==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition report under Section 13 or 15(d) of the
Exchange Act
For the transition period from _________ to __________
__________
Commission File Number: 0-15938
__________
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 July 31, 1998, there were 3,264,579 shares of the issuer's $.001 par
value Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except number of shares) 1998 1997
- -----------------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,052 $ 1,102
Accounts receivable, less allowance for doubtful accounts 5,292 5,077
Inventories 5,352 2,583
Net assets of discontinued operations (Note 3) 494 560
Other current assets 258 181
---------------------
Total current assets 12,448 9,503
Property and equipment, net 879 935
Other assets 319 391
---------------------
Total assets $13,646 $10,829
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,094 $ 1,560
Bank borrowings (Note 2) 1,760 -
Borrowings under inventory financing agreement (Note 2) 2,113 889
Current portion of long-term debt 74 69
Accrued compensation and benefits 415 480
Other current liabilities 151 65
---------------------
Total current liabilities 7,607 3,063
Long-term debt (Note 2) 261 1,997
---------------------
Total liabilities 7,868 5,060
---------------------
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;
3,264,579 and 3,262,329 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively 3 3
Additional paid-in capital 12,200 12,196
Accumulated deficit (6,425) (6,430)
---------------------
Total stockholders' equity 5,778 5,769
---------------------
Total liabilities and stockholders' equity $13,646 $10,829
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $7,133 $ 5,446
Cost of revenues 5,311 4,131
-----------------
Gross profit 1,822 1,315
Selling, general and administrative expenses 1,524 1,329
-----------------
Operating income (loss) 298 (14)
Interest expense (51) (52)
Equity in losses of unconsolidated subsidiaries - (7)
Write-down of investments in unconsolidated subsidiaries - (404)
Other income 30 18
-----------------
Income (loss) from continuing operations before income taxes 277 (459)
Provision for income taxes 10 6
-----------------
Income (loss) from continuing operations 267 (465)
-----------------
Discontinued operations (Note 3):
Loss from operations (69) (370)
Provision for estimated costs of disposal - -
-----------------
Loss from discontinued operations (69) (370)
=================
Net income (loss) $ 198 $ (835)
=================
Basic net income (loss) per common share:
From continuing operations $ .08 $ (.14)
From discontinued operations (.02) (.11)
-----------------
Basic net income (loss) per common share $ .06 $ (.25)
=================
Diluted net income (loss) per common share:
From continuing operations $ .07 $ (.14)
From discontinued operations (.02) (.12)
-----------------
Diluted net income (loss) per common share $ .05 $ (.26)
=================
Weighted average common shares outstanding:
Basic 3,265 3,262
=================
Diluted 3,629 3,262
=================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Revenues $12,753 $ 9,901
Cost of revenues 9,570 7,527
------------------
Gross profit 3,183 2,374
Selling, general and administrative expenses 2,879 2,478
------------------
Operating income (loss) 304 (104)
Interest expense (112) (91)
Equity in losses of unconsolidated subsidiaries - (40)
Write-down of investments in unconsolidated subsidiaries - (404)
Other income 61 54
------------------
Income (loss) from continuing operations before income taxes 253 (585)
Provision for income taxes 21 11
------------------
Income (loss) from continuing operations 232 (596)
------------------
Discontinued operations (Note 3):
Loss from operations (152) (619)
Provision for estimated costs of disposal (75) -
------------------
Loss from discontinued operations (227) (619)
------------------
Net income (loss) $ 5 $(1,215)
==================
Basic net income (loss) per common share:
From continuing operations $ .07 $ (.18)
From discontinued operations (.07) (.19)
------------------
Basic net income (loss) per common share $ - $ (.37)
==================
Diluted net income (loss) per common share:
From continuing operations $ .06 $ (.18)
From discontinued operations (.06) (.19)
------------------
Diluted net income (loss) per common share $ - $ (.37)
==================
Weighted average common shares outstanding:
Basic 3,264 3,262
==================
Diluted 3,781 3,262
==================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5 $(1,215)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Depreciation and amortization 150 72
Provision for estimated costs of disposal
of discontinued operation 75 -
Equity in undistributed losses of unconsolidated subsidiaries - 40
Write-down of investments in unconsolidated subsidiaries - 404
Changes in operating assets and liabilities:
Increase in accounts receivable (215) (898)
Increase in inventories (2,769) (311)
(Increase) decrease in other assets (7) 80
Increase in accounts payable, accrued expenses and
other current liabilities 1,480 37
(Increase) decrease in net assets of discontinued operations 66 (27)
------------------
Net cash used in operating activities (1,215) (1,818)
------------------
Cash flows from investing activities:
Purchases of property and equipment (92) (242)
Redemptions of coupons - 75
------------------
Net cash used in investing activities (92) (167)
------------------
Cash flows from financing activities:
Proceeds from bank and inventory finance borrowings 1,287 360
Repayments of capital lease obligation (34) (15)
Proceeds from exercise of stock options 4 -
------------------
Net cash provided by financing activities 1,257 345
Net decrease in cash and cash equivalents (50) (1,640)
Cash and cash equivalents at beginning of period 1,102 3,161
------------------
Cash and cash equivalents at end of period $ 1,052 $ 1,521
==================
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 112 94
Income taxes 14 25
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements are presented on a consolidated
basis, consisting of the accounts of Farmstead Telephone Group, Inc. and its
wholly-owned subsidiary, FTG Venture Corporation (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 presented. As further
described in Note 3 contained herein, the Company has presented its voice
processing products business 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, 1997.
2. DEBT OBLIGATIONS
Inventory Financing Agreement
On April 30, 1998 the original one year term of the Company's $2
million inventory finance agreement with Finova Capital Corporation
("Finova") expired, however it is being continued on a discretionary basis.
In May 1998, this credit line was temporarily increased to $3,500,000 until
August 30, 1998. All other lending terms and conditions remain the same as
in the original agreement.
Bank Borrowings
As of June 30, 1998, the unused portion of the Company's revolving
credit facility was $1,740,000, of which approximately $1,400,000 was
available under the borrowing formula. The average amounts borrowed under
this credit facility during the three and six months ended June 30, 1998
were approximately $1,685,000 and $1,853,000, respectively. Borrowings are
dependent upon the continuing generation of collateral, subject to the
credit limit. The weighted average interest rate on the outstanding
borrowings was 9.6% for the six months ended June 30, 1998. As of June 30,
1998, the Company was in compliance with its loan covenants.
Long-term Debt
Long-term debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
6/30/98 12/31/97
-------------------
<S> <C> <C>
Bank revolving credit agreement (a) $ - $1,697
Obligation under capital lease 335 369
-----------------
335 2,066
Less current portion (74) (69)
-----------------
Long-term debt $261 $1,997
=================
</TABLE>
(a) Reclassified as a current liability effective May 31, 1998.
3. DISCONTINUED OPERATIONS
In December 1997, the Company began actively pursuing divesting itself
of its Cobotyx voice processing products business. The Company has not yet
located a buyer for the business, however assets offered for sale include
inventories, fixed assets, and certain other current assets which, as of
June 30, 1998 aggregated approximately $494,000, plus all related
technologies developed by the Company, tradenames, and other contract
rights. For the three months ended June 30, 1998 and 1997, voice processing
product revenues approximated $155,000 and $396,000, respectively. For the
six months ended June 30, 1998 and 1997, voice processing product revenues
approximated $351,000 and $810,000, respectively. The voice processing
products business incurred a $69,000 operating loss for the three months
ended June 30, 1998. This business incurred a $227,000 loss for the six
months ended June 30, 1998, consisting of a $152,000 operating loss and a
$75,000 charge to accrue estimated costs of discontinuing the business.
The $370,000 loss from discontinued operations for the three months
ended June 30, 1997 consisted of a $125,000 loss from the voice processing
products business, and a $245,000 loss from the operations of Farmstead
Asset Management Services, LLC ("FAMS") which was sold in December 1997.
The $619,000 loss from discontinued operations for the six months ended June
30, 1997 consisted of a $217,000 loss from the voice processing products
business, and a $402,000 loss from the operations of FAMS.
During the six months ended June 30, 1998, the Company significantly
reduced the operating expenses of the Cobotyx Division such that future
operations of this business should not materially impact the Company's
operating results.
The Company has restated prior year information contained in the
consolidated financial statements and notes thereto as a result of the
discontinued operations presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income (Loss)
The Company recorded net income of $198,000 for the three months ended
June 30, 1998, consisting of income from continuing telephone equipment
operations of $267,000, and a $69,000 loss from discontinued voice
processing equipment operations. This compares to a net loss of $835,000
for the three months ended March 31, 1997, consisting of a $465,000 loss
from continuing operations, and a $370,000 loss from discontinued
operations. The $370,000 loss from discontinued operations for the three
months ended June 30, 1997 consisted of a $125,000 loss from the voice
processing products business, and a $245,000 loss from the operations of
Farmstead Asset Management Services, LLC ("FAMS") which was sold in December
1997.
The Company recorded net income of $5,000 for the six months ended
June 30, 1998, consisting of income from continuing telephone equipment
operations of $232,000, and a $227,000 loss from discontinued voice
processing equipment operations. This compares to a net loss of $1,215,000
for the six months ended June 30, 1997, consisting of a $596,000 loss from
continuing operations, and a $619,000 loss from discontinued operations.
The $619,000 loss from discontinued operations for the six months ended June
30, 1997 consisted of a $217,000 loss from the voice processing products
business, and a $402,000 loss from the operations of FAMS.
In December 1997, the Company began actively pursuing divesting itself
of its Cobotyx voice processing products business. The Company has not yet
located a buyer for the business, however assets offered for sale include
inventories, fixed assets, and certain other current assets which, as of
June 30, 1998 aggregated approximately $494,000, plus all related
technologies developed by the Company, tradenames, and other contract
rights. During the six months ended June 30, 1998, the Company
significantly reduced the operating expenses of the Cobotyx Division such
that future operations of this business should not materially impact the
Company's operating results.
Discussion of the Results of Continuing Operations
Revenues
Revenues from continuing operations for the three months ended June
30, 1998 were approximately $7,133,000, an increase of $1,687,000 or 31%
from the comparable 1997 period. The increase was attributable to a 25%
increase in end user parts and system sales, principally as a result of
expanded sales territories, and in part in connection with the Company's
appointment by Lucent technologies as an Authorized Refurbisher of Classic
Lucent(TM) business telephone equipment. The revenue increase was partially
offset by a 24% decline in service revenues. Parts and system sales
comprised 97% of revenues from continuing operations for the three months
ended June 30, 1998 (95% in the comparable 1997 period), while service
revenues accounted for 3% of revenues from continuing operations in 1998 (5%
in 1997).
Revenues from continuing operations for the six months ended June 30,
1998 were approximately $12,753,000, an increase of $2,852,000 or 29% from
the comparable 1997 period. The increase was attributable to a 28%
increase in end user parts and system sales, principally as a result of
expanded sales territories, and in part in connection with the Company's
appointment by Lucent technologies as an Authorized Refurbisher of Classic
LucentTM business telephone equipment. The revenue increase was partially
offset by a 29% decline in service revenues. Parts and system sales
comprised 96% of revenues from continuing operations for the six months
ended June 30, 1998 (93% in the comparable 1997 period), while service
revenues accounted for 4% of revenues from continuing operations in 1998 (7%
in 1997).
Gross Profit
The gross profit from continuing operations for the three months ended
June 30, 1998 was $1,822,000, an increase of $507,000 or 38% from the
comparable 1997 period. The gross profit margin was 25% of revenues in the
1998 period as compared to 24% in the 1997 period. The one percentage
point increase in gross profit margin was due to the combined effect of
higher end user sales margins and lower labor and other overhead costs per
revenue dollar, offset by increased dealer sales at lower than average
margins.
The gross profit from continuing operations for the six months ended
June 30, 1998 was $3,183,000, an increase of $809,000 or 34% from the
comparable 1997 period. The gross profit margin was 24% of revenues in the
1998 period as compared to 23% of revenues in the 1997 period. The one
percentage point increase in gross profit margin was due to the combined
effect of higher end user sales margins and lower labor and other overhead
costs per revenue dollar, offset by increased dealer sales at lower than
average margins.
Selling, General & Administrative ("SG&A") Expenses
SG&A expenses for the three months ended June 30, 1998 were
$1,524,000, an increase of $195,000 or 14% over the comparable 1997 period.
SG&A expenses were 21% of revenues for the three months ended June 30, 1998,
compared to 24% of revenures for the comparable 1997 period. SG&A expenses
for the six months ended June 30, 1998 were $2,879,000, an increase of
$401,000 or 16% over the comparable 1997 period. SG&A expenses were 22% of
revenues for the six months ended June 30, 1998, compared to 25% of revenues
for the comparable 1997 period.
The increase in SG&A during each of the current year periods was
principally attributable to (i) higher levels of employment and associated
employee costs, as the Company increased its sales, marketing, customer and
technical support resources 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 March
1997 relocation to a larger headquarters in East Hartford, Connecticut.
Interest Expense
Interest expense for the three months ended June 30, 1998 was $51,000,
as compared to $52,000 in the comparable 1997 period. Interest expense for
the six months ended June 30, 1998 was $112,000, as compared to $91,000 in
the comparable 1997 period. The increase in the current six month period was
attributable to higher average debt levels.
Other Income
Other income for the three months ended June 30, 1998 was $30,000, as
compared to $18,000 in the comparable 1997 period. Other income for the six
months ended June 30, 1998 was $61,000, as compared to $54,000 in the
comparable prior year period. Other income in each period consisted
principally of interest earned on the Company's investments.
Liquidity and Capital Resources
Working capital at June 30, 1998 was $4,841,000 a 25% decrease from
$6,440,000 at December 31, 1997. The working capital ratio at June 30, 1998
was 1.6 to 1 as compared to 3.1 to 1 at December 31, 1997. The $1,599,000
decrease in working capital was primarily attributable to a reclassification
to current liabilities of the Company's outstanding bank borrowings under a
two year agreement which expires May 1999. Outstanding bank borrowings were
$1,760,000 at June 30, 1998.
Operating activities used $1,215,000 during the six months ended June
30, 1998 principally due to an increase in inventories of approximately
$2,769,000. The increase in inventories resulted from (i) the replenishment
of an unusually low inventory level at December 31, 1997 which resulted from
strong year end sales activities and (ii) the Company's decision to maintain
higher levels of inventories in support of current and projected higher end
user and dealer sales volumes.
Investing activities used $92,000 during the six months ended June 30,
1998 from the purchase of telecommunications and computer equipment as the
Company expanded and upgraded certain of its fixed assets.
Financing activities generated $1,257,000 during the six months ended
June 30, 1998, principally from advances under a revolving loan agreement
with First Union National Bank ("FUNB") and from borrowings under an
inventory finance agreement with Finova. As of June 30, 1998, the unused
portion of the FUNB revolving credit facility was $1,740,000, of which
approximately $1,400,000 was available under the borrowing formula. The
average amounts borrowed under this credit facility during the three and six
months ended June 30, 1998 were approximately $1,685,000 and $1,853,000,
respectively. Borrowings are dependent upon the continuing generation of
collateral, subject to the credit limit. The weighted average interest rate
on the outstanding borrowings was 9.6% for the six months ended June 30, 1998.
As of June 30, 1998, the Company was in compliance with its loan covenants.
On April 30, 1998 the original one year term of the Company's $2
million inventory finance agreement with Finova expired, however the
agreement is being continued on a discretionary basis. In May 1998, this
credit line was temporarily increased to $3,500,000 until August 30, 1998.
All other lending terms and conditions remain the same as in the original
agreement.
The Company is currently soliciting the written consent of the holders
of its Public Warrants, Class A and Class B Warrants (collectively the
"Warrants") in a unified proposal to (a) reduce the present exercise price
of the Warrants to $2.00, (b) reduce the Target Price (as defined in the
Warrant Agreements) of the Warrants to $2.90, (c) establish the minimum
period by which the Company must notify holders of the Warrants of future
modifications to the Warrant Agreements at 20 calendar days, and (d) provide
for proportional increases and decreases in the Target Price of the Warrants
upon future changes (if any) in the exercise price of the Warrants without
the need of the Company to seek additional approval from the Warrant
holders. The primary purpose of the proposed amendments to the Warrants is
to raise capital in the near term for general working capital purposes, by
increasing the likelihood that, due to the proposed reductions in the
exercise prices and Target Prices, the warrants may be exercised sooner than
as currently contemplated under their present exercise and Target Prices.
As of June 30, 1998 there were 183,579 Public Warrants, 1,137,923 Class A
Warrants and 1,137,923 Class B Warrants outstanding. The effective date of
the proposed amendments is expected to be September 3, 1998, but only for
those classes of Warrants which receive affirmative written consents from
the holders of at least 51% of said class of Warrants on or before September
3, 1998.
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. The Company does not currently have
any material commitments for capital expenditures.
Forward Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-QSB contain certain
statements which are not historical facts and are considered forward-looking
statements within the meaning of the Federal Securities laws. The Company's
actual results could differ materially from those projected in the forward-
looking statements as a result of, among other factors, general economic
conditions and growth in the telecommunications industry, competitive
factors and pricing pressures, changes in product mix, product demand, risk
of dependence on third party suppliers, and other risk factors detailed in
this report, described from time to time in the Company's other Securities
and Exchange Commission filings, or discussed in the Company's press
releases. In addition, other written or oral statements which constitute
forward-looking statements may be made by or on behalf of the Company. All
forward-looking statements included in this document are based upon
information available to the Company on the date hereof. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of security Holders
The proposals voted upon at the Company's Annual Meeting of
Stockholders, held June 18, 1998, along with the voting results, were as
follows:
(1) Election of Directors: All nominees were elected. The results
of balloting were as follows:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
----------------------------------------------
<S> <C> <C>
George J. Taylor, Jr. 2,695,637 212,852
Robert G. LaVigne 2,695,037 213,452
Harold L. Hansen 2,694,037 214,452
Hugh M. Taylor 2,695,437 213,052
Joseph J. Kelley 2,693,237 215,252
</TABLE>
(2) Ratification of the Appointment of Deloitte & Touche LLP as
Independent Auditors of the Company for the Year Ending December 31, 1998:
The proposal was approved with 2,833,233 votes for, 48,109 votes against,
27,147 abstentions and no broker non-votes.
(3) Approval of the Company's Amended and Restated 1992 Stock Option
Plan: The proposal was approved with 2,511,849 votes for, 355,408 votes
against, 41,232 abstentions and no broker non-votes.
Item 5. Other Information:
The Securities and Exchange Commission (the "SEC") recently amended
its proxy rules to provide that a registrant, such as the Company, may
specify, in its proxy statement or form of proxy for its annual meeting of
stockholders, that proxies solicited by the registrant will confer
discretionary authority to vote with regard to matters not identified in the
proxy statement that may be raised at the meeting, including matters to be
raised by stockholders that were not properly submitted to the registrant as
stockholder proposals (for inclusion in the registrant's proxy statement and
form of proxy) in accordance with SEC Rule 14a-8, if the registrant did not
have notice of such matters at least 45 days before the date on which the
registrant first mailed its proxy materials for the prior year's annual
meeting of stockholders. The Company first mailed its proxy materials for
its 1998 Annual Meeting of Stockholders on May 1, 1998. Under the SEC's
amended proxy rules, the 45-day deadline for notice to the Company of
non-Rule 14a-8 matters to be raised at the Company's 1999 Annual Meeting of
Stockholders is therefore March 17, 1999.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10.13 Amended and Restated 1992 Stock Option Plan
11 Statement Re: Computation of Diluted Per Share Earnings
(Unaudited) for the Three and Six Months Ended June 30,
1998 and 1997
27 Financial Data Schedule
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: August 5, 1998 /s/ Robert G. LaVigne
--------------------------------
Robert G. LaVigne
Executive Vice President,
Chief Financial Officer
EXHIBIT 10.13
AMENDED AND RESTATED 1992 STOCK OPTION PLAN
1. PURPOSE
The Amended and Restated 1992 Stock Option Plan (the "Plan") is
intended to encourage stock ownership of FARMSTEAD TELEPHONE GROUP, INC., a
Delaware corporation (the "Corporation") by officers, directors, consultants
and employees of the Corporation and any subsidiary corporations (the
"Subsidiaries"), as defined in Section 424(f) of the Internal Revenue Code
of 1986, as amended (the "Code"), so that they may acquire or increase their
proprietary interest in the success of the Corporation and Subsidiaries, and
to encourage them to remain in the employ of, or maintain their relationship
with, the Corporation and/or the Subsidiaries. It is further intended that
options issued pursuant to this Plan shall constitute either "incentive
stock options" within the meaning of Section 422 of the Code ("Incentive
Stock Options") or non-qualified stock options, the tax consequences of
which are governed by Section 83 of the Code ("Non-Qualified Stock
Options"), as designated at the time of grant. Any option granted pursuant
to this Plan which for any reason fails to qualify as an Incentive Stock
Option shall be deemed to have been granted as an option not qualified under
Section 422 of the Code. The Corporation intends this Plan to enable it to
issue Non-Qualified Stock Options, with terms similar in most respects to
Incentive Stock Options. Non-Qualified Stock Options may be granted
independently of Incentive Stock Options.
2. ADMINISTRATION
The Plan shall be administered by a committee appointed by the Board
of Directors of the Corporation (the "Committee"). The Committee shall be
composed of members who (i) to the extent necessary to comply with Rule
16b-3 as promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") are "Non-Employee Directors" within the meaning of Rule
16b-3 and (ii) to the extent any option granted hereunder is intended to
qualify as performance-based compensation under Section 162(m) of the Code,
constitute "outside directors" within the meaning of Section 162(m) of the
Code and the regulations promulgated thereunder. Such Committee shall
consist of not less than two members of the Corporation's Board of
Directors. The Board of Directors may from time to time remove members
from, or add members to, the Committee. Vacancies on the Committee,
howsoever caused, shall be filled by the Board of Directors. The Committee
shall select one of its members as Chairman, and shall hold meetings at such
times and places as it may determine. A majority of the Committee at which
a quorum is present, or acts reduced to or approved in writing by a majority
of the members of the Committee, shall be the valid acts of the Committee.
The Committee shall from time to time at its discretion determine (i) those
officers, directors, consultants and employees (including key and non-key)
who shall be granted options; (ii) the number of shares of stock to be
optioned to each; and (iii) subject to the express provisions of the Plan,
the terms of all options so granted.
The interpretation and construction by the Committee of any provisions
of the Plan or of any option granted under it shall be final unless
otherwise determined by the Board of Directors. No member of the Board of
Directors or the Committee shall be liable for any action or determination
made in good faith with respect to the Plan or any option granted under it.
If at any time no Committee shall be in office, the Board shall perform the
functions of the Committee
3. ELIGIBILITY
The persons who shall be eligible to receive Incentive Stock Options
shall be such officers and employees (whether or not they are directors) of
the Corporation or its Subsidiaries as the Committee shall select from time
to time. Non-employee directors, consultants and others, who have a
relationship with the Corporation or its Subsidiaries which the Committee
considers beneficial to the Corporation, may only receive Non-Qualified
Stock Options. Officers and employees may also receive Non-Qualified Stock
Options. An optionee may hold more than one option, but only on the terms
and subject to the restrictions hereafter set forth.
4. STOCK
The stock subject to the options to be granted hereunder shall be an
aggregate of 3,500,000 shares of the Corporation's authorized but unissued
or reacquired $.001 par value common stock, hereafter sometimes called
"Common Stock." The aggregate fair market value (determined at the time the
option is granted) of the Common Stock with respect to which Incentive Stock
Options are exercisable for the first time in any calendar year by an
optionee under this Plan or any other plan of the Corporation, a parent of
the Corporation (if any) or Subsidiaries (if any), shall not exceed $100,000
(or such other amount as may then be permissible under Section 422 of the
Code). Any option granted and exercisable in excess of such amount shall be
treated as a Non-Qualified Stock Option with respect to such excess. For
the purpose of the immediately preceding sentence, options that are not
qualified as Incentive Stock Options by reason of such excess shall be
deemed to relate first to the most recently granted options. The
limitations established by each of the preceding sentences shall be subject
to adjustment as provided in Article 6(h) of the Plan.
In the event of any outstanding option under the Plan for any reason
expires, lapses or is otherwise terminated, the shares of Common Stock
allocable to the unexercised portion of such option may again become the
subject of an option granted under the Plan.
5. SECTION 162(m) QUALIFYING AWARDS
The Committee may, in its sole discretion, grant Non-Qualified Stock
Options to any key employee with the intent that such award qualifies as
"performance-based compensation" under Section 162(m) of the Code, or any
successor provision thereto, and the regulations thereunder (a "162(m)
Award"). The provisions of this Article 5 as well as all other applicable
provisions of the Plan not inconsistent with this Article 5 shall apply to
all Section 162(m) Awards issued under the Plan, and any ambiguities in
construction shall be interpreted to effectuate that intent. In connection
with the foregoing, the following limitations apply to all employees of the
Corporation:
(i) No employee shall be granted, in any fiscal year of the Company,
options to purchase more than 500,000 shares of Common Stock.
(ii) In connection with his or her initial employment, an employee
may be granted options to purchase up to an additional 100,000 shares which
shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Corporation's capitalization as described
in Article 6(h).
(iv) If an option is canceled in the same fiscal year of the
Corporation in which it was granted (other than in connection with a
transaction described in Article 6(h)), the canceled option shall be counted
against the limits set forth in subsections (i) and (ii) above. For this
purpose, if the exercise price of an option is reduced, the transaction will
be treated as a cancellation of the option and the grant of a new option.
Amounts earned under such awards shall be based upon the attainment of
performance objectives established by the Committee in accordance with
Section 162(m). Such performance objectives may vary by optionee and by
award and shall be based upon the attainment of specific amounts of, or
changes in one or more of the following: fair market value of the
Corporation's common stock, revenues, earnings, shareholders' equity, return
on equity, assets, return on assets, capital, return on capital, book value,
economic value added, operating margins, cash flow, shareholder return,
expenses or market share. The Committee may provide that in measuring the
achievement of the performance objectives, an award may include or exclude
items such as realized investment gains and losses, extraordinary, unusual
or non-recurring items, asset write-downs, effects of accounting changes,
currency fluctuations, acquisitions, divestitures, reserve-strengthening and
other non-operating items. Where the compensation associated with a stock
option grant at fair market value under the Plan is based solely on an
increase in the value of the stock after the date of grant, such
compensation attributable to the stock option is deemed by regulation to be
subject to a preestablished performance objective without the need of any
further designation by the Committee.
6. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Plan shall be authorized by the
Committee and shall be evidenced by agreements in such form as the Committee
shall from time to time approve, which agreements shall comply with and be
subject to the following terms and conditions:
(a) Number of Shares
Each option shall state the total number of shares to which it
pertains.
(b) Option Price
Each option shall state the option price, which, in the case of an
Incentive Stock Option, shall be not less than 100% of the fair market value
of the shares of Common Stock of the Corporation on the date of the granting
of the option. Notwithstanding the preceding sentence, in the case of an
individual, who immediately before the grant of an option, owns (including
constructive ownership pursuant to Section 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Corporation or its parent (if any) or any of the Subsidiaries ("10%
Stockholder"), the purchase price per share of Common Stock under each such
option shall not be less than 110% of the fair market value per share of
stock at the time of the grant of the option. At or prior to the time an
option is granted, the Committee shall fix the term of such option which,
notwithstanding Article 6(d) of the Plan, shall not be more than ten years
from the date of the grant of the option in the case of persons other than
10% Stockholders, and five years from the date of grant of the option for
10% Stockholders. The foregoing restrictions shall not apply to grants of
Non-Qualified Stock Options. The option price of Non-Qualified Stock
Options granted under the Plan shall be less than or equal to the fair
market value on the date of such grant but not less than fifty percent (50%)
of fair market value on the date of such grant. In the event that the
Committee takes no action to fix the term of an option granted to such an
individual, such option shall contain a provision that it shall expire ten
years from the date of grant. For purposes of this paragraph, the parent of
the Corporation shall be any corporation, which with respect to the
Corporation, is a parent corporation pursuant to Section 424(e) of the Code;
and the Subsidiaries of the Corporation shall be all corporations which,
with respect to the Corporation, are subsidiary corporations pursuant to
Section 424(f) of the Code. During such time as the Common Stock is not
listed upon an established stock exchange the fair market value per share
shall be the mean between the closing "bid" and "ask" prices of the Common
Stock in the New York over-the-counter market on the day the option is
granted, as reported by the National Association of Securities Dealers, Inc.
If the stock is listed upon an established stock exchange or exchanges, such
fair market value shall be deemed to be the highest closing price of the
Common Stock on such stock exchange or exchanges on the day the option is
granted or if no sale of the Corporation's Common Stock shall have been made
on any stock exchange that day, on the next preceding day on which there was
a sale of such stock. If there is no established market for the stock, the
fair market value shall be determined by the most recent prior private sale
price of the Common Stock. Subject to the foregoing the Committee in fixing
the option price shall have full authority and discretion so long as they
shall act in good faith.
(c) Medium and Time of Payment
The option price shall be payable in United States dollars upon the
exercise of the option and may be paid in cash or by check. The Committee
may permit an optionee to elect to pay the option price upon the exercise of
the option by (i) accepting payment in shares of Common Stock of the
Corporation, based upon the fair market value of those shares as determined
under Article 6(b) of the Plan, or (ii) authorizing a third party to sell
shares of Common Stock (or a sufficient portion of the shares) acquired upon
exercise of the option and remit to the Corporation a sufficient portion of
the sale proceeds to pay the entire option price and any tax withholding
resulting from such exercise.
(d) Term and Exercise of Options
No Incentive Stock Option shall be exercisable either in whole or in
part prior to six months from the date it is granted. Notwithstanding the
limitations of the first sentence of this subparagraph, the Committee, in
its discretion, may waive such vesting requirements, and each option shall
also be otherwise exercisable pursuant to the terms of each option agreement
as determined by the Committee. To the extent that the option is not
exercised in any period, the number of shares as to which the option is
exercisable shall accumulate and be exercisable, in whole or in part, in any
subsequent period but not later than ten years (or five (5) years in the
case of a 10% Stockholder) from the date the option is granted. No option
shall be exercisable after the expiration of ten years (or five (5) years in
the case of a 10% Stockholder) from the date it is granted or three months
after termination of employment, except as provided for herein in the event
of death or permanent and total disability (as defined below) of the
optionee. Upon exercise, the option must be exercised for a minimum number
of one hundred (100) shares, unless the number of shares for which the
option is exercisable at such time shall be less than one hundred (100)
shares in which case the minimum number of shares exercisable shall be the
total amount for which the option is exercisable.
(e) Termination of Employment Except Death
In the event that an optionee shall cease to be employed by the
Corporation or Subsidiaries for any reason other than his death and shall be
no longer in the employ of any of them, subject to the condition that no
option shall be exercisable after the expiration of ten years (or five (5)
years in the case of a 10% Stockholder) from the date it is granted, such
optionee shall have the right to exercise the option at any time within
three months (twelve months in the case of the "permanent and total
disability" of the optionee as defined in Section 22(e)(3) of the Code)
after such termination of employment to the extent his right to exercise
such option had accrued pursuant to Article 6(d) of the Plan and had not
previously been exercised at the date of such termination. Subject to
Treasury Regulation 1.421-7, whether authorized leave of absence for
military or governmental service shall constitute termination of employment,
for the purposes of the Plan, shall be determined by the Committee, which
determination, unless overruled by the Board of Directors, shall be final
and conclusive. (As used in this Plan, the terms "employ" and "employment"
shall be deemed to refer to employment as an employee in any such capacity,
and "termination of employment" shall be deemed to mean termination of
employment as an employee in all of such capacities and continuation of
employment as an employee in none of such capacities. Solely with respect
to Non-Qualified Stock Options, the terms "employ" and "employment" shall
also be deemed to refer to service as a consultant, director and/or officer
of the Corporation and/or a Subsidiary, whether or not the optionee is
otherwise an employee, and "termination of employment" shall be deemed to
mean the termination of such service in all of such capacities and the
termination of all employment of the optionee by the Corporation and any of
its Subsidiaries and the continuation of such service and/or employment in
none of such capacities.)
(f) Transferability of Options
No option may be transferred by the optionee otherwise than by will or
by the laws of descent and distribution, and during the optionee's lifetime
the option may be exercised only by him or her; provided however, that the
Committee or the Board of Directors, as applicable, in its discretion, may
allow for transferability of Non-Qualified Stock Options by the optionee to
"Immediate Family Members". Immediate Family Members means children,
grandchildren, spouse or common law spouse, siblings or parents of the
optionee or to bona fide trusts, partnerships or other entities controlled
by and of which the beneficiaries are Immediate Family Members of the
optionee. Any option grants that are transferable are further conditioned
on the Optionee and Immediate Family Members agreeing to abide by the
Corporation's then current stock option transfer guidelines.
(g) Death of Optionee
In the event of the death of an optionee, no option shall be exercised
unless such optionee had been an employee of the Corporation or any
Subsidiary for a period of six (6) months following the date of grant
thereof. If the optionee shall die while in the employ of the Corporation
or a Subsidiary or within a period of three months after the termination of
his employment with the Corporation or any Subsidiary and shall not have
fully exercised the option, an option may be exercised, subject to the
condition that no option shall be exercisable after the expiration of ten
years from the date it is granted, to the extent that the optionee's right
to exercise such option had accrued pursuant to Article 6(d) of the Plan at
the time of his death and had not previously been exercised, at any time
within one year after the optionee's death, by the executors or
administrators of the optionee or by any person or persons who shall have
acquired the option directly from the optionee by bequest or inheritance.
(h) Changes in Capitalization
Subject to any required action by the stockholders, the aggregate
number of shares of Common Stock reserved for issuance under the Plan, the
number of shares of Common Stock covered by each outstanding option, and
the price per share thereof set forth in each such option, may, in the
discretion of the Committee, be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock of the Corporation
by reason of any Common Stock dividend or Common Stock split or reverse
stock split, recapitalization (including, without limitation, the payment of
an extraordinary cash dividend), the issuance of stock rights, merger,
consolidation, combination, exchange of shares, spin-off, distribution of
assets to stockholders, or other similar corporate change. In its
discretion, the Committee may also adjust the number of shares of Common
Stock covered by each outstanding option in the event of the sale or other
disposition or distribution by the Corporation of all or a portion of its
assets.
Subject to any required actions by the stockholders, if the
Corporation shall be the surviving corporation in any merger or
consolidation, each outstanding option shall pertain to and apply to the
securities to which a holder of the number of shares of Common Stock subject
to the option would have been entitled. A dissolution or liquidation of the
Corporation or a merger or consolidation in which the Corporation is not the
surviving corporation, shall cause each outstanding option to terminate,
provided that each optionee shall, in such event, have the right immediately
prior to such dissolution or liquidation, or merger or consolidation in
which the Corporation is not the surviving corporation, to exercise his
option in whole or in part without regard to the installment provisions of
Article 6(d) of the Plan.
In the event of a change in the Common Stock of the Corporation as
currently constituted, which is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par
value, or without par value, the shares resulting from any such change shall
be deemed to be the Common Stock within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or
securities of the Corporation, such adjustments shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive, provided that each Incentive Stock Option granted pursuant to
this Plan shall not be adjusted in a manner that causes such option to fail
to continue to qualify as an Incentive Stock Option within the meaning of
Section 422 of the Code.
Except as hereinbefore expressly provided in this Article 6(h), the
optionee shall have no rights by reason of any subdivision or consolidation
of shares of stock of any class or the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class or
by reason of any dissolution, liquidation, merger or consolidation or spin-
off of assets or stock of any class, or securities convertible into shares
of stock of any class, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to
the option.
The grant of an option pursuant to the Plan shall not affect in any
way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(i) Rights as a Stockholder or Employee
An optionee or a transferee of an option shall have no rights as a
stockholder with respect to any shares covered by his option until the date
of the issuance of a stock certificate to him for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether
in cash, securities or other property) or distributions or other rights for
which the record date is prior to the date such stock certificate is issued,
except as provided in Article 6(h) hereof. The Plan is not a contract of
employment, and the terms of employment of any optionee or the relationship
of any non-employee consultant with the Corporation shall not be affected in
any way by the Plan or related instruments except as specifically provided
therein. The establishment of the Plan shall not be construed as conferring
any legal rights upon any optionee for a continuation of employment, nor
shall it interfere with the right of the Corporation or any Subsidiary to
discharge any optionee and to treat him without regard to the effect which
such treatment might have upon him as an optionee.
(j) Modification, Extension and Renewal of Options
Subject to the terms and conditions and within the limitations of the
Plan, including but limited to Article 6(d), the Committee may modify,
extend or renew outstanding options granted under the Plan or accept the
surrender of outstanding options (to the extent not theretofore exercised)
and authorize the granting of the new options in substitution theretofore
(to the extent not theretofore exercised). The Committee shall not,
however, modify any outstanding options so as to specify a lower price.
Notwithstanding the foregoing, however, no modification of an option shall,
without the consent of the optionee, alter or impair any rights or
obligations under any option theretofore granted under the Plan.
(k) Investment Purpose and Qualification of Shares
Each option under the plan shall be granted on the condition that the
purchases of stock thereunder shall be for investment purposes, and not with
a view to resale or distribution except that in the event the stock subject
to such option is registered under the Securities Act of 1933, as amended
(the "Securities Act"), or in the event a resale of such stock without such
registration would otherwise be permissible, such condition shall be
inoperative if in the opinion of counsel for the Corporation such condition
is not required under the Securities Act of 1933 or any other applicable
law, regulation, or rule of any governmental agency.
The Corporation shall seek such authority as may lawfully be required
to offer and sell the shares covered by an option in each jurisdiction in
which an optionee resides. However, nothing herein shall require the
Corporation to register under the Securities Act of 1933 either the Plan,
options granted thereunder or any securities issued or issuable pursuant to
any option granted under the Plan. If such authority is not obtained for
any reason, the Corporation shall not be obligated (and shall be relieved of
any liability for failure) to issue and sell any securities which may be
exercisable pursuant to any option granted hereunder until and unless such
authority is obtained.
(l) Other Provisions
The Option agreements authorized under the Plan shall from time to
time and from option to option contain such other provisions, including,
without limitation, restrictions upon the exercise of the option, as the
Committee shall deem advisable in each case. Any such option agreement
shall contain such limitations and restriction upon the exercise of the
option as shall be necessary, in the case of Incentive Stock Options, in
order that such option will be an Incentive Stock Option or to conform to
any change in the law.
7. CORPORATION LOANS
The Corporation may make non-recourse, collateralized loans to
employees for the purpose of exercising options, with such loans to be made
to employees of the Corporation or the Subsidiaries who are then and who
remain in good standing, said loans bearing interest at a rate to be
determined by the Committee, but in no event at a rate of interest less than
the Federal interest rate applicable under Section 7872 of the Code. Such
loans shall be in such amounts as may from time to time be required to
enable said employees to exercise options granted under the Plan, to the
extent that such loans are permitted by law and to the extent that such
options are then exercisable, and shall be secured by the shares being
purchased. Such loans shall, however, terminate and be due and payable
(including interest) thirty days after the last day of the employment of any
employee, if earlier, upon the disposition by the employee of the shares
purchased with the proceeds of such loans.
8. TERM OF PLAN
Options may be granted pursuant to the Plan from time to time within a
period of ten years from the date the Plan is adopted, or the date the Plan
is approved by the stockholders, whichever is earlier.
9. INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification as they may have
as directors or as members of the Committee, the members of the Committee
shall be indemnified by the Corporation against the reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection
with the defense of any action, suit or proceeding, or in connection with
any appeal therein, to which they or any of them may be a party by reason of
any action taken or failure to act under or in connection with the Plan or
any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent
legal counsel selected by the Corporation) or paid by them in satisfaction
of a judgement in any such action, suit or proceeding; provided that within
60 days after institution of any such action, suit or proceeding a Committee
member shall in writing offer the Corporation the opportunity, at its own
expense, to handle and defend the same. The foregoing right of
indemnification shall not be exclusive and shall be independent of any other
rights of indemnification to which such persons may be entitled under the
Corporation's Certificate of Incorporation or By-Laws, by contract, as a
matter of law, or otherwise.
10. AMENDMENT OF THE PLAN
The Board of Directors of the Corporation may, at any time or times
amend the Plan for the purpose of satisfying the requirements of any changes
in applicable laws or regulations or for any other purpose which may at the
time be permitted by law or may at any time terminate the Plan as to any
further grants of options, provided that no such amendment shall without the
approval of the stockholders of the Corporation (a) increase the number of
shares subject to the Plan, (b) change the designation of the class of
employees eligible to receive options, (c) reduce the option price of
outstanding incentive stock options or reduce the price at which incentive
stock options may be granted, (d) change the per-person limit contained in
Article 5 of the Plan, or (e) alter the Plan in such a way that incentive
stock options granted or to be granted hereunder would not be considered
Incentive Stock Options as defined in Section 422 of the Code, and further
provided that neither the Board of Directors nor the Committee may amend,
suspend, modify, or terminate the Plan so as to alter or impair any
grantee's rights (without the consent of the grantee) under any option
theretofore granted under the Plan.
11. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of Common Stock
pursuant to options will be used for general corporate purposes.
12. NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the optionee
to exercise such option.
13. APPROVAL OF STOCKHOLDERS
This Plan is subject to approval by the affirmative vote of the
holders of a majority of the shares of the Corporation's Common Stock
present in person or represented by proxy and entitled to vote at an Annual
or Special Meeting of stockholders, which approval must occur within the
period beginning twelve months before or ending twelve months after the date
the Plan is adopted by the Board of Directors. In the period following the
adoption of this Plan by the Board of Directors but prior to obtaining
approval by the stockholders, the Committee may grant options hereunder,
subject to obtaining stockholder approval of the Plan.
* * * * * *
EXHIBIT 11. STATEMENT RE: COMPUTATION OF DILUTED PER SHARE EARNINGS
(UNAUDITED)
Three and Six Months Ended June 30, 1998 and 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended 6/30 ended 6/30
---------------- -----------------
Diluted Shares (1): 1998 1997 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
Weighted average basic shares outstanding 3,265 3,262 3,264 3,262
Net effect of dilutive stock options based on the
treasury stock method using average market price 163 - 222 -
Net effect of dilutive warrants based on the treasury
stock method using average market price (2) 201 - 295 -
-------------------------------------
Diluted weighted average shares 3,629 3,262 3,781 3,262
=====================================
Net income (loss):
From continuing operations $ 267 $ (465) $ 232 $ (596)
From discontinued operations (69) (370) (227) (619)
-------------------------------------
Net income (loss) $ 198 $ (835) $ 5 $(1,215)
=====================================
Diluted net income (loss) per common share:
From continuing operations $ .07 $ (.14) $ .06 $ (.18)
From discontinued operations (.02) (.12) (.06) (.19)
-------------------------------------
Diluted net income (loss) per common share $ .05 $ (.26) $ - $ (.37)
=====================================
<F1> In calculating diluted weighted average shares, all securities
convertible into common stock are excluded if their inclusion would
have the effect of increasing the earnings per share amount or
decreasing the loss per share amount otherwise computed.
<F2> The Company is currently soliciting the written consent of the holders
of its Public Warrants, Class A and Class B Warrants (collectively the
"Warrants") in a unified proposal which includes reducing the Warrant
exercise prices to $2.00. Although the effective date of the exercise
price reduction is expected to be September 3, 1998, the effect of the
proposed new exercise price on the calculation of diluted shares is
presented herein.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,052
<SECURITIES> 0
<RECEIVABLES> 5,292
<ALLOWANCES> 0
<INVENTORY> 5,352
<CURRENT-ASSETS> 12,448
<PP&E> 879
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,646
<CURRENT-LIABILITIES> 7,607
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 5,775
<TOTAL-LIABILITY-AND-EQUITY> 13,646
<SALES> 12,753
<TOTAL-REVENUES> 12,753
<CGS> 9,570
<TOTAL-COSTS> 9,570
<OTHER-EXPENSES> 2,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 253
<INCOME-TAX> 21
<INCOME-CONTINUING> 232
<DISCONTINUED> (227)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
