally effective and for twenty-five (25) days subsequent thereto (i) the
Prospectus and/or any supplement thereto will contain all statements which are
required to be stated therein by the Act and Rules and Regulations, and (ii) the
Prospectus and/or any supplement thereto will not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, in light of
the circumstances under which they were made; provided, however, that no
representations, warranties or agreements are made hereunder as to information
contained in or omitted from the Prospectus in reliance upon, and in conformity
with, the written information furnished to the Company by you as set forth in
Section 2(e) above.
(iii)The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its state of incorporation, with
full power and authority (corporate and other) to own its properties and conduct
its businesses as described in the Prospectus and is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions in
which the nature of its business or the character or location of its properties
requires such qualification, except where the failure to so qualify would not
have a material adverse effect on the business, properties or operations of the
Company and the subsidiaries as a whole.
(iv) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, the Option Securities and the
Underwriter's Securities and to enter into this Agreement, the Underwriter's
Warrant dated as of the initial closing date to be exercised and delivered by
the Company to the Underwriter (the "Underwriter's Warrant Agreement"), and the
financial advisory and investment banking agreement dated as of the Initial
Closing Date between the Company and the Underwriter (the "Consulting
Agreement"), and to consummate the transactions provided for in such agreements,
and each of such agreements has been duly and properly authorized, and on the
Initial Closing Date will be duly and properly executed and delivered by the
Company. This Agreement constitutes and on the Initial Closing Date each of the
Underwriter's Warrant Agreement and the Consulting Agreement will then
constitute valid and binding agreements, enforceable in accordance with their
respective terms (except as the enforceability thereof may be limited by
bankruptcy or other similar laws affecting the rights of creditors generally or
by general equitable principles and except as the enforcement of indemnification
provisions may be limited by federal or state securities laws).
(v) Except as disclosed in the Prospectus, the Company is not in violation of
its respective certificate or articles of incorporation or bylaws or in default
in the performance or observance of any material obligation, agreement, covenant
or condition contained in any material bond, debenture, note or other evidence
of indebtedness or in any material contract, indenture, mortgage, loan
agreement, lease, joint venture, partnership or other agreement or instrument to
which the Company is a party or by which it may be bound or is not in material
violation of any law, order, rule, regulation, writ, injunction or decree of any
governmental instrumentality or court, domestic or foreign; and the execution
and delivery of this Agreement, the Representative's Warrant Agreement and the
Consulting Agreement, and the consummation of the transactions contemplated
therein and in the Prospectus and compliance with the terms of each such
agreement will not conflict with, or result in a material breach of any of the
terms,
4
conditions or provisions of, or constitute a material default under, or result
in the imposition of any material lien, charge or encumbrance upon any of the
property or assets of the Company pursuant to, any material bond, debenture,
note or other evidence of indebtedness or any material contract, indenture,
mortgage, loan agreement, lease, joint venture, partnership or other agreement
or instrument to which the Company is a party nor will such action result in the
material violation by the Company of any of the provisions of its respective
certificate or articles of incorporation or bylaws or any law, order, rule,
regulation, writ, injunction, decree of any government, governmental
instrumentality or court, domestic or foreign, except where such violation will
not have a material adverse effect on the financial condition of the Company.
(vi) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Prospectus and the Company will have the adjusted
capitalization set forth therein on the Initial Closing Date; all of the shares
of issued and outstanding capital stock of the Company set forth therein have
been duly authorized, validly issued and are fully paid and nonassessable; the
holders thereof do not have any rights of rescission with respect therefor and
are not subject to personal liability for any obligations of the Company by
reason of being stockholders under the laws of the State in which the Company is
incorporated; none of such outstanding capital stock is subject to or was issued
in violation of any preemptive or similar rights of any stockholder of the
Company; and such capital stock (including the Securities, the Option Securities
and the Representative's Securities) conforms to all statements relating thereto
contained in the Prospectus.
(vii)The Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights, warrants,
options or other securities, except for this Agreement or as described in the
Prospectus. The Securities, the Option Securities and the Underwriter's
Securities are not and will not be subject to any preemptive or other similar
rights of any stockholder, have been duly authorized and, when issued, paid for
and delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and will conform to the description thereof contained in
the Prospectus; the holders thereof will not be subject to any liability solely
as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities, the Option Securities and the
Underwriter's Securities has been duly and validly taken; and the certificates
representing the Securities, the Option Securities and the Underwriter's
Securities will be in due and proper form. Upon the issuance and delivery
pursuant to the terms hereof of the Securities, the Option Securities and the
Underwriter's Securities to be sold by the Company hereunder, the Underwriter
will acquire good and marketable title to such Securities, Option Securities and
Underwriter's Securities free and clear of any lien, charge, claim, encumbrance,
pledge, security interest, defect or other restriction of any kind whatsoever
other than restrictions as may be imposed under the securities laws.
(viii) The Company has good and defensible title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are described or referred
to in the Prospectus or which are not materially significant or important in
relation to its business or which have been incurred in the ordinary course of
business; except as described in the Prospectus all of the leases and subleases
under which the Company holds properties or assets as lessee or sublessee as
described in the Prospectus are in full force and effect, and the Company is not
in material default in respect of any of the terms or provisions of any of such
leases or subleases, and no claim has been asserted by anyone adverse to the
Company's rights as lessor, sublessor, lessee or sublessee under any of the
leases or subleases mentioned above or affecting or questioning the Company's
right to the continued possession of the leased or subleased premises or assets
under any such lease or sublease; and the Company owns or leases all such
properties as are necessary to its operations as now conducted and as
contemplated to be conducted, except as otherwise stated in the Prospectus.
(ix) The financial statements, together with related notes, set forth in the
Prospectus fairly present the financial position and results of operations of
the Company at the respective dates and for the respective periods to which they
apply. Said statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
in all material respects during the periods involved but any stub period has not
been audited by an independent accounting firm. There has been no adverse change
or development involving a prospective change in the condition, financial or
otherwise,. or in the prospects, value, operation, properties, business or
results of operations of the Company whether or not arising in the ordinary
course of business, since the date of the financial statements included in the
Registration Statement and the Prospectus.
5
Subsequent to the respective dates as of which information is given in
the Prospectus as it may be amended or supplemented, and except as described in
the Prospectus, the Company has not, directly or indirectly, incurred any
liabilities or obligations, direct or contingent, not in the ordinary course of
business or entered into any transactions not in the ordinary course of
business, which are material to the business of the Company as a whole and there
has not been any change in the capital stock of, or any incurrence of long term
debts by, the Company or any issuance of options, warrants or rights to purchase
the capital stock of the Company or declaration or payment of any dividend on
the capital stock of the Company or any material adverse change in the condition
(financial or other), net worth or results of operations of the Company as a
whole and the Company has not become a party to, any material litigation whether
or not in the ordinary course of business.
There is no pending or threatened, action, suit or proceeding to
which the Company is a party before or by any court or governmental agency or
body, which might result in any material adverse change in the condition
(financial or other), business or prospects of the Company as a whole or might
materially and adversely affect the properties or assets of the Company as a
whole nor are there any actions, suits or proceedings against the Company
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disturbance by the employees of the
Company individually exists or is, to the knowledge of the Company, imminent
which might be expected to materially and adversely affect the conduct of the
business, property, operations, financial condition or earnings of the Company
as a whole.
(xii) Except as may be disclosed in the Prospectus, the Company has
properly prepared and filed all necessary federal, state, local and foreign
income and franchise tax returns, has paid all taxes shown as due thereon, has
established adequate reserves for such taxes which are not yet due and payable,
and does not have any tax deficiency or claims outstanding, proposed or assessed
against it.
(xiii) The Company has sufficient licenses, permits, right to use trade or
service marks and other governmental authorizations currently required for the
conduct of its business as now being conducted and as contemplated to be
conducted and the Company is in all material respects complying therewith.
Except as set forth in the Prospectus, the expiration of any such licenses,
permits, or other governmental authorizations would not materially affect the
Company's operations. To its knowledge, none of the activities or businesses of
the Company are in material violation of, or cause the Company to materially
violate any law, rule, regulations, or order of the United States, any state,
county or locality, or of any agency or body of the United States or of any
state, county or locality.
(xiv)The Company has not at any time (i) made any contributions to any
candidate for political office in violation of law, or failed to disclose fully
any such contribution, or (ii) made any payment to any state, federal or foreign
governmental officer or official, or other person charged with similar public or
quasipublic duties, other than payments required or allowed by applicable law.
(xv) On each closing date, all transfer or other taxes (other than income
taxes) which may be required to be paid in connection with the sale and issuance
of the Securities, the Option Securities and the Underwriter's Securities will
have been fully paid or provided for by the Company and all laws imposing such
taxes will have been fully complied with.
(xvi)Except as set forth in the Prospectus the Company knows of no
outstanding claims for services either in the nature of a finder's fee,
brokerage fee or otherwise with respect to this financing for which the Company
or the Underwriters may be responsible, or which may affect the Underwriter's
compensation as determined by the National Association of Securities Dealers,
Inc. ("NASD") except as otherwise disclosed in the Prospectus or known by the
Underwriters.
(xvii) The Company has its property adequately insured against loss or
damage by fire and maintains such other insurance as is customarily maintained
by companies in the same or similar business.
The Underwriter's Warrants herein described are duly and validly
authorized and upon delivery to the Representative in accordance herewith will
be duly issued and legal, valid and binding obligations of the Company,
6
except as the enforceability thereof may be limited by bankruptcy or other
similar laws affecting the rights of creditors generally or by equitable
principles, and except as the enforcement of indemnification provisions may be
limited by federal or state securities laws.
(xix)The Underwriter's Securities issuable upon exercise of any of the
Underwriter's Warrants have been duly authorized, and when issued upon payment
of the exercise price therefor, will be validly issued, fully paid and
nonassessable.
(xx) Except as set forth in the Prospectus, no default exists in the due
performance and observance of any term, covenant or condition of any license,
contract, indenture, mortgage, installment sale agreement, lease, deed of trust,
voting trust agreement, stockholders agreement, note, loan or credit agreement,
purchase order, or any other agreement or instrument evidencing an obligation
for borrowed money, or any other material agreement or instrument to which the
Company is a party or by which the Company may be bound or to which the property
or assets (tangible or intangible) of the Company is subject or affected.
(xxi) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and, to the best of its knowledge, is in
substantial compliance in all material respects with all federal, state, local,
and foreign laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours. There are no pending
investigations involving the Company, by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company, or any predecessor
entity, and none has ever occurred. No representation question exists respecting
the employees of the Company, and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company. No grievance
or arbitration proceeding is pending or threatened under any expired or existing
collective bargaining agreements of the Company. No labor dispute with the
employees of the Company exists, or, is imminent; and the Company is not aware
of any existing or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors which may result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs, position, prospects, value, operation, properties,
business or results of operations of the Company.
(xxii) Except as may be set forth in the Registration Statement, the
Company does not maintain, sponsor or contribute to any program or arrangement
that is an "employee pension benefit plan," an "employee welfare benefit plan,"
or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(l) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute,
now or at any time previously, to a defined benefit plan, as defined in Section
3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or Section
4975 of the Internal Revenue Code (the "Code"), which could subject the Company
to any tax penalty on prohibited transactions and which has not adequately been
corrected. Each ERISA Plan is in compliance with all material reporting,
disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401 (a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multiemployer plan."
(xxiii) None of the Company, or any of its employees, directors,
stockholders, or affiliates (within the meaning of the Rules and Regulations)
has taken or will take, directly or indirectly, any action designed to or which
has constituted or which might be expected to cause or result in, under the
Exchange Act, or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities,
Option Securities, Underwriter's Securities or otherwise.
(xxiv) None of the patents, patent applications, trademarks, service marks,
trade names, copyrights, and licenses and rights to the foregoing presently
owned or held by the Company, are in dispute or, to the best knowledge of the
Company's management are in any conflict with the right of any other person or
entity. The Company (i)
7
except as disclosed in the Prospectus owns or has the right to use, free and
clear of all liens, charges, claims, encumbrances, pledges, security interests,
defects or other restrictions or equities of any kind whatsoever, all patents,
trademarks, service marks, trade names and copyrights, technology and licenses
and rights with respect to the foregoing, used in the conduct of its business as
now conducted or proposed to be conducted without infringing upon or otherwise
acting adversely to the right or claimed right of any person, corporation or
other entity under or with respect to any of the foregoing, and (H) except as
set forth in the Prospectus or otherwise disclosed to the Underwriter in
writing, to the best knowledge of the Company's management is not obligated or
under any liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, trade name, copyright, know-how, technology or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise.
(xxv) Except as disclosed in the Prospectus the Company owns and has the
unrestricted right to use to the best knowledge of the Company's management all
trade secrets, know-how (including all other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), inventions,
designs, processes, works of authorship, computer programs and technical data
and information (collectively herein "intellectual property") required for or
incident to the development, manufacture, operation and sale of all products and
services sold or proposed to be sold by the Company, free and clear of and
without violating any right, lien, or claim of others, including without
limitation, former employers of its employees; provided, however, that the
possibility exists that other persons or entities, completely independently of
the Company or its employees or agents, could have developed trade secrets or
items of technical information similar or identical to those of the Company. The
Company is not aware of any such development of similar or identical trade
secrets or technical information by others. The Company has valid and binding
confidentiality agreements with all of its officers, directors, employees and
consultants covering its intellectual property (subject to the equitable powers
of any court), which agreements have remaining terms of at least two years from
the effective date of the Registration Statement except where the failure to
have such agreements would not materially and adversely effect the Company's
business taken as a whole. The Company has good and marketable title to, or
valid and enforceable leasehold estates in, all items of real and personal
property stated in the Prospectus, to be owned or leased by it free and clear of
all liens, charges, claims, encumbrances, pledges, security interests, defects,
or other restrictions or equities of any kind whatsoever, other than those
referred to in the Prospectus and liens for taxes not yet due and payable.
(xxvi) whose reports are filed with the Commission as a part of the
Registration Statement, are independent certified public accountants as required
by the Act and the Rules and Regulations.
(xxvii) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which the Company and to which each of the
Company's officers and directors and any person or entity deemed to be an
affiliate of the Company pursuant to the Rules and Regulations has agreed not
to, directly or indirectly, sell, assign, transfer, or otherwise dispose of any
shares of common stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any shares
of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or
otherwise) for a period of not less than 13 months following such effective date
without the prior written consent of the Underwriter and such approval if
granted, then to be extended on a pro-rata basis to all other restricted
shareholders. The Company will cause the Transfer Agent, as defined below, to
mark an appropriate legend on the face of stock certificates representing all of
such securities and to place "stop transfer" orders on the Company's stock
ledgers. The foregoing is inapplicable to acquisitons by the Company or the
issuance of common stock pursuant to warrants and options outstanding
immediately prior to the closing.
(xxviii) The Registered Securities have been approved for listing on
NASDAQ or an Exchange.
(xxix) Except as set forth in the Prospectus or disclosed in writing to the
Underwriter (which writing specifically refers to this Section), no officer or
director of the Company, holder of 5% or more of securities of the Company or
any "affiliate" or "associate" (as these terms are defined in Rule 405
promulgated under the Rules and Regulations) of any of the foregoing persons or
entities has or has had, either directly or indirectly, (i) an interest in
8
any person or entity which (A) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company any goods or services, or
(ii) a beneficiary interest in any contract or agreement to which the Company is
a party or by which it may be bound or affected. Except as set forth in the
Prospectus under "Certain Transactions" or disclosed in writing to the
Underwriter (which writing specifically refers to this Section) there are no
existing agreements, arrangements, understandings or transactions, or proposed
agreements, arrangements, understandings or transactions, between or among the
Company, and any officer, director, principal stockholder of the Company, or any
partner, affiliate or associate of any of the foregoing persons or entities.
(xxx)Any certificate signed by any officer of the Company, and delivered to
the Underwriter or to the Underwriter's counsel (as defined herein) shall be
deemed a representation and warranty by the Company to the Underwriter as to the
matters covered thereby.
(xxxi) Each of the minute books of the Company has been made available to
the Underwriter and contains a complete summary of all meetings and actions of
the directors and stockholders of the Company, since the time of its
incorporation and reflect all transactions referred to in such minutes
accurately in all respects.
(xxxii) As of the Initial Closing Date, the Company will enter into the
Consulting Agreement substantially in the form filed as an Exhibit to the
Registration Statement with respect to the furnishing of consulting services by
the Underwriter to the Company.
(xxxiii) Except and only to the extent described in the Prospectus or
disclosed in writing to the Underwriter (which writing specifically refers to
this Section), no holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company have the
right to include any securities issued by the Company in the Registration
Statement or any registration statement to be filed by the Company or to require
the Company to file a registration statement under the Act and no person or
entity holds any anti-dilution rights with respect to any securities of the
Company. Except as disclosed in the Prospectus, all rights so described or
disclosed have been waived or have not been triggered with respect to the
transactions contemplated by this Agreement, the Consulting Agreement and the
Representative's Warrant Agreement (including the warrants issuable thereunder).
(xxxiv) The Company has not entered into any employment agreements with
members of management, except as disclosed in the Prospectus.
(xxxv) No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Registered Securities pursuant to
the Prospectus and the Registration Statement, the issuance of the Underwriter's
Warrants, the performance of this Agreement, the underwriter's Warrant Agreement
and the Consulting Agreement, and the transactions contemplated hereby and
thereby, including without limitation, any waiver of any preemptive, first
refusal or other rights that any entity or person may have for the issue and/or
sale of any of the Securities, the Option Securities and the Underwriter's
Securities, except such as have been or may be obtained under the Act or
otherwise or may be required under state securities or blue sky laws in
connection with the Underwriter's purchase and distribution of the Securities,
the Option Securities, the Underwriter's Securities and the Underwriter's
Warrants to be sold by the Company hereunder.
(xxxvi) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it may be
bound or to which its assets, properties or businesses may be subject have been
duly and validly authorized, executed and delivered by the Company and
constitute the legal, valid and binding agreements of the Company, enforceable
against the Company, in accordance with their respective terms. The descriptions
in the Registration Statement of agreements, contracts and other documents are
accurate and fairly present the information required to be shown with respect
thereto by Form SB-2, and there are no contracts or other documents which are
required by the Act to be described in the Registration Statement or filed as
exhibits to the Registration Statement which are not
9
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(xxxvii) Within the past two (2) years, none of the Company's independent
public accountants has brought to the attention of the Company's management any
"material weakness" as defined in the Statement of Auditing Standard No. 60 in
any of the Company's internal controls.
4. Covenants of the Company. The Company covenants and agrees with you that:
(a) It will cooperate in all respects in making the Prospectus effective and
will not at any time, whether before or after the effective date, file any
amendment to or supplement to the Prospectus of which you shall not previously
have been advised and furnished with a copy or to which you or your counsel
shall have reasonably objected or which is not in compliance with the Act and
the Rules and Regulations or applicable state law.
As soon as the Company is advised thereof, the Company will advise you, and
confirm the advice in writing, of the receipt of any comments of the Commission
or any state securities department, when the Registration Statement becomes
effective if the provisions of Rule 430A promulgated under the Act will be
relied upon, when the Prospectus has been filed in accordance with said Rule
430A, of the effectiveness of any posteffective amendment to the Registration
Statement or Prospectus, or the filing of any supplement to the Prospectus or
any amended Prospectus, of any request made by the Commission or any state
securities department for amendment of the Prospectus or for supplementing of
the Prospectus or for additional information with respect thereto, of the
issuance of any stop order suspending the effectiveness of the Prospectus or any
order preventing or suspending the use of any Prospectus or any order suspending
trading in the Common Stock of the Company, or of the suspension of the
qualification of the Securities, the Option Securities or the Underwriter's
Securities for offering in any jurisdiction, or of the institution of any
proceedings for any such purposes, and will use its best efforts to prevent the
issuance of any such order and, if issued, to obtain as soon as possible the
lifting or dismissal thereof.
The Company has caused to be delivered to you copies of such Prospectus, and the
Company has consented and hereby consents to the use of such copies for the
purposes permitted by law. The Company authorizes you and the dealers to use the
Prospectus and such copies of the Prospectus in connection with the sale of the
Securities, the Option Securities and the Underwriter's Securities for such
period as in the opinion of your counsel and our counsel the use thereof is
required to comply with the applicable provisions of the Act and the Rules and
Regulations. The Company will prepare and file with the states, promptly upon
your request, any such amendments or supplements to the Prospectus, and take any
other action, as, in the opinion of your counsel, may be necessary or advisable
in connection with the initial sale of the Securities, the Option Securities and
the Underwriter's Securities and will use its best efforts to cause the same to
become effective as promptly as possible.
The Company shall file the Prospectus (in form and substance satisfactory to
the Underwriter) or transmit the Prospectus by a means reasonably calculated to
result in filing with the Commission pursuant to rule 424(b)(1) or pursuant to
Rule 424(b)(3) not later than the Commission's close of business on the earlier
of (i) the second business day following the execution and delivery of this
Agreement, and (ii) the fifth business day after the effective date of the
Registration Statement.
In case of the happening, at any time within such period as a Prospectus is
required under the Act to be delivered in connection with the initial sale of
the Securities, the Option Securities and the Underwriter's Securities, of any
event of which the Company has knowledge and which materially affects the
Company, or the securities thereof, and which should be set forth in an
amendment of or a supplement to the Prospectus in order to make the statements
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is required under the Act to be delivered, or in case it shall be
necessary to amend or supplement the Prospectus to comply with the Act, the
Rules and Regulations or any other law, the Company will forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
10
therein not misleading in light of the circumstances under which they are made.
The preparation and furnishing of any such amendment or supplement to the
Prospectus or supplement to be attached to the Prospectus shall be without
expense to you.
The Company will to the best of its ability comply with the Act, the
Exchange Act and applicable state securities laws so as to permit the initial
offer and sales of the Securities, the Option Securities and the Underwriter's
Securities under the Act, the Rules and Regulations, and applicable state
securities laws.
(b) It will cooperate to qualify the Securities, the Option Securities and
the Underwriter's Securities for initial sale under the securities laws of such
jurisdictions as you may designate and will make such applications and furnish
such information as may be required for that purpose, provided the Company shall
not be required to qualify as a foreign corporation or a dealer in securities.
The Company will, from time to time, prepare and file such statements and
reports as are or may be required to continue such qualification in effect for
so long as the Underwriter may reasonably request.
(c) So long as any of the Securities, the Option Securities or the
Underwriter's Securities remain outstanding in the hands of the public, the
Company, at its expense, will annually furnish to its stockholders a report of
its operations to include financial statements audited by independent public
accountants, and will furnish to the Underwriter as soon as practicable after
the end of each fiscal year, a balance sheet of the Company as at the end of
such fiscal year, together with statements of operations, stockholders' equity,
and changes in cash flow of the Company for such fiscal year, all in reasonable
detail and accompanied by a copy of the certificate or report thereon of
independent public accountants.
(d) It will deliver to you at or before the Initial Closing Date two signed
copies of the Registration Statement including all financial statements and
exhibits filed therewith, whether or not incorporated by reference. The Company
will deliver to you, from time to time until the effective date of the
Prospectus, as many copies of the Pre-Effective Prospectus as you may reasonably
request. The Company will deliver to you on the effective date of the Prospectus
and thereafter for so long as a Prospectus is required to be delivered under the
Act and the Rules and Regulations as many copies of the Prospectus, in final
form, or as thereafter amended or supplemented, as you may from time to time
reasonably request.
(e) The Company will apply the net proceeds from the sale of the Securities
and the Option Securities substantially in the manner set forth under "Use of
Proceeds" in the Prospectus. No portion of the proceeds shall be used, directly
or indirectly, to acquire any securities issued by the Company, without the
prior written consent of the Underwriter.
(f) As soon as it is practicable, but in any event not later than the first
(lst) day of the fifteenth (15th) full calendar month following the effective
date of the Registration Statement, the Company will make available to its
security holders and the Underwriter an earnings statement (which need not be
audited) covering a period of at least twelve (12) consecutive months beginning
after the effective date of the Registration Statement, which shall satisfy the
requirements of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations.
(g) As reimbursement for the Underwriter's nonaccountable expenses relating
to the transactions contemplated hereby, the Company shall pay to the
Underwriter at each closing date, and to be deducted from the purchase price for
the Securities and the Option Securities, an amount equal to three percent (3%)
of the gross proceeds received by the Company from the sale of the Securities
and the Option Securities at such closing date less in the case of the Initial
Closing Date, the sum of $50,000 previously paid by the Company.
If the sale of the Securities by the Underwriter is not consummated for any
reason not attributable to the Underwriter, or if (i) the Company withdraws the
Registration Statement from the Commission or does not proceed with the public
offering, or (ii) the representations in Section 3 hereof are not correct or the
covenants cannot be complied with, or (iii) there has been a materially adverse
change in the condition, prospects or obligations of the Company or a materially
adverse change in stock market conditions from current conditions, all as
determined by the Underwriter, then the Company shall reimburse the Underwriter
for its out of pocket expenses including without
11
limitation, its legal fees and disbursements all on an accountable basis but not
to exceed $100,000 (less the $50,000 previously paid by the Company), and if any
excess remains from the advance previously paid, such excess will be returned to
the Company. If however, in the event of the sale or merger of the Company, or
any significant subsidiary or significant assets of the Company or substitution
of Underwriter (the "Transaction") after such date as the Company has filed a
Registration Statement with the Securities and Exchange Commission the Company
shall reimburse the Underwriter for its fees and expenses in accordance with the
preceding paragraph and shall also pay the Underwriter an amount in cash equal
to two percent (2%) of the total legal consideration of the Transaction to a
maximum of $250,000 less the fees and expenses so reimbursed. Such amount will
be paid on the date of closing of the Transaction.
(h) The Company or any stockholder who enters into an agreement referred to
in Section 3(a)(xxvii), shall not, without the Underwriter's prior written
consent, sell or offer to sell any shares of Common Stock for thirteen (13)
months after the effective date excluding acquisitions or warrants or options to
purchase any shares of Common Stock or equity securities.
(i) During a date five years after the date hereof, the Company will make
available to its stockholders, as soon as practicable, and deliver to the
Underwriter:
(i) as soon as they are available, copies of all reports (financial or other)
mailed to stockholders;
(ii) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, the NASD or any securities
exchange;
(iii) every press release and every material news item or article of interest to
the financial community in respect of the Company or its affairs which was
released or prepared by or on behalf of the Company; and
(iv) any additional information of a public nature concerning the Company (and
any future subsidiaries) or its businesses which the Underwriter may request.
During such five-year period, if the Company has active subsidiaries, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(j) The Company will maintain a Transfer Agent and, if necessary under the
jurisdiction of incorporation of the Company, a Registrar (which may be the same
entity as the Transfer Agent) for its Common Stock.
(k) The Company will furnish to the Underwriter or on the Underwriter's
order, without charge, at such place as the Underwriter may designate, copies of
each Preliminary Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be signed and will
include all financial statements and exhibits), the Prospectus, and all
amendments and supplements thereto, including any prospectus prepared after the
effective date of the Registration Statement, in each case as soon as available
and in such quantities as the Underwriter may request.
(1) Neither the Company nor any of its officers, directors or any of its
affiliates will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in stabilization
or manipulation of the price of any of the Company's securities.
(m) The Company shall timely file all such reports, forms or other documents
as may be required (including, but not limited to, a Form SR as may be required
pursuant to Rule 463 under the Act) from time to time, under the Act, the
Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.
12
(n) The Company shall cause the Securities to be listed on NASDAQ for a
period of five (5) years from the date hereof, use its best efforts to maintain
the listing of the Securities to the extent they are outstanding.
(o) As soon as practicable, (i) before the effective date of the
Registration Statement, file a Form 8-A with the Commission providing for the
registration under the Exchange Act of the Securities and (ii) but in no event
more than 30 days from the effective date of the Registration Statement, take
all necessary and appropriate actions to be included in Standard and Poor's
Corporation Descriptions and/or Moody's OTC Manual and to continue such
inclusion for a period of not less than five years if the securities are not
listed on an securities exchange.
(p) Until the completion of the distribution of the Securities, the Company
shall not without the prior written consent of the Underwriter and its counsel,
issue, directly or indirectly, any press release or other communication or hold
any press conference with respect to the Company or its activities or the
offering contemplated hereby, other than trade releases issued in 'the ordinary
course of the Company's business consistent with past practices with respect to
the Company's operations.
5. Conditions of the Underwriter's Obligations. The obligation of the
Underwriters to offer and sell the Securities and the Option Securities is
subject to the accuracy (as of the date hereof, and as of the Closing Dates) of
and compliance with the representations and warranties of the Company to the
performance by it of its agreement and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become effective as and when
cleared by the Commission, and you shall have received notice thereof, on or
prior to any closing date no stop order suspending the effectiveness of the
Prospectus shall have been issued and no proceedings for that or similar purpose
shall have been instituted or shall be pending, or, to your knowledge or to the
knowledge of the Company, shall be contemplated by the Commission; any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriter; and
qualification, under the securities laws of such states as you may designate, of
the issue and sale of the Securities upon the terms and conditions herein set
forth or contemplated and containing no provision unacceptable to you shall have
been secured, and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order proceedings with
respect thereto be instituted or pending or threatened under such law.
(b) On any closing date and, with respect to the letter referred to in
subparagraph (iii), as of the date hereof, you shall have received:
(i) the opinion, together with such number of signed or photostatic copies
of such opinion as you may reasonably request, addressed to you by securities
counsel for the Company, in form and substance satisfactory to the Underwriter
and William M. Prifti, Esq., counsel to the Underwriter, dated each such closing
date, to the effect that:
(A) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the jurisdiction in which it is
incorporated and has all necessary corporate power and authority to carry on its
business as described in the Prospectus.
(B) The Company is qualified to do business in each jurisdiction in which
conducting its business requires such qualification, except where the failure to
be so qualified would not have a material adverse effect on the Company's
business or assets.
(C) The Company has the full corporate power and authority to enter into
this Agreement, the Representative's Warrant Agreement and the Consulting
Agreement and to consummate the transactions provided for therein and each such
Agreement has been duly and validly authorized, executed and delivered by the
Company. Each of this Agreement, the Consulting Agreement and the Underwriter's
Warrant Agreement, assuming due authorization, execution and delivery by each
other party thereto, constitutes a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, subject to
bankruptcy, insolvency or similar laws
13
governing the rights of creditors and to general equitable principles, and
provided that no opinion need be given as to the enforceability of any
indemnification or contribution provisions, and none of the Company's execution
or delivery of this Agreement, the Consulting Agreement or the Underwriter's
Warrant Agreement, its performance hereunder or thereunder, its consummation of
the transactions contemplated herein or therein, or the conduct of its business
as described in the Registration Statement, the Prospectus, and any amendments
or supplements thereto, conflicts with or will conflict with or results or will
result in any material breach or violation of any of the terms or provisions of,
or constitutes or will constitute a material default under, or result in the
creation or imposition of any material lien, charge, claim, encumbrance, pledge,
security interest, defect or other restriction of any kind whatsoever upon, any
property or assets (tangible or intangible) of the Company pursuant to the terms
of (A) the articles of incorporation or by-laws of the Company, (B) to the
knowledge of such counsel, any material license, contract, indenture, mortgage,
deed of trust, voting trust agreement, stockholders' agreement, note, loan or
credit agreement or any other agreement or instrument to which the Company is a
party or by which it is or may be bound, or (C) to the knowledge of such
counsel, any statute, judgment, decree, order, rule or regulation applicable to
the Company, whether domestic or foreign.
(D) The Company had authorized and outstanding capital stock as set forth in
the Prospectus under the heading "Capitalization" as of the date set forth
therein, and all of such issued and outstanding shares of capital stock have
been duly and validly authorized and issued, and to the knowledge of such
counsel are fully paid and nonassessable, and no stockholder of the Company is
entitled to any preemptive rights to subscribe for, or purchase shares of the
capital stock. The holders of such capital stock are not and will not be subject
to personal liability for obligations of the Company, by reason of being
stockholders, under the laws of the jurisdiction in which it is incorporated,
and to the knowledge of such counsel none of such securities were issued in
violation of the preemptive rights of any holders of any securities of the
Company.
(E) To the knowledge of such counsel, the Company is not a party to or bound
by any instrument, agreement or other arrangement providing for it to issue any
capital stock, rights, warrants, options or other securities, except for this
Agreement, the Underwriter's Warrant Agreement, and except as described in the
Prospectus. The Securities, the Underwriter's Securities and all other
securities issued or issuable by the Company as of the date of this Agreement
conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. The Securities, the
Underwriter's Securities and the Option Securities to be sold by the Company
hereunder and under the Underwriter's Warrant Agreement are not and will not be
subject to any preemptive or other similar rights of any stockholder, have been
duly authorized and, when issued, paid for and delivered in accordance with the
terms hereof and of the Underwriter's Warrant Agreement, will be validly issued,
fully paid and non-assessable and conform to the description thereof contained
in the Prospectus; the holders thereof will not be subject to any liability
solely as such holders; all corporate action required to be taken for the
authorization, issue and sale of the Securities, the Underwriter's Securities
and the Option Securities has been duly and validly taken; and the certificates
representing the Securities and the Options Securities and the Underwriter's
Warrants are in due and proper form. The Underwriter's Warrants constitute valid
and binding obligations of the Company to issue and sell, upon exercise thereof
and payment therefor, the number and type of securities of the Company called
for thereby. Upon payment for and delivery of the Securities, the Option
Securities, the Representative's Warrants and the Underwriter's Securities with
all necessary endorsements and in accordance with the terms of this Agreement,
and assuming the Underwriters are acquiring the Securities and the Option
Securities (and the Underwriter is acquiring the Underwriter's Warrants and the
Underwriter's Securities) in good faith without notice of any adverse claim, the
Underwriters will be the owners of the Securities and the Option Securities and
the Underwriter will be the owner of the Underwriter's Warrants and the
Underwriter's Securities, in each case free and clear of any adverse claim.
(F) The specimen forms of certificates evidencing the Securities are in due
and proper form under the laws of the state of incorporation; the Securities,
when issued and delivered as provided herein, will be duly and validly issued,
fully paid and nonassessable.
(G) To the knowledge of such counsel, there are no claims, suits or other
legal proceedings pending or threatened against the Company in any court or
before or by any governmental body which might materially affect
14
the business of the Company or the financial condition of the Company as a
whole, except as set forth in or contemplated by the Prospectus.
(H) Based on oral and/or written advice from the staff of the Commission,
the Registration Statement has become effective and, to the knowledge of such
counsel, no stop order suspending the effectiveness of the Prospectus is in
effect and no proceedings for that purpose are pending before, or threatened by,
federal or by a state securities administrator.
(I) To the knowledge of such counsel, there are no legal or governmental
proceedings, actions, arbitrations, investigations, inquiries or the like
pending or threatened against the Company of a character required to be
disclosed in the Prospectus which have not been so disclosed, questions the
validity of the capital stock of the Company or this Agreement or the
Underwriter's Warrant Agreement or might adversely affect the condition,
financial or otherwise, or the prospects of the Company or which could adversely
affect the Company's ability to perform any of its obligations under this
Agreement, the Underwriter's Warrant Agreement or the Consulting Agreement.
(J) To such counsel's knowledge, there are no material agreements, contracts
or other documents known to such counsel required by the Act to be described in
the Registration Statement and the Prospectus and filed as exhibits to the
Registration Statement (or required to be filed under the Exchange Act if upon
such filing they would be incorporated, in whole or in part, by reference
therein) other than those described in the Registration Statement and the
Prospectus and filed as exhibits thereto, and to such counsel's knowledge (A)
the exhibits which have been filed are correct copies of the documents of which
they purport to be copies; (B) the descriptions in the Registration Statement
and the Prospectus and any supplement or amendment thereto of contracts and
other documents to which the Company is a party or by which it is bound,
including any document to which the Company is a party or by which it is bound
incorporated by reference into the Prospectus and any supplement or amendment
thereto, are accurate in all material respects and fairly represent the
information required to be shown by Form SB-1.
(K) No consent, approval, order or authorization from any regulatory board,
agency or instrumentality having jurisdiction over the Company, or its
properties (other than registration under the Act or qualification under state
or foreign securities laws) is required for the valid authorization, issuance,
sale and delivery of the Securities, the Option Securities or the Underwriter's
Securities.
(L) The statements in the Prospectus under "Risk Factors-Significant Control
by Existing Stockholders," "Limitation on Officer's and Director's Liability . .
. " "Description of Securities," and "Shares Eligible For Future Sales" have
been reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations or legal conclusions,
are correct in all material respects.
Such counsel shall also state that it has participated in the preparation of
the Registration Statement and Prospectus and, although such counsel has not
independently verified the accuracy and completeness of the information
contained therein, nothing has come to such counsel's attention which causes
such counsel to believe that the Registration Statement (other than the
financial statements together with related notes, and other financial and
statistical data contained in the Registration Statement or omitted therefrom,
as to which such counsel need express no opinion) on the date it became
effective and on the date of such opinion contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary, in light of the circumstances under which they were made, to make the
statements therein not misleading, or that the Prospectus (other than the
financial statements together with related notes, and other financial and
statistical data contained in the Prospectus or omitted therefrom, as to which
such counsel need express no opinion), as amended or supplemented, contains on
the date it became effective and on the date of such opinion any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary, in light of the circumstances under which they were
made, in order to make the statements therein not misleading.
Such opinion shall also cover such other matters incident to the
transactions contemplated hereby and the offering Prospectus as you or counsel
to the Underwriter shall reasonably request. In rendering such opinion, to the
15
extent deemed reasonable by them, such counsel may rely upon certificates of any
officer of the Company or public officials as to matters of fact of which the
maker of such certificate has knowledge.
(ii) a certificate, signed by the Chief Executive Officer and the Principal
Financial or Accounting Officer of the Company dated the Closing Date, to the
effect that with regard to the Company, each of the conditions set forth in
Section 5(d) have been satisfied.
(iii) a letter, addressed to the Underwriter and in form and substance
satisfactory to the Underwriter in all respects (including the nonmaterial
nature of the changes or decreases, if any, referred to in clause (D) below),
from dated, respectively, as of the effective date of the Registration Statement
and as of the Closing Date, as the case may be:
(A) Confirming that they are independent public accountants with respect to
the Company and its consolidated subsidiaries, if any, within the meaning of the
Act and the applicable published Rules and Regulations.
(B) Stating that, in their opinion, the financial statements, related notes
and schedules of the Company and its consolidated subsidiaries, if any, included
in the Registration Statement examined by them comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations thereunder.
(C) Stating that, with respect to the period from to a specified
date (the specified date") not earlier than five (5) business days prior to the
date of such letter, they have read the minutes of meetings of the stockholders
and board of directors (and various committees thereof) of the Company and its
consolidated subsidiaries, if any, for the period from through the
specified date, and made inquiries of officers of the Company and its
consolidated subsidiaries, if any, responsible for financial and accounting
matters and, especially as to whether there was any decrease in sales, income
before extraordinary items or net income as compared with the corresponding
period in the preceding year; or any change in the capital stock of the Company
or any change in the longterm debt or any increase in the short-term bank
borrowings or any decrease in net current assets or net assets of the Company or
of any of its consolidated subsidiaries, if any, and further stating that while
such procedures and inquiries do not constitute an examination made in
accordance with generally accepted auditing standards, nothing came to their
attention which caused them to believe that during the period from ,
through the specified date there were any decreases as compared with the
corresponding period in the preceding year in sales, income before extraordinary
items or net income; or any change in the capital stock of the Company or
consolidated subsidiary, if any, or any change in the longterm debt or any
increase in the short-term bank borrowings (other than any increase in
short-term bank borrowings in the ordinary course of business) of the Company or
any consolidated subsidiary, if any, or any decrease in the net current assets
or net assets of the Company or any consolidated subsidiary, if any; and
(D) stating that they have carried out certain specified procedures
(specifically set forth in such letter or letters) as specified by the
Underwriter (after consultations with relating to such procedures),
not constituting an audit, with respect to certain tables, statistics and other
financial data in the Prospectus specified by the Underwriter and such financial
data not included in the Prospectus but from which information in the Prospectus
is derived, and which have been obtained from the general accounting records of
the Company or consolidated subsidiaries, if any, or from such accounting
records by analysis or computation, and having compared such financial data with
the accounting records of the Company or the consolidated subsidiaries, if any,
stating that they have found such financial data to agree with the accounting
records of the Company.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Prospectus and other related matters shall be satisfactory to or
approved by counsel to the Underwriter and you shall have received from
a signed opinion dated as of each closing date, with respect
to the incorporation of the Company, the validity of the Securities, the form of
the Prospectus, (other than the financial statements together with related notes
and other financial and statistical data contained in the Prospectus or omitted
therefrom, as to which such counsel need express no opinion), the execution of
this Agreement and other related matters as you may reasonably require.
16
(d) At each closing date, (i) the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material respects
with the same effect as if made on and as of such closing date; (ii) the
Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with the Act
and the Rules and Regulations and in all material respects conform to the
requirements thereof, and neither the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary, in light of the
circumstances under which they were made, in order to make the statements
therein not misleading; (iii) there shall have been since the respective dates
as of which information is given no material adverse change in the business,
properties or condition (financial or otherwise), results of operations, capital
stock, longterm debt or general affairs of the Company from that set forth in
the Prospectus, except changes which the Prospectus indicates might occur after
the effective date of the Prospectus, and the Company shall not have incurred
any material liabilities or material obligations, direct or contingent, or
entered into any material transaction, contract or agreement not in the ordinary
course of business other than as referred to in the Prospectus and which would
be required to be set forth in the Prospectus; and (iv) except as set forth in
the Prospectus, no action, suit or proceeding at law or in equity shall be
pending or threatened against the Company which would be required to be set
forth in the Prospectus, and no proceedings shall be pending or threatened
against the Company or any subsidiary before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company.
(e) On or before the Initial Closing Date, the Company shall have
executed and delivered to the Underwriter, (i) the Underwriter's Warrant
Agreement substantially in the form filed as an Exhibit to the Registration
Statement in final form and substance satisfactory to the Underwriter, and (ii)
the Representative's Warrants in such denominations and to such designees as
shall have been provided to the Company.
(f) On or before the Initial Closing Date, the Securities shall have been
duly approved for listing on NASDAQ.
(g) On or before the Initial Closing Date, there shall have been delivered
to the Underwriter all of the Lock-up Agreements required to be delivered
pursuant to Section 3(a)(xxvii), in form and substance satisfactory to the
Underwriter and Underwriter's counsel.
(h) On or before the Initial Closing Date, the Company shall have (i)
executed and delivered to the Underwriter the Consulting Agreement, in the form
filed as an Exhibit to the Registration Statement and (ii) paid the Underwriter
the full retainer pursuant to the Consulting Agreement.
If any condition to the Underwriter's obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Underwriter may terminate this Agreement or, if
the Underwriter so elects, it may waive any such conditions which have not been
fulfilled or extend the time for their fulfillment.
6. Conditions of the Company's Obligations. The obligation of the Company to
sell and deliver the Securities is subject to the following:
(a) The provisions regarding the effective date, as described in Section
10.
(b) At the Initial Closing Date, no stop order suspending the
effectiveness of the Prospectus shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission or by any state
securities department.
(c) Tender of payment by the Underwriter in accord with Section 2 hereof.
7. Indemnification.
17
(a) The Company agrees to indemnify and hold harmless each Underwriter and its
employees and each person, if any, who controls you within the meaning of the
Act, against any losses, claims, damages or liabilities, joint or several (which
shall, for any purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), to which each
Underwriter or such controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission made in the Prospectus, or such amendment or supplement to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, which is in reliance upon and in conformity
with written information furnished by the Company to you specifically for use in
the preparation thereof, and provided further that the indemnity agreement
contained in this subsection (a) shall not inure to the benefit of you with
respect to any person asserting any such loss, claim, damage or liability who
has purchased the Securities which are the subject thereof if you or any
participants failed to send or give a copy of the Prospectus to such person at
or prior to the written confirmation of the sale of such Securities to such
person.
(b) Each Underwriter will indemnify and hold harmless the Company, each of
its directors, each of its officers, each person, if any, who controls the
Company within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission was made in the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by you specifically for use in the preparation thereof. This indemnity
will be in addition to any liability which any Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of notice
of the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against the indemnifying party under this Section,
notify the indemnifying party of the commencement thereof, but the omission so
to notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party, similarly notified, to assume the defense thereof,
subject to the provisions herein stated, with counsel satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel satisfactory to the indemnified party; provided that, if the
indemnified party is you or a person who controls you, the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both you or such controlling person and the
indemnifying party and you or such controlling person shall have been advised by
such counsel that there is a conflict of interest which would prevent counsel
for the indemnifying party from representing the indemnifying party and you or
such controlling person (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of you or such controlling
person, it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction or which are consolidated into the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for you and all such controlling persons,
18
which firm shall be designated in writing by you). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnified party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnified party.
8. Contribution. In order to provide for just and equitable contribution
tinder the Act in any case in which (i) the indemnifying party makes a claim for
indemnification pursuant to Section 7 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of Section 7 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriters, then the Company and the Underwriters in the aggregate shall
contribute to the aggregate losses, claims, damages, or liabilities to which
they may be subject (which shall, for all purposes of this Agreement, include,
but not be limited to, all costs of defense and investigation and all attorneys'
fees) in either such case (after contribution from others) in such proportions
that the Underwriters are responsible in the aggregate for that portion of such
losses, claims, damages or liabilities determined by multiplying the total
amount of such losses, claims, damages or liabilities times the difference
between the public offering price and the commission to the Underwriter and
dividing the product thereof by the public offering price, and the Company, if
applicable, shall be responsible for that portion of such losses, claims,
damages or liabilities times the commission to the Underwriters and dividing the
product thereof by the public offering price; provided, however, that the
Underwriters shall not be required to so contribute any amount in excess of the
underwriting discount applicable to the Securities purchased by the Underwriters
hereunder if such allocation is not permitted by applicable law, then the
relative fault of the Company and the Underwriters in connection with the
statements or omissions which resulted in such damages and other relevant
equitable considerations shall also be considered. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 12(2) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The foregoing contribution agreement shall in no
way affect the contribution liabilities of any person having liability under
Section 12 of the Act other than the Company and the Underwriter. As used in
this paragraph, the term "Underwriters" includes any person who controls the
Underwriters within the meaning of Section 15 of the Act. If the full amount of
the contribution specified in this paragraph is not permitted by law, then any
Underwriter and each person who controls any Underwriter shall be entitled to
contribution from the Company, to the full extent permitted by law.
9. Costs and Expenses. Subject to the provisions of Section 4(g) the Company
will pay all costs and expenses incident to the performance of this Agreement by
the Company including, but not limited to, the fees and expenses of counsel to
the Company and of the Company's accountants; the costs and expenses incident to
the preparation, printing, filing and distribution under the Act of the
Registration Statement and Prospectus (including the fee of the Commission, any
securities exchange and the NASD in connection with the filing required by the
NASD relating to the offering of the Securities contemplated hereby); all
expenses, including fees of counsel, which shall be due and payable on the
Closing Date in connection with the qualification of the Securities under the
state securities or blue sky laws; the cost of furnishing to you copies of the
Prospectus, this Agreement, the cost of printing the certificates representing
the Securities and of preparing and photocopying the Underwriting Agreement, the
cost of three underwriter's bound volumes, any advertising costs and expenses,
including but not limited to the "road show" information meetings and
presentations, any advertisements printed in connection with the sale of the
Securities including the "tombstone" advertisement, prospectus memorabilia,
issue and transfer taxes, if any. The Company will also pay all costs and
expenses incident to the furnishing of any amended Prospectus of or any
supplement to be attached to the Prospectus.
10. Effective Date. This Agreement shall become effective at 10:00 p.m. New
York time on the next full business day following the effective date of the
Registration Statement, or at such other time after the effective date of the
Prospectus as you in your discretion shall first commence the public offering of
any of the Securities covered thereby, provided, however, that at all times the
provisions of Sections 7, 8, 9 and 11 shall be effective.
11. Termination.
19
(a) This Agreement, may be terminated at any time prior to the Closing Date by
you if in your judgment it is impracticable to offer for sale or to enforce
contracts made by you for the sale of the Securities agreed to be sold hereunder
by reason of (i) the Company as a whole having sustained a material loss,
whether or not insured, by reason of fire, earthquake, flood, accident or other
calamity, or from any labor dispute or court or government action, order or
decree, (ii) trading in securities of the Company having been suspended by a
state securities administrator or by the Commission, (iii) material governmental
restrictions having been imposed on trading in securities generally (not in
force and effect on the date hereof) or trading on the New York Stock Exchange,
American Stock Exchange, Boston Stock Exchange or in the over-the-counter market
shall have been suspended, (iv) a banking moratorium having been declared by
federal or New York State authorities, (v) an outbreak or escalation of
hostilities or other national or international calamity having occurred, (vi)
the passage by the Congress of the United States or by any state legislative
body, of any act or measure, or the adoption of any orders, rules or regulations
by any governmental body or any authoritative accounting institute or board, or
any governmental executive, which is believed likely by you to have a material
impact on the business, financial condition or financial statements of the
Company; or (vii) any material adverse change having occurred, since the
respective dates as of which information is given in the Prospectus, in the
condition, financial or otherwise, of the Company as a whole, whether or not
arising in the ordinary course of business, (viii) cease to be employed by the
Company in their present capacity; (ix) the Securities are not listed on NASDAQ.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11 or in Section 10, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
12. Representations, Warrants and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company (or its officers) and the Underwriter set forth in or
made pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of the Underwriter, the Company, or
any of their officers or directors and will survive delivery of and payment for
the Securities.
13. Notices. All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to you, will be mailed, delivered
or telephoned and confirmed to you at Schneider Securities, Inc., 104 Broadway,
Denver, CO 80203, Attention: Thomas J. O'Rourke, President; to the Company at 81
Church Street, East Hartford, CT 06108, Attention: George Taylor Jr., President.
14. Parties at Interest. This Agreement is made solely for the benefit of
the Underwriter(s), and the Company, and their respective controlling persons,
directors and officers, and their respective successors, assigns, executors and
administrators. No other person shall acquire or have any right under or by
virtue of this Agreement.
15. Headings. The Section headings in this Agreement have been inserted as a
matter of convenience of reference and are not a part of this Agreement.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without giving effect to
conflict of law principles.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which together shall constitute one and the same
instrument.
20
If the foregoing correctly sets forth the understanding between the Company
and you, as Representative of the several underwriters, please so indicate in
the space provided below for such purpose, whereupon this letter and your
acceptance shall constitute a binding agreement between us.
Very truly yours,
FARMSTEAD TELEPHONE GROUP, INC.
By:_________________________________
(Authorized Officer)
George Taylor Jr., President
Accepted as of the date first above written:
SCHNEIDER SECURITIES, INC.
By:_________________________________________
(Authorized Officer)
Thomas Schneider, Chairman
21
SCHEDULE I
UNDERWRITERS
Units
consisting
of
Underwriter Common Stock
- ----------- Class A Redeemable Warrants
Class B Redeemable Warrants
---------------------------
Schneider Securities, Inc.
______________ ______________
TOTAL
- -----
EXHIBIT B
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY
SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY
KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE
DATE. YOUR EXECUTION HEREOF WELL INVOLVE NO OBLIGATION OR COMMITMENT OF ANY KIND
UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE.
FARMSTEAD TELEPHONE GROUP, INC.
SELECTED DEALERS AGREEMENT
, 1996
Dear Sirs:
1. Schneider Securities, Inc. named as the Underwriter ("Underwriter") in
the enclosed preliminary Prospectus, proposes to offer on a firm commitment
standby basis, subject to the terms and conditions and execution of the
Underwriting Agreement, a maximum of 1,000,000 Units each Unit consisting of one
share of Common Stock and one Class A Redeemable Warrant and one Class B
Redeemable Warrant ("Securities") of the above Company. The Securities are more
particularly described in the enclosed preliminary Prospectus, additional copies
of which will be supplied in reasonable quantities upon request. Copies of the
definitive Prospectus will be supplied after the effective date of the
Registration Statement.
2. The Underwriter is soliciting offers to buy, upon the terms and
conditions hereof, a part of the Securities from Selected Dealers, including you
who are to act as principal and who are (i) registered with the Securities and
Exchange Commission ("Commission") as broker-dealers under the Securities
Exchange Act of 1934, as amended ("1934 Act"), and members in good standing with
the National Association of Securities Dealers, Inc. ("NASD"), or (ii) dealers
or institutions with their principal place of business located outside the
United States, its territories and possessions who are not eligible for
membership in the NASD and who agree to make no sales within the United States,
its territories or possessions or to persons who are nationals thereof or
residents therein and, in making sales, to comply with the NASD's Interpretation
with Respect to FreeRiding and Withholding and with Sections 8, 24p 25, to the
extent applicable to foreign nonmember brokers or dealers, and Section 36 of the
NASD's Rules of Fair Practice. The Securities are to be offered at a public
price of $ per Unit. Selected Dealers will be allowed a concession of not less
than $ per Unit, except as provided below. You will be notified of the precise
amount of such concession prior to the effective date of the Registration
Statement. You may reallow not in excess of $ per Unit to dealers who meet the
requirements set forth in this Section 2. This offer is solicited subject to the
issuance and delivery of the Securities and their acceptance by the Underwriter,
to the approval of legal matters by counsel and to the terms and conditions as
herein set forth.
3. Your offer to purchase may be revoked in whole or in part without
obligation or commitment of any kind by you and any time prior to acceptance and
no offer may be accepted by us and no sale can be made until after the
registration statement covering the Securities has become effective with the
Commission. Subject to the foregoing, upon execution by you of the Offer to
Purchase below and the return of same to us, you shall be deemed to have offered
to purchase the number of Securities set forth in your offer on the basis set
forth in paragraph 2 above. Any oral notice by us of acceptance of your offer
shall be immediately followed by written or telegraphic confirmation
preceded or accompanied by a copy of the Prospectus. If a contractual commitment
arises hereunder, all the terms of this Selected Dealers Agreement shall be
applicable. We may also make available to you an allotment to purchase
Securities, but such allotment shall be subject to modification or termination
upon notice from us any time prior to an exchange of confirmations reflecting
completed transactions. All references hereafter in this Agreement to the
purchase and sale of Securities assume and are applicable only if contractual
commitments to purchase are completed in accordance with the foregoing.
4. You agree that in reoffering said Securities, if your offer is accepted
after the effective date, you will make a bona fide public distribution of same.
You will advise us upon request of Securities purchased by you remaining unsold
and we shall have the right to repurchase such Securities upon demand at the
public offering price without paying the concession with respect to any
Securities so repurchased. Any of the Securities purchased by you pursuant to
this Agreement are to be subject to the terms hereof. Securities shall not be
offered or sold by you below the public offering price before the termination of
this Agreement.
5. Payment for Securities which you purchase hereunder shall be made by you
on or before five (5) business days after the date of each confirmation by
certified or bank cashier's check payable to the Underwriter. Certificates for
the Securities shall be delivered as soon as practicable after delivery
instructions are received by the Underwriter.
6. A registration statement covering the offering has been filed with the
Securities and Exchange Commission in respect to the Securities. You will be
promptly advised when the registration statement becomes effective. Each
Selected Dealer in selling Securities pursuant hereto agrees (which agreement
shall also be for the benefit of the Company) that it will comply with the
applicable requirements of the Securities Act of 1933 and of the Securities
Exchange Act of 1934 and any applicable rules and regulations issued under said
Acts. No person is authorized by the Company or by the Underwriter to give any
information or to make any representations other than those contained in the
Prospectus in connection with the sale of the Securities. Nothing contained
herein shall render the Selected Dealers a member of the Underwriting Group or
partners with the Underwriter or with one another.
7. You will be informed by us as to the states in which we have been advised
by counsel the Securities have been qualified for sale or are exempt under the
respective securities or blue sky laws of such states, but we have not assumed
and will not assume any obligation or responsibility as to the right of any
Selected Dealer to sell Securities in any state. You agree not to sell
Securities in any other state or jurisdiction and to not sell Securities in any
state or jurisdiction unless you are qualified or licensed to sell securities in
such state or jurisdiction.
8. The Underwriter shall have full authority to take such action as it may
deem advisable in respect of all matters pertaining to the offering or arising
thereunder. The Underwriter shall not be under any liability to you, except such
as may be incurred under the Securities Act of 1933 and the rules and
regulations thereunder, except for lack of good faith and except for obligations
assumed by us in this Agreement, and no obligation on our part shall be implied
or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate when the
offering is completed. Nothing herein contained shall be deemed a commitment on
our part to sell you any Securities; such contractual commitment can only be
made in accordance with the provisions of paragraph 3 hereof.
10. You represent that you are a member in good standing of the NASD and
registered as a broker-dealer with the Commission, or that you are a foreign
broker-dealer not eligible for membership under Section 1 of the Bylaws of the
NASD who agrees to make no sales within the United States, its territories or
possessions or to persons who are nationals thereof or residents therein and, in
making sales, to comply with the NASD's interpretation with Respect to
FreeRiding and Withholding and with Sections 8, 24, 25 to the extent applicable
to foreign nonmember brokers and dealers, and Section 36 of the NASD's Rules of
Fair Practice. Your attention is called to and you agree to comply with the
following: (a) Article III, Section 1 of the Rules of Fair Practice of the NASD
and the interpretations of said Section promulgated by the Board of Governors of
the NASD including Section 24 and the interpretation with respect to
"Free-Riding and Withholding;" (b) Section 10(b) of the 1934 Act and Rules
10b-6, 10b-10 of the general
2
rules and regulations promulgated under the 1934 Act; and (c) Rule 15c2-8 of the
general rules and regulations promulgated under the 1934 Act requiring the
distribution of a preliminary Prospectus to all persons reasonably expected to
be purchasers of the Securities from you at least 48 hours prior to the time you
expect to mail confirmations. You, as a member of the NASD, by signing this
Agreement, acknowledge that you are familiar with the cited laws and rules and
agree that you will not directly and/or indirectly violate any provisions of
applicable law in connection with your participation in the distribution of the
Securities.
11. In addition to compliance with the provisions of paragraph 10 hereof,
you will not, until advised by us in writing or by wire that the entire offering
has been distributed and closed, bid for or purchase Securities in the open
market or otherwise make a market in the Securities or otherwise attempt to
induce others to purchase the Securities in the open market. Nothing contained
in this paragraph 11 shall, however, preclude you from acting as agent in the
execution of unsolicited orders of customers in transactions effectuated for
them through a market maker.
12. You understand that the Underwriter may in connection with the offering
engage in stabilizing transactions. If the Underwriter contracts for or
purchases in the open market in connection with such stabilization any
Securities sold to you hereunder and not effectively placed by you, the
Underwriter may charge you the Selected Dealer's concession originally allowed
you on the Securities so purchased and you agree to pay such amount to us on
demand.
13. By submitting an Offer to Purchase you confirm that you may, in
accordance with Rule 156-1 adopted under the 1934 Act, agree to purchase the
number of Securities you may become obligated to purchase under the provisions
of this Agreement.
14. All communications from you should be directed to us at Two Charles
Street, Providence, RI 02904 (401-861-0320) and (fax 401-274-8942). All
communications from us to you shall be directed to the address to which this
letter is mailed.
Very truly yours,
SCHNEIDER SECURITIES, INC.
By________________________________________
(Authorized Officer)
3
OFFER TO PURCHASE
The undersigned does hereby offer to purchase (subject to the right to
revoke as set forth in paragraph 3) ________________* Securities in accordance
with the terms and conditions set forth above. We hereby acknowledge receipt of
the Prospectus referred to in the first paragraph thereof relating to such
Securities. We further state that in purchasing such Securities we have relied
upon such Prospectus and upon no other statement whatsoever, written or oral.
__________________________________
By _______________________________
(Authorized Officer)
*If a number appears here which does not correspond with what you wish to offer
to purchase, you may change the number by crossing out the number, inserting a
different number and initializing the change.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") THE WARRANT MAY
NOT BE OFFERED, SOLD, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF ANY EFFECTIVE
REGISTRATION STATEMENT AS TO SUCH SECURITIES FILED UNDER THE ACT, OR AN
EXEMPTION FROM REGISTRATION, AND COMPLIANCE WITH APPLICABLE STATE SECURITIES
LAWS. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER
HEREOF THAT SUCH REGISTRATION IS NOT REQUIRED AND THAT SUCH LAWS ARE COMPLIED
WITH.
VOID AFTER 3:30 P.M., EASTERN TIME, ON .
UNDERWRITER'S
WARRANT TO PURCHASE
UNITS
CONSISTING OF
COMMON STOCK AND REDEEMABLE WARRANTS
FARMSTEAD TELEPHONE GROUP, INC.
This is to Certify That, FOR VALUE RECEIVED, Schneider Securities, Inc. (the
"Holder") is entitled to purchase, subject to the provisions of this Warrant,
from Farmstead Telephone Group, Inc. ("Company"), a Delaware corporation, at any
time on or after___________ , and not later than 3:30 p.m., Eastern Time, on
_________100,000 Units (consisting of 100,000 shares Common Stock and 100,000
Class A and 100,000 Class B Redeemable Warrants) of the Company ("Securities")
exercisable at a purchase price for the Securities which is 140% of the Unit
public offering price of $___.The number of Securities to be received upon the
exercise of this Warrant and the price to be paid for the Securities may be
adjusted from time to time as hereinafter set forth. The purchase price of a
Security in effect at any time and as adjusted from time to time is hereinafter
sometimes referred to as the "Exercise Price." The Securities, as adjusted from
time to time, underlying the Warrants are hereinafter sometimes referred to as
"Warrant Securities". The Securities issuable upon the exercise hereof are in
all respects identical to the Securities being purchased by the Underwriter for
resale to the public pursuant to the terms and conditions of the Underwriting
Agreement.
(a) Exercise of Warrant. Subject to the provisions of Section (g) hereof, this
Warrant may be exercised in whole or in part at anytime or from time to time on
or after _____________ , 1997, but not later than 3:30 p.m., Eastern Time on
_____________ , 2001, or if _____________, 2001, is a day on which banking
institutions are authorized by law to close, then on the next succeeding day
which shall not be such a day, by presentation and surrender hereof to the
Company or at the office of its stock transfer agent, if any, with the Purchase
Form annexed hereto duly executed and accompanied by payment of the Exercise
Price for the number of shares specified in such Form, together with all federal
and state taxes applicable upon such exercise. The Company agrees to provide
notice to the Holder that any tender offer is being made for the Securities no
later than the day the Company becomes aware that any tender offer is being made
for the Securities. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the right of the Holder to purchase the balance
of the shares purchasable hereunder along with any additional Redeemable
Warrants not exercised. Upon receipt by the Company of this Warrant at the
office of the Company or at the office of the Company's stock transfer agent, in
proper form for exercise and accompanied by the total Exercise Price, the Holder
shall be deemed to be the holder of record of the Securities issuable upon such
exercise, notwithstanding that the stock transfer books of the Company shall
then be closed or that certificates representing such Securities shall not then
be actually delivered to the Holder.
(b) Reservation of Securities. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of Securities as shall be required for issuance or
delivery upon exercise of this Warrant. The Company covenants and agrees that,
upon exercise of the Warrants and payment of the Exercise Price therefor, all
Securities and other securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable .-and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all Securities issuable upon the
exercise of the Warrants to be listed (subject to official notice of issuance)
on all securities exchanges on which the Common Stock issued to the public in
connection herewith may then be listed and/or quoted on NASDAQ.
(c) Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of such fractional share, determined as follows:
(1) If the Securities are listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange, the current value
shall be the last reported sale price of the Common Stock on such exchange on
the last business day prior to the date of exercise of this Warrant or if no
such sale is made on such day, the average of the closing bid and asked prices
for such day on such exchange; or
(2) If the Securities are not so listed or admitted to unlisted trading
privileges, the current value shall be the mean of the last reported bid and
asked prices reported by the National Association of Securities Dealers
Automated Quotation System (or, if not so quoted on NASDAQ or by the National
Quotation Bureau, Inc.) on the last business day prior to the date of the
exercise of this Warrant; or
(3) If the Securities are not so listed or admitted to unlisted trading
privileges and bid and asked prices are not so reported, the current value shall
be an amount, not less than book value, determined in such reasonable manner as
may be prescribed by the Board of Directors of the Company, such determination
to be final and binding on the Holder.
(d) Exchange, Assignment or Loss of Warrant. This Warrant is exchangeable,
without expense, at the option of the Holder, upon presentation and surrender
hereof to the Company or at the office of its stock transfer agent, if ANY, for
other Warrants of different denominations entitling the Holder thereof to
purchase (under the same terms and conditions as provided by this Warrant) in
the aggregate the same number of Securities purchasable hereunder. This Warrant
may not be sold, transferred, assigned, or hypothecated until after one year
from the effective date of the registration statement except that it may be (i)
assigned in whole or in part to the officers of the "Underwriter", and
(ii)transferred to any successor to the business of the "Underwriter." Any such
assignment shall be made by surrender of this Warrant to the Company, or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and with funds sufficient to pay any transfer tax;
whereupon the Company shall, without charge, execute and deliver a new Warrant
in the name of the assignee named in-such instrument of assignment, and this
Warrant shall promptly be canceled. This Warrant may be divided or combined with
other Warrants which carry the same rights upon presentation hereof at the
office of the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants issued in substitution for or
replacement of this Warrant, or into which this Warrant may be divided or
exchanged. Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
2
(e) Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
(f) Notices to Warrant Holders. So long as this Warrant shall be outstanding
and unexercised (i) if the Company shall pay any dividend or make any
distribution upon the Common Stock, or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any shares of stock
of any class or any other rights, or (iii) if any capital reorganization of the
Company, reclassification of the capital stock of the Company, consolidation or
merger of the Company with or into another corporation, sale, lease or transfer
of all or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then, in any such case, the Company shall
cause to be delivered to the Holder, at least ten (10) days prior to the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
such reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any, is
to be fixed, as of which the holders of Common Stock of record shall be entitled
to exchange their shares of Common Stock for equivalent securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(g) Adjustment of Exercise Price and Number of Shares of Common Stock
Deliverable.
(A)(i) Except as hereinafter provided, in the event the Company shall, at
any time or from time to time after the date hereof, issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such issuance, subdivision or combination being herein call a
"Change of Shares"), then, and thereafter upon each further Change of Shares,
the Exercise Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to such Change of Shares shall be
changed to a price (including any applicable fraction of a cent to the nearest
cent) determined by dividing (i) the sum of (a) the total number of shares of
Common Stock outstanding immediately prior to such Change of Shares, multiplied
by the Exercise Price in effect immediately prior to such Change of Shares, and
(b) the consideration, if any, received by the Company upon such issuance,
subdivision or combination by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to an
amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with this
Section (g) the following provisions shall be applicable:
(I) Shares of Common Stock issuable by way of dividend or other distribution
on any capital stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(II) The number of shares of Common Stock at any one time outstanding shall
not be deemed to include the number of shares issuable (subject to readjustment
upon the actual issuance thereof) upon the exercise of options, rights or
warrants and upon the conversion or exchange of convertible or exchangeable
securities.
(ii) Upon each adjustment of the Exercise Price pursuant to this Section
(g), the number of Units purchasable upon the exercise of each Warrant shall be
the number derived by multiplying the number of Units purchasable immediately
prior to such adjustment by the Exercise Price in effect prior to such
adjustment and dividing the product so obtained by the applicable adjusted
Exercise Price.
3
(B) In case of any reclassification or change of outstanding Securities
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of a subdivision or combination), or in case of any consolidation or merger of
the Company with or into another corporation other than a merger with a
"Subsidiary" (which shall mean any corporation or corporations, as the case may
be, of which capital stock having ordinary power to elect a majority of the
Board of Directors of such corporation (regardless of whether or not at the time
capital stock of any other class or classes of such corporation shall have or
may have voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned by the Company or by one or more Subsidiaries)
or by the Company and one or more Subsidiaries in which merger the Company is
the continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants (other than a change in par value, or
from par value to no par value, or from no par value to par value or as a result
of subdivision or combination) or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, then, as a condition of such reclassification, change, consolidation,
merger, sale or conveyance, the Company, or such successor or purchasing
corporation, as the case may be, shall make lawful and adequate provision
whereby the Holder of each Warrant then outstanding shall have the right
thereafter to receive on exercise of such Warrant the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the principal office of the Company a statement signed by its
President or a Vice President and by its Treasurer or an Assistant Treasurer or
its Secretary or an Assistant Secretary evidencing such provision. Such
provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
(g)(A). The above provisions of this Section (g)(B) shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(C) Irrespective of any adjustments or changes in the Exercise Price or the
number of Securities purchasable upon exercise of the Warrants, the Warrant
Certificates theretofore and thereafter issued shall, unless the Company shall
exercise its option to issue new Warrant Certificates pursuant hereto, continue
to express the Exercise Price per share and the number of shares purchasable
thereunder as the Exercise Price per share and the number of shares purchasable
thereunder as expressed in the Warrant Certificates when the same were
originally issued.
(D) After each adjustment of the Exercise Price pursuant to this Section
(g), the Company will promptly prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Company setting forth: (i) the Exercise Price as so
adjusted, (ii) the number of Securities purchasable upon exercise of each
Warrant, after such adjustment, and (iii' a brief statement of the facts
accounting for such adjustment. The Company will promptly file such certificate
in the Company's minute books and cause a brief summary thereof to be sent by
ordinary first class mail to each Holder at his last address as it shall appear
on the registry books of the Company. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an officer
or the Secretary or an Assistant Secretary of the Company that such notice has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(E) No adjustment of the Exercise Price shall be made as a result of or in
connection with the issuance or sale of Securities if the amount of said
adjustment shall be less than $.10, provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.10. In addition, Holders shall not be entitled to cash dividends
paid by the Company prior to the exercise of any Warrant or Warrants held by
them.
4
(F) In the event that the Company shall at any time prior to the exercise of
all Warrants declare a dividend consisting solely of shares of Common Stock or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, the Holders of the unexercised Warrants shall thereafter be
entitled, in addition to the Securities or other securities and property
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same property, assets, rights, evidences of indebtedness, that
they would have been entitled to receive at the time of such dividend or
distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Section (g).
(h) Piggyback Registration. If, at any time commencing one year from the
effective date of the registration statement and expiring six (6) years
thereafter, the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Act") (other than in connection with a
merger or pursuant to Form S-8, S-4 or other comparable registration statement)
it will give written notice by registered mail, at least thirty (30) days prior
to the filing of each such registration statement, to the Underwriter and to all
other Holders of the Warrants and/or the Warrant Securities of its intention to
do so. If the Underwriter or other Holders of the Warrants and/or Warrant
Securities notify the Company within twenty (20) days after receipt of any such
notice of its or their desire to include any such securities in such proposed
registration statement, the Company shall afford each of the Underwriter and
such Holders of the Warrants and/or Warrant Securities the opportunity to have
any such Warrant Securities registered under such registration statement.
Notwithstanding the provisions of this Section, the Company shall have the
right at any time after it shall have given written notice pursuant to this
Section (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
(i) Demand Registration.
(1) At any time commencing one year from the effective date of the registration
statement and expiring four (4) years thereafter, the Holders of the
Representative's Warrants and/or Warrant Securities representing a "Majority"
(as hereinafter defined) of such securities (assuming the exercise of all of the
Underwriter's Warrants) shall have the right (which right is in addition to the
registration rights under Section (i) hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, a registration
statement and such other documents, including a prospectus, as may be necessary
in the opinion of both counsel for the Company and counsel for the Underwriter
and Holders, in order to comply with the provisions of the Act, so as to permit
a public offering and sale of their respective Warrant Securities for nine (9)
consecutive months by such Holders and any other holders of the Representative's
Warrants and/or Warrant Securities who notify the Company within ten (10) days
after receiving notice from the Company of such request.
(2) The Company covenants and agrees to give written notice of any
registration request under this Section (i) by any Holder or Holders to all
other registered Holders of the Representative's Warrants and the Warrant
Securities within ten (10) days from the date of the receipt of any such
registration request.
(3) In addition to the registration rights under this Section (i) at any
time commencing one year after the effective date of the registration statement
and expiring four (4) years thereafter, the Holders of Representative's Warrants
and/or Warrant Securities shall have the right, exercisable by written request
to the Company, to have the Company prepare and file, on one occasion, with the
Commission a registration statement so as to permit a public offering and sale
for nine (9) consecutive months by such Holders of its Warrant Securities;
provided, however, that the provisions of Section (i)(2) hereof shall not apply
to any such registration request and registration and all costs incident thereto
shall be at the expense of the Holder or Holders making such request.
5
(j) Covenants of the Company With Respect to Registration. In connection with
any registration under Section (h) or (i) hereof, the Company covenants and
agrees as follows:
(i) The Company shall use its best efforts to file a registration statement
within sixty (60) days of receipt of any demand therefor, shall use its best
efforts to have any registration statement declared effective at the earliest
possible time, and shall furnish each Holder desiring to sell Warrant Securities
such number of prospectuses as shall reasonably be requested.
(ii) The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections (h), (i) and 0) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. If the
Company shall fail to comply with the provisions of Section (j)(i), the Company
shall, in addition to any other equitable or other relief available to the
Holder(s), extend the Exercise Period by such number of days as shall equal the
delay caused by the Company's failure.
(iii)The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process to qualify as a foreign corporation to do business under the laws of any
such jurisdiction.
(iv) The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), from
and against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter contained in Section 7 of the
Underwriting Agreement.
(v) The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent with the
same effect as the provisions contained in Section 7 of the Underwriting
Agreement pursuant to which the Underwriter has agreed to indemnify the Company.
(vi) The Holder(s) may exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(vii)The Company shall not permit the inclusion of any securities other than
the Warrant Securities to be included in any registration statement filed
pursuant to Section (i) hereof, or permit any other registration statement to be
or remain effective during the effectiveness of a registration statement filed
pursuant to Section (i) hereof, other than a secondary offering of equity
securities by the Company, without the prior written consent of the Holders of
the Warrants and Warrant Securities representing a Majority of such securities
(assuming an exercise of all the Warrants underlying the Warrants).
(viii) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (x) an opinion of counsel to the Company, dated
the effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (y) a "cold comfort"
6
letter dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement) signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(ix) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least 12 consecutive months
beginning after the effective date of the registration statement.
(x) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as any such Holder or underwriter shall
reasonably request.
(xi) The Company shall enter into an underwriting agreement with the
managing underwriters, which may be the Underwriter. Such agreement shall be
satisfactory in form and substance to the Company, and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter; provided however, that no Holder
shall be required to make any representations, warranties or covenants or grant
any indemnity to which it shall object in any such underwriting agreement. The
Holders shall be parties to any underwriting agreement relating to an
underwritten sale of their Warrant Securities and may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(xii)For purposes of this Agreement, the term " Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
(50%) of the then outstanding Warrants or Warrant Securities that (i) are not
held by the Company, an affiliate, officer, creditor, employee or agent thereof
or any of their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith or (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under the
Act.
(k) Conditions of Company's Obligations. The Company's obligation under Section
6 hereof shall be conditioned as to each such public offering, upon a timely
receipt by the Company in writing of:
(A) Information as to the terms of such public offering furnished by or on
behalf of the Holders making a public distribution of their Warrant Securities;
and
(B) Such other information as the Company may reasonably require from such
Holder, or any underwriter for any of them, for inclusion in such registration
statement or offering statement or post-effective amendment.
(C) An agreement by the Holder to sell his Warrants and Warrant Securities
on the basis provided in the Underwriting Agreement.
7
(1) Continuing Effect of Agreement. The Company's agreements with respect
to the Warrant Securities in this Warrant will continue in effect regardless of
the exercise or surrender of this Warrant.
(m) Notices. Any notices or certificates by the Company to the Holder and by
the Holder to the Company shall be deemed delivered if in writing and delivered
personally or sent by certified mail, to the Holder, addressed to him or sent
to, Schneider Securities, Inc., 104 Broadway, Denver, CO 80203, or, if the
Holder has designated, by notice in writing to the Company, any other address,
to such other address, and, if to the Company, addressed to it at 81 Church
Street, East Hartford, CT 06108. The Company may change its address by written
notice to Schneider Securities, Inc.
(n) Limited Transferability. This Warrant Certificate and the Warrant may
not be sold, transferred, assigned or hypothecated for a one-year period after
the effective date of the Registration Statement except to underwriters of the
Offering referred to in the Underwriting Agreement or to individuals who are
either partners or officers of such an underwriter or by will or by operation of
law. The Warrant may be divided or combined, upon request to the Company by the
Warrantholder, into a certificate or certificates evidencing the same aggregate
number of Warrants. The Warrant may not be offered, sold, transferred, pledged
or hypothecated in the absence of any effective registration statement as to
such Warrant filed under the Act, or an exemption from the requirement of such
registration, and compliance with the applicable state securities laws. The
Company may require an opinion of counsel satisfactory to the Company that such
registration is not required and that such laws are complied with. The Company
may treat the registered holder of this Warrant as he or it appears on the
Company's book at any time as the Holder for all purposes. The Company shall
permit the Holder or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants.
(o) Transfer to Comply With the Securities Act of 1933. The Company may
cause the following legend, or one similar thereto, to be set forth on the
Warrants and on each certificate representing Warrant Securities, or any other
security issued or issuable upon exercise of this Warrant not theretofore
distributed to the public or sold to underwriters for distribution to the public
pursuant to Sections (h) or (i) hereof; unless counsel satisfactory to the
Company is of the opinion as to any such certificate that such legend, or one
similar thereto, is unnecessary:
"The warrants represented by this certificate may not be offered for sale,
sold or otherwise transferred except pursuant to an opinion of counsel
satisfactory to the Company is obtained stating that such offer or sale is in
compliance wrath state and federal securities law.
(p) Applicable Law. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Connecticut, without giving effect to
conflict of law principles.
(q) Assignability. This Warrant may not be attended except in a writing
signed by each Holder and the Company.
8
(r) Survival of Indemnification Provisions. The indemnification provisions
of this Warrant shall survive until , 2002.
Farmstead Telephone Group, Inc.
a Delaware corporation
By _____________________________
George Taylor, Jr., President
Date:__________________________
Attest:
_________________________________
, Secretary
9
PURCHASE FORM
Dated_____________ 19__
The undersigned hereby irrevocably elects to exercise the Warrant to the
extent of purchasing__________ Securities and hereby makes payment of $_________
in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name____________________________________________________________________________
(please typewrite or print in block letters)
Address_________________________________________________________________________
Signature_______________________________________________________________________
ASSIGNMENT FORM
FOR VALUE RECEIVED,_____________________________________________________________
hereby sells, assigns and transfers unto
Name____________________________________________________________________________
(please typewrite or print in block letters)
Address_________________________________________________________________________
the right to purchase Securities as represented by this Warrant to the extent
of________________ Securities as to which such right is exercisable and does
hereby irrevocably constitute and appoint_____________________, attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises.
Signature_______________________________________________________________________
Dated:_____________ 19__
10
FARMSTEAD TELEPHONE GROUP, INC.
CONSULTING AGREEMENT
, 1996
George Taylor Jr., President
Farmstead Telephone Group, Inc.
81 Church Street
East Hartford, CT 06108
Dear Mr. Taylor:
This will confirm the arrangements, terms and conditions, whereby
Schneider Securities, Inc. (hereinafter referred to as "Consultant") has been
retained by you to serve as financial consultant and advisor to Farmstead
Telephone Group, Inc. (hereinafter referred to as the "Company"), on a
nonexclusive basis for a period of 36 months commencing on the closing date of
the public offering (the "Closing"). The undersigned hereby agree to the
following terms and conditions:
1. Consulting Services. Consultant will render financial consulting and
advice pertaining to the Company's business affairs as you may from time to time
request.
2. Financing. Consultant will assist and represent you in obtaining
both short and long-term financing whether from banks or the sale of the
Company's debt or equity.
3. Wall Street Liaison. Consultant will when appropriate arrange
meetings with individuals and financial institutions in the investment community
such as security analysts, portfolio managers, and market makers and
representatives of the Company.
4. Compensation. The Company agrees to pay the Consultant in the
aggregate the sum of One Hundred Eight Thousand ($108,000) Dollars at the rate
of Three Thousand ($3,000) Dollars per month with the full amount payable at the
closing of the Offering.
5. Relationship. Nothing herein shall constitute Consultant as employee
or agent of the Company except to such extent as might hereafter be agreed upon
for a particular purpose. Except as expressly agreed, Consultants shall not have
the authority to obligate or commit the Company in any manner whatsoever.
6. Assignment and Termination. This Agreement shall not be assignable
by any party except to successors to all or substantially all of the business of
either the Consultant or the Company nor may this Agreement be terminated by
either party for any reason whatsoever without the prior written consent of the
other party, which consent may not be arbitrarily withheld by the party whose
consent is required.
Very truly yours,
Schneider Securities, Inc.
By:
--------------------------
Title:
-----------------------
Agreed and Accepted By:
Farmstead Telephone Group, Inc.
By:
--------------------------
George Taylor Jr., President
Exhibit 23 (a)
Independent Auditors' Consent
We consent to the use in this Registration Statement of Farmstead Telephone
Group, Inc. on Form SB-2 of our report dated March 8, 1996 appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the headings "Selected Financial Data" and "Experts" in such
Prospectus.
/S/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 31, 1996
HELLER, HOROWITZ & FEIT, P.C.
ATTORNEYS AT LAW
292 MADISON AVENUE
NEW YORK, N.Y. 10017
(212) 685-7600
JACOB W. HELLER COUNSEL
RICHARD F. HOROWITZ ROBERT C. MALABY
ELI FEIT ___
LAWRENCE J. TASCANO
STUART A. BLANDER CABLE ADDRESS
SIGMUND S. WISSNER-GROSS HELLFEITER, N.Y.
MAURICE W. HELLER ___
ALAN A. HELLER
___ TELECOPIER
(212) 696-9459
IRVING ROTHSTEIN
MAY ORENSTEIN
JOEL C. HAIMS
May 30, 1996
Farmstead Telephone Group, Inc.
81 Church Street
East Hartford, Connecticut 06108
Gentlemen:
As counsel for your Company, we have examined your Articles of
Incorporation, By-Laws, such other corporate records, documents and proceedings
and such questions of law as we have deemed relevant for the purpose of this
opinion.
We have also, as such counsel, examined the Registration Statement (the
"Registration Statement") of your Company on Form SB-2, covering the
registration under the Securities Act of 1933, as amended, of the proposed offer
and resale of (i) up to 1,150,000 Units (including the Underwriter's
overallotment option) of the Company's securities (the "Units"), each Un it
consisting of one share of Common Stock, par value $.001 (the "Common Stock"),
one Class A Common Stock Purchase Warrant (the "Class A Warrants") and one Class
B Common Stock Purchase Warrant (the "Class B Warrants" and collectively with
the Class A Warrants, the "Public Warrants"), (ii) 2,000,000 shares of Common
Stock underlying the Public Warrants, (iii) up to 100,000 Units issuable to the
underwriter, including 100,000 shares of Common Stock, 100,000 Class A Warrants
and 100,000 Class B Warrants (the "Underwriter's Warrants") and (iv) 200,000
shares of Common Stock underlying the Underwriter's Warrants (collectively,
items (i) - (iv), the "Registered Securities"). Our review has also included the
exhibits and form of prospectus (the "Prospectus") for the resale of the
Registered Securities.
On the basis of such examination, we are of the opinion that:
1. The Company is a corporation duly authorized and validly existing and in
good standing under the laws of the State of Delaware, with corporate power to
conduct the business which it conducts as described in the Registration
Statement.
2. The Common Stock identified in items (i) and (iii) above have been duly
and validly authorized and created and, subject to the payment therefore
pursuant to the terms contemplated in the Prospectus, will be duly and validly
issued as fully paid and nonassessable shares of Common Stock of the Company.
3. The Warrants identified in items (i) and (iii) above have been duly and
validly authorized and created and when exercised in accordance their respective
terms, the shares of Common Stock identified in items (ii) and (iv) above will
be issued as fully paid and nonassessable shares of Common Stock of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus under the
caption "Legal Matters."
Very truly yours,
/s/ Heller, Horowitz & Feit, P.C.
HELLER, HOROWITZ & FEIT, P.C.
HH&F:mm
