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 September 30, 1997
[x] Transition report under Section 13 or 15(d) of the Exchange Act 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
(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 [ ]
As of October 31, 1997, there were 3,262,329 shares of the issuer's $.001 par
value Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 1
TABLE OF CONTENTS TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
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Page
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Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 1997 and December 31,
1996 3
Consolidated Statements of Operations - Three Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Operations - Nine Months Ended September
30, 1997 and 1996 5
Consolidated Statements of Cash Flows - Nine Months Ended September
30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE> 2
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, December 31,
(In thousands, except number of shares) 1997 1996
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 1,246 $ 3,161
Accounts receivable, less allowance for doubtful accounts 4,155 3,792
Inventories 3,800 3,595
Other current assets 308 594
-------------------------
Total current assets 9,509 11,142
Property and equipment, net of accumulated depreciation and
amortization (Note 2) 853 321
Investment in unconsolidated subsidiaries (Note 5) - 117
Net assets of discontinued operation (Note 6) 400 435
Other assets 30 59
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Total assets $ 10,792 $ 12,074
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,389 $ 2,048
Bank borrowings (Note 3) - 1,903
Borrowings under inventory financing agreement (Note 4) 1,090 -
Accrued expenses and other current liabilities (Note 6) 655 488
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Total current liabilities 3,134 4,439
Long-term debt (Note 3) 2,037 -
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Total liabilities 5,171 4,439
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Stockholders' equity:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
no shares issued or 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 (6,578) (4,564)
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Total stockholders' equity 5,621 7,635
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Total liabilities and stockholders' equity $ 10,792 $ 12,074
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, 1997 and 1996
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(In thousands, except per share amounts) 1997 1996
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Revenues $ 5,310 $ 5,193
Cost of revenues 3,975 3,758
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Gross profit 1,335 1,435
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Operating expenses:
Selling, general and administrative expenses 1,516 1,208
Research and development expenses 51 24
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Total operating expenses 1,567 1,232
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Operating income (loss) (232) 203
Interest expense (58) (40)
Equity in losses of unconsolidated subsidiaries - (18)
Other income 25 18
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Income (loss) from continuing operations before income taxes (265) 163
Provision for income taxes 11 3
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Income (loss) from continuing operations (276) 160
Discontinued operations (Note 6):
Loss from operations (194) (35)
Provision for loss on disposal of discontinued operation (329) -
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Loss from discontinued operations (523) (35)
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Net income (loss) $ (799) $ 125
===================
Net Income (loss) per common share:
From Continuing operations $ (.08) $ .07
From Discontinued operations (.16) (.02)
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Net Income (loss) per common share $ (.24) $ .05
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Weighted average common and common equivalent shares
outstanding (000's) 3,287 2,317
===================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30, 1997 and 1996
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<CAPTION>
(In thousands, except per share amounts) 1997 1996
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Revenues $ 16,005 $ 13,503
Cost of revenues 11,900 9,539
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Gross profit 4,105 3,964
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Operating expenses:
Selling, general and administrative expenses 4,543 3,307
Research and development expenses 132 82
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Total operating expenses 4,675 3,389
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Operating income (loss) (570) 575
Interest expense (150) (107)
Equity in losses of unconsolidated subsidiaries (40) (33)
Write-down of investments in unconsolidated subsidiaries
(Note 5) (404) -
Other income 79 442
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Income (loss) from continuing operations before income
taxes (1,085) 877
Provision for income taxes 22 11
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Income (loss) from continuing operations (1,107) 866
Discontinued operations (Note 6):
Loss from operations (578) (207)
Provision for loss on disposal of discontinued operation (329) -
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Loss from discontinued operations (907) (207)
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Net income (loss) $ (2,014) $ 659
=====================
Net income (loss) per common share:
From Continuing operations $ (.32) $ .39
From Discontinued operations (.26) (.09)
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Net income (loss) per common share $ (.58) $ .30
=====================
Weighted average common and common equivalent shares
outstanding (000's) 3,457 2,203
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, 1997 and 1996
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(In thousands) 1997 1996
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Cash flows from operating activities:
Net income (loss) $ (2,014) $ 659
Adjustments to reconcile net income to net cash flows provided
(used) by continuing operating activities:
Provision for loss on disposal of discontinued operation 329 -
Depreciation and amortization 173 96
Equity in undistributed losses of unconsolidated subsidiaries 40 33
Write-down of investments in unconsolidated subsidiaries 404 -
Changes in operating assets and liabilities:
Increase in accounts receivable (628) (1,611)
Increase in inventories (257) (1,349)
(Increase) decrease in other assets 233 (87)
Increase (decrease) in accounts payable, accrued expenses
and other liabilities (744) 1,443
Increase in net assets of discontinued operation (119) -
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Net cash provided (used) by operating activities: (2,583) (816)
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Cash flows from investing activities:
Purchases of property and equipment (279) (325)
Purchases of redeemable coupons - (754)
Redemption of coupons 75 738
Investment in unconsolidated subsidiaries - (40)
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Net cash used in investing activities (204) (381)
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Cash flows from financing activities:
Net proceeds from bank and inventory finance borrowings 903 521
Repayments of capital lease obligation (31) -
Proceeds from sales of common stock and exercise of stock
options, net - 3,248
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Net cash provided by financing activities 872 3,769
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Net increase (decrease) in cash and cash equivalents (1,915) 2,572
Cash and cash equivalents at beginning of period 3,161 622
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Cash and cash equivalents at end of period $ 1,246 $ 3,194
=====================
Supplemental schedule of non-cash financing and investing
activities:
Purchase of equipment under capital lease obligation $ 419 $ -
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 150 $ 106
Income taxes 49 19
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
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. As further described in Note 6 contained herein, the Company expects
to complete the sale of Farmstead Asset Management Services, LLC ("FAMS") in
November, effective October 1, 1997. The accompanying consolidated balance
sheet as of September 30, 1997 and the consolidated statements of operations
for the three and nine months ended September 30, 1997 present FAMS as a
discontinued operation, and certain amounts previously reported for
accompanying prior year periods have been restated for comparison purposes.
This Form 10-QSB should be read in conjunction with the consolidated 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 three and nine months ended September 30, 1997 and 1996, there would
have been no material change to the earnings (loss) per share data presented.
Fully-diluted earnings (loss) per share is not presented for the three
and nine months ended September 30, 1997 and 1996 because the effect is
immaterial and antidilutive in all periods.
Note 2. Property and Equipment
Included in property and equipment at September 30, 1997 is $419,000 of
capital lease property consisting principally of office furniture, equipment
and computer equipment acquired in fiscal 1997 in connection with the Company's
relocation to a larger operating facility.
Note 3. Long-term Debt
As of September 30, 1997, long-term debt obligations consisted of the
following (in thousands):
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Bank revolving credit agreement (a) $ 1,716
Obligation under capital lease (b) 388
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2,104
Less current portion (67)
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Long-term debt $ 2,037
=======
</TABLE>
(a) Effective May 30, 1997, the Company entered into a two year, $3.5
million revolving loan agreement with First Union Bank of Connecticut
(subsequently renamed First Union National Bank, hereinafter referred to as
"First Union"), modifying and replacing its previous one year, $2.5 million
agreement with First Union. Under this agreement, borrowings are advanced at
80% of eligible accounts receivable, bear interest at First Union prime plus
.5% (9% at September 30, 1997), and are secured by all of the Company's assets
excluding inventories. The agreement requires the Company to maintain a minimum
net worth of $6 million until December 31, 1997 at which
<PAGE> 7
time a minimum level of $6.4 million is required. The Company is also required
to maintain certain debt to net worth and debt service coverage ratios. In
addition, the agreement restricts fixed asset purchases and does not allow
the payment of cash dividends without the consent of the lender. There is no
requirement to maintain compensating balances under the agreement. As of
September 30, 1997, the Company was in violation of its tangible net worth
requirement. On November 12, 1997, the Company obtained a waiver from the
bank of this default, and the bank lowered the minimum net worth requirement
to $5.3 million at any time thereafter. An amended loan agreement which
contains this modification, and changes the advance rate to 75% of eligible
accounts receivable, is expected to be executed in November. As of September
30, 1997, the unused portion of the credit facility was $1,784,000, of which
approximately $784,000 was available under the borrowing formula. The average
and highest amounts borrowed under these credit facilities during the nine
months ended September 30, 1997 were approximately $1,700,000 and $2,282,000,
respectively. Borrowings are dependent upon the continuing generation of
collateral, subject to the credit limit.
(b) In May 1997, the Company entered into a five year, noncancelable
lease agreement to finance $419,000 of office furniture, equipment and computer
equipment acquired in connection with the Company's relocation to a larger
operating facility. Monthly lease payments under the lease are $9,589, with a
$1.00 purchase option at the end of the lease. The effective interest rate on
the capitalized lease obligation at June 30, 1997 was 13.29%. As of September
30, 1997 the future minimum annual lease payments are as follows (in
thousands):
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Year ending December 31:
1997 $ 29
1998 115
1999 115
2000 115
2001 115
Thereafter 29
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Total minimum lease payments 518
Less amount representing interest (130)
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Present value of net minimum lease payments
under capital lease $ 388
======
</TABLE>
Note 4. Inventory Financing Agreement
On June 6, 1997, the Company entered into a $2 million line of credit
agreement with AT&T Commercial Finance Corporation ("AT&T-CFC") which expires
April 30, 1998. The credit line is used to finance the acquisition of inventory
manufactured by Lucent Technologies, Inc. ("Lucent"), and borrowings are
secured by all of the Company's inventories. Under the terms of this agreement,
advances to finance products purchased directly from Lucent are repayable,
interest-free, in either two or three equal monthly installments, depending
upon the product purchased. Advances to finance Lucent products purchased from
other vendors ("Other Eligible Inventory") are repayable in two equal monthly
installments, bear interest at prime plus 1.5%, and are subject to a $500,000
borrowing limit. For products purchased directly from Lucent the ratio of total
collateral available to AT&T-CFC after deduction of any senior liens, to total
AT&T-CFC indebtedness must be at least 1.5 to 1. The ratio of Other Eligible
Inventory to advances on Other Eligible Inventory must be at least 2 to 1. The
Company is currently in compliance with these requirements. As of September 30,
1997, the Company's outstanding borrowings under this credit arrangement were
$1,090,000.
Note 5. Investment in Unconsolidated Subsidiaries
In June 1997, due principally to fiscal year 1997 operating losses at
Beijing Antai Communication Equipment Co., LTD. ("ATC"), and a shift in the
Company's focus to domestic business development, the Company established a
full reserve against both the $77,000 balance of its investment in, and its
$265,000 accounts
<PAGE> 8
receivable from, ATC, which aggregated a $342,000 non-cash charge against
earnings. In June 1997, the Company also wrote down $52,000 of inventory
located at TeleSolutions, Inc., and accrued $10,000 of estimated closing
costs, as it decided to close this operation.
Note 6. Sale of FAMS
In September 1997, the Company entered into negotiations with an employee
of the Company for the sale of the Company's interest in FAMS. The sale
transaction is expected to be completed in November, effective October 1,1997.
FAMS, LLC, a newly formed New Jersey corporation (the "Buyer") will acquire all
of the Company's interest in FAMS for $40,000 in cash and a $360,000 10% Note,
payable in 60 monthly installments. As presently structured, the Note will be
secured by a one year letter of credit, and by all of the assets of FAMS.
Accordingly, the operations of FAMS has been treated as a discontinued
operation. The Company has accrued a loss on disposal of FAMS of $329,000,
consisting of (i) a charge of $154,000 representing the excess of the book
value of the net assets sold over the sales proceeds, (ii) a $90,000 accrual
for the estimated cost of rental obligations on FAMS's current facility through
the March 31, 1998 expiration of the lease term, and (iii) $85,000 of other
costs and expenses of the sale and phase out of the Company's obligations.
Pursuant to the terms of sale, the Company will be contingently obligated to
assume any remaining rental obligations of FAMS in its current facility should
the Buyer relocate the business prior to the March 31, 1998 lease expiration.
For the three and nine months ended September 30, 1997, FAMS recorded
revenues of $311,000 and $799,000 respectively, as compared with revenues of
$444,000 and $983,000 for the respective three and nine months ended September
30, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net Loss
The Company recorded a net loss from continuing operations of $276,000
for the three months ended September 30, 1997 as compared to net income from
continuing operations of $160,000 for the comparable 1996 period. The decline
in earnings was attributable to several factors, as further explained below,
including the unprofitable operations of the Cobotyx voice processing products
division. This division incurred a net loss of approximately $139,000 in the
current period as compared to a net loss of approximately $35,000 in the
comparable prior year period, due to declining revenues.
The Company recorded a net loss from continuing operations of $1,107,000
for the nine months ended September 30, 1997, as compared to net income from
continuing operations of $866,000 for the comparable 1996 period. The decline
in earnings was attributable to several factors, as further explained below.
Due to the unprofitable operations of the Company's foreign affiliates, ATC and
TeleSolutions, the Company established a full valuation reserve against all
associated assets, including inventory located overseas. The combined foreign
affiliate losses and asset write-downs resulted in a one-time, charge against
earnings of $444,000. The net loss from continuing operations for the current
nine month period was also attributable to the unprofitable operations of the
Cobotyx voice processing products division. This division incurred a net loss
of approximately $407,000 in the current period as compared to a net loss of
approximately $203,000 in the comparable prior year period, due to declining
revenues. In addition, the Company recorded approximately $660,000 less income
in 1997 from the AT&T coupon rebate program than it did in 1996.
In September 1997, the Company entered into negotiations with an employee
of the Company for the sale of the Company's interest in FAMS. The sale
transaction is expected to be completed in November, effective October 1,1997.
FAMS, LLC, a newly formed New Jersey corporation (the "Buyer") will acquire all
of the Company's interest in FAMS for $40,000 in cash and a $360,000 10% Note,
payable in 60 monthly installments. As presently structured, the Note
<PAGE> 9
will be secured by a one year letter of credit, and by all of the
assets of FAMS. Accordingly, the operations of FAMS has been treated as a
discontinued operation. The Company has accrued a loss on disposal of FAMS
of $329,000, consisting of (i) a charge of $154,000 representing the excess
of the book value of the net assets sold over the sales proceeds, (ii) a
$90,000 accrual for the estimated cost of rental obligations on FAMS's
current facility through the March 31, 1998 expiration of the lease term,
and (iii) $85,000 of other costs and expenses of the sale and phase out of
the Company's obligations. Pursuant to the terms of sale, the Company will
be contingently obligated to assume any remaining rental obligations of
FAMS in its current facility should the Buyer relocate the business prior
to the March 31, 1998 lease expiration.
For the three and nine months ended September 30, 1997, FAMS recorded
revenues of $311,000 and $799,000 respectively, as compared with revenues of
$444,000 and $983,000 for the respective three and nine months ended September
30, 1996. Prior to the effective date of sale, FAMS incurred losses of $194,000
and $578,000 during the three and nine months ended September 30, 1997,
respectively.
Revenues
Revenues from continuing operations for the three months ended September
30, 1997 were $5,310,000, an increase of $117,000 or 2% from the comparable
1996 period. The increase was attributable to the Company's telephone equipment
products and services, which were up by 8% 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
42% from the comparable prior year period as a result of lower dealer and
international sales. Revenues from telephone equipment sales and services
accounted for 94% of consolidated revenues from continuing operations for the
three months ended September 30, 1997 (89% in the comparable 1996 period),
while revenues from voice processing product sales and services accounted for
6% of consolidated revenues from continuing operations in 1997 (11% in 1996).
Revenues for the nine months ended September 30, 1997 were $16,005,000,
an increase of $2,502,000 or 19% from the comparable 1996 period. The increase
was attributable to the Company's telephone equipment products and services,
which were up by 26% 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 32% from the comparable prior
year period as a result of lower dealer and international sales. Revenues from
telephone equipment sales and services accounted for 93% of consolidated
revenues for the nine months ended September 30, 1997 (88% in the comparable
1996 period), while revenues from voice processing product sales and services
accounted for 7% of consolidated revenues in 1997 (12% in 1996).
Cost of Revenues and Gross Profit
Cost of revenues from continuing operations for the three months ended
September 30, 1997 were $3,975,000, an increase of $217,000 or 6% from the
comparable 1996 period. The gross profit margin was 25% of revenues during
1997, as compared to 28% of revenues for the comparable 1996 period. The
decrease in gross profit margin was attributable principally to (i) increased
sales of new equipment to the Company's associate dealers at lower profit
margins than the Company realizes from sales of secondary market equipment to
end users, (ii) decreased sales of voice processing products which typically
yield higher profit margins than telephone equipment, and (iii) lower profit
margins on service revenues.
Cost of revenues from continuing operations for the nine months ended
September 30, 1997 were $11,900,000, an increase of $2,361,000 or 25% from the
comparable 1996 period. The gross profit margin was 26% of revenues during
1997, as compared to 29% of revenues for the comparable 1996 period. The
decrease in the gross profit margin was attributable principally to the reasons
described above for the three months ended September 30, 1997, and to lower
product purchase rebates earned from the utilization of AT&T coupons during the
period.
<PAGE> 10
Operating Expenses
Operating expenses from continuing operations were 30% and 24%
respectively, of revenues for the three months ended September 30, 1997 and
1996. Operating expenses were 29% and 25% respectively, of revenues for the
nine months ended September 30, 1997 and 1996.
Selling, general & administrative ("SG&A") expenses for the three months
ended September 30, 1997 were $1,516,000, an increase of $335,000 or 27% over
the comparable 1996 period. SG&A expenses for the nine months ended September
30, 1997 were $4,543,000, an increase of $1,236,000 or 25% over the comparable
1996 period. SG&A expenses were 28% of revenues for the three months ended
September 30, 1997, compared with 23% for the comparable 1996 period, and were
28% of revenues for the nine months ended September 30, 1997, compared with 25%
for the comparable 1996 period. The increase in SG&A during the current year
periods 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, developed a network of associate dealers,
and expanded its sales territories, and (ii) higher facility rental and
occupancy costs, including increased depreciation expense from fixed assets
purchased in connection with the Company's relocation to its larger
headquarters in East Hartford, Connecticut.
Other Income and Expenses
Other income for the three and nine months ended September 30, 1997 was
$25,000 and $79,000, respectively, as compared to $18,000 and $442,000 for the
respective three and nine month periods ended September 30, 1996. Other income
in the current year periods consisted principally of interest earned on the
Company's invested cash. Included in other income for the nine months ended
September 30, 1996 was $410,000 of rebates from AT&T under a coupon redemption
program.
Liquidity and Capital Resources
Working capital at September 30, 1997 was $6,375,000, a 5% decrease from
the $6,703,000 of working capital at December 31, 1996. The working capital
ratio at September 30, 1997 was approximately 3 to 1 as compared to 2.5 to 1 at
December 31, 1996. The increase in the working capital ratio was attributable
to the reclassification to long-term liabilities from current liabilities of
the Company's borrowings under its revolving credit facility which, in May
1997, was replaced with a two year loan agreement.
Operating activities used $2,583,000 during the nine months ended
September 30, 1997, principally as a result of the operating loss for the
period, increases in accounts receivable and inventories, and a reduction in
accounts payable. Accounts payable declined due to the start-up of an
inventory financing agreement, as further described below, the advances under
which to finance inventory purchases are presented as a financing activity on
the Consolidated Statement of Cash Flows.
Investing activities used $204,000 during the nine months ended September
30, 1997. During the current period, the Company purchased approximately
$698,000 of office furniture and equipment, computer equipment, and leasehold
improvements, principally in conjunction with the Company's relocation to a
larger headquarters in East Hartford, Connecticut. In May 1997, the Company
entered into a five year, noncancelable lease agreement to finance $419,000 of
these purchases. Under the lease agreement, which is being accounted for as a
capital lease, monthly lease payments are $9,589, with a $1.00 buyout option at
the end of the lease.
Financing activities generated $872,000 during the nine months ended
September 30, 1997, principally from advances under an inventory finance
agreement which, as of September 30, 1997 amounted to $1,090,000. On June 6,
1997, the Company entered into a $2 million line of credit agreement with AT&T
Commercial Finance Corporation ("AT&T-CFC") which expires April 30, 1998. The
credit line is used to finance the acquisition of inventory manufactured by
Lucent Technologies, Inc. ("Lucent"), and borrowings are secured by all of the
Company's inventories. Under the terms of this agreement, advances to finance
products purchased directly from Lucent are repayable, interest-free, in either
two or three equal monthly installments, depending upon the product purchased.
Advances to finance Lucent products purchased from other vendors ("Other
Eligible Inventory") are
<PAGE> 11
repayable in two equal monthly installments, bear interest at prime plus 1.5%,
and are subject to a $500,000 borrowing limit. For products purchased directly
from Lucent the ratio of total collateral available to AT&T-CFC after
deduction of any senior liens, to total AT&T-CFC indebtedness must be at least
1.5 to 1. The ratio of Other Eligible Inventory to advances on Other Eligible
Inventory must be at least 2 to 1. The Company is currently in compliance
with these requirements.
Effective May 30, 1997, the Company entered into a two year, $3.5 million
revolving loan agreement with First Union Bank of Connecticut (subsequently
renamed First Union National Bank, hereinafter referred to as "First Union"),
modifying and replacing its previous one year, $2.5 million agreement with
First Union. Under this agreement, borrowings are advanced at 80% of
eligible accounts receivable, bear interest at First Union prime plus .5% (9%
at September 30, 1997), and are secured by all of the Company's assets
excluding inventories. The agreement requires the Company to maintain a minimum
net worth of $6 million until December 31, 1997 at which time a minimum level
of $6.4 million is required. The Company is also required to maintain certain
debt to net worth and debt service coverage ratios. In addition, the agreement
restricts fixed asset purchases and does not allow the payment of cash
dividends without the consent of the lender. There is no requirement to
maintain compensating balances under the agreement. As of September 30, 1997,
the Company was in violation of its tangible net worth requirement. On November
12, 1997, the Company obtained a waiver from the bank of this default, and the
bank lowered the minimum net worth requirement to $5.3 million at any time
thereafter. An amended loan agreement which contains this modification, and
changes the advance rate to 75% of eligible accounts receivable, is expected to
be executed in November. As of September 30, 1997, the unused portion of the
credit facility was $1,784,000, of which approximately $784,000 was available
under the borrowing formula. The average and highest amounts borrowed under
these credit facilities during the nine months ended September 30, 1997 were
approximately $1,700,000 and $2,282,000, respectively. Borrowings are dependent
upon the continuing generation of collateral, subject to the credit limit.
The Company believes that it has sufficient capital resources, in the
form of cash and availability under its credit facilities, 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
The Company hereby incorporates by reference the information set forth
in Note 3 of the consolidated financial statements and the discussion contained
in Item 2 regarding the default under the loan agreement with First Union.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE> 12
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibit is filed herewith:
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
<PAGE> 13
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: November 12, 1997 /s/ Robert G. LaVigne
---------------------------------------
Robert G. LaVigne
Executive Vice President, Chief
Financial Officer
<PAGE> 14
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,246
<SECURITIES> 0
<RECEIVABLES> 4,155
<ALLOWANCES> 0
<INVENTORY> 3,800
<CURRENT-ASSETS> 9,509
<PP&E> 853
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,792
<CURRENT-LIABILITIES> 3,134
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 5,618
<TOTAL-LIABILITY-AND-EQUITY> 10,792
<SALES> 16,005
<TOTAL-REVENUES> 16,005
<CGS> 11,900
<TOTAL-COSTS> 11,900
<OTHER-EXPENSES> 4,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (1,085)
<INCOME-TAX> 22
<INCOME-CONTINUING> (1,107)
<DISCONTINUED> (907)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,014)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
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