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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to __________
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Commission File Number: 0-15938
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Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle, East Hartford, CT 06108-3728
(Address of principal executive offices) (Zip Code)
(860) 610-6000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's $.001 par value Common Stock
was 3,262,329 shares as of March 31, 1997.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
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Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations - Three Months Ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
</TABLE>
PART I
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except number of shares) 1997 1996
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,877 $ 3,224
Accounts receivable, less allowance for doubtful accounts 3,762 3,917
Inventories 3,672 3,931
Other current assets 585 619
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Total current assets 9,896 11,691
Property and equipment, net of accumulated depreciation and
amortization 978 476
Investment in unconsolidated subsidiaries 84 117
Other assets 109 144
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Total assets $ 11,067 $ 12,428
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank Borrowings $ 1,370 $ 1,903
Accounts payable 2,056 2,364
Accrued expenses and other current liabilities 386 526
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Total current liabilities 3,812 4,793
Other liabilities - -
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Total liabilities 3,812 4,793
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;
3,262,329 shares issued and outstanding 3 3
Additional paid-in capital 12,196 12,196
Accumulated deficit (4,944) (4,564)
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Total stockholders' equity 7,255 7,635
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Total liabilities and stockholders' equity $ 11,067 $ 12,428
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</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1997 1996
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<S> <C> <C>
Revenues $ 5,102 $ 4,122
Cost of revenues 3,751 2,916
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Gross profit 1,351 1,206
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Operating expenses:
Selling, general and administrative expenses 1,657 1,085
Research and development expenses 34 34
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Total operating expenses 1,691 1,119
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Operating income (loss) (340) 87
Interest expense (39) (30)
Equity in losses of unconsolidated subsidiaries (33) (12)
Other income 37 292
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Income (loss) before income taxes (375) 337
Provision for income taxes 5 5
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Net income (loss) $ (380) $ 332
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Net income (loss) per share $ (.12) $ .15
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Weighted average common and common equivalent shares 3,297 2,142
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</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (380) $ 332
Adjustments to reconcile net income (loss) to net cash
flows used in operating activities:
Depreciation and amortization 48 30
Equity in undistributed losses of unconsolidated
subsidiaries 33 12
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 155 (124)
(Increase) decrease in inventories 259 (402)
(Increase) decrease in other assets 38 (537)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (448) 162
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Net cash used in operating activities (295) (527)
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Cash flows from investing activities:
Purchases of property and equipment (544) (222)
Redemptions of coupons 25 -
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Net cash used in investing activities (519) (222)
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Cash flows from financing activities:
Proceeds from short-term borrowings - 410
Repayments of short-term borrowings (533) -
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Net cash provided by (used in) financing activities (533) 410
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Net decrease in cash and cash equivalents (1,347) (339)
Cash and cash equivalents at beginning of period 3,224 622
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Cash and cash equivalents at end of period $ 1,877 $ 283
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 39 $ 30
Income taxes 15 5
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
The interim financial statements for 1997 are presented on a consolidated
basis, 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, 1996.
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") was issued, which will become effective
for periods ending after December 15, 1997. SFAS No. 128 will replace the
presentation of primary earnings per share ("EPS") with a presentation of
"basic EPS, which excludes dilution from convertible securities such as options
and warrants, and is instead computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
EPS will be computed similarly to fully diluted EPS pursuant to APB Opinion No.
15, "Earnings Per Share". Had the Company implemented SFAS No. 128 for the
quarter ended March 31, 1997, there would have been no material change to the
earnings (loss) per share data presented for 1997 or 1996.
Fully-diluted earnings (loss) per share is not presented for the three
months ended March 31, 1997 and 1996 because the effect is immaterial and
antidilutive in both periods. The weighted average shares and per share amounts
presented for 1996 have been restated to give retroactive recognition to the
1-for-10 reverse stock split implemented August 13, 1996.
Note 2. Bank Borrowings
In April 1997, the Company accepted a proposal from First Union Bank to
renew its revolving loan facility for an additional two year term. Under the
terms of the proposal, the amount of the line will be increased to either $4
million, advanced at 80% of eligible receivables and 40% of eligible inventory,
or $3.5 million, advanced at 80% of eligible receivables if the line is secured
by receivables only. Borrowings will bear interest at the bank's prime rate
plus 0.50%. The modified loan agreement, which is expected to close prior to
the May 31, 1997 expiration of the current agreement, will contain requirements
as to a minimum amount of net worth, and maintenance of debt to net worth and
debt service coverage ratios.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues
Revenues for the three months ended March 31, 1997 were $5,102,000, an
increase of $980,000 or 24% from the comparable 1996 period. The increase was
attributable to the Company's telephone equipment products and services, which
were up by 30% over the comparable prior year period, due to sales of new
products under the Company's Platinum Dealer Program with Lucent Technologies,
increased secondary market equipment sales, and increased service revenues.
Voice processing product revenues decreased by 35% from the comparable prior
year period as a result of lower dealer and international sales. Revenues from
telephone equipment sales and services accounted for 87% of consolidated
revenues for the three months ended March 31, 1997 (84% in the comparable 1996
period), while revenues from voice processing product sales and services
accounted for 8% of consolidated revenues in 1997 (15% in 1996). Revenues from
Farmstead Asset Management Services, LLC ("FAMS"), which began operations at
the end of February 1996, accounted for 5% of consolidated first quarter 1997
revenues (1% in the comparable 1996 period).
Cost of Revenues
Cost of revenues for the three months ended March 31, 1997 were
$3,751,000, an increase of $835,000 or 29% from the comparable 1996 period
primarily due to higher sales volume. The gross profit margin was 26.5% of
revenues during 1997, as compared to 29% of revenues for the comparable 1996
period. The decrease was attributable to product sales mix, principally (i)
increased sales of new equipment to end users and to the Company's associate
dealers at lower profit margins than the Company realizes from sales of
secondary market equipment, and (ii) decreased sales of voice processing
equipment, and increased overhead costs per revenue dollar. The Company is not
aware of any market conditions which would cause gross profit margins to
significantly fluctuate from current levels.
Operating Expenses
Selling, general & administrative ("SG&A") expenses for the three months
ended March 31, 1997 were $1,657,000, an increase of $572,000 or 53% over the
comparable 1996 period. SG&A expense was 32% of revenues in 1997 as compared to
26% of revenues in the comparable 1996 period. The increase was principally
attributable to (i) higher levels of employment and associated employee costs,
as the Company increased its sales, customer and technical support capabilities
in connection with becoming a dealer and distributor for new Lucent products,
and developed a network of associate dealers, (ii) three full months of SG&A
expense incurred by FAMS in the current year quarter, as compared to
approximately one month of SG&A expense in 1996, and (iii) increased marketing
and investor relations expenses.
Other Income and Expenses
Other income for the three months ended March 31, 1997 was $37,000 as
compared to $292,000 for the comparable 1996 period. Included in other income
for 1996 was $280,000 of rebates from AT&T under a coupon redemption program.
Other income in the current period consisted principally of interest earned on
the Company's invested cash.
Liquidity and Capital Resources
Working capital at March 31, 1997 was $6,084,000, a 12% decrease from the
$6,898,000 of working capital at December 31, 1996. The working capital ratio
at March 31, 1997 was approximately 2.6 to 1 as compared to 2.4 to 1 at
December 31, 1996.
Operating activities used $295,000 during the three months ended March 31,
1997, principally from the reduction of accounts payable and other current
obligations, and as a result of the operating loss for the period. This was
partially offset by a reduction in accounts receivable and inventories.
Investing activities used $519,000 during the three months ended March 31,
1997, principally in the purchase of office furniture, equipment and leasehold
improvements in conjunction with the Company's relocation to 22 Prestige Park
Circle, East Hartford, Connecticut. The Company plans to obtain financing over
a five year term for a substantial portion of the cost of these purchases,
however as of the date of this report no agreements have been entered into.
Financing activities during the three months ended March 31, 1997 used
$533,000 in the reduction of outstanding borrowings under the Company's
revolving credit facility. As of March 31, 1997, the Company had approximately
$1,010,000 of borrowing availability under this credit facility, and the
average and highest amounts borrowed during the three months ended March 31,
1997 were $1,477,000 and $2,162,000, respectively. These borrowings are
dependent upon the continuing generation of collateral, subject to a $2.5
million credit line. In April 1997, the Company accepted a proposal from First
Union Bank to renew its revolving loan facility for an additional two year
term. Under the terms of the proposal, the amount of the line will be increased
to either $4 million, advanced at 80% of eligible receivables and 40% of
eligible inventory, or $3.5 million, advanced at 80% of eligible receivables if
the line is secured by receivables only. Borrowings will bear interest at the
bank's prime rate plus 0.50%. The modified loan agreement, which is expected to
close prior to the May 31, 1997 expiration of the current agreement, will
contain requirements as to a minimum amount of net worth, and maintenance of
debt to net worth and debt service coverage ratios.
The Company believes that it has sufficient capital resources, in the
form of cash and availability under its revolving credit facility, to satisfy
its present working capital requirements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: May 5, 1997 /s/ Robert G. LaVigne
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Robert G. LaVigne
Vice President - Finance and Administration,
Chief Financial Officer
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,877
<SECURITIES> 0
<RECEIVABLES> 3,762
<ALLOWANCES> 0
<INVENTORY> 3,672
<CURRENT-ASSETS> 9,896
<PP&E> 978
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,067
<CURRENT-LIABILITIES> 3,812
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 7,252
<TOTAL-LIABILITY-AND-EQUITY> 11,067
<SALES> 5,102
<TOTAL-REVENUES> 5,102
<CGS> 3,751
<TOTAL-COSTS> 3,751
<OTHER-EXPENSES> 67
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> (375)
<INCOME-TAX> 5
<INCOME-CONTINUING> (380)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (380)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
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