UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-15938
FARMSTEAD TELEPHONE GROUP, INC.
(Name of small business issuer in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Prestige Park Circle, East Hartford, CT 06108-3728
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (860) 610-6000
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of Exchange on which registered
----------------------------- ------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $20,559,000
As of February 27, 1998, the aggregate market value of the Common Stock of
the registrant held by non-affiliates, based upon the last sale price of
the registrant's Common Stock on such date, was approximately $9,676,000.
As of February 27, 1998, the registrant had 3,262,329 shares of its $0.001
par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement for the
Annual Meeting of Stockholders to be held on June 18, 1998 are
incorporated by reference in Items 9 through 13 of Part III of this Annual
Report on Form 10-KSB.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS TO FORM 10-KSB
PART I
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Item 1. Business 3
Item 2. Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures 12
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 12
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners and Management 13
Item 12. Certain Relationships and Related Transactions 14
Item 13. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 30
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FORWARD-LOOKING STATEMENTS
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth below and elsewhere herein 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 I
Item 1. Business
General
Farmstead Telephone Group, Inc. (the "Company") was incorporated in
Delaware in 1986 and became a publicly held company in May 1987. The
Company is located at 22 Prestige Park Circle, East Hartford, CT 06108,
and its telephone number is (860) 610-6000. The Company is presently
engaged in the Customer Premise Equipment ("CPE") segment of the
telecommunications industry, principally as a secondary market reseller of
used, remanufactured and/or refurbished Lucent Technologies, Inc.
("Lucent") business telephone parts and systems, and as an authorized
Lucent dealer and distributor of certain new telecommunications products.
The Company also provides equipment repair and refurbishing, inventory
management, and other related value-added services. The Company sells its
products and services to both large and small end-user businesses,
government agencies, and to other dealers and distributors. CPE refers to
equipment which resides at the customer's premises.
In January, 1994, the Company acquired certain operating assets of
Cobotyx Corporation, Inc. ("CCI"), a designer, manufacturer and supplier
of voice processing systems, and expanded its entry into this marketplace
through the formation of a voice processing products division ("Cobotyx
Division"). In December 1997, the Company began actively pursuing
divesting itself of its Cobotyx voice processing products business. Assets
expected to be sold during 1998 include inventories, fixed assets, all
related technologies developed by the Company, tradenames, and other
contract rights. The operations of the Cobotyx business unit through its
disposal date are not expected to have a material negative impact on the
Company's future operating results. For the years ended December 31, 1997
and 1996, voice processing product revenues approximated $1,479,000 and
$2,297,000, respectively.
In February, 1996, the Company purchased from AT&T Systems Leasing
Corporation, a subsidiary of AT&T Capital Corporation, certain assets of
its discontinued Asset Recovery Center ("ARC"). The assets acquired
consisted primarily of warehouse equipment, vehicles, computer and office
equipment, and inventory. Prior to its closing in January 1996, the ARC
primarily operated to service AT&T affiliates in the orderly disposition,
by way of consignment sales arrangements, of excess, overstocked and end-
of-life telecommunications, computer and data transmission equipment. The
Company concurrently formed a subsidiary corporation, Farmstead Asset
Management Services, LLC ("FAMS"), and commenced a similar operation in
Piscataway, New Jersey. Effective October 1, 1997, the Company sold all of
its ownership interests in FAMS. For the years ended December 31, 1997 and
1996, FAMS recorded revenues of $799,000 (through the date of sale) and
$1,230,000, respectively.
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Products
The Company sells used, remanufactured, refurbished and new
telephone parts and systems manufactured by Lucent (See "Relationship with
AT&T/Lucent Technologies" for further information on Lucent). These
products are private switching systems, generally PBXs and key systems,
located at the customers premises, that permit a number of local
telephones or terminals to communicate with one another, with or without
use of the public telephone network. Key systems are generally used by
small businesses, and are characterized by telephones which have multiple
buttons permitting the user to select outgoing or incoming telephone lines
directly. PBXs are private telephone switching systems usually located on
a customer's premises, with an attendant console, and are designed for use
by larger businesses. A PBX normally has more memory capacity and
therefore can provide more features and flexibility than a key system. The
Company sells both telephone system parts and complete systems, however
the Company's revenues are predominantly from the sale of parts. Parts
sold primarily include both digital and analog telephone sets and circuit
packs, and other system accessories such as headsets, consoles,
speakerphones and paging systems.
Lucent key systems sold by the Company, in both piece parts and
complete systems, include: Merlin(R) and Merlin Legend(R), Spirit(R) and
Partner(R). Lucent PBX equipment sold by the Company, primarily in parts,
include: System 25, System 75, System 85, and Definity(R).
Telephone equipment sales revenues accounted for approximately 93%
of consolidated revenues from continuing operations in both 1997 and 1996,
while service revenues comprised 7% of consolidated revenues from
continuing operations in both years. Sales of PBX equipment and associated
telephones and accessories comprised approximately 81% of telephone
equipment sales in 1997 (88% in 1996), while key equipment parts and
system sales comprised approximately 15% of telephone equipment sales in
1997 (12% in 1996).
Relationship with AT&T/Lucent Technologies
Prior to February 1, 1996, the business of Lucent was conducted as a
part of the operations of AT&T Corp. ("AT&T"). On February 1, 1996, as a
result of a decision to restructure the company, AT&T began the process of
separating Lucent into a stand-alone company. AT&T completed an IPO of
Lucent shares in April 1996 and the divestiture of Lucent was completed in
October 1996 through the distribution of AT&T's shares in Lucent to AT&T
shareholders. Lucent is comprised of the systems and technology units that
were formerly part of AT&T. With 1997 revenues of $26.3 billion, Lucent is
one of the world's leading designers, developers and manufacturers of
telecommunications systems, software and products. Throughout this report,
references to AT&T and Lucent will be referred to collectively as "Lucent
Technologies", or "Lucent".
Since 1985, Lucent has provided support to the secondary market by
continuing to offer installation, maintenance, repair, reconditioning and
certification services for its products purchased by end-users through
equipment resellers. Equipment resellers such as the Company may also,
with various restrictions, utilize Lucent documentation, technical
information and software. Lucent also generally provides up to a one year
warranty for products purchased from Lucent for resale. The installation
and maintenance of Lucent equipment is generally provided by Lucent. The
Company does, however, coordinate the installation scheduling directly with
Lucent if requested to do so by its customer. The Company also has agreements
with a number of installation and maintenance companies covering the New
England and New York geographic areas who can also provide such services.
The Company currently has dealer and distributor agreements in
effect with Lucent, which have original terms ranging up to two years, and
expire at various dates between July 1998 and January 1999, although they
can generally be canceled upon 90 days notice. These agreements allow the
Company to sell new key system products and certain PBX products in New
England and New York state. In February 1998, the Company was selected by
Lucent to be one of only two Authorized Remarketing Suppliers in a six
month national trial program that allows
<PAGE> 4
the Company, under a licensing agreement, to refurbish and resell used Lucent
business communications equipment. Under the terms of the trial agreement,
the Company is authorized to buy back used Lucent business communications
equipment from Lucent and from other sources, refurbish it to Lucent
standards, and resell it nationally to end users as "certified" equipment for
installation and full warranty by Lucent. The trial program expires August
18, 1998. Based upon the outcome of this program, the Company may be
afforded the opportunity to enter into a longer term agreement, however no
assurances can be given that this program will be successful or that the
Company will enter into an extended contract. Prior to entering into this
trial program the Company was an "Authorized Distributor of Selected
Lucent--Remanufactured Products" since 1991.
The Company believes that its relationship with Lucent is
satisfactory and has no indication that Lucent has any intention of
canceling any of the existing agreements. The Company's business has not
been adversely impacted by the divestiture of Lucent from AT&T, nor does
the Company expect it to be. The Company could, however, be materially
adversely affected should Lucent decide to no longer provide installation
and maintenance services on used, remanufactured or refurbished products
sold by resellers such as the Company, or should it cancel the Company's
dealer and distributor agreements.
Marketing and Customers
Telephone parts, systems and services are marketed through the
Company's direct sales staff, and through a network of associate dealers,
to over 1,700 business locations, with customers ranging from large,
multi-location corporations, to small companies and home offices, and to
equipment wholesalers, dealers, distributors and government agencies and
municipalities. Approximately 77% (63% in 1996) of the Company's 1997
telephone equipment sales and service revenues were to customers located
in New England, New York, New Jersey and Pennsylvania. End-users accounted
for approximately 89 % (95% in 1996) of telephone equipment revenues in
1997, while sales to dealers and other resellers accounted for
approximately 11% (5% in 1996).
During the two years ended December 31, 1997, no single customer
accounted for more than 10% of revenues from continuing operations, except
for one company in the financial services industry, which accounted for
approximately 11% in 1996. The Company's business is not considered
seasonal.
The Company has attempted over the last several years to market
telecommunications equipment in the People's Republic of China ("PRC") to
businesses, government agencies and local telephone service providers
through its 50% owned affiliate, Beijing Antai Communication Equipment
Company, Ltd. ("ATC") located in Beijing, PRC. These products included (i)
used Lucent Dimension(R) PBX equipment, and (ii) central office equipment,
consisting of proprietary Chinese system software, proprietary digital and
analog interfaces, and a proprietary billing system, the combination of
which enables the PBX equipment to be operated as a small central office
(a telephone company facility where subscriber's lines are joined to
switching equipment for connecting other subscribers to each other,
locally and long distance). To date, sales of these products in China have
been insignificant, and due to the emerging demand for more current
technology products, the Company has abandoned pursuing sales of this
product in China.
Customer Services
The Company is committed to respond to its customers' service or
project-oriented telecommunications needs. While each type of service is
not material to the Company's operations as a whole, the Company believes
they help differentiate the Company from its competitors, as well as
contribute to longer lasting customer relationships and incremental sales.
The Company provides the following services:
Repair and Refurbishing: The Company performs fee-based repair and
refurbishing services for its customers through its in-house facilities
and use of subcontract repair shops. The in-house work includes cleaning,
buffing and minor repairs. The Company outsources major repairs of circuit
boards and digital telephone sets.
<PAGE> 5
Inventory Management: The Company provides inventory storage,
accounting, and distribution services, acting as a centralized depot for its
customers' idle telecommunications equipment.
Other Services: The Company's technical staff currently provide
engineering, configuration, technical "hot line" telephone support and
limited on-site installation services. The Company rents out equipment on
a month-to-month basis, servicing those customers that have temporary,
short-term equipment needs. For customers in the television broadcast
industry the Company provides telecommunications coordination services for
broadcast sports and other events throughout the country.
The Company's combined service revenues accounted for 7% of
consolidated revenues from continuing operations in both 1997 and 1996. No
individual service category accounted for more than 5% of consolidated
revenues from continuing operations.
Competition
The Company operates in a highly competitive marketplace. Telephone
equipment product competitors currently include Lucent and other new
equipment manufacturers such as Northern Telecom Ltd., other new equipment
distributors, as well as other secondary market equipment resellers, of
which the Company estimates there are over 100 nationwide. The Company
believes that key competitive factors in this market are timeliness of
delivery, service support, price and product reliability. The Company
considers its working relationships with its customers to be an important
and integral competitive factor. The Company anticipates intensified
competition from larger companies having substantially greater technical,
financial and marketing resources, as well as larger customer bases and
name recognition than the Company. As the industry further develops CTI
("Computer Telephony Integration"--the actual hardware and software that
attaches to both telephone systems and computers) products, the Company
anticipates that it will encounter a broader variety of competitors,
including new entrants from related computer and communication industries.
Suppliers
The Company obtains its telephone equipment parts for resale from a
variety of sources, depending upon price and availability at the time of
purchase. These sources include Lucent, its largest supplier, and other
secondary market equipment dealers and distributors, leasing companies and
end-users. In accordance with various distribution agreements with Lucent,
the Company is required to purchase new products only from Lucent. The
Company believes that if the various Lucent agreements were to be canceled
or not renewed, it could obtain similar used or refurbished products from
other suppliers, but would lose its ability to acquire new products for
sale. The Company is not otherwise dependent upon any single supplier for
used telephone equipment. The Company believes that product availability
in the marketplace is presently sufficient to allow the Company to meet
its customers' used equipment delivery requirements. See also
"Relationship with AT&T/Lucent Technologies".
Patents, Licenses and Trademarks
No patent or trademark is considered material to the Company's
continuing operations. Pursuant to dealer/distribution agreements in
effect with Lucent, the Company may utilize, during the term of these
agreements, certain Lucent designated trademarks, insignia and symbols in
the Company's advertising and promotion of Lucent products.
Research and Development
Research and development is not material to the Company's continuing
operations.
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Employees
As of December 31, 1997, the Company had 80 employees, of which 77
were employed on a full-time basis. Included are 7 full-time employees of
the Cobotyx voice processing products division which is classified as a
discontinued operation. The Company's employees are not represented by any
organized labor union and are not covered by any collective bargaining
agreements.
Item 2. Property
As of December 31, 1997, the Company operated in a 34,760 square
foot building in East Hartford, CT, which is being leased pursuant to a
five year lease which commenced February 1997. The lease agreement
contains two three-year renewal options. The Company believes that its
facilities are adequate for its present needs and suitable for their
intended uses. If new or additional space is required, the Company
believes that adequate facilities are available at competitive prices in
the immediate areas of its current operations.
Item 3. Legal Proceedings
The Company is not a party to any pending material proceedings and
no such proceedings are known to be contemplated by others.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since September 12, 1996, the Company's securities have traded on
the American Stock Exchange. Prior thereto the Company's securities traded
on The Nasdaq SmallCap MarketSM ("Nasdaq") tier of The Nasdaq Stock
MarketSM. . The Company's securities, their trading symbols and, in
parentheses, the dates they began trading on the American Stock Exchange,
are as follows: Common Stock--FTG (9/12/96); Redeemable Class A Common
Stock Purchase Warrant--FTG.WS.A (11/29/96); Redeemable Class B Common
Stock Purchase Warrant--FTG.WS.B (11/29/96); Warrant issued in the
Company's 1987 initial public offering--FTG.WS (9/12/96).
The following sets forth the range of quarterly high and low sales
prices for the common stock, for the two years ended December 31, 1997
(market prices and numbers of outstanding common shares for 1996 have been
restated to give retroactive recognition to the 1-for-10 reverse stock
split effected August 13, 1996):
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1997 1996
Common Stock: -------------- --------------
Quarter Ended High Low High Low
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March 31 $4.00 $2.75 $5.90 $1.90
June 30 3.62 2.25 5.90 3.10
September 30 2.56 1.69 5.00 3.10
December 31 2.94 1.62 3.88 2.69
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There were 3,262,329 common shares outstanding at December 31, 1997
and 1996, respectively. There were 589 holders of record of the common
stock as of December 31, 1997 representing approximately 4,500 beneficial
stockholders. The Company has paid no dividends and does not expect to pay
dividends in the foreseeable future as it intends to retain earnings to
finance the growth of its operations. Pursuant to a Commercial Loan and
<PAGE> 7
Security Agreement with First Union National Bank, the Company is
prohibited from declaring or paying any dividends or making any other
distribution on any of the shares of its capital stock, without the prior
consent of the lender.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto contained in Item 7 of
this Report.
Results of Operations
Net Loss
The Company recorded a net loss $1,866,000 for the year ended
December 31, 1997 as compared to net income of $882,000 for the year ended
December 31, 1996. These results consisted of a loss from continuing
operations of $600,000 for 1997 as compared to income from continuing
operations of $1,206,000 for 1996, and a loss from discontinued operations
of $1,266,000 for 1997 as compared to a loss from discontinued operations
of $324,000 for 1996.
Continuing Operations
---------------------
The decline in the operating results from continuing operations from
1996 to 1997 was attributable to several factors. In 1997, 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 of $444,000. The Company recorded approximately $899,000 less
income in 1997 from the AT&T coupon rebate program than it did in 1996,
due to the expiration of this program in 1997. In addition, the Company's
operating expenses increased as the Company increased its employment
levels in connection with expanding its sales territory and product lines,
and relocating to a larger facility.
Discontinued Operations
-----------------------
In September 1997, due to declining revenues and resulting operating
losses, the Company entered into negotiations with an employee of FAMS for
the sale of the Company's interest in FAMS. The sale transaction was
completed in December, effective October 1, 1997. FAMS, LLC, a newly formed
New Jersey corporation (the "Buyer") acquired all of the Company's
interest in FAMS for $40,000 in cash and a $360,000 10% Note, payable in
60 monthly installments. The Note is secured by a $45,000 letter of credit
and by all of the assets of FAMS. The Company has recorded a loss on
disposal of FAMS of $208,000, consisting of $116,000 representing the
excess of the book value of the net assets sold over the sales proceeds,
and $92,000 of other costs and expenses of the sale. For the years ended
December 31, 1997 and 1996, FAMS recorded revenues of $799,000 and
$1,230,000, respectively. Prior to the effective date of sale, FAMS
incurred an operating loss of approximately $578,000 in 1997, as compared
with an operating loss of approximately $370,000 in 1996.
In December 1997 the Company began actively pursuing divesting
itself of its Cobotyx voice processing products business. Assets expected
to be sold during 1998 include inventories, fixed assets, and certain
other current assets which, as of December 31, 1997 aggregated
approximately $560,000, plus all related technologies developed by the
Company, tradenames, and other contract rights. The operations of this
business through its disposal date are not expected to have a material
negative impact on the Company's 1998 operating results, and the Company
expects to sell these assets at book value. For the years ended December
31, 1997 and 1996, voice processing product revenues approximated
$1,479,000 and $2,297,000, respectively. The loss from operations was
approximately $480,000 in 1997 as compared to income from operations of
$46,000 in 1996.
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Discussion of the Results of Continuing Operations
Revenues
Revenues from continuing operations for the year ended December 31,
1997 were $20,559,000, an increase of $4,253,000 or 26% from the
comparable 1996 period. The increase was attributable to sales of new
products principally through the Company's associated dealers, increased
end user secondary market equipment sales, and increased service revenues.
Telephone equipment sales revenues accounted for approximately 93% of
consolidated revenues in 1997 and in 1996, while service revenues
comprised 7% of consolidated revenues in both years.
Gross Profit
Gross profit from continuing operations for the year ended December
31, 1997 was $5,099,000, an increase of $659,000 or 15% from the
comparable 1996 period. The gross profit margin was 25% of revenues during
1997, as compared to 27% of revenues for the comparable 1996 period. The
decrease in gross profit margin was attributable principally to product
sales mix as sales of new equipment to dealers, which yield lower profit
margins than end user sales, increased over the prior year. The decrease
in the gross profit margin from the prior year was also partly
attributable to lower product purchase rebates earned in 1997 from the
utilization of AT&T coupons.
Operating Expenses
Selling, general and administrative ("SG&A") expenses from
continuing operations for the year ended December 31, 1997 were
$5,108,000, an increase of $1,558,000 or 44% over the comparable 1996
period. SG&A expenses were 25% of revenues in 1997, compared with 22% for
the comparable 1996 period. The increase in SG&A in 1997 was principally
attributable to (i) higher average employment levels and associated
compensation costs, as the Company increased its sales, marketing,
customer and technical support staff, developed a network of associate
dealers, and expanded its sales territories and product lines, 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 from continuing operations for the year ended December
31, 1997 was $100,000, as compared with $627,000 for the year ended
December 31, 1996. Other income for 1997 consisted principally of interest
earned on the Company's invested cash. Included in other income for 1996
was $542,000 of rebates earned from AT&T on coupons tendered for
redemption, net of coupon acquisition costs.
Interest expense increased $47,000 or 30% in 1997 as compared with
1996. The increase was attributable to higher average borrowings under the
Company's revolving credit facility, and interest expense incurred under a
capital lease entered into in 1997.
Year ended December 31, 1996 as compared to the year ended December 31, 1995
Revenues
Revenues from continuing operations for the year ended December 31,
1996 were $16,306,000, an increase of $4,151,000 or 34% from the
comparable 1995 period. The increase was attributable to (i) higher end
user sales of refurbished and Lucent--remanufactured products, (ii) sales
of new Lucent equipment pursuant to various product dealer and distributor
agreements entered into by the Company in 1996, and (iii) higher levels of
provided services, including installations, event coordination and
equipment repair and refurbishing. Provided services represented 7% of
telephone equipment revenues in 1996 (3% in 1995). End user revenues
accounted for 95% of total telephone equipment revenues in 1996 (86% in
1995), while revenues from dealers and other equipment resellers accounted
for 5% (14% in 1995).
<PAGE> 9
Gross Profit
Gross profit from continuing operations for the year ended December
31, 1996 was $4,440,000, an increase of $1,019,000 or 30% from the
comparable 1995 period. The gross profit margin was 27% of revenues for
1996 as compared to 28% of revenues for the comparable prior year period.
For the year ended December 31, 1996, $459,000 of purchase rebates were
credited to cost of sales, which had the effect of increasing the
Company's gross profit margin to 28% from 24% otherwise realized.
Excluding the effect of the rebates as described above, increased product
acquisition costs on certain telephone system parts and higher labor and
warehousing costs were the principal reasons for a lower overall gross
profit margin from the prior year.
Operating Expenses
Selling, general and administrative expenses from continuing
operations ("SG&A") increased $347,000 or 11% in 1996 as compared with
1995. SG&A was 22% of revenues in 1996 as compared with 26% in 1995. The
increase in SG&A was attributable to increased sales compensation,
personnel costs and other operating costs associated with the Company's
increased business volume and number of employees.
Other Income and Expenses
Other income from continuing operations increased $618,000 in 1996
as compared with 1995. Included in other income for 1996 was $542,000
related to rebates earned from AT&T on coupons tendered for redemption,
net of coupon acquisition costs. The rebates are a result of coupons
issued by AT&T in 1995 in settlement of a lawsuit, which are freely
transferable and which can be used towards the cost of AT&T products and
services purchased from May 1995 through June 1, 1997. In 1996 the Company
began purchasing coupons at a discount to their $50 face value and
redeeming them with AT&T for the full $50 face value. Accordingly, the
Company recorded in other income the difference between the face value of
the coupons and their acquisition cost. The Company continued to take
advantage of the coupon redemption program through its June 1, 1997
expiration date. See Note 3 to the consolidated financial statements
included elsewhere herein.
Interest expense increased $58,000 or 59% in 1996 as compared with
1995. The increase was attributable to higher average borrowings under the
Company's revolving credit facility, in order to support the Company's
increased sales and operating levels. Average borrowings in 1996 were
$1,406,000 as compared with $880,000 in 1995.
Liquidity and Capital Resources
Working capital from continuing operations at December 31, 1997 was
$6,440,000, an 8% decrease from $7,033,000 of working capital at December
31, 1996. The working capital ratio at December 31, 1997 was approximately
3 to 1 as compared to 2.6 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. Excluding this reclassification, working
capital otherwise declined in 1997 by approximately $2,496,000 principally
due to the Company's 1997 net loss.
Operating activities used $2,199,000 during the year ended December
31, 1997, principally as a result of the Company's net loss, and a 34%
increase in accounts receivable from December 31, 1996 due to increased
fourth quarter sales over the prior year.
Investing activities used $492,000 during the year ended December
31, 1997, due to the purchase 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 an additional $419,000 of office
furniture and equipment, computer equipment, and leasehold improvements
for like use. Under the lease agreement, which is being
<PAGE> 10
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 $632,000 during the year ended
December 31, 1997, from advances under the Company's revolving credit
facility.
On June 6, 1997, the Company entered into a $2 million line of
credit agreement with AT&T Commercial Finance Corporation which expires
April 30, 1998. In December 1997, the credit agreement was acquired by
Finova Capital Corporation ("Finova"). The credit line is used to finance
the acquisition of inventory manufactured by 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
Finova (after deduction of any senior liens), to total Finova 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 December 31,
1997, outstanding borrowings under this credit arrangement were $889,000.
The Company expects to either renew the Finova credit agreement for an
additional term on or prior to its expiration date or to obtain a similar
facility with a new lender, on terms not materially less favorable to the
Company than its present terms.
On 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. Certain terms and conditions of this
agreement were further modified in December 1997. Under the current
agreement, borrowings are advanced at 75% of eligible accounts receivable,
bear interest at First Union prime plus .5% (9% at December 31, 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 $5.3
million, and 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. The Company was in compliance with these
covenants and loan requirements at December 31, 1997. As of December 31,
1997, the unused portion of the credit facility was $1,803,000, of which
approximately $1,050,000 was available under the borrowing formula. The
average and highest amounts borrowed under these credit facilities during
the year ended December 31, 1997 were approximately $1,714,000 and
$2,282,000, respectively. Borrowings are dependent upon the continuing
generation of collateral, subject to the credit limit. The weighted
average interest rate on the Company's outstanding debt was 10.1 % for
1997 and 10.6% for 1996. The carrying values of the Company's borrowings
approximated their fair values at December 31, 1997 and 1996.
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. Inflation has not been a
significant factor in the Company's operations.
The Company has been investigating the nature and extent of the work
required to ensure that its systems are Year 2000 compliant. The Company's
major systems consist principally of packaged software purchased from
vendors who have represented that these systems are already Year 2000
compliant or will soon be. Based upon currently available information, the
Company believes that it will be able to manage its Year 2000 transition
without any material costs or material adverse effects on its business
operations.
<PAGE> 11
Item 7. Financial Statements
The following report and financial statements of the Company are
contained on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Deloitte & Touche LLP 16
Consolidated Balance Sheets--December 31, 1997 and 1996 17
Consolidated Statements of Operations--Years Ended
December 31, 1997 and 1996 18
Consolidated Statement of Changes in Stockholders' Equity
--Years Ended December 31, 1997 and 1996 19
Consolidated Statements of Cash Flows--Years Ended
December 31, 1997 and 1996 20
Notes to Consolidated Financial Statements 21
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure: None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within
120 days after the close of its fiscal year.
Executive Officers of the Company
(Information as of January 1, 1998)
<TABLE>
<CAPTION>
First Became
An Executive
Name Age Officer in Position(s) Held
- ------------------------ --- ------------ ---------------------------------------
<S> <C> <C> <C>
Directors:
- ----------
George J. Taylor, Jr. * 55 1984 Chairman of the Board, President, Chief
Executive Officer
Robert G. LaVigne * 46 1988 Executive Vice President, Chief
Financial Officer, Secretary, Treasurer
Alexander E. Capo 47 1987 Vice President--Sales
Joseph A. Novak, Jr. 54 1993 Vice President--Operations
Neil R. Sullivan 46 1994 Vice President--Accounting &
Administration, Assistant Secretary
John G. Antonich 56 1996 Vice President & General Manager--
Cobotyx Division
Robert L. Saelens 52 1997 Vice President--Marketing
<FN>
- -------------------
<F*> Member of the Board of Directors.
</FN>
</TABLE>
<PAGE> 12
George J. Taylor, Jr., Chairman of the Board of Directors and Chief
Executive Officer of the Company (including its predecessors) since 1984,
and President since 1989. Member of the Compensation Committee of the
Board of Directors (until February 4, 1998) President of Lease Solutions,
Inc. (formerly Farmstead Leasing, Inc.), a business products and
automobile leasing company, from 1981 to 1993. Vice President--Marketing
and Sales for National Telephone Company from 1977 to 1981. Director of
Beijing Antai Communication Equipment Company, Ltd. Mr. Taylor was one of
the founders of the National Association of Telecommunication Dealers, has
been a member of, or advisor to, its Board of Directors since its
inception in 1986, and for two years served as its President and Chairman.
Brother of Mr. Hugh M. Taylor, a Director of the Company.
Robert G. LaVigne, Executive Vice President since July 1997. Chief
Financial Officer, Corporate Secretary and Treasurer since 1988. Vice
President--Finance & Administration from 1988 until July 1997. General
Manager of the domestic telephone equipment division from January 1994
until October 1994. Controller of Economy Electric Supply, Inc., a
distributor of electrical supplies and fixtures, from 1985 to 1988.
Corporate Controller of Hi-G, Inc., a manufacturer of electronic and
electromechanical components, from 1982 to 1985. Certified Public
Accountant. Director of ATC.
Alexander E. Capo, Vice President--Sales since July 1997. Vice
President--Sales & Marketing from 1987 until July 1997. Director of Sales
for The Farmstead Group, Inc. from 1985 to 1987. Sales Manager for the
National Telephone Company from 1972 to 1983.
Joseph A. Novak, Jr., Vice President--Operations since 1993.
General Manager of Farmstead Asset Management Services, LLC from 1996 to
1997. Prior to 1990, he was employed by AT&T for 28 years, serving in
various operational and sales management capacities. Vice General Manager
and a Director of ATC.
Neil R. Sullivan, Vice President--Accounting & Administration since
July 1997. Vice President & General Manager of the domestic telephone
equipment division from August 1996 to July 1997. Corporate Controller
from October 1994 to August 1996. Assistant Secretary of the Company since
1994. From 1981 to 1994 he was employed by Zero Corporation ("Zero"), a
manufacturer of cabinets, cooling equipment and containers for the
electronics industry. Mr. Sullivan was Controller of various divisions of
Zero from 1981 to 1991, and was Vice President/General Manager of the
Zero-East division from 1991 to 1994.
John G. Antonich, Vice President & General Manager--Cobotyx voice
processing products division since 1996. Director of Sales from 1993 to
1996. Account Executive with Quodata, a software manufacturer, from 1991
to 1993. Prior thereto, he had extensive sales, technical and managerial
experience with Sperry Univac, Datapoint and Shared Technologies, Inc.
Robert L. Saelens, Vice President--Marketing since June 1997.
President of Saelens & Associates, a marketing consulting firm, from 1989
to 1997. President of Baker, Bateson & Saelens, Inc., a marketing
consulting firm, from 1982 to 1989. Prior thereto Mr. Saelens served for
ten years in the Creative and Strategic planning departments of the J.
Walter Thompson Corporation.
Item 10. Executive Compensation
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within
120 days after the close of its fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within
120 days after the close of its fiscal year.
<PAGE> 13
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's proxy statement which the
Company intends to file with the Securities and Exchange Commission within
120 days after the close of its fiscal year.
Item 13. Exhibits and Reports on Form 8-K
Exhibits: See Index to Exhibits on page 30.
Reports on Form 8-K: The registrant did not file any reports on Form 8-K
during the fourth quarter of 1997.
<PAGE> 14
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 17, 1998.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ George J. Taylor, Jr.
----------------------------------
George J. Taylor, Jr.
Chairman of the Board, Chief
Executive Officer and President
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated as of March 17, 1998.
<TABLE>
<CAPTION>
Signature Title
- -------------------------------- ------------------------------------------------
<S> <C>
/s/ George J. Taylor, Jr Chairman of the Board, Chief Executive Officer,
- -------------------------------- and President (Principal Executive Officer)
George J. Taylor, Jr.
/s/ Robert G. LaVigne
- -------------------------------- Executive Vice President, Chief Financial Officer,
Robert G. LaVigne Secretary and Director (Principal Financial and
Accounting Officer)
/s/ Harold L. Hansen Director
- --------------------------------
Harold L. Hansen
/s/ Hugh M. Taylor Director
- --------------------------------
Hugh M. Taylor
/s/ Joseph J. Kelley Director
- --------------------------------
Joseph J. Kelley
</TABLE>
<PAGE> 15
REPORT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Farmstead Telephone Group, Inc.
East Hartford, Connecticut
We have audited the accompanying consolidated balance sheets of Farmstead
Telephone Group, Inc. and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinions.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Farmstead Telephone
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 3, 1998
<PAGE> 16
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands, except number of shares) 1997 1996
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,102 $ 3,161
Accounts receivable, less allowance for doubtful
accounts of $579 in 1997 and $245 in 1996 5,077 3,792
Inventories 2,583 3,111
Net assets of discontinued operations (Note 7) 560 848
Other current assets 181 560
--------------------
Total current assets 9,503 11,472
Property and equipment, net 935 186
Net assets of discontinued operations (Note 7) - 240
Investment in unconsolidated subsidiaries (Note 10) - 117
Other assets 391 59
--------------------
Total assets $ 10,829 $ 12,074
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,560 $ 2,048
Bank Borrowings (Note 6) - 1,903
Borrowings under inventory finance agreement (Note 6) 889 -
Current portion of long-term debt 69 -
Accrued expenses and other current liabilities 545 488
--------------------
Total current liabilities 3,063 4,439
Long-term debt 1,997 -
--------------------
Total liabilities 5,060 4,439
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; zero shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares
authorized; 3,262,329 shares issued and outstanding 3 3
Additional paid-in capital 12,196 12,196
Accumulated deficit (6,430) (4,564)
--------------------
Total stockholders' equity 5,769 7,635
--------------------
Total liabilities and stockholders' equity $ 10,829 $ 12,074
====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 20,559 $ 16,306
Cost of revenues 15,460 11,866
--------------------
Gross profit 5,099 4,440
Operating expenses:
Selling, general and administrative 5,108 3,550
Research and development - 11
--------------------
Total operating expenses 5,108 3,561
--------------------
Operating income (loss) (9) 879
Interest expense 204 157
Equity in losses of unconsolidated subsidiaries (Note 10) 40 124
Write-down of investments in unconsolidated subsidiaries
(Note 10) 404 -
Other income (100) (627)
--------------------
Income (loss) from continuing operations before income
taxes (557) 1,225
Provision for income taxes 43 19
--------------------
Income (loss) from continuing operations (600) 1,206
--------------------
Discontinued operations (Note 7):
Loss from operations (1,058) (324)
Loss on sale of discontinued operation (208) -
--------------------
Loss from discontinued operations (1,266) (324)
--------------------
Net income (loss) $ (1,866) $ 882
====================
Basic net income (loss) per common share:
From continuing operations $ (.18) $ .49
From discontinued operations (.39) (.13)
--------------------
Basic net income (loss) per common share $ (.57) $ .36
====================
Diluted net income (loss) per common share:
From continuing operations $ (.18) $ .48
From discontinued operations (.39) (.13)
--------------------
Diluted net income (loss) per common share $ (.57) $ .35
====================
Basic weighted average common shares outstanding (000's) 3,262 2,460
Dilutive effect of stock options - 26
--------------------
Diluted weighted average common and common equivalent
shares outstanding (000's) 3,262 2,486
====================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional
----------------- paid-in Accumulated
(In thousands) Shares Amount capital deficit Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <S> <C>
Balance at December 31, 1995 21,239 $ 21 $ 8,431 $ (5,446) $ 3,006
Stock options exercised 5 - 1 - 1
Reverse stock split (Note 9) (19,120) (19) 19 - -
Sale of Units (Note 9) 1,138 1 3,745 - 3,746
Net income - - - 882 882
--------------------------------------------------------
Balance at December 31, 1996 3,262 3 12,196 (4,564) 7,635
Net loss - - - (1,866) (1,866)
--------------------------------------------------------
Balance at December 31, 1997 3,262 $ 3 $ 12,196 $ (6,430) $ 5,769
========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,866) $ 882
Adjustments to reconcile net income (loss) to net cash
flows used by operating activities:
Depreciation and amortization 308 160
Equity in undistributed losses of unconsolidated
subsidiaries 40 113
Write-down of investments in unconsolidated subsidiaries 77 -
Write-down of accounts receivable from unconsolidated
subsidiary 265 -
Changes in operating assets and liabilities:
Increase in accounts receivable (1,550) (1,101)
(Increase) decrease in inventories 528 (1,590)
Decrease in other assets (32) (377)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities (431) 1,085
(Increase) decrease in net assets of discontinued
operations 462 (517)
---------------------
Net cash used by operating activities (2,199) (1,345)
---------------------
Cash flows from investing activities:
Purchases of property and equipment (552) (164)
Purchases of redeemable coupons - (1,194)
Redemptions of coupons 60 1,084
Investment in unconsolidated subsidiaries - (40)
---------------------
Net cash used in investing activities (492) (314)
---------------------
Cash flows from financing activities:
Bank and inventory finance borrowings 682 451
Repayments of capital lease obligation (50) -
Proceeds from exercise of stock options and warrants - 1
Proceeds from sales of Units and common stock, net - 3,746
---------------------
Net cash provided by financing activities 632 4,198
---------------------
Net increase (decrease) in cash and cash equivalents (2,059) 2,539
Cash and cash equivalents at beginning of year 3,161 622
---------------------
Cash and cash equivalents at end of year $ 1,102 $ 3,161
=====================
Supplemental schedule of non-cash financing and investing
activities:
Purchase of assets under capital lease obligation $ 419 $ -
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 204 $ 159
Income taxes 49 21
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 20
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Farmstead Telephone Group, Inc. (the "Company") is presently engaged in
the Customer Premise Equipment ("CPE") segment of the telecommunications
industry, principally as a secondary market reseller of used, remanufactured
and/or refurbished Lucent Technologies, Inc. ("Lucent") business telephone
parts and systems, and as an authorized Lucent dealer and distributor of
certain new telephone system products. The Company also provides equipment
repair and refurbishing, inventory management, and other related value-added
services. The Company sells its products and services to corporate end users,
and to other dealers and distributors. CPE refers to equipment which resides at
the customer's premises. During the two years ended December 31, 1997, no
single customer accounted for more than 10% of revenues from continuing
operations, except for one company in the financial services industry, which
accounted for approximately 11% in 1996.
Principles of Consolidation
The consolidated financial statements presented herein include the
accounts of the Company and all wholly-owned subsidiaries. Investments in
companies in which ownership interests range from 20-50% and which the Company
exercises significant influence but does not control, are accounted for under
the equity method. Under the equity method, the original investment is recorded
at cost and subsequently increased or decreased by the Company's share of the
subsidiary's undistributed earnings or losses. The investment is also reduced
by the amount of any deferred gross profits on sales to the subsidiary until
such time as the related goods are resold by the subsidiary. All material
intercompany transactions and balances have been eliminated.
Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when a product is shipped or when a service is
performed.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on an average basis, which approximates the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
which range from three to ten years. Maintenance, repairs and minor renewals
are charged to operations as incurred.
Income Taxes
The Company provides for income taxes under the asset and liability
method, under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
<PAGE> 21
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Net Income (Loss) Per Share
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" was issued, which became effective for periods ending
after December 15, 1997. This Statement has replaced the presentation of
primary and fully diluted earnings per share ("EPS") with a presentation of
basic EPS and diluted EPS. Basic EPS is computed by dividing net income (loss)
(the numerator) by the weighted average number of common shares outstanding
(the denominator) during the period. Diluted EPS is computed by increasing the
denominator by the weighted average number of additional shares that could have
been outstanding from securities convertible into common stock, such as stock
options and warrants, unless their effect on net income (loss) per share is
antidilutive. Earnings per share amounts presented for 1996 have been restated
for comparative purposes.
Reclassification
Certain prior year amounts have been reclassified to conform with the
1997 presentation.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1997 includes investments in
money market funds consisting of high quality short term instruments,
principally U.S. Government and Agency issues and commercial paper.
3. OTHER CURRENT ASSETS
As part of a class action lawsuit settlement in 1995, AT&T was required
to issue approximately 4.2 million $50 face value coupons to the class action
members. The coupons are freely transferable and are redeemable against the
cost of certain specified AT&T telephone system products or maintenance
services sold by the Company during the period May 1, 1995 through June 1,
1997. In 1996, the Company began purchasing coupons in the marketplace at a
discount to their $50 face value and redeeming them with AT&T subject to a
maximum discount of 20% of the sales price up to a $2,500 maximum discount per
transaction. The Company's accounting policy is to record income in an amount
equal to the excess of the face value of the coupons redeemed over the
acquisition cost of the coupons, in the period in which it can calculate the
amount of rebate it has earned. During the year ended December 31, 1996, the
Company recorded $542,000 as other income from the redemption of coupons
applicable to prior year sales. Rebates earned on current year purchases are
recorded in cost of sales after the related products are sold, and amounted to
$54,000 and $411,000, respectively, for 1997 and 1996. Included in other
current assets at December 31, 1996 was $231,000 of rebates receivable,
representing cash due from the tendering of redeemable coupons. The rebate
program terminated in June 1997.
4. PROPERTY AND EQUIPMENT, NET
As of December 31, the components of property and equipment, net were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
At cost:
Equipment $ 820 $ 357
Furniture and fixtures 102 76
Leasehold improvements 78 45
Leased equipment under capital lease 419 -
-----------------
1,419 478
Less accumulated depreciation and amortization (484) (292)
-----------------
Property and equipment, net $ 935 $ 186
=================
</TABLE>
<PAGE> 22
Leased equipment under capital lease at December 31, 1997 consists
principally of office furniture, equipment and computer equipment acquired in
connection with the Company's relocation to a larger operating facility. The
accumulated amortization of the leased equipment was $61,000 at December 31,
1997.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of December 31, the components of accrued expenses and other
liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
At cost:
Salaries, commissions and benefits $ 480 $ 476
Other 65 12
--------------
Accrued expenses and other current liabilities $ 545 $ 488
==============
</TABLE>
6. DEBT OBLIGATIONS
Inventory Financing Agreement:
------------------------------
On June 6, 1997, the Company entered into a $2 million line of credit
agreement with AT&T Commercial Finance Corporation which expires April 30,
1998. In December 1997, the credit agreement was acquired by Finova Capital
Corporation ("Finova"). The credit line is used to finance the acquisition of
inventory manufactured by 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 Finova (after deduction of any senior liens), to total Finova 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 December 31, 1997, outstanding
borrowings under this credit arrangement were $889,000. The Company expects to
either renew the Finova credit agreement for an additional term on or prior to
its expiration date or to obtain a similar facility with a new lender, on terms
not materially less favorable to the Company than its present terms.
Long-term Debt:
---------------
As of December 31, 1997, long-term debt obligations consisted of the
following (in thousands):
<TABLE>
<S> <C>
Bank revolving credit agreement (a) $ 1,697
Obligation under capital lease (b) 369
-------
2,066
Less current portion (69)
-------
Long-term debt $ 1,997
=======
</TABLE>
(a) On 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. Certain terms and conditions of this agreement were further
modified in December 1997. Under the current agreement, borrowings are advanced
at 75% of eligible accounts receivable, bear interest at First Union prime plus
.5% (9% at December 31, 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 $5.3 million, and 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. The Company was in compliance with these covenants and loan
requirements at December
<PAGE> 23
31, 1997. As of December 31, 1997, the unused portion of the credit facility
was $1,803,000, of which approximately $1,050,000 was available under the
borrowing formula. The average and highest amounts borrowed under these credit
facilities during the year ended December 31, 1997 were approximately
$1,714,000 and $2,282,000, respectively. Borrowings are dependent upon the
continuing generation of collateral, subject to the credit limit. The weighted
average interest rate on the Company's outstanding debt was 10.1 % for
1997 and 10.6% for 1996. The carrying values of the Company's borrowings
approximated their fair values at December 31, 1997 and 1996.
(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 is 13.29%. As of December 31, 1997 the future
minimum annual lease payments are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1998 $ 115
1999 115
2000 115
2001 115
2002 29
-----
Total minimum lease payments 489
Less amount representing interest (120)
-----
Present value of net minimum lease payments
under capital lease $ 369
=====
</TABLE>
7. DISCONTINUED OPERATIONS
FAMS
----
In February, 1996, the Company purchased from AT&T Systems Leasing
Corporation, a subsidiary of AT&T Capital Corporation, certain assets of its
discontinued Asset Recovery Center ("ARC") for a purchase price of $250,000.
Prior to its closing in January 1996, the ARC primarily operated to service
AT&T affiliates in the orderly disposition, by way of consignment sales
arrangements, of excess, overstocked and end-of-life telecommunications,
computer and data transmission equipment. The assets acquired consisted
primarily of warehouse equipment, vehicles, computer and office equipment, and
inventory. The Company concurrently formed a subsidiary corporation, Farmstead
Asset Management Services, LLC ("FAMS"), which used the purchased assets in a
similar operation in Piscataway, New Jersey.
In September 1997, due to declining revenues and resulting operating
losses, the Company entered into negotiations with an employee of FAMS for the
sale of the Company's interest in FAMS. The sale transaction was completed in
December, effective October 1,1997. FAMS, LLC, a newly formed New Jersey
corporation (the "Buyer") acquired all of the Company's interest in FAMS for
$40,000 in cash and a $360,000 10% Note, payable in 60 monthly installments.
The Note is secured by a $45,000 letter of credit and by all of the assets of
FAMS. The Company has recorded a loss on disposal of FAMS of $208,000,
consisting of $116,000 representing the excess of the book value of the net
assets sold over the sales proceeds, and $92,000 of other costs and expenses of
the sale. For the years ended December 31, 1997 and 1996, FAMS recorded
revenues of $799,000 and $1,230,000, respectively. Prior to the effective date
of sale, FAMS incurred an operating loss of approximately $578,000 in 1997, as
compared with an operating loss of approximately $370,000 in 1996.
Voice Processing Products
-------------------------
In December 1997 the Company began actively pursuing divesting itself of
its Cobotyx voice processing products business. Assets expected to be sold
during 1998 include inventories, fixed assets, and certain other
<PAGE> 24
current assets which, as of December 31, 1997 aggregated approximately
$560,000, plus all related technologies developed by the Company, tradenames,
and other contract rights. The operations of the Cobotyx business unit through
its disposal date are not expected to have a material impact on the Company's
operating results, and the Company expects to sell these assets at
approximately book value. For the years ended December 31, 1997 and 1996,
voice processing product revenues approximated $1,479,000 and $2,297,000,
respectively. The Company's loss from the operations of its voice processing
products business was approximately $480,000 in 1997 as compared to income of
approximately $46,000 in 1996.
The Company has restated prior year information contained in the
consolidated financial statements and notes thereto as a result of these
discontinued operations.
8. STOCK OPTIONS
The Company's 1992 Stock Option Plan ("1992 Plan") permits the granting
of options to employees, directors and consultants of the Company, which shall
be either incentive stock options as defined under Section 422 of the Internal
Revenue Code, or non-qualified options. Incentive stock options may be granted
at no less than market value at the time of granting, with a maximum term of
ten years except, for a 10% or more stockholder, the exercise price shall not
be less than 110% of market value, with a maximum term of five years. The
Company is authorized to grant options to acquire up to 3,500,000 shares of
common stock under the 1992 Plan, which expires in 2002.
The Company's 1986 and 1987 Key Employees and Key Personnel Stock Option
Plans have expired, however options previously granted under these plans may
continue to be exercised in accordance with the terms of the individual grants.
Options currently granted under all plans expire on various dates through 2007.
A summary of stock option transactions for each of the two years in the
period ended December 31, 1997 is as follows (the number of shares and option
prices for all periods prior to August, 1996 have been adjusted for the effects
of the 1-for-10 reverse stock split implemented on that date):
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
--------- -------------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1995 300,441 $ 1.56 - 11.80 $ 4.25
Granted 565,959 2.20 - 6.70 3.32
Exercised (500) 2.20 2.20
Canceled or lapsed (44,250) 3.30 - 4.20 4.17
--------------------------------------
Outstanding at December 31, 1996 821,650 1.56 - 11.80 3.69
Granted 1,000,109 1.88 - 3.75 2.18
Exercised - - -
Canceled or lapsed (914,150) 2.13 - 10.00 3.58
--------------------------------------
Outstanding at December 31, 1997 907,609 $ 1.56 - 11.80 $ 2.14
======================================
As of December 31, 1997:
Exercisable 70,468 $ 1.56 - 11.80 $ 3.39
Available for future grant 2,612,333
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1997:
<PAGE> 25
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted Avg.
Remaining
Range of Number Contractual Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.56 - 2.00 875,259 9.5 $ 1.99 45,118 $ 1.83
$2.01 - 5.00 16,000 5.0 3.73 13,000 3.79
$5.01 - 11.80 16,350 6.0 8.33 12,350 8.66
</TABLE>
Effective September 2, 1997, the Company issued replacement options to
all employees and directors who had outstanding options at that date with an
exercise price higher than $2.00 per share. The replacement options were issued
at $2.00 per share which represented the fair market value of the common stock
on the grant date. Approximately 847,000 options were cancelled and replaced
with these new grants.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Accordingly, compensation cost for stock
options is recorded as the excess, if any, of the market price of the Company's
common stock at the date of grant over the exercise price of the option. Had
compensation cost for the Company's stock option plans been determined in
accordance with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock- Based Compensation", the
Company's net income (loss) and basic and diluted net income (loss) per share
would have approximated the pro forma amounts shown below for each of the years
ended December 31 (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1996
---------------------- ---------------------
As As
Reported Pro forma Reported Pro forma
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,866) $ (2,315) $ 882 $ 418
Basic net income (loss) per share (.57) (.71) .36 .17
Diluted net income (loss) per share (.57) (.71) .35 .17
</TABLE>
The fair value of options granted during 1997 was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: 5.37% (6.25% in 1996) risk-free interest rate,
expected option lives of 5 years (3.4 years in 1996), expected volatility of
80%, and no dividend yield.
9. STOCKHOLDERS' EQUITY
In 1986, 416,663 warrants were issued in conjunction with the formation
of the Company, each warrant entitling the holder to purchase one-half share of
common stock at a price of $2.00 per share, expiring April 30, 1992. In May
1987, the Company sold 3,313,630 units in its initial public offering, each
unit consisting of one share of common stock and a detachable unit warrant
(together with the warrants issued in 1986, hereinafter referred to as "Public
Warrants") entitling the holder to purchase one-half share of common stock at a
price of $2.00 per share, expiring April 30, 1992. Pursuant to the underwriting
agreement the Company issued to its underwriters options ("Underwriters
Options") to purchase 331,363 of the Company's units, exercisable at $1.68 per
unit through April 13, 1992.
Since May 1987, the Company has periodically extended and modified both
the Public Warrants and the Underwriters Options. Currently, both are due to
expire on June 30, 2002. The Public Warrants are currently exercisable at $4.70
per share, and entitle the holder to acquire 1.06 shares of common stock for
each warrant tendered. They are subject to redemption by the Company on thirty
days written notice at a price of $.05 per warrant, if the bid price for the
common stock is $11.25 or higher per share for ten consecutive business days.
The Underwriters Options are exercisable at $7.50 per unit, entitling the
holder to acquire one share of common stock
<PAGE> 26
and a warrant, exercisable at $4.70 per share, to purchase 1.06 shares of
common stock. As of December 31, 1997, there were 183,579 Public Warrants
outstanding.
In September 1996, the Company completed a secondary offering of
1,000,000 Units, each Unit consisting of one share of Common Stock, one
Redeemable Class A Common Stock Purchase Warrant (the "Class A Warrants") and
one Redeemable Class B Common Stock Purchase Warrant (the "Class B Warrants",
and collectively with the Class A Warrants, the "Warrants") at an offer price
of $4.06 per Unit. The Units were first offered to stockholders of record as of
August 12, 1996 pursuant to a Rights Offering, which resulted in the sale of
80,512 Units. Upon completion of the Rights Offering, all of the remaining
919,488 Units were then sold through an underwritten offering. In October 1996
an additional 137,923 Units were sold to the Company's underwriter, pursuant to
the underwriter's over-allotment option provision. These transactions resulted
in proceeds of approximately $3,746,000, net of expenses.
Prior to the commencement of the secondary offering, the Company
implemented a 1-for-10 reverse stock split which became effective August 13,
1996, and which had the effect of reducing the number of outstanding shares of
common stock prior to the commencement of the secondary offering from
21,243,676 to 2,124,406, and the number of outstanding warrants from 1,835,727
to 183,579. In this report, all per share amounts, numbers of shares, stock
options and market prices of the Company's common stock for periods prior to
the reverse split have been restated to give retroactive recognition to the
reverse stock split.
Each Class A Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.28 and each Class B Warrant entitles the holder to
purchase one share of Common Stock at a price of $6.09 at any time until August
12, 2001. The Warrants are redeemable by the Company at a redemption price of
$.10 per Warrant on thirty days' prior written notice, provided that the
reported closing price of the Common Stock equals or exceeds $6.09 for the
Class A Warrants and $6.90 for the Class B Warrants, for a period of twenty
consecutive trading days ending five days prior to the notice of redemption.
In connection with the underwritten portion of the secondary offering,
the Underwriter received a warrant to purchase 89,948 Units at an exercise
price of $6.70, exercisable from September 17, 1997 until September 16, 2001.
10. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
In May 1995, the Company completed the acquisition of a 50% interest in
Beijing Antai Communication Equipment Co., Ltd. ("ATC"), for a purchase price
of $100, plus a $390,000 capital contribution to ATC. ATC, located in Beijing,
Peoples Republic of China ("PRC"), was formed in October 1992 as a Joint
Venture Enterprise, and is also owned 50% by Beijing Aquatic Product Inc. ATC,
previously a distributor for the Company in the PRC, markets, assembles,
manufactures, installs and services the Company's telecommunications products
which have been developed for use in the PRC. These products include (i) used
Lucent PBX equipment, and (ii) central office equipment, consisting of
proprietary Chinese system software, proprietary digital and analog interfaces,
and a proprietary billing system, the combination of which enables the PBX
equipment to be operated as a small central office. ATC also distributes and
installs local telecommunications transmission systems and home and business
alarm systems, however their historical operations to date have been
insignificant, and no assurances can be given that the Company or ATC will be
successful in selling its products in the PRC. The acquisition costs exceeded
the underlying equity in the net assets of ATC by approximately $190,000 which
were being amortized on a pro rata basis over the remaining 17 year term of the
joint venture. 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 receivable from, ATC, which aggregated a $342,000
non-cash charge against earnings.
<PAGE> 27
In June 1996, the Company and several Philippines investors formed
TeleSolutions, Inc., in which the Company invested $40,000 for a 40% ownership
interest. TeleSolutions was formed for the purpose of refurbishing, installing
and selling telecommunications equipment in the Republic of the Philippines. In
June 1997, the Company wrote off $52,000 of inventory located at TeleSolutions,
Inc., and accrued $10,000 of estimated closing costs for this operation.
The following table shows the changes in the Company's investment in
unconsolidated subsidiaries during each of the years ended December 31
($000's):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Investment at beginning of year $ 117 $ 201
Capital contribution, including other direct
acquisition costs - 40
Equity in unconsolidated subsidiary:
Equity in net losses (34) (113)
Amortization of excess of cost over equity
in net assets (6) (11)
Write-down of investment balance (77) -
---------------
Investment at end of year $ - $ 117
===============
</TABLE>
11. LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
In November 1996, the Company entered into a five year lease, commencing
February 1997, for a 34,760 square foot building in East Hartford, CT. Under
the terms of the lease agreement, the minimum monthly rental will be $13,759
for the first two years, $14,483 for year three, and $15,207, for years four
and five. The lease agreement contains two three-year renewal options. In March
1997, the Company relocated substantially all of its Connecticut operations
into this facility. Rent expense from continuing operations was $197,000 in
1997 and $191,000 in 1996. Future minimum lease payments under noncancelable
operating leases at December 31, 1997 are as follows: $165,108 for 1998,
$172,348 for 1999, $181,036 for 2000, $182,484 for 2001, and $30,414 for 2002,
totaling $731,390.
Effective January 1, 1998, the Company entered into a ten year employment
agreement with the Chief Executive Officer ("CEO"). The agreement provides for
five years of full-time employment (the "Active Period"), and five years of
limited employment (the "Limited Period") commencing January 1, 2003. During
the Active Period, a minimum annual base salary will be paid as follows:
$200,000 in 1998, $250,000 in 1999, and $300,000 for 2000 to 2003. During the
Limited Period, the CEO will be paid an annual amount equal to one-third of the
base salary rate in effect at the commencement of the Limited Period, as
consideration for up to fifty days of active service per year. The agreement
provides for an annual bonus of up to 50% of base salary during the term of the
agreement, an option to purchase up to 500,000 shares of common stock at the
fair market value on the date of grant, and $1,500,000 in life insurance for
the benefit of the CEO's named designee.
The agreement provides for severance pay during the term should the
Company terminate the agreement without cause, or in the event of a change in
control of the Company, as defined. During the Active Period, severance pay
will equal three times (i) the amount of the then-current base pay, plus (ii)
the average bonus paid during the three most recent years. During the Limited
Period, severance pay will equal three times the total amount that would have
been due for the time remaining in the Limited Period. In addition, the Company
is obligated to provide supplemental retirement benefits, payable at age 65 to
80, in an amount equal to one-third of the CEO's average final three year
salary, currently estimated to be $100,000 per year. To fund this retirement
obligation and insurance benefit, the Company concurrently established a
Supplemental Executive Retirement Plan and purchased a split dollar variable
life insurance policy with a $50,000 annual 10 year premium.
<PAGE> 28
12. INCOME TAXES
Current income tax expense attributable to income from continuing
operations consisted of state tax expense of $24,000 and federal tax expense of
$19,000 in 1997, and state tax expense of $19,000 in 1996. There was no
deferred federal or state tax expense in either of those years.
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to pretax income (loss) as a result
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (634) $ 300
Increase (reduction) in income taxes resulting from:
Amortization of goodwill 3 3
State and local income taxes, net of federal income
tax benefit 16 15
Unutilized loss of foreign subsidiary 133 43
(Realized) unrealized benefit of operating loss
carryforwards 506 (350)
Other 19 8
-----------------
$ 43 $ 19
=================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to allowance for
doubtful accounts $ 125 $ 100
Inventories, principally due to additional costs inventoried
for tax purposes pursuant to the Tax Reform Act of 1986 139 142
Net operating loss and capital loss carryforwards 1,133 855
Other 8 130
--------------------
Total gross deferred tax assets 1,405 1,227
Less valuation allowance (1,405) (1,227)
--------------------
Net deferred tax assets $ - $ -
====================
Deferred tax liabilities $ - $ -
====================
</TABLE>
The valuation allowance is considered necessary due to the Company's past
history of operating losses. Accordingly, net deferred tax assets have been
reduced to the amount which management believes is more likely than not to be
realized.
The Company has net operating loss carryforwards for federal income tax
purposes of approximately $3,229,000. No federal income tax provision has been
made in the accompanying financial statements, except for alternative minimum
taxes paid in 1997, because of the presence of net operating loss
carryforwards. These carryforwards expire on various dates through 2012.
<PAGE> 29
INDEX TO EXHIBITS
Registrant hereby incorporates by reference the following documents filed
as part of the S-18 Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B).
3(a) Certificate of Incorporation.
3(b) By-Laws.
4(a) Form of Unit Warrant.
4(b) Amended Form of Underwriter's Option.
4(c) 1986 Key Employees and Key Personnel Stock Option Plan.
4(d) 1987 Key Employees and Key Personnel Stock Option Plan.
10(i) Agreement between the Company and AT&T.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1988 on
Form 10-K:
10.5 Amendment to the 1986 Key Employees and Key Personnel Stock
Option plan previously filed as Exhibit No. 4(c) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc.
declared effective on April 3, 1987.
10.6 Amendment to the 1987 Key Employees and Key Personnel Stock
Option Plan previously filed as Exhibit No. 4(d) in the Form S-18
Registration Statement of Farmstead Telephone Group, Inc.
declared effective on April 13, 1987.
Registrant hereby incorporates by reference the following exhibits filed
as part of the S-3 Registration Statement of the Company's securities declared
effective on July 3, 1991 (File No. 33-41442)
4 Form of Private Placement Warrant
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual Report for the year ended December 31, 1991 on
Form 10-K:
10.12 Certificate of Amendment of Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated July 10, 1991.
Registrant hereby incorporates by reference the following exhibits filed
with the Form S-3 Registration Statement of the Company's securities declared
effective on October 29, 1992 (Registration No. 33-50432):
4(a) Resolutions adopted by Unanimous Written Consent of the Company's
Board Of Directors dated as of July 9, 1992 amending terms of
Warrants and Underwriter's Options.
10(e) Agreement dated June 25, 1992 between the Company and The Wall
Street Group, Inc.
<PAGE> 30
Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Annual Report on Form 10-K for the year ended December
31, 1992:
4(e) 1992 Stock Option Plan.
Registrant hereby incorporates by reference the following exhibits filed
as part of Form SB-2 , Amendment No. 1, dated January 21, 1995 (Registration
No. 33-87134):
10.7 Stock Purchase Agreement between Farmstead Telephone Group, Inc.
and DW International Ltd., dated December 31, 1994.
Registrant hereby incorporates by reference the following exhibit filed
with the Registrant's Annual Report on Form 10-KSB for the year ended December
31, 1994:
10.3 Summary compensation arrangements for Named Executive.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1995:
10.2 Commercial Revolving Loan and Security Agreement dated June 5,
1995, between Farmstead Telephone Group, Inc. and Affiliated
Business Credit Corporation
10.3 Contract for Beijing Antai Communication Equipment Company Ltd.,
dated September 23, 1992
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Annual report on Form 10-KSB for the year ended December
31, 1995:
10.1 Letter agreement dated March 11, 1996, amending the Commercial
revolving Loan and Security Agreement dated June 5, 1995 between
Farmstead Telephone Group, Inc. and Affiliated Business Credit
Corporation
Registrant hereby incorporates by reference the following exhibits filed
as part of SB-2 Registration Statement dated June 3, 1996 (Registration No.
333-5103):
1.1 Form of Standby Underwriting Agreement.
1.2 Form of Selected Dealers Agreement.
4.2 Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant).
10.1 Form of Underwriter's Consulting Agreement.
Registrant hereby incorporates by reference the following exhibits filed
as part of Amendment No. 1 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103):
10.2 Letter of Agreement dated June 3, 1996 between Farmstead
Telephone Group, Inc. and Lucent Technologies, Inc.
Registrant hereby incorporates by reference the following exhibits filed
as part of Amendment No. 2 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103):
<PAGE> 31
3(a) Amendment of Certificate of Incorporation.
4.1 Form of Warrant Certificate.
4.3 Form of Warrant Agreement.
4.4 Form of Unit Certificate.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996:
10.1 Agreement of Lease By and between Tolland Enterprises and
Farmstead Telephone Group, Inc., dated November 5, 1996.
Registrant hereby incorporates by reference the following exhibits filed
with the Registrant's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 1997:
10.1 Letter agreement dated as of May 30, 1997 by and among Farmstead
Telephone Group, Inc. (the "Borrower"), Farmstead Asset
Management Services, LLC (the "Guarantor") and First Union Bank
of Connecticut (successor-in-interest to Affiliated Business
Credit Corporation) (the "Lender"), amending the Commercial
Revolving Loan and Security Agreement dated June 5, 1995, as
amended, between Borrower and Lender.
10.2 Third Amended and Restated Revolving Promissory Note, dated June
6, 1997, in the amount of $3,500,000.
10.3 Agreement for Wholesale Financing, dated June 6, 1997, and
related letter agreement dated June 3, 1997.
The following exhibits are filed herewith:
10.1 Purchase and Sale Agreement, dated December 1, 1997 by and among
Farmstead Telephone Group, Inc., FTG Venture Corporation, FAMS,
LLC and Farmstead Asset Management Services, LLC.
10.2 Letter agreement dated December 1, 1997 by and among Farmstead
Telephone Group, Inc., FTG Venture Corporation, FAMS, LLC and
Farmstead Asset Management Services, LLC, amending the Purchase
and Sale Agreement.
10.3 FAMS, LLC Promissory Note, dated December 1, 1997 in the
principal amount of $360,000.
10.4 Letter agreement dated as of December 1, 1997 by and among
Farmstead Telephone Group, Inc. (the "Borrower"), Farmstead Asset
Management Services, LLC (the "Guarantor") and First Union
National Bank (successor-in-interest to Affiliated Business
Credit Corporation), amending the Commercial Revolving Loan and
Security Agreement dated June 5, 1995, and as amended May 30,
1997.
10.5 Employment Agreement dated as of January 1, 1998 between
Farmstead Telephone Group, Inc. and George J. Taylor, Jr.
<PAGE> 32
10.6 Supplemental Executive Retirement Plan, effective as of January
1, 1998
21. Subsidiaries of Small Business Issuer
<PAGE> 33
Exhibit 10.1
PURCHASE AND SALE AGREEMENT
---------------------------
THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered
into this 1st day of December, 1997 (the "Closing Date") and effective as of
October 1, 1997 (the "Effective Date"), by and among FARMSTEAD TELEPHONE GROUP,
INC., a Delaware corporation ("FTG") and FTG VENTURE CORPORATION, a Delaware
corporation ("FVC") (collectively, FTG and FVC are referred to as "Sellers"),
and FAMS, L.L.C., a New Jersey limited liability company ("Buyer") and
FARMSTEAD ASSET MANAGEMENT SERVICES, LLC, a Delaware limited liability company
(the "Company").
RECITALS
FTG is the record owner of ninety-eight percent (98%) of the membership
units in the Company (the "FTG Units"), and FVC is the record owner of the
remaining two percent (2%) of the membership units in the Company (the "FVC
Units") (the FTG Units and the FVC Units are referred to collectively as the
"Units").
Sellers wish to sell and Buyer wishes to purchase the Units under the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the respective agreements, covenants
and representations and warranties set forth in this Agreement, the parties
hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF UNITS
--------------------------
1.1 Purchase and Sale of Units. Subject to the terms and conditions of
this Agreement, each of the Sellers hereby sells, transfers, conveys and
assigns all of its right, title and interest in and to the Units to the Buyer,
and the Buyer hereby purchases the Units in consideration for payment of the
Purchase Price, as defined in Section 1.2 hereof. The Units evidence ownership
in the Company, which Company owns, as of the Effective Date, the assets and is
obligated for the liabilities listed in Schedule A attached hereto.
1.2 Purchase Price. The Purchase Price payable to Sellers shall be Four
Hundred Thousand Dollars ($400,000) payable as follows:
<PAGE> 1
(a) Twenty-Six Thousand Dollars ($26,000) (the "FTG Payment")
shall be paid by the Buyer to FTG on the Closing Date by certified check,
bank check, or by wire transfer of immediately available funds to an
account designated by FTG.
(b) Fourteen Thousand Dollars ($14,000) (the "FVC Payment") shall
be paid by the Buyer to FVC on the Closing Date by certified check, bank
check or wire transfer of immediately available funds to an account
designated by FVC, which payment shall constitute the consideration paid
by Buyer to FVC for the FVC Units.
(c) Three Hundred Sixty Thousand Dollars ($360,000) payable by
Buyer to FTG by delivery on the Closing Date of a promissory note
substantially in the form of Exhibit A attached hereto (the "Note").
1.3 The Note. The Note shall be payable in sixty (60) equal monthly
installments of principal and interest, the first such installment which shall
become due and payable on the first to occur of (i) the first day of the month
following the month in which the Company moves its offices located at 11
Colonial Drive, Lot 1, Block 460-C, Centennial Corporate Park, Piscataway, New
Jersey (the "Premises") to a new location, or (ii) April 1, 1998, and the
remaining installments which shall be due and payable on the first day of the
next succeeding fifty-nine (59) months. Interest on the Note shall be one and
one-half percent (1.5%) above the prime rate of interest as published in the
Wall Street Journal on the Closing Date.
1.4 Guaranty Agreement. Buyer shall cause the Company to execute and
enter into a certain guaranty agreement substantially in the form of Exhibit B
attached hereto (the "Guaranty") pursuant to which the Company shall guaranty
the payment and performance of all of Buyer's obligations under this Agreement
and the Note.
1.5 Security Agreement. The obligations of the Company pursuant to the
Guaranty shall be secured by all of the assets of the Company under terms and
conditions set forth in a security agreement substantially in the form of
Exhibit C attached hereto (the "Security Agreement").
1.6 Additional Security. As additional security for the Buyer's
obligations under the Note, the Buyer shall, as of the Closing Date, post a
standby letter of credit (the "Letter of Credit") in a form acceptable to
Sellers and in the amount of Forty-Five Thousand Dollars ($45,000) which FTG
may, under the terms and conditions of the Letter of Credit, draw upon either
(i) in the event of a default in payment by the Buyer for amounts which become
due and payable to FTG under the Note which is not cured within ten (10) days
of the date of default; (ii) if there shall be an Event of Default by the
Company under the Guaranty or the Security Agreement; or (iii) in the event of
default by either Buyer or the Company under any loan agreements, credit
agreements, reimbursement agreements, or debt instruments of any kind or
description between either the Buyer or the Company and the issuer (the
"Issuer") of the Letter of Credit. The Letter of Credit shall be held in place
and maintained for the benefit of FTG until April 15, 2002.
<PAGE> 2
1.7 Employees and Benefits. Notwithstanding anything to the contrary
set forth herein, FTG shall be responsible for and pay wages and health
insurance and life insurance premiums covering employees of the Company for the
period commencing on October 1, 1997 and ending on October 31, 1997, after
which FTG shall have no further obligation to the Company relating to wages and
benefits paid to employees of the Company of any kind or description.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
-----------------------------------------
Each of the Sellers, with respect to itself only and not with respect to
the other Seller, represent and warrant to Buyer to the best knowledge and
belief of the directors and officers of each of the Sellers as follows:
2.1 Share Ownership. Each of the Sellers own either the FTG Interest or
the FVC Interest, as the case may be, beneficially and of record, free and
clear of any lien.
2.2 Power and Authority. Each of the Sellers has the full corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder.
2.3 Buyer's Ownership. Upon payment of the Purchase Price, Buyer will
acquire legal and beneficial ownership of each of the Units, free and clear of
any lien against the Units created by the Sellers.
2.4 Organization and Good Standing. Each of the Sellers is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware.
2.5 Material Changes. Each of the Sellers represents and warrants that
during the period commencing on February 29, 1996 and ending on July 1, 1997
(the "Farmstead Period") neither of the Sellers or their affiliates, officers,
directors, agents or employees has entered into, agreed upon or otherwise made
commitments on its own behalf or on behalf of the Company which have not been
disclosed to Buyer or the Company.
2.6 Environmental Compliance. Each of the Sellers represents and
warrants that during the Farmstead Period, the Company has not been made aware
of any violation of any law, regulation or order of the United States or the
State of New Jersey relating to the environment, pollution, emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous materials or wastes into ambient air, surface water, ground water,
land or environmental medium, and each of the Sellers agrees to indemnify,
defend, and save the Buyer harmless against any claim, damage, liability,
costs, penalties, or fines which the Buyer may suffer as a result of air,
ground or water pollution caused by the Sellers in the Company's use of the
premises located at either 11 Colonial Drive, Lot 1, Block 460-C, Centennial
Corporate Park, Piscataway, New Jersey (the "Premises") or 91 New England
Avenue, Centennial Corporate Park, Piscataway, New Jersey, for
<PAGE> 3
actions or inactions of the Company occurring on or before the Closing Date,
provided, however, that the Sellers shall have no obligation to indemnify the
Buyer pursuant to this Section 2.6 if such air, ground or water pollution is
caused by the grossly negligent or willful actions or inactions, directly or
indirectly of Allan W. Anger, Jr. occurring during the Farmstead Period.
2.7 Validity of Agreement. This Agreement has been duly executed and
delivered by each of the Sellers and a duly authorized officer of each of the
Sellers and constitutes the valid and binding obligation of each of the
Sellers, enforceable against each of the Sellers in accordance with its terms.
This Agreement and the performance by the Sellers of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of each of the Sellers.
2.8 Books and Records. The minute books of the Company shall be made
available to Buyer by the Sellers for its inspection and contain accurate and
complete records of all meetings of and corporate actions or written consents
by the members and officers of the Company.
2.9 Disclosure. Neither of the Sellers has withheld from Buyer any
material facts relating to the assets, properties, liabilities, business,
operations, financial condition, results of operations or prospects of the
Company including, but not limited to, material facts relating to the physical
condition of the Premises on or before the Closing Date.
2.10 Further Obligations of the Company. Effective as of the Closing
Date, FTG and FVC acknowledge and agree that the Company shall have no further
obligation to FTG with respect to any and all intercompany obligations carried
on the books of FTG or FVC as an accounts receivable attributable to the
Company and accrued prior to the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to Seller as follows:
3.1 Organization, Power and Authority. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New Jersey and has corporate power and authority to own, operate and lease its
properties and conduct its business as now conducted.
3.2 Validity of Agreement. Buyer has corporate power and authority to
enter into this Agreement and to perform its obligations hereunder. This
Agreement has been duly executed and delivered by a duly authorized officer of
Buyer and constitutes the valid and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms. This Agreement and the performance
by Buyer of the transactions contemplated hereby have been duly authorized by
all necessary corporate action.
<PAGE> 4
3.3 No Breach. Neither the execution and delivery of, or the
performance by Buyer of its obligations under this Agreement, nor the
consummation of the transactions contemplated hereby, will (a) violate,
conflict with or result in the breach of, any applicable law or order or the
Articles of Incorporation or Bylaws of Buyer, (b) result in the creation of any
lien upon any of the assets or properties of Buyer, or (c) violate, conflict
with, result in the breach of or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or
accelerate or permit the acceleration of the performance required by, or
otherwise give any Person additional rights or compensation under, any note,
deed, lease, instrument, security agreement or mortgage, any commitment,
contract, license, sales commitment or other instrument or oral understanding
to which Buyer is a party or by which any of its assets or properties are
bound.
3.4 No Consents Necessary. No consent is required to be obtained from,
made with or given to any Person by Buyer in connection with its execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated by this Agreement.
3.5 The Principals. Buyer, by virtue of the management of the Company
by one or more of its shareholders prior to the Closing Date, has had full and
complete access to the books, records, minutes and business operations of the
Company without limitation or restriction and acknowledges and agrees that all
aspects of the Company's business and operations up to the Closing Date are
known to them, and that Buyer is relying on its own investigation, and the
Sellers' representations in Article II herein with respect to the business of
the Company in agreeing to the terms and conditions in this Agreement.
3.6 Investment Purpose. The Units are being purchased for investment
only and not with a view to any public distribution thereof, and Buyer will not
offer to sell or otherwise dispose of the stock in violation of any of the
requirements of the federal securities laws or any applicable state securities
laws.
ARTICLE IV
CONDITIONS TO CLOSING
---------------------
4.1 Conditions to Obligations of Buyer. The obligations of Buyer to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing Date, of the following conditions (any
one or more of which may be waived in whole or in part in a writing signed by
Buyer):
(a) Accuracy of Representations and Warranties. The
representations and warranties of each of the Sellers contained in this
Agreement shall be true and correct in all material respects as made,
both on the date of this Agreement and at and as of the Closing Date.
<PAGE> 5
(b) Performance of Covenants and Agreements. Each of the Sellers
shall have performed or complied with, in all material respects, all
covenants and agreements contemplated by this Agreement to be performed
or complied with by them at or prior to the Closing Date.
(c) Receipt of Documents. Seller shall have delivered, or caused
to be delivered, to Buyer each of the documents required by Section 5.1.
4.2 Conditions to Obligations of Each of the Sellers. The obligation of
each of the Sellers to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment at or prior to the Closing Date
of the following conditions (any one or more of which may be waived in whole or
in part in a writing signed by each of the Sellers):
(a) Accuracy of Representations and Warranties. The
representations and warranties of Buyer contained in this Agreement shall
be true and correct in all material respects as made, both on the date of
this Agreement and at and as of the Closing Date
(b) Performance of Covenants and Agreements. Buyer shall have
performed or complied with, in all material respects, all covenants and
agreements contemplated by this Agreement to be performed or complied
with by Buyer at or prior to the Closing Date.
(c) Receipt of Documents. Buyer shall have delivered, or caused
to be delivered, to Sellers each of the documents required by Section
5.2.
ARTICLE V
CLOSING
-------
5.1 Deliveries by Each of the Sellers. On or before the Closing Date,
each of the Sellers shall deliver to Buyer:
(a) a certificate signed by each of the Sellers to the effect
that the conditions set forth in Section 4.1 have been satisfied;
(b) a certificate of the Secretary of each of the Sellers, in
form and substance reasonably satisfactory to Buyer, certifying as to (i)
the resolutions of the Board of Directors of each of the Sellers
approving and authorizing this Agreement and the transactions
contemplated hereby, and (ii) copies of the Articles of Incorporation and
Bylaws of each of the Sellers;
<PAGE> 6
(c) a good standing certificate of each of the Sellers issued by
the Secretary of State of Delaware and each state where they are
qualified to do business as a foreign corporation;
(d) copies of any and all books and records in their possession
or under their control relating to the Company, including, without
limitation, all tax returns and other books and records relating to taxes
payable to any federal, state, local or foreign governmental entity or
agency; and
(e) the Units.
5.2 Deliveries by Buyer. At the closing, Buyer shall deliver to Seller:
(a) the FTG Payment;
(b) the FVC Payment;
(c) the Note;
(d) the Guaranty Agreement;
(e) the Security Agreement;
(f) the Letter of Credit;
(g) a certificate of an officer of Buyer to the effect that the
conditions set forth in Section 4.2 have been satisfied;
(h) a certificate of the Secretary or Members of Buyer, in form
and substance reasonably satisfactory to Sellers, certifying as to (i)
the resolutions of the Board of Directors of Buyer approving and
authorizing this Agreement and the transactions contemplated hereby, and
(ii) copies of the Articles of Incorporation and Bylaws of Buyer; and
(i) a good standing certificate of Buyer issued by the Secretary
of State of the State of New Jersey.
(j) by bank or certified check, a payment to FTG pursuant to
Section 1.7 hereof.
<PAGE> 7
ARTICLE VI
POST-CLOSING COVENANTS
----------------------
6.1 Name Change. Buyer covenants and agrees that upon the first to
occur of (i) October 1, 2002, or (ii) thirty (30) days after the receipt by the
Buyer (the "Notice Period") written notice from either of the Sellers that an
action or failure to act by the Company has caused "material damage", as
hereinafter defined, to the business of either of the Sellers (the "Notice")
pursuant to which the Buyer does not seek arbitration as provided for in
Section 8.12 hereof. Buyer shall cause the name of the Company to be changed
from Farmstead Asset Management Services, LLC to any other name that does not
include the name "Farmstead." This Section 6.1 shall apply to the Company, the
Buyer, and any heirs, successors or assigns of Buyer or any entity into which
the Buyer may be merged. For the purposes of this Section 6.1, "material
damage" shall mean damage to either of the Sellers resulting from any or all of
the following: (x) any Event of Default to the Company as defined in the Note
or the Security Agreement; (y) a material breach of this Agreement by the
Buyer; and (z) any action or failure to act by the Company, which shall
directly or indirectly materially injure either of the Sellers or their
affiliates in the conduct of their businesses by virtue of the use by the
Company of the name which includes the word "Farmstead" Notwithstanding all of
the foregoing, in the event that Buyer, at any time within the Notice Period,
serves written notice upon the Sellers of its intention to seek arbitration in
accordance with the terms and conditions of Section 8.12 hereof with respect to
the issues set forth by either of the Sellers in the Notice, such issues will
be resolved in binding arbitration as provided for in Section 8.12 hereof, and
Buyer and Sellers will act in accordance with the findings of the arbitrator.
6.2 Post-Closing Access. After the Closing Date, Buyer shall retain for
a period of seven (7) years all books and records of the Company for the period
commencing on February 23, 1996 through the Closing Date, and shall give to
each of the Sellers and their authorized representatives such access to the
books and records being transferred and assigned to Buyer by each of the
Sellers which relate to the operation of the business of the Company prior to
the Closing Date as may be reasonably required by either of the Sellers.
Sellers shall be entitled, at their own expense, to make extracts and copies of
such books and records and Buyer will cooperate with each of the Sellers
therewith.
6.3 Security Deposit. Buyer shall, immediately upon receipt by the
Company, cause the Company to return to FTG any and all funds received by Buyer
from its landlord in connection with the return of the Company's security
deposit paid to its landlord (the "Security Deposit") in order to secure the
Company's obligations under that certain Lease Agreement dated March 20, 1996,
by and between the Company, as Tenant, and H. Harding Brown, David J.
Frischman, Douglas Friedrich and Robert K. Brown, as Landlord (the "Lease").
Notwithstanding all of the foregoing, in the event that (i) the Buyer
moves out of the Premises into a new premises owned or managed by the Landlord,
which premises may include the current Premises in any modified form, on or
before January 1, 1998, and (ii) the Buyer obtains from the
<PAGE> 8
Landlord a written release from the Landlord releasing the Sellers from any
and all obligations under the Lease, and any other agreement, contract or
document binding either of the Sellers to obligations to the Landlord with
respect to the Premises, Buyer shall retain the Security Deposit for itself,
and shall have no further obligation to FTG with respect to the Security
Deposit.
6.4 Rent. Rent due and owing to the Company's landlord under the terms
and conditions set forth in the Lease for the period commencing on October 1,
1997 and ending on March 31, 1998 shall be paid monthly in full as follows:
<TABLE>
<CAPTION>
Month Payable by:
- --------------------- ---------------------------------------------
<S> <C>
(a) October, 1997 FTG
(b) November, 1997 If the Company continues to occupy the
Premises as of November 1, 1997, then the
Company shall pay the rent due the Landlord
for the month of November in full. If the
Company no longer occupies the Premises as of
November 1, 1997, then FTG shall pay the rent
due for the month of November in full.
(c) December, 1997 If the Company continues to occupy the
Premises as of December 1, 1997, then the
Company shall pay the rent due the Landlord
for the month of December in full. If the
Company no longer occupies the Premises as of
December 1, 1997, then FTG shall pay the rent
due for the month of December in full.
(d) January, 1998 If the Company continues to occupy the
Premises as of January 1, 1998, then the
Company shall pay the rent due the Landlord
for the month of January in full. If the
Company no longer occupies the Premises as of
January 1, 1998, then FTG shall pay the rent
due for the month of January in full.
(e) February, 1998 If the Company continues to occupy the
Premises as of February 1, 1998, then the
Company shall pay the rent due the Landlord
for the month of February in full. If the
Company no longer occupies the Premises as of
February 1, 1998, then FTG shall pay the rent
due for the month of February in full.
<PAGE> 9
(f) March, 1998 If the Company continues to occupy the
Premises as of March 1, 1998, then the
Company shall pay the rent due the Landlord
for the month of March in full. If the
Company no longer occupies the Premises as of
March 1, 1998, then FTG shall pay the rent
due for the month of March in full.
</TABLE>
Notwithstanding all of the foregoing, in the event that the Company
vacates the Premises prior to March 1, 1998 and occupies and leases a new
remises owned by the Landlord, the Buyer covenants and agrees that it shall use
its best efforts to obtain a release from the Landlord releasing the Company
and the Sellers from any and all obligations under the Lease effective as of
the day the Company vacates the Premises.
6.5 Financial Statements and Audits. Buyer shall, commencing on the
first day of the month after the Closing Date and ending when all of its
obligations under the Note have been satisfied, provide FTG with (i) monthly
financial statements of Company prepared in accordance with generally accepted
accounting principles consistently applied and certified by the Company as true
and correct as of the date of issuance to FTG which shall be provided no later
than twenty (20) days after the last day of each month; and (ii) audited
financial statements of the Company or any successor to the Company provided to
FTG within ninety (90) days of the close of the Company's or a successor's
fiscal year. In addition, Sellers shall, upon reasonable notice to the Company,
have a right of access to the books and records of the Company for the purposes
of auditing, at its own expense, the financial condition of the Company or
conducting appraisals of the Company's assets, provided, however, that Sellers
shall not, in the exercise of such rights of access, materially interfere with
the conduct of the Company's business.
6.6 Required Notice. Buyer shall provide FTG with written notice of any
event of default by either Buyer or the Company under any loan agreements,
credit agreements, reimbursement agreements or debt instruments of any kind or
description between either the Buyer or the Company and the Issuer.
ARTICLE VII
INDEMNIFICATION AND SURVIVAL
----------------------------
7.1 Indemnification by Each of the Sellers. Subject to the provisions
of this Article VII, each of the Sellers individually, and not jointly and
severally, agree to indemnify, defend and hold harmless Buyer, its respective
affiliates, successors, assigns, stockholders, partners, directors, officers,
employees, agents and representatives (collectively, "Buyer Indemnitees") from
and against any and
<PAGE> 10
all liabilities, obligations, damages, deficiencies, expenses, actions,
demands, fines, penalties, amounts paid in settlement, assessments, judgments,
payments, costs and expenses, including reasonable attorneys' fees
(collectively, "Damages"), incurred or suffered by any of the Buyer
Indemnitees resulting from, arising out of or relating to (i) any inaccuracy
in or breach of any representation or warranty of each of the Sellers
contained in this Agreement or any of the other documents, instruments or
certificates delivered by or on behalf of each of the Sellers in connection
herewith, (ii) any breach of or any default under any of the covenants or
agreements of each of the Sellers contained in this Agreement or in any of the
other documents, instruments or certificates delivered by or on behalf of each
of the Sellers, or the Company in connection herewith, and (iii) any actions of
Sellers or the Company, or their affiliates, officers, directors, agents or
employees relating to the conduct of the Company's business prior to the
Effective Date, except for those grossly negligent, fraudulent, illegal or
intentionally wrongful actions of Allan W. Anger, Jr. in his capacity as an
employee of the Company.
7.2 Indemnification by Buyer. Subject to the provisions of this Article
VII, Buyer agrees to indemnify, defend and hold harmless each of the Sellers
and their respective successors, assigns, heirs, executors and personal
representatives (collectively, "Seller Indemnitees") from and against any and
all Damages incurred or suffered by any of the Seller Indemnitees resulting
from, arising out of our relating to (i) any inaccuracy in any representation
or warranty of Buyer contained in this Agreement or in any of the other
documents, instruments or certificates delivered by or on behalf of Buyer in
connection herewith, (ii) any breach of or any default under any of the
covenants and agreements of Buyer contained in this Agreement or in any of the
other documents, instruments or certificates delivered by or on behalf of Buyer
in connection herewith, or (iii) any grossly negligent, fraudulent, illegal or
intentionally wrongful acts of Allan W. Anger, Jr. as determined in a court of
competent jurisdiction located in the State of New Jersey in his capacity as an
employee of the Company occurring prior to the Effective Date, and (iv) any
actions of Buyer or the Company, or their affiliates, officers, directors,
agents or employees relating to the conduct of the Company's business on or
after the Effective Date.
7.3 Notice of Claims: Defense.
(a) Promptly after receipt by any Buyer Indemnitee or Seller
Indemnitee (in any such case, the "Beneficiary") of notice of any claim
or potential claim, or the commencement of any action by any Person that
is not a party to this Agreement or a Buyer Indemnitee or a Seller
Indemnitee (a "Third Party Claim"), which could give rise to a right to
indemnification pursuant to Section 7.1 or Section 7.2 hereof, the
Beneficiary shall give the party who may become obligated to provide
indemnification hereunder (the "Indemnitor") written notice describing
the Third Party Claim in reasonable detail and specifying, to the extent
known, the nature, circumstances and the amount of such Third Party
Claim. The Indemnitor shall have twenty-one (21) calendar days from its
receipt of notice from the Beneficiary of a Third Party Claim to notify
the Beneficiary (i) whether the Indemnitor disputes the Beneficiary's
right of indemnity with respect to such Third Party Claim, and (ii) if,
except for the limitations set forth in Article VII, the Indemnitor does
not dispute such right of indemnity, whether or not the Indemnitor
desires to defend the Beneficiary against such Third Party Claim.
<PAGE> 11
(b) If the Indemnitor notifies the Beneficiary within such
twenty-one (21) day period that (i) the Indemnitor does not dispute the
Beneficiary's right of indemnification and (ii) the Indemnitor desires to
defend against such Third Party Claim, then the Indemnitor shall have the
right to assume and control, at its sole cost and expense, the defense
and/or settlement of such Third Party Claim by appropriate proceedings
with counsel reasonably acceptable to the Beneficiary. The Beneficiary
may participate in, but not control, any such defense or settlement, at
its sole cost and expense.
(c) If the Indemnitor (i) disputes the Beneficiary's right of
indemnity with respect to a Third Party Claim or (ii) does not dispute
such right of indemnity but either fails to promptly assume and prosecute
the defense and/or settlement of such Third Party Claim or ceases or
fails to diligently and in good faith defend and/or settle such Third
Party Claim, then the Beneficiary shall be entitled to assume and control
the defense and/or settlement of such Third Party Claim, and the
Beneficiary shall be entitled to indemnification for such defense. If the
Indemnitor does not assume the defense of a Third Party Claim for any
reason, Indemnitor may still participate in, but not control, the defense
of such Third Party Claim at the Indemnitor's sole cost and expense.
(d) The party responsible for the defense of any Third Party
Claim (the "Responsible Party") shall, to the extent reasonably requested
by the other party, keep such other party informed as to the status of
any Third Party Claim for which such party is not the Responsible Party,
including, without limitation, all settlement negotiations and offers.
The Indemnitor and the Beneficiary shall use reasonable efforts to
cooperate with each other in the defense and/or settlement of any Third
Party Claim.
(e) Neither the Indemnitor, on the one hand, nor the Beneficiary,
on the other hand, shall settle any Third Party Claim without the prior
written consent of the other party, which consent shall not be
unreasonably withheld. The Responsible Party shall promptly notify the
other party of each settlement offer (including whether or not the
Responsible Party is willing to accept the proposed settlement offer)
with respect to a Third Party Claim. Such other party agrees to notify
the Responsible Party with reasonable promptness whether or not such
party is willing to accept the proposed settlement offer.
(f) In the event that a party hereto has a claim for
indemnification that does not involve a Third Party Claim (a "Direct
Claim"), such party shall notify the Indemnitor of such Direct Claim with
reasonable promptness after such party becomes aware of the Direct Claim,
specifying, to the extent known, the nature, circumstances and amount of
such Direct Claim.
7.4 Survival of Representations, Warranties and Covenants.
Each of the representations and warranties set forth in Article II and
Article III hereof shall survive the Closing Date until the third anniversary
of the Closing Date, at which time all such
<PAGE> 12
representations and warranties, and any cause of action arising out of any
claim which is not asserted prior to said date, shall terminate and be of no
further force and effect, except that the expiration of such representations
and warranties shall not affect any right to pursue any claims (or any causes
of action arising out of such claims) asserted by any party prior to said
date. There shall be no time or other limits on the covenants of the parties
herein or in any other documents or instruments delivered in connection
herewith, except as expressly provided herein or in such other documents or
instruments.
ARTICLE VIII
MISCELLANEOUS
-------------
8.1 Notices. All notices, requests, consents and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given (a) upon personal delivery, (b) one business day after being
sent by recognized overnight delivery service, or (c) five business days after
being mailed by first-class mail, postage prepaid, and in each case addressed
as follows:
(a) if to Buyer, to:
FAMS, L.L.C.
11 Colonial Drive
Lot 1, Block 460-C
Centennial Corporate Park
Piscataway, NJ 08854
Attn: Allan W. Anger, Jr.
with a copy to:
McKenna, Leone & DuPont P.C.
229 Broad Street
Red Bank, NJ 07701
Attn: Phillip Leone, Esq.
(b) if to either of the Sellers, to:
Farmstead Telephone Group, Inc.
22 Prestige Park Circle
East Hartford, CT 06108
Attn: George J. Taylor
with a copy to:
<PAGE> 13
Pepe & Hazard LLP
Goodwin Square
Hartford, CT 06103-4302
Attention: Donald L. Borod, Esq.
provided, however, that if any party shall have designated a different address
by notice to the other, then to the last address so designated.
8.2 Binding Effect; Assignment. This Agreement and the rights and
duties hereunder shall be binding upon and inure to the benefit of the
successors and permitted assigns of each of the parties to this Agreement.
Except for the assignment by Buyer of this Agreement and all or any of its
rights and obligations hereunder to any of its Affiliates, (which assignment
may be made without the consent of each of the Sellers), no party shall assign
or delegate this Agreement or any rights or obligations hereunder without the
prior written consent of the other parties.
8.3 Entire Agreement. This Agreement and the Exhibits and Schedules set
forth the entire understanding of the parties to this Agreement and supersede
all prior agreements, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any party or any officer, employee,
shareholder or representative of any party to this Agreement.
8.4 Governing Law: Construction. This Agreement shall be construed and
enforced in accordance with and governed by the internal substantive laws of
the State of New Jersey without giving effect to the principles of conflicts of
law thereof. The headings of the Articles and Sections of this Agreement and in
the Schedules and Exhibits to this Agreement are inserted for convenience of
reference only and shall not be used in interpreting this Agreement. Unless
specifically stated otherwise, references to Articles, Sections, Exhibits and
Schedules refer to the Articles, Sections, Exhibits and Schedules to this
Agreement.
8.5 No Third Party Rights. Nothing in this Agreement expressed or
implied is intended or shall be construed to confer upon or give to any Person,
other than the parties to this Agreement, any rights or remedies under or by
reason of this Agreement.
8.6 Amendment. This Agreement may be amended only by an instrument in
writing duly executed by the parties to this Agreement.
8.7 Waivers. Any waiver by any party of any breach of or failure to
comply with any provision of this Agreement by any other party shall be in
writing and shall not be construed as, or constitute, a continuing waiver of
such provision, or a waiver of any other breach of, or failure to comply with,
any other provision of this Agreement.
<PAGE> 14
8.8 Fees and Expenses of Transaction Taxes. Each Seller shall pay the
fees, costs and expenses incurred by it in connection with the negotiation of
this Agreement and the consummation of the transactions contemplated by this
Agreement. Buyer shall pay the fees, costs and expenses incurred by it in
connection with the negotiation of this Agreement and the consummation of the
transactions contemplated by this Agreement.
8.9 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute a single instrument.
8.10 Publicity. Any public announcements with respect to this Agreement
or the transactions contemplated by this Agreement shall be made at such time
and in such manner as is determined by mutual agreement and consent of the
parties hereto, which mutual agreement shall be bargained for in good faith and
which consent shall not be unreasonably withheld by any party hereto.
Furthermore, no party to this Agreement shall make any public announcement with
regard to this Agreement or any of the transactions contemplated herein without
the written consent of the other parties hereto.
8.11 Severability. In case any provision or restriction of this
Agreement shall be held invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions of this Agreement will
not be affected or impaired thereby. The parties hereto further agree that any
such unenforceable provision or restriction shall be deemed modified so that it
shall be enforced to the greatest extent permissible under law, and to the
extent that any court of competent jurisdiction determines any restrictions
herein to be overly broad or unenforceable, such court is hereby empowered and
authorized to limit such restriction so that it is enforceable for the longest
duration of time and largest geographical area possible.
8.12 Arbitration. Any disputes arising among the parties to this
Agreement with respect to the terms or conditions of this Agreement including,
but not limited to, disputes relating to the happening of an event which causes
"material damage" to either of Sellers or their affiliates as defined in
Section 6.1 hereof, or the fulfillment of such terms and conditions by the
parties hereto, shall be settled by binding arbitration in the State of New
Jersey in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. In the event that a dispute arises which requires
arbitration under this Section 8.12, the parties shall attempt to agree upon
one arbitrator to resolve such dispute. In the event that the parties are
unable to agree upon an arbitrator within fourteen (14) days, then each party
shall choose one arbitrator and the arbitrators chosen by the parties shall
choose a single arbitrator who shall resolve such dispute. Each party shall
bear its respective costs of the arbitration. The prevailing party in any such
arbitration shall be entitled to have the arbitrators' award enforced by any
court of competent jurisdiction.
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
BUYER:
FAMS, L.L.C.
By: /s/ Alan Anger, Jr.
------------------------------------
, Manager
SELLERS:
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Robert G. LaVigne
------------------------------------
Robert G. LaVigne, Secretary
Duly Authorized
FTG VENTURE CORPORATION
By: /s/ Robert G. LaVigne
------------------------------------
Robert G. LaVigne, Secretary
Duly Authorized
COMPANY:
FARMSTEAD ASSET MANAGEMENT SERVICES, LLC
By: /s/ Robert G. LaVigne
------------------------------------
Robert G. LaVigne, Secretary
Duly Authorized
Farmstead Telephone Group, Inc.
Member
<PAGE> 16
Schedule A
----------
Assets and Liabilities of the Company
1. The Assets of the Company include the balance sheet assets of the Company
as of 9/30/97 excluding the security deposit referenced in Section 6.3 of
this Agreement.
[A more particularized list of assets is to be provided via
Federal Express on 10/30/97]
2. The Liabilities of the Company include balance sheet liabilities of the
Company as of 9/30/97 excluding intercompany payables to FTG as provided
for in Section 2.10 of this Agreement.
[A more particularized list of liabilities is to be provided via
Federal Express on 10/30/97]
Exhibit 10.2
November 26, 1997
George J. Taylor, Jr.
President
FTG Venture Corporation
22 Prestige Park Circle
East Hartford, CT 06108
Allan W. Anger, Jr.
Farmstead Asset Management Services, LLC
11 Colonial Drive
Lot 1, Block 460-C
Centennial Corporate Park
Piscataway, NJ 08854
Allan W. Anger, Jr.
Member
FAMS, L.L.C.
Lot 1, Block 460-C
Centennial Corporate Park
Piscataway, NJ 08854
Re: Purchase and Sale Agreement dated the 1st day of December, 1997 and
effective October 1, 1997, by and among Farmstead Telephone Group,
Inc. and FTG Venture Corporation, and FAMS, LLC and Farmstead Asset
Management Services, LLC
Gentlemen:
This Letter Agreement sets forth the understanding and agreement of all
of the signatories hereto with respect to certain amendments agreed to by all
of the parties to that certain Purchase and Sale Agreement (the "Purchase
Agreement") dated the 1st day of December, 1997 and effective the 1st day of
October, 1997, by and among Farmstead Telephone Group, Inc. ("FTG") and FTG
Venture Corporation ("FVC"), and FAMS, LLC ("FAMS") and Farmstead Asset
Management Services, LLC (the "Company"). All of the parties hereto agree as
follows:
The Purchase Agreement is hereby amended as follows:
1. Section 1.6 is hereby amended by deleting from the first sentence
the words "Ninety-One Thousand Dollars ($91,000)" and replacing
them with the words "Forty-Five Thousand Dollars ($45,000)."
<PAGE> 1
2. Section 1.6 is hereby amended by deleting from the last sentence
the words "April 15, 1999" and replacing them with the words "March
31, 2003."
3. Section 1.6 is hereby amended by adding a new sentence immediately
after the last sentence to read as follows:
"In the event that amounts of principal and interest remain
due and unpaid to FTG under the Note on and after March 31, 2003 ,
Buyer shall obtain an extension of the Letter of Credit until all
of Buyer's obligations for payment of principal and interest due
under the Note are paid in full, and notwithstanding anything to
the contrary contained in this Agreement, the Note, the Guaranty
and the Security Agreements, the failure of Buyer to extend the
Letter of Credit under the foregoing circumstances shall be deemed
an Event of Default, as defined under the Note, and a material
breach of this Agreement."
4. A new Section 1.8 is hereby added which reads as follows:
1.8 Pallet Racking. The Company hereby transfers, conveys and
assigns all of its right, title and interest in and to
one-half of that certain Pallet Racking (the "Racking") more
particularly described in Schedule A.6 at page 6, SYS No.
000259 attached hereto as Exhibit A, and is carried on the
books of the Company at a Net Book Value of $19,184.58 as of
September 30, 1997.
5. A new Section 1.9 is hereby added to read as follows:
1.9 Excluded Receivable. The Company hereby transfers, conveys
and assigns to FTG all of its right, title and interest in
and to that certain account receivable of the Company payable
by World Services International (the "Excluded Receivable")
more particularly described in Schedule A.1 at page 1
attached hereto as Exhibit B together with all proceeds
thereof, which Excluded Receivable shall not be considered an
asset of the Company for the purposes of the Purchase
Agreement.
6. A new Section 1.10 is hereby added to read as follows:
<PAGE> 2
1.10 FTG Credit. The Company hereby grants to FTG a credit in the
amount of Fifteen Thousand Two Hundred Seventy-Nine and
26/100 Dollars ($15,279.26) on future purchases made by FTG
from the Company (the "FTG Credit"), which FTG Credit shall
be utilized by FTG, in its sole discretion, in lieu of
payment on purchases of inventory and/or fixed assets that
the Company shall make available for sale to FTG priced at
the lower of the Company's cost of the inventory and/or fixed
assets or the book value as reflected on the books of the
Company as of the date of the purchase by FTG. The FTG
Credit, as adjusted to account for purchases made by FTG,
shall be carried on the books of the Company as a liability
of the Company until such time as FTG has fully utilized the
FTG Credit by purchasing inventory of the Company.
7. A new Section 6.7 is hereby added to read as follows:
6.7 Delivery of Racking. No later than the first to occur of (i)
the date upon which the Company moves its offices at the
Premises, or (ii) the effective date of any lease entered
into by the Buyer with the Landlord to continue to occupy the
Premises or any portion of the Premises on or after April 1,
1998, the Company shall deliver to FTG, at FTG's expense, the
Racking at a location designated by FTG.
8. Schedule A.1 at page 1 is hereby amended by deleting the line item
entitled "World Services International" and all accounting entries
associated therewith as indicated on the attached Exhibit B.
If the above reflects your understanding of the agreed upon amendments to
the Purchase Agreement, please sign this Letter Agreement in the spaces
provided for you below, which signature, together with those of the other
parties hereto, shall bind all of the parties hereto to the amendments to the
Purchase Agreement set forth herein.
Sincerely,
FARMSTEAD TELEPHONE GROUP, INC.
/s/ Robert G. LaVigne
-------------------------------------
Robert G. LaVigne
Secretary
Duly Authorized
<PAGE> 3
AGREED AND ACCEPTED:
s/s Robert G. LaVigne
- ---------------------------------------
Robert G. LaVigne
Secretary
FTG Venture Corporation
s/s Allan W. Anger, Jr.
- ---------------------------------------
Allan W. Anger, Jr.
Duly Authorized Member of FAMS, LLC
On behalf of
Farmstead Asset Management Service, LLC
s/s Allan W. Anger, Jr.
- ---------------------------------------
Allan W. Anger, Jr.
Member
FAMS, LLC
<PAGE> 5
Exhibit 10.3
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND LAWS OR AN
EXEMPTION FROM REGISTRATION IS AVAILABLE.
$360,000
FAMS, L.L.C.
PROMISSORY NOTE
Hartford, Connecticut
December 1, 1997
FOR VALUE RECEIVED the undersigned, FAMS, L.L.C., a New Jersey limited
liability company (the "Company") hereby promises to pay to the order of
Farmstead Telephone Group, Inc., a Delaware corporation ("Holder"), the
principal sum of Three Hundred Sixty Thousand Dollars ($360,000), in legal
tender of the United States with interest thereon at the rate set forth below,
and all amounts which may become due under any other document evidencing the
indebtedness herein described. Principal, together with interest due hereon,
shall be payable to Holder at such place as Holder may designate in writing, in
sixty (60) equal consecutive monthly installments of principal plus interest
accrued thereon, the first such payment of which shall be due and payable on
the first to occur of either (i) the first day of the month following the month
in which the Company moves its principal offices located at 11 Colonial Drive,
Lot 1, Block 460-C, Centennial Corporate Park, Piscataway, New Jersey into
newly acquired office space; or (ii) April 1, 1998 (the date upon which the
first payment becomes due and payable to Holder in accordance with the terms
set forth herein shall be referred to as the "First Payment Date"), and, for
the next succeeding fifty-nine (59) months, such payment shall be due and
payable on the first day of each month thereafter until all principal and
interest due hereunder is paid in full.
This Note shall have the following additional terms and provisions:
1. Interest. This Note shall bear interest at the rate of one and
one-half percent (1.5%) above the prime lending rate, as published in the Wall
Street Journal on the date hereof.
2. Prepayment. This Note may be pre-paid in whole or in part by the
Company upon ten (10) days advanced written notice to Holder.
3. Events of Default; Acceleration. The following shall constitute
"Events of Default:
<PAGE> 1
a. If the Company shall fail to make payments due hereunder
within ten (10) days of the date such payment is due, whether
at maturity or some other date fixed for payment;
b. If the Company becomes insolvent or if a creditors' committee
is appointed for the business of the Company; or if the
Company makes an assignment for the benefit of creditors, or
is adjudicated bankrupt, or if a petition in bankruptcy or
for reorganization or to effect a plan of arrangement with
creditors is filed by or against the Company; or if the
Company applies for or permits the appointment of a receiver
or trustee for any of its property or assets; or if any such
receiver or trustee is appointed for any of its properties or
assets, or if any of the above actions or proceedings are
commenced by or against the Company;
c. If the Company is dissolved or liquidated;
d. If there shall be a material breach by the Company or
Farmstead Asset Management Services, L.L.C. ("FAMS"), a
Delaware limited liability company, of any term, covenant,
condition, agreement or representation and warranty set forth
in that certain Purchase and Sale Agreement of even date
herewith, by and among FTG Venture Corporation, a Delaware
corporation ("FVC"), the Company, the Holder and FAMS (the
"Agreement") which material breach shall continue without
cure for thirty (30) days after mailing, by certified mail,
of written notice of said breach by Holder to the Company;
e. If there shall be an Event of Default by FAMS, as such term
is defined in that certain Guaranty Agreement dated the 1st
day of December, 1997, by and between FAMS and the Holder;
f. If there shall be an Event of Default by FAMS, as such term
is defined in that certain Security Agreement dated the 1st
day of December, 1997, by and between Holder and FAMS;
g. If there shall be an Event of Default by FAMS as such term is
defined in that certain Lease Agreement, dated March 20,
1996, by and between H. Harding Brown, David J. Frischman,
Douglas Friedrich and Robert K. Brown, Substituted
Co-Trustees Under Trust Indenture dated the 25th day of June,
1968 (the "Landlord") and FAMS for that certain property
located at, and known as, 11 Colonial Drive, Lot 1, Block
460-C, Centennial Corporate Park, Piscataway, New Jersey (the
"Lease"), such Event of Default occurring on or after the
date hereof, provided, however, that, for the purposes of
this Note, it shall not be an Event of Default under the
Lease if the rent due and owing
<PAGE> 2
the Landlord under the Lease is not paid by FAMS as a result
of the operation of Section 6.4 of the Purchase and Sale
Agreement; and
h. Failure to maintain the standby letter of credit (the "Letter
of Credit"), as more particularly described in Section 1.5 of
the Agreement, for a period commencing on the date hereof and
ending on April 15, 1999, or in the event of a default by
either the Company or FAMS under any loan agreements, credit
agreements, reimbursement agreements, or debt instruments of
any kind or description between either the Company or FAMS
and any Institutional Bank Lender as such term is defined in
Section 5 hereof.
If any of the foregoing Events of Default shall occur, Holder may at any time
(unless all defaults shall theretofore have been remedied) at Holder's option,
by written notice to the Company, declare this Note to be due and payable. Upon
mailing of such notice this Note shall immediately mature and become due and
payable together with interest accrued thereon and Holder may exercise Holder's
rights under Section 4 hereof.
4. Remedies on Default, Etc. In case one or more Events of Default
shall occur and be continuing, and this Note shall be due and payable as set
forth in Section 3 hereof and, subject to the terms hereof, Holder may proceed
to protect and enforce Holder's rights by an action at law, suit in equity or
other appropriate proceeding, whether for the specific performance of any
agreement contained herein, or for an injunction against a violation of any of
the terms hereof, or in aid of the exercise of any power granted hereby or by
law. In the event of default, the Company agrees to pay to Holder such further
amount as shall be sufficient to cover the costs and expenses of collection,
and all costs related to Holder's enforcement of Holder's rights under this
Note, including, without limitation, reasonable attorneys' fees and expenses
whether or not a formal action is commenced. No right, power or remedy
conferred hereby upon Holder shall be exclusive of any other right, power or
remedy referred to herein nor now or hereafter available at law, in equity, by
statute, or otherwise. No course of dealing and no delay on the part of Holder
in exercising any right, power or remedy shall operate as a waiver hereof or
otherwise prejudice Holder's rights, powers and remedies.
5. Subordination. The Holder hereby agrees that its rights to payment
under this Note and the debt evidenced hereby are subordinate to any loans or
obligations owing to an "Institutional Bank Lender" (hereinafter defined) by
the Company. As used herein, the term "Institutional Bank Lender" means any
bank, savings and loan association, finance company, trust company, insurance
company, pension fund, investment advisor, charitable foundation, or venture
capital company approved by Seller which approval shall not be unreasonably
withheld, all of which shall be actively involved in financing commercial
businesses. Lender further agrees that if there occurs an event of default as
defined under any of the loan documents evidencing the obligations of the
Company to an Institutional Bank Lender, the Holder shall not seek payments due
under this Note for a period of one hundred eighty (180) days from the date of
the default. The foregoing subordination shall be effective without the
necessity of having further instruments executed hereunder to effect such
subordination. Holder shall execute, acknowledge and deliver, within ten (10)
days after demand, such further
<PAGE> 3
instruments evidencing such subordination of this Note as may be requested by
any Institutional Lender making a loan to the Company.
6. Security Agreement. The obligations of the Company pursuant to this
Note shall be secured by certain collateral of the Company under the terms and
conditions set forth in that certain Security Agreement of even date herewith,
by and between the Company and the Holder, substantially in the form of Exhibit
A, attached hereto.
7. Exchange of Notes. At the request of Holder and subject to the
terms hereof, upon surrender of this Note to the Company at its principal
office, the Company at its expense will issue in exchange thereof a new Note or
Notes, in such denomination or denominations and payable to the order of such
payee or payees as may be requested. Such new Note or Notes shall be in the
form of this Note and shall be in an aggregate principal amount equal to the
principal amount of this Note then outstanding.
8. Replacement of Notes. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note and, in the case of any such loss, theft or destruction, upon
delivery of an indemnification agreement by Holder in a form reasonably
acceptable to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Note, the Company at its expense will
execute and deliver, in lieu thereof, a new Note of like tenor.
9. Transfer of Note. Transfer of this Note is subject to restrictions
imposed by federal and state securities laws.
10. Notices. Any notice, request or instruction to be given hereunder
shall be in writing, shall be delivered by facsimile transmission, or courier,
or mailed by certified mail, return receipt requested, postage prepaid and
addressed as follows: if to the Company at FAMS, LLC, 11 Colonial Drive, Lot 1,
Block 460-C, Centennial Corporate Park, Piscataway, New Jersey 08854; and if to
Holder, addressed to Holder's address as shown on the records of the Company.
Either of the addresses specified above may be changed by notice given as
herein provided. All communications will be deemed effective upon receipt.
11. General. This Note shall be governed by and construed and enforced
in accordance with the laws of the State of New Jersey. The paragraph headings
contained herein are for reference purposes only and shall not in any way
affect the meaning or interpretation of the terms of this Note. This Note shall
be binding upon the Company and its successors and assigns and shall inure to
the benefit of and be enforceable by Holder and Holder=os successors and
assigns. This Note may not be modified or altered in any manner except by a
writing signed by both parties. The failure of Holder at any time or times to
require performance of any provision hereof shall in no manner affect the right
at a later time to enforce the same. No waiver by Holder of any condition of
this Note or the breach of any provision hereof, whether by conduct or
otherwise, in any one or more instances shall be
<PAGE> 4
deemed to be construed as a further or continuing waiver of any such condition
or breach. By accepting this Note, Holder agrees to be bound by the terms and
conditions hereof.
12. COMMERCIAL TRANSACTION. THE COMPANY ACKNOWLEDGES THAT THE DELIVERY
OF THIS NOTE IS PART OF A COMMERCIAL TRANSACTION AND VOLUNTARILY AND KNOWINGLY
WAIVES AND RELINQUISHES ANY AND ALL RIGHTS WHICH IT MAY HAVE PURSUANT TO ANY
LAW OR CONSTITUTIONAL PROVISION TO ANY NOTICE OR HEARING PRIOR TO ANY ATTEMPT
BY HOLDER TO OBTAIN A PREJUDGMENT REMEDY IN CONNECTION HEREWITH, AND, FURTHER
WAIVES DEMAND, PRESENTMENT FOR PAYMENT, AND NOTICE OF DISHONOR. THE COMPANY
HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PRECEDING OF ANY KIND OR NATURE IN
ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS NOTE AND ANY
ASSIGNMENT HEREOF.
FAMS, L.L.C
By: s/s Allan W. Anger, Jr.
----------------------------------
Its President
Duly Authorized
<PAGE> 5
Exhibit 10.4
As of December 1, 1997
First Union National Bank
205 Church Street
New Haven, CT 06510
Gentlemen:
This letter sets forth our agreements with respect to the obligations
described below of Farmstead Telephone Group, Inc. (the "Borrower") and
Farmstead Asset Management Services, LLC (the "Guarantor") to First Union
National Bank (successor-in-interest to Affiliated Business Credit Corporation)
("First Union").
The Borrower acknowledges that it is unconditionally indebted to First
Union with respect to the revolving loan (the "Revolving Loan") extended by
First Union to Borrower in the original principal amount of up to $3,500,000
which is evidenced by, among other things, a Commercial Revolving Loan and
Security Agreement dated June 5, 1995, as amended by letter agreements between
Borrower and First Union dated March 11, 1996, May 1, 1996, September 6, 1996
and as of May 30, 1997 (collectively, the "Loan Agreement") and a $3,500,000
Third Amended and Restated Revolving Promissory Note dated June 6, 1997 (the
"Third Amended and Restated Revolving Promissory Note"), the current principal
balance of which as of November 30, 1997 is $1,999,180.66, plus interest
accrued and accruing thereon and costs and expenses of collection, including
without limitation, attorneys' fees (collectively, the "Indebtedness").
Additionally, the Borrower acknowledges that it has no defense, offset,
counterclaim or right of recoupment to its obligations with respect to the
Indebtedness and further that it has no other claim whatsoever against First
Union (whether arising in contract, tort or otherwise) with respect to the
Indebtedness or any other matter whatsoever.
All indebtedness, liabilities and obligations of the Borrower to First
Union, whenever and however arising, including without limitation, the
obligations arising under the Loan Agreement and the Third Amended and Restated
Revolving Promissory Note, have been unconditionally, jointly and severally
guaranteed by the Guarantor pursuant to a Guaranty Agreement dated March 11,
1996 (the "Guaranty"). The Guarantor acknowledges that it has no defense,
offset, counterclaim or right of recoupment to its obligations with respect to
the Guaranty and further that it has no other claim whatsoever against First
Union (whether arising in contract, tort or otherwise) with respect to the
Guaranty or any other matter whatsoever.
The Borrower and the Guarantor (collectively, the "Obligors") have
requested that First Union (the "Accommodations") (a) consent to Borrower's
sale ("Sale"), pursuant to a certain Purchase and Sale Agreement dated as of
October 1, 1997 among Borrower, Guarantor, FTG Venture Corporation and FAMS,
L.L.C. (the "Buyer"), of Borrower's entire
<PAGE> 1
ownership interest in the Guarantor, (b) release Guarantor's obligations
pursuant to the Guaranty, (c) release its lien security interest in the assets
of the Guarantor granted pursuant to that certain Security Agreement dated
March 11, 1997 (the "Security Agreement"), and (d) waive Borrower's default
of the tangible net worth covenant set forth in the Loan Agreement.
Capitalized terms used herein that are not defined herein have the meanings
ascribed to them in the Loan Agreement.
First Union has agreed to extend the Accommodations but only on the
following terms and conditions:
1. As an inducement to and in consideration of First Union's
agreements contained herein, the Obligors represent, warrant and acknowledge to
First Union that (a) all representations and warranties contained in the Loan
Agreement and in the other documents executed in connection with the
Indebtedness (collectively, including without limitation the Loan Agreement,
the "Loan Documents") are true and correct on and as of the date hereof and are
incorporated herein by reference and hereby remade; (b) the resolutions
previously adopted by the Board of Directors of the Borrower and the members of
the Guarantor and provided to First Union have not in any way been rescinded or
modified and are now in full force and effect, except to the extent that they
have been modified or supplemented to authorize this Agreement and the
transactions described herein; (c) except as expressly waived herein, no event
of default has occurred or is continuing under any of the Loan Documents and no
condition exists which would constitute an event of default thereunder but for
the giving of notice or passage of time, or both; and (d) the consummation of
the transactions contemplated hereby is not prevented or limited by, nor does
it conflict with or result in a breach of the terms, conditions or provisions
of, any evidence of indebtedness, agreement or instrument of whatever nature to
which either the Borrower or the Guarantor is a party or by which either of
them is bound, does not constitute a default under any of the foregoing, and
does not violate any federal, state or local law, regulation or order of any
court or agency which is binding upon the Borrower or the Guarantor.
2. The Loan Agreement is hereby amended as follows:
(a) The definition of "Borrowing Base" is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"Borrowing Base" shall mean an amount equal to the lesser of: (i)
THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), or (ii)
an amount equal to the aggregate of (1) seventy-five percent (75%)
of Eligible Accounts (not including AT&T Coupons (as defined
below)), plus (2) the lesser of (A) ONE HUNDRED FIFTY THOUSAND
DOLLARS ($150,000), or (B) fifty percent (50%) of the amount due to
Borrower from American Telephone & Telegraph Company ("AT&T") in
connection with the coupons issued in the so-called SPIRIT
Communications System Class Action Settlement ("AT&T Coupons") (it
being expressly agreed and understood that only the amount by which
AT&T's obligations with respect to AT&T Coupons together with all
accounts due from AT&T to Borrower
<PAGE> 2
exceeds the then amount due from Borrower to AT&T shall be eligible
pursuant to this subsection (2)(B)).".
(b) Section 6.27 (Tangible Net Worth) is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"Section 6.27 Tangible Net Worth. Permit its Tangible Net Worth to
be less than $5,300,000 at December 30, 1997 and at any time
thereafter. As used herein, "Tangible Net Worth" shall mean at any
time the sum of (i) book value of total assets, minus (ii) total
liabilities, minus (iii) all assets which are classified as
intangible assets in accordance with generally accepted accounting
principles, minus (iv) debt due from any shareholders of Borrower
or other affiliates of Borrower, plus (v) all or any portion of
that certain promissory note due from FAMS, L.L.C. in the original
principal amount of $360,000 which is reserved against on the
Borrower's books, plus (vi) all debt that has been subordinated to
the Lender by express written agreement between the Lender and the
holder of such debt."
(c) Section 6.9 (Debt Service Coverage Ratio) is hereby deleted
in its entirety and the following is substituted in lieu thereof:
"6.29 Debt Service Coverage Ratio. At December 31, 1997 and at the
end of each and every three (3) month period thereafter, permit its
Debt Service Coverage Ratio for the immediately preceding three (3)
month period to be less than 1.2 to 1.0. As used herein, "Debt
Service Coverage Ratio" shall mean that quotient equal to: (a) the
sum of (i) earnings before interest and income tax expense plus
depreciation and amortization during such three (3) month period,
plus (ii) the amount of increases to debt that has been
subordinated to the Lender by express written agreement between the
Lender and the holder of such debt during such three (3) month
period, plus (iii) unrestricted cash proceeds of additional equity
received during such three (3) month period, minus (iii) all
unfinanced expenditures of cash for the purchase of capital assets
during such three (3) month period, minus (iv) distributions to
Borrower's shareholders during such three (3) month period,
plus/minus (v) undistributed income/loss of unconsolidated
subsidiaries and/or affiliates during such three (3) month period,
minus (vi) reductions during such three (3) month period (by virtue
of the payment of dividends, redemptions or otherwise) in any
equity, divided by (b) the sum of (i) the scheduled repayment of
long term indebtedness paid during such preceding three (3) month
period, including but not limited to, amounts paid during such
preceding three (3) month period under capital leases, plus (ii)
interest expensed during such preceding three (3) month period."
<PAGE> 3
3. Contemporaneously herewith, $40,000 (which represents the entire
cash payment paid by the Buyer in connection with the Sale) shall be applied by
the Borrower to reduce the outstanding principal balance of the Revolving Loan.
4. Contemporaneously herewith, the Borrower shall execute and/or
deliver to First Union (a) a Security and Pledge Agreement (together with the
original security agreement and the original guaranty from Farmstead Asset
Management Services LLC in favor of the Borrower), (b) an Allonge Endorsement
(together with the original promissory note from the Buyer in favor of the
Borrower), (c) an original amendment to the beneficiary designation of the
letter of credit posted by the Buyer in favor of the Borrower (together with
the original of such letter of credit), and (d) UCC-3 assignments, all of which
shall be in form and content satisfactory to First Union.
5. First Union hereby waives Section 6.27 (Tangible Net Worth) for the
period ending September 30, 1997.
6. Contemporaneously herewith, the Borrower shall pay to First Union a
non-refundable fee of $2,500 which First Union may, in its sole discretion,
charge to the Revolving Loan or any accounts of Borrower maintained with First
Union.
7. The Borrower acknowledges and agrees that all indebtedness,
liabilities and obligations of the Borrower to First Union, including without
limitation, the Indebtedness evidenced by the Third Amended and Restated
Revolving Promissory Note, shall (except as set forth in the Intercreditor
Agreements) continue to be secured by a first lien on and security interest in
all of the Borrower's assets.
8. This Agreement and the other Loan Documents constitute the entire
understanding and agreement among the parties hereto and supersede any prior or
contemporaneous oral understanding with respect to the subject matter hereof.
Except as expressly modified herein, the Loan Documents remain unmodified and
in full force and effect in accordance with their terms. To the extent that
there is a conflict between this Agreement and the Loan Documents, the terms of
this Agreement shall prevail.
If the foregoing is in accordance with your agreement, please indicate
the same by signing below.
WITNESSED: Very truly yours,
__________________________________ FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Robert G. LaVigne
__________________________________ ------------------------------------
Its Executive Vice President
<PAGE> 4
__________________________________ FARMSTEAD ASSET MANAGEMENT SERVICES, LLC
By: /s/ Robert G. LaVigne
__________________________________ ------------------------------------
Its Secretary
Reviewed and Agreed to:
FIRST UNION NATIONAL BANK
By: ______________________________
Its
<PAGE> 5
Exhibit 10.5
FARMSTEAD TELEPHONE GROUP, INC.
GEORGE J. TAYLOR, JR.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 1st day of January, 1998, between
Farmstead Telephone Group, Inc., a Delaware corporation (the "Company"), and
George J. Taylor, Jr. (the "Executive").
RECITALS
The Company is engaged in various businesses, including the sale of new,
and the secondary market resale of, used Lucent telephone parts and systems,
the distribution of related re-manufactured products, the provision of repair,
refurbishment and other services for telephone equipment, and the sale of voice
mail and other telephone-related products (collectively, the "Business").
Executive is the founder of the Company and is the Chairman of the Board
of Directors (the "Board") and Chief Executive Officer. He is also currently
the President of the Company and is an executive officer of the Company.
The Company and the Executive acknowledge that the Executive's abilities
and services are important to the prospects of the Company. For this reason,
the Company desires to assure itself of the future services of the Executive,
and to provide certain security to Executive, and the Executive desires to
accept employment as provided in this Agreement.
NOW, THEREFORE, in consideration of the mutual and dependent promises
hereinafter set forth, the parties, intending to be legally bound, do hereby
agree as follows:
ARTICLE I
Employment
----------
Section 1.1 Employment. The Company agrees to employ the Executive during
the Active Employment Period (as referred to in Section 2.1(a) below) as the
Chairman of the Board and Chief Executive Officer and President of the Company.
The Company agrees to employ the Executive during the Limited Employment Period
(as referred to in Section 2.1(b) below) as Chairman of the Board and in such
other comparable capacities as are consistent with his position during the
Active
<PAGE> 1
Employment Period. The period of employment under this Agreement shall
commence on the date of this Agreement and shall continue for the Term as
provided in Article II.
Section 1.2 Duties. The Executive shall serve as Chairman of the Board
and Chief Executive Officer and President of the Company, or in such other
equal or superior capacity as may be designated by the Board, provided that
Executive's continued service as a director of the Company is subject to his
continued election to the Board by the Shareholders of the Company. As Chairman
of the Board, Chief Executive Officer, and President, Executive shall be
employed in an executive management capacity, and Executive shall report only
to the Board. Executive shall perform such duties and services consistent with
such positions as may be assigned to him from time to time by the Board.
Executive agrees, subject to his election as such, to serve as a member of any
committee of the Board. During the Active Employment Period, Executive shall
devote substantially all of his working time, attention and skill during the
normal business week to the business and affairs of the Company and shall
perform diligently and faithfully his duties as Chairman of the Board and Chief
Executive Officer and President. During the Limited Employment Period, the
Executive shall devote time as referred to in Section 2.2 below.
Notwithstanding the above, during the Term of this Agreement (a) Executive may
have involvement with other businesses so long as such businesses are not
competitive with the business of the Company and such activities do not
interfere with Executive's obligations to the Company as described above, and
(b) Executive may serve on the boards of directors of other corporations so
long as the business of such corporations is not competitive with the business
of the Company.
Section 1.3 Compensation.
(a) Base Salary. The Company shall pay to Executive during each
calendar year during the Active Employment Period (as referred to in Section
2.1(a) below) of this Agreement an annual base salary (the "Base Salary"). The
initial rate of Base Salary effective as of January 1, 1998 is $200,000 and
Executive shall be paid at that annual rate for the balance of 1998. Such Base
Salary will be increased as follows:
(i) Effective January 1, 1999, to $250,000; and
(ii) Effective January 1, 2000, to $300,000.
Subsequently, such Base Salary may be increased (but not decreased)
by the Board in its discretion in connection with its annual review of the
Company's performance at the end of each calendar year. The Base Salary shall
be payable in accordance with customary payroll practices of the Company, but
in no event less frequently than monthly.
<PAGE> 2
(b) Annual Bonus. For each calendar year during the Term of this
Agreement, commencing in 1998, Executive shall be eligible for a bonus of up to
fifty (50%) percent of the Base Salary in effect as of January 1 of the subject
year.
(i) The Board of Directors will establish at the beginning of
each subject year the provisions that will determine the
payment of the bonus amount;
(ii) Such provisions may include profitability, growth or other
financial measures, and other goals or objectives, all of
which may vary from year to year; and
(iii) Executive can draw up to 50% of the maximum bonus quarterly
during the subject year.
(c) Special Bonus. Executive will be paid a special bonus of $25,000
effective as of January 1, 1998.
Section 1.4 Stock Options.
(a) Option Grant. Executive shall be granted, effective as of January
2, 1998, a nonqualified stock option under the 1992 Stock Option Plan for
500,000 shares at the fair market value as of January 2, 1998.
(b) Vesting. Upon grant, fifty (50%) percent of the option grant shall
be vested immediately. The balance of the grant shall become vested at the end
of four years, six months from the date of the grant. Notwithstanding the
above, the options shall be subject to acceleration of vesting upon achievement
of financial goals to be established by the Board of Directors.
(c) Exercise. The options may be exercised up to ten years from the
date of grant.
(d) Change in Control. In the event of a change in control as defined
in Section 5.1, all unvested options will immediately become vested and
exercisable.
(e) Other Provisions. In other respects not set forth above, the option
grant will be subject to all provisions of the 1992 Stock Option Plan and will
be evidenced by a written agreement between Executive and the Company.
Section 1.5 Benefits
(a) Standard Benefits. The Executive shall be entitled during the Term
of this Agreement to participate in any Company benefits for executive
officers, including, but not limited to, four (4) weeks paid annual vacation
(which will accrue and may be carried over to the extent not actually
<PAGE> 3
taken in a particular year), health insurance and other benefits generally
provided to such executive officers, provided that there will be no vacation
benefits during the Limited Employment Period.
(b) Other Benefits. In addition, Executive shall also be entitled to
the following other benefits during the Term of the Agreement:
(i) The Company shall make available to Executive for business
use an Acura RL, or comparable car of Executive's choice, and
the Company shall be responsible for maintenance and
insurance of the vehicle and replacement every three (3)
years;
(ii) Executive shall be entitled to be reimbursed (up to $5,000 in
the aggregate) for the initiation fees for membership in a
country club and a health club of Executive's choice, and
ongoing dues and costs associated with the use of such clubs
for business purposes;
(iii) The Company shall maintain life insurance coverage naming
Executive's designee as beneficiary in the benefit amount of
$1,500,000, of which at least $1,000,000 will be a split
dollar policy, with the Executive having the right to
continue the insurance as provided in Section 2.10;
(iv) The Company shall maintain long-term disability insurance
covering Executive which shall provide to Executive a benefit
equal to sixty (60%) of total annual cash compensation,
defined as the Base Salary then in effect, plus the average
of annual bonuses paid over the prior three (3) years;
(v) The Company shall, during the Term of this Agreement and for
two years after the end of the Term, continue to maintain, to
the extent reasonably available in the judgment of the Board,
directors and officers liability insurance to cover any acts
or omissions by Executive as an officer or director during
the Term of this Agreement;
(vi) The Executive will be entitled to retirement benefits as
outlined in a Supplemental Executives' Retirement Plan
Agreement to be mutually-agreed between Executive and Company
based on the attached adoption agreement; and
(vii) The Executive will be reimbursed for professional estate and
financial planning services up to $5,000 in 1998 and an
average of $1,000 per year thereafter.
<PAGE> 4
(c) Upon submission of appropriate invoices or vouchers, the Company
shall pay or reimburse the Executive for all reasonable expenses that he incurs
in the performance of his duties during the Term of this Agreement in
furthering the business, and in keeping with the policies, of the Company.
ARTICLE II
Term and Termination
--------------------
Section 2.1 Employment Period. Subject to Section 2.3 below, the Company
agrees to employ the Executive for ten (10) years (the "Term"):
(a) during five (5) consecutive years of full-time employment
commencing January 1, 1998, "Active Employment Period," plus;
(b) during five (5) consecutive years of limited employment, "Limited
Employment Period", commencing January 1, 2003.
Section 2.2 Limited Employment Period. During the Limited Employment
Period, Executive shall be available to provide up to fifty (50) days of active
service per year. The Executive shall be paid at an annual amount equal to
one-third (1/3) of the Base Salary rate in effect at the time of commencement
of the Limited Employment Period, but not less than One Hundred Thousand
Dollars ($100,000) annually. If Executive is required to provide more than 50
days of active service in a year, he will be paid an additional amount for such
extra days at a per diem rate of Two Thousand Dollars ($2,000) per day.
Section 2.3 Expiration or Termination of Employment. Employment under
this Agreement will be terminated upon the earlier to occur of:
(a) expiration of the Term;
(b) upon Executive's death;
(c) upon Executive's permanent disability;
(d) upon the date the Executive's Active Employment Period is
terminated by the Company or the Executive in accordance with Section 2.4 or
2.5; or
(e) if during the Limited Employment Period, Executive's employment is
terminated by the Company or the Executive as provided in Sections 2.4 or 2.5.
<PAGE> 5
Section 2.4 Termination by the Company. The Term of this Agreement shall
end if the Company determines to terminate Executive either "for cause" or
"without cause" at any time during the Term of this Agreement. Except in the
case of termination "for cause," termination by the Company will not be
effective until thirty (30) days after the Company has given written notice to
the Executive of such termination.
Section 2.5 Termination by Executive. The Term of this Agreement shall
end if, at any time during the Term, the Executive determines to terminate his
employment either "voluntarily" or "with good reason." The Executive may
terminate his employment voluntarily at any time upon ninety (90) days written
notice to the Company, provided that the Company may, in such circumstances,
require Executive to vacate the Company's premises prior to the expiration of
such ninety (90) day period so long as the Company continues to provide the
applicable, then-current compensation and benefits to Executive for the
duration of such ninety (90) days period. The Executive may terminate his
employment upon written notice to the Company, effective immediately, upon the
occurrence of "good reason" as defined below, provided that such notice must be
given by Executive within thirty (30) days after the event constituting "good
reason."
Section 2.6 Defined Terms. The following terms shall have the meanings
prescribed:
(a) "For cause" shall mean: (i) a conviction of Executive for the
willful commission of a felony or the willful perpetration by Executive of a
material dishonest act against the Company, or (ii) the willful failure of
Executive to act in accordance with any reasonable instruction of the Board
relating to the performance of Executive's employment duties in accordance with
this Agreement, if such failure is not corrected within seven business days
after Executive's receipt of written notification by the Board (acting by
majority) of such failure; provided, however, that the provisions of this
Section 2.6(a)(ii) shall not constitute "for cause" if an event constituting
"good reason" (as defined below) has occurred within 60 days prior to such
notice.
(b) "Good reason" shall mean a reduction in Base Salary, a material
adverse change in the method of determining Executive's bonus, a material
reduction in Executive's responsibilities or benefits, any other material
breach of this Agreement by the Company, a relocation of the Company's
corporate offices in excess of fifty (50) highway miles from the current
locations of such offices, or the failure to re-elect Executive as Chairman of
the Board and Chief Executive Officer and President or the other removal of
Executive from those positions (other than for cause by the Company or
voluntarily by executive). Notwithstanding the above, during the Limited
Employment Period, a failure to elect Executive Chief Executive Officer and
President will not constitute "Good Reason" if Executive is elected Chairman of
the Board.
Section 2.7 Severance Pay.
<PAGE> 6
(a) If the Company terminates this Agreement without cause during the
Active Employment Period as referred to in Section 2.4, the Executive shall be
entitled to severance equal to three (3) times the Executive Compensation
Amount (as defined below). For purposes of this Agreement, the "Executive
Compensation Amount" at any time shall mean the total of Executive's
then-current Base Salary, plus the average of Bonuses paid to Executive for the
three (3) most recent calendar years. Such severance shall be paid to the
Executive as follows: one-half (1/2) within fifteen (15) days following the
effective date of termination and the balance in equal weekly installments over
the twelve (12) months following the effective date of termination. The
Executive shall also be entitled to continue to receive all benefits as
referred to in Section 1.5(a) and 1.5(b)(iii) and (iv) until the earlier of (x)
the date Executive commences receiving benefits from another employer, or (y)
twenty-four (24) months following the effective date of termination.
(b) If the Executive terminates this Agreement with good reason during
the Active Employment Period as referred to in Sections 2.5 and 2.6(b), the
Executive shall be entitled to severance pay equal to three (3) times the
Executive Compensation Amount to be paid as provided in Section 2.7(a).
Executive shall also be entitled to continue to receive all benefits as
referred to in Section 2.7(a) during the period referred to in Section 2.7(a).
(c) If the Company terminates this Agreement without cause or the
Executive terminates this Agreement with good reason (to the extent applicable)
during the Limited Employment Period, the Executive shall be entitled to
payment of the total amount that would have been due for the time remaining in
the Term of the Limited Employment Period, payable at the times provided in
Section 2.7(a). Executive shall also be entitled to continue to receive all
benefits as referred to in Section 2.7(a) during the period referred to in
Section 2.7(a).
(d) Executive shall not be entitled to severance pay or other
compensation from the Company if the Term of the Agreement expires as provided
in Section 2.3(a), is terminated for cause by the Company as referred to in
Sections 2.4 and 2.6(a), or if Executive leaves the Company voluntarily as
provided in Section 2.5.
(e) Executive agrees that the above severance pay will constitute an
adequate and complete severance in the event of termination or expiration of
this Agreement as provided above, and Executive waives any other claims for
compensation or severance or other liability from the Company in such
situations except as otherwise expressly provided in this Agreement.
Section 2.8 Obligations Upon Death. If the Executive dies during the Term
of this Agreement, the Company's obligations under this Agreement shall
terminate immediately and the Executive's estate shall be entitled to all
arrearage of salary and expenses but shall not be entitled to further
compensation. In addition, Executive's estate shall be entitled to receive such
benefits under the terms of any plan and programs of the Company applicable to
Executive, including, but not limited to, the life insurance referenced in
Section 1.5(b)(iii).
<PAGE> 7
Section 2.9 Termination Upon Permanent Disability. If the Executive is
permanently disabled, as determined by the insurance carrier underwriting the
benefit in Section 1.5(b)(iv), the Executive's employment with the Company
shall terminate, and the Executive shall be entitled to benefits under the
insurance maintained by the Company as provided in that section and under any
other Company plan or program, including, but not limited to, the Supplemental
Executives' Retirement Plan referred to in Section 1.5(b)(vi).
Section 2.10 Certain Insurance. Upon the expiration of the Term of this
Agreement or termination in a manner providing severance as set forth above,
Executive shall have the option, exercisable by him within thirty (30) days
after the effective date of termination or expiration, to continue the life
insurance policy referred to in Section 1.5(b)(iii) above, provided that
Executive shall be responsible for paying any premiums on such policy to keep
it in effect after the Company's obligations to maintain such policy as
provided above in this Agreement have ended.
Section 2.11 Survival of Provisions. Notwithstanding anything else in
this Agreement, the provisions of Articles III, IV and V shall survive the
termination of the Executive's employment with the Company.
ARTICLE III
Covenants, Representations and Warranties
-----------------------------------------
Section 3.1 Covenant Not to Disclose. The Executive agrees that, in
performing this normal duties with the Company and by virtue of the
relationship of trust and confidence between the Executive and Company, he
possesses and will possess certain knowledge of operations and other
confidential information of the Company which are of a special and unique
nature and value to the Company. The Executive covenants and agrees that he
will not, at any time, whether during the Term of this Agreement, or for
twenty-four (24) months after the expiration or termination of this Agreement,
otherwise, reveal, divulge or make known to any person or entity (other than
the Company) or use for his own account, any Company confidential record, data,
plan, trade secret, policy, strategy, method or practice of obtaining or doing
business, computer program, know-how or knowledge relating to customers, sales,
suppliers, market developments, equipment, processes, products or any other
confidential information whatever (the "Confidential Information"), whether or
not obtained with the knowledge and permission of the Company and whether or
not developed, devised or otherwise created in whole or in part through the
efforts of the Executive. The Executive further covenants and agrees that he
shall retain all Confidential Information which he acquires or develops in
trust for the sole benefit of the Company and its successors and assigns.
Confidential Information shall not include any information which has entered
the public domain otherwise than by reason of a disclosure by the Executive or
which is made available by a third party to Executive with right to disclose.
The Executive agrees to deliver to the Company at the termination of his
<PAGE> 8
employment or at any other time the Company may request, all Company property,
including, but not limited to, Confidential Information which he then may
possess or have under control.
Section 3.2 Inventions and Patents. The Executive agrees that all
inventions, innovations or improvements in the Company's methods of conducting
its business (including new contributions, improvements, ideas and discoveries,
whether patentable or not) conceived or made by him during the employment
period belong to the Company. The Executive agrees to promptly disclose such
inventions, innovations or improvements to the Company and take all actions
reasonable requested by the Company to establish and confirm such ownership.
ARTICLE IV
Covenant Not To Compete
-----------------------
Section 4.1 Restrictive Covenant. The Executive covenants and agrees with
the Company so long as he is employed by the Company, and for twenty-four (24)
months following the effective date of termination of Executive's employment
with the Company for which he receives a severance benefit pursuant to Sections
2.7(a) or (b) or for twelve (12) months following the termination of
Executive's employment with the Company for which he receives a severance
benefit pursuant to Section 2.7(c), Executive shall not, anywhere in the
Restricted Area, either directly or indirectly, compete with, own, have an
interest in, manage, engage in or be employed by, connected with or work for,
any person, corporation, partnership or other entity that competes with the
Business of the Company or its successors or assigns, or which is owned by,
affiliated with, or the owner of any such competitor of the Company, without
the written consent of the Company.
Section 4.2 Definitions. The following terms shall have the meanings
prescribed:
(a) "Business" shall refer to the Business as described in the Recitals
to this Agreement. The Business shall include any of the foregoing activities
as conducted by the Company (i) as of the date of the execution of this
Agreement, (ii) during the Term of this Agreement, (iii) as of the termination
or expiration date, or (iv) as reasonably proposed by the Company as of the
termination or expiration date.
(b) "Compete" shall mean engaging, participating, or being involved in
any respect or in any capacity in the business of, or furnishing any aid,
assistance or service of any kind to any person or entity in connection with,
the trading, leasing, buying, selling, exchanging, lending to, borrowing from,
marketing, merchandising, importing, exporting, distributing, or producing, of
any product or service similar in either design or function, or both, to any
product or service of the Business.
(c) "Restricted Area" shall mean any geographic area in which the
Company is doing Business at any time during this Agreement.
<PAGE> 9
Section 4.3 Non-Compete Election. In the event that the Executive leaves
the employment of the Company in circumstances that would not otherwise require
the Company to make a severance payment, the Company may, at its election,
decide to make a severance payment to Executive for up to six (6) months and
the non-compete provisions of this Article IV shall apply during such
designated period. Such severance pay shall be equal to 1/12 of the Executive
Compensation Amount multiplied by the number or months designated by the
Company (up to six months) as the severance period. Such severance shall be
paid in a lump sum within fifteen days after the effective date of termination
and Executive shall also be entitled to continue to receive all benefits as
provided in Section 1.5(a) until the earlier of (x) the date Executive
commences receiving benefits from another employer, or (y) the completion of
such designated severance period.
Section 4.4 "Blue Pencil" Rule. The Executive and the Company desire that
the provisions of Article IV be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. If a court of competent jurisdiction, however,
determines that any restrictions imposed on the Executive in this Article IV
are unreasonable or unenforceable because of duration, area of restriction, or
otherwise, the Executive and the Company agree and intend that the court shall
enforce this Article IV to whatever extent the court deems reasonable. The
parties intend that the court shall have the right to strike or change any
provision of Article IV and substitute therefor different provisions to effect
the intent of this Section 4.4.
Section 4.5 Legitimate Purpose. The Executive has read carefully all of
the terms and conditions of this Article IV and agrees that the restraints set
forth herein: (a) are reasonable and necessary to support the legitimate
business interests and goodwill of the Company; and (b) will not preclude the
Executive from earning a livelihood during the life of this Article IV.
ARTICLE V
Change in Control
-----------------
Section 5.1 Change in Control Definition. A "change in control" of the
Company shall be deemed to have occurred if (a) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), as amended is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing more than thirty (30%) percent of the combined voting
power of the Company's then outstanding securities, or if (b) over any twelve
(12) month period ("Period") during the Term of this Agreement, individuals who
at the beginning of such Period constitute the Board of the Company do not
constitute at least fifty (50%) percent of the number of Directors elected
during such twelve (12) month Period, or if (c) the Board adopts a resolution,
in its sole discretion, to the effect that a material change in control of the
Company has occurred for the purposes of this Agreement. For purposes of clause
(b) above, a person who was not a Director at the beginning of such Period but
who has (i) filled the place of a Director who has died or has retired in the
ordinary course in accordance with any Company policies then in effect, and
(ii) been approved in advance by
<PAGE> 10
Directors who constitute at least two-thirds (2/3rds) of the Directors who
were, or are deemed to be, Directors at the beginning of the Period shall for
purposes of this provision be deemed to be a Director since the beginning of
the Period. Upon the occurrence of a change of control described above, the
Executive shall have the right to elect to terminate his employment under
this Agreement by resignation at any time during the thirty (30) day period
immediately following the expiration of six (6) calendar months from the
event giving rise to said change in control, and such resignation shall be
effective fourteen (14) days after delivery of such resignation in written
form to the Company. Nothing herein shall prevent Executive from terminating
his employment for good reason, pursuant to Section 2.5, at any time.
Section 5.2 Impact of Change in Control. Upon resignation by Executive
after a change in control as provided in Section 5.1 above:
(a) if during the Active Employment Period, the Company shall pay the
termination benefit described in Section 2.7(a) to Executive; and
(b) if during the Active Employment Period, shall result in immediate
vesting of all stock option grants then unvested; or
(c) if during the Limited Employment Period, the Company shall pay the
termination benefit described in Section 2.7(c) to Executive.
Section 5.3 Change in Control Payments. Severance payments, any other
payments, and amounts resulting from acceleration of unvested stock options
related to a change in control shall be payable in full, except that if such
payments and resultant additional parachute tax penalties result in a reduction
of the net amount received by the Executive, payment above the limits of
Section 280 G of the Internal Revenue Code of 1986 will not be made.
ARTICLE VI
Miscellaneous
-------------
Section 6.1 Notices. All notices required by this Agreement shall be in
writing and shall be sufficiently given if hand delivered, delivered by
overnight delivery service, or mailed by registered or certified mail, return
receipt requested, to the following addresses:
If to the Company: Farmstead Telephone Group, Inc.
22 Prestige Park Circle
East Hartford, CT 06108
Attention:
<PAGE> 11
If to Executive: At the most recent address available in
the Company's employment records.
Any party may change its address by written notice to the other party. All
notices shall be deemed to have been given as of the date so delivered or
mailed.
Section 6.2 Waiver. The waiver by any party of any breach or default of
any provision of this Agreement shall not operate as a waiver of any subsequent
breach.
Section 6.3 Insurance. The Company may, at its election and for its
benefit, insure the Executive against accidental loss or death, and the
Executive shall submit to a physical examination and supply such information as
may be required in connection therewith.
Section 6.4 Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
whether written or oral, which relate to the subject matter hereof in any way.
Section 6.5 Construction and Interpretation. Whenever possible, each
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or any other jurisdiction,
but this Agreement will be reformed and reconstrued, and enforced to the
maximum extent possible, in such jurisdictions as if such invalid, illegal or
unenforceable provision never had been contained herein.
Section 6.6 Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
Section 6.7 Amendments. Any provisions of this Agreement may be amended
only with the prior written consent of the Company and the Executive.
Section 6.8 Governing Law. This Agreement shall be interpreted under the
laws of the State of Connecticut.
Section 6.9 Assignment. This Agreement may not be assigned by any party
hereto, provided that the Company may assign this Agreement in connection with
a merger or consolidation
<PAGE> 12
involving the Company or a sale of substantially all its assets, to the
surviving corporation or purchaser as the case may be, so long as such
assignee assumes the Company's obligations hereunder.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ George J. Taylor, Jr.
----------------------------------
GEORGE J. TAYLOR, JR.
By: __________________________________
Address: _____________________________
______________________________________
______________________________________
<PAGE> 13
Exhibit 10.6
Farmstead Telephone Group, Inc.
Supplemental Executive Retirement Plan
Effective as of January 1, 1998
Recitals
This Farmstead Telephone Group, Inc. Supplemental Executive Retirement
Plan (the "Plan") is adopted by Farmstead Telephone Group, Inc. (the
"Employer") for George J. Taylor, Jr. ("Executive"). The purpose of the Plan is
to provide Executive with supplemental retirement income. The Plan is intended
to be an unfunded excess benefit plan under Section 3(36) of the Employee
Retirement Income Security Act of 1974 ("ERISA").
Accordingly, the following Plan is adopted.
Article I
Definitions
-----------
1.1 "Base Salary" means Executive's annual base salary determined
pursuant to the Employment Agreement.
1.2 "Benefit" means the benefit committed on behalf of Executive or
Beneficiary as of the date of reference.
1.3 "Beneficiary" means any person or person so designated in
accordance with the provisions of Article VI.
1.4 "Code" means the Internal Revenue Code of 1986 and the regulations
thereunder, as amended from time to time.
1.5 "Effective Date" means the effective date of the Plan, which shall
be January 1, 1998.
1.6 "Employer" means Farmstead Telephone Group, Inc. and its successors
and assigns unless otherwise herein provided, or any other corporation or
business organization that, with the consent of Farmstead Telephone Group, Inc.
or its successors or assigns, assumes the Employer's obligations hereunder, or
any other corporation or business organization that agrees, with the consent of
Farmstead Telephone Group, Inc., to become a party to the Plan.
<PAGE> 1
1.7 "Employment Agreement" means the most recent Employment Agreement
between Executive and Employer dated January 1, 1998 and any amendments
thereto.
1.8 "Executive" means George J. Taylor, Jr., including, where
appropriate according to the context of the Plan, those Beneficiaries who may
become eligible to receive a benefit under the Plan.
1.9 "Normal Retirement Date" means age sixty-five (65).
1.10 "Permanent Disability" means a determination by the Employer's
long-term disability insurance carrier that Executive is permanently disabled.
1.11 "Plan" means the Farmstead Telephone Group, Inc. Supplemental
Executive Retirement Plan, as amended from time to time.
1.12 "Trust" means the trust fund established pursuant to the Plan.
1.13 "Trustee" means the trustee named in the agreement establishing the
Trust and such successor and/or additional trustees as may be named pursuant to
the terms of the agreement establishing the Trust.
Article II
Eligibility and Participation
-----------------------------
Executive shall be eligible to participate in the Plan on the Effective
Date.
Article III
Benefits
--------
At retirement, Executive shall be entitled to receive for fifteen (15)
years an annual benefit equal to one-third (1/3) of the average of his three
years of Base Salary earned immediately prior to his termination of employment,
but in any event not less than one hundred thousand dollars ($100,000). Payment
of Executive's Benefit shall commence on the earlier of Executive's death,
termination as the result of a permanent disability or attainment of his Normal
Retirement Date.
Article IV
Entitlement to Benefits
-----------------------
4.1 Termination of Employment. If Executive terminates employment with
the Employer for any reason, Executive's Benefit shall be calculated according
to the provisions of Article III and distributed according to the provisions of
Article V.
<PAGE> 2
4.2 Change of Control. If a Change of Control (as defined in the
Employment Agreement) occurs, Executive's Benefit shall be valued and payable
according to the provisions of Articles III and V.
4.3 Re-employment of Recipient. If Executive is receiving installment
distributions pursuant to Section 5.2 and is re-employed by the Employer, the
remaining distributions due to Executive shall not be suspended.
Article V
Distribution of Benefits
------------------------
5.1 Amount. Executive (or his Beneficiary) shall become entitled to
receive, on or about the date of his termination of employment with the
Employer, a distribution in an aggregate amount equal to Executive's annual
Benefit. Any payment due hereunder that is not paid by the Trust will be paid
by the Employer from its general assets.
5.2 Method of Payment.
(a) Cash Payments. All payments under the Plan shall be made in
cash.
(b) Timing and Manner of Payment. In the case of distributions to
Executive or his Beneficiary by virtue of an entitlement
pursuant to a Change in Control as provided in Section 4.2,
an aggregate amount sufficient to fund Executive's unpaid
current Benefit plus future Benefit will be transferred by
the Employer to the Trust in a lump sum. In the event
Executive becomes entitled to benefits pursuant to
termination of employment as provided in Section 4.1,
Executive's Benefit will be paid by the Trust or the
Employer, as provided by Section 5.1, in equal monthly
installments made over a fifteen (15) year period.
5.3 Death Benefits. If Executive dies before his Normal Retirement Date
or before the completion of payments to the Executive hereunder, the entire
value of Executive's Benefit shall be paid, as provided in Section 5.2, to the
person or persons designated in accordance with Section 6.1. Provided, however,
that Beneficiary may elect to have Executive's Aggregate Benefit paid in a lump
sum.
5.4 Excess Benefit. Employer may cause the Trust to be funded with an
insurance policy on Executive's life or such other assets as the Employer and
Trustee agree. In the event that the value of Trust assets, whether or not the
proceeds of any life insurance policy on Executive's life, exceed Executive's
Benefit, such assets shall revert to the Employer.
<PAGE> 3
Article VI
Beneficiaries; Participant Data
-------------------------------
6.1 Designation of Beneficiaries. Executive from time to time may
designate any person or persons (who may be named contingently or successively)
to receive such benefits as may be payable under the Plan upon or after
Executive's death, and such designation may be changed from time to time by
Executive by filing a new designation. Each designation will revoke all prior
designations by Executive, shall be in a form prescribed by the Employer, and
will be effective only when filed in writing with the Employer during the
Executive's lifetime.
In the absence of a valid Beneficiary designation, or if, at the time any
benefit payment is due to a Beneficiary, there is no living Beneficiary validly
named by the Executive, the Employer shall pay any such benefit payment to the
Executive's spouse, if then living, but otherwise to the Executive's then
living descendants, if any, per stirpes, but, if none, to the Executive's
estate. In determining the existence or identity of anyone entitled to a
benefit payment, the Employer may rely conclusively upon information supplied
by the Executive's personal representative, executor, or administrator. If a
question arises as to the existence or identity of anyone entitled to receive a
benefit payment as aforesaid, or if a dispute arises with respect to any such
payment, then, notwithstanding the foregoing, the Employer, in its sole
discretion, may distribute such payment to the Executive's estate without
liability for any tax or other consequences that might flow therefrom or may
take such other action as the Employer deems to be appropriate.
6.2 Information to be Furnished by Executive and Beneficiaries;
Inability to Locate Participants or Beneficiaries. Any communication,
statement, or notice addressed to Executive or to a Beneficiary at his last
post office address as shown on the Employer's records shall be binding on the
Executive or Beneficiary for all purposes of the Plan. The Employer shall not
be obliged to search for Executive or Beneficiary beyond the sending of a
registered letter to such last known address. If the Employer notifies
Executive or Beneficiary that he is entitled to an amount under the Plan and
Executive or Beneficiary fails to claim such amount or make his location known
to the Employer within three (3) years thereafter, then, except as otherwise
required by law, if the location of one or more of the next of kin of Executive
is known to the Employer, the Employer may direct distribution of such amount
to any one or more or all of such next of kin, in such proportions as the
Employer determines. If the location of none of the foregoing persons can be
determined, the Employer shall have the right to direct that the amount payable
shall be deemed to be a forfeiture, except that the dollar amount of the
forfeiture, unadjusted for deemed gains or losses in the interim, shall be paid
by the Employer if a claim for the benefit subsequently is made by the
Executive or the Beneficiary to whom it was payable. If a benefit payable to an
unlocated Executive or Beneficiary is subject to escheat pursuant to applicable
state law, the Employer shall not be liable to any person for any payment made
in accordance with such law.
<PAGE> 4
Article VII
The Trust
---------
The Employer shall establish the Trust with the Trustee, pursuant to such
terms and conditions as are set forth in the Trust Agreement to be entered into
between the Employer and the Trustee. The Trust is intended to be treated as a
grantor trust under the Code, and the establishment of the Trust is not
intended to cause Executive to realize current income on amounts contributed
thereto, and the Trust shall be so interpreted. The Employer shall contribute a
minimum annual amount of fifty thousand dollars ($50,000) to the Trust until
Executive's Benefit commences.
Article VIII
Administration
--------------
8.1 Administrative Authority. Except as otherwise specifically provided
herein, the Employer shall have the sole responsibility for and the sole
control of the operation and administration of the Plan and shall have the
power and authority to take all action and to make all decisions and
interpretations that may be necessary or appropriate in order to administer and
operate the Plan, including, without limiting the generality of the foregoing,
the power, duty and responsibility to:
(a) Resolve and determine all disputes or questions arising under the
Plan, including the power to determine the rights of Executive and
Beneficiaries, and their respective benefits, and to remedy any
ambiguities, inconsistencies, or omissions in the Plan.
(b) Adopt such rules of procedure and regulations as in its opinion may
be necessary for the proper and efficient administration of the
Plan and as are consistent with the Plan.
(c) Implement the Plan in accordance with its terms and the rules and
regulations adopted as above.
(d) Make determinations concerning the crediting and distribution of
Plan Accounts.
(e) Appoint any persons or firms, or otherwise act to secure
specialized advice or assistance, as it deems necessary or
desirable in connection with the administration and operation of
the Plan, and the Employer shall be entitled to rely conclusively
upon, and shall be fully protected in any action or omission taken
by it in good faith reliance upon, the advice or opinion of such
firms or persons. The Employer shall have the power and authority
to delegate from time to time by written instrument all or any part
of its duties,
<PAGE> 5
powers, or responsibilities under the Plan, both ministerial and
discretionary, as it deems appropriate, to any person or committee,
and in the same manner to revoke any such delegation of duties,
powers, or responsibilities. Any action of such person or committee
in the exercise of such delegated duties, powers, or
responsibilities shall have the same force and effect for all
purposes hereunder as if such action had been taken by the
Employer. Further, the Employer may authorize one or more persons
to execute any certificate or document on behalf of the Employer,
in which event any person notified by the Employer of such
authorization shall be entitled to accept and conclusively rely
upon such certificate or document executed by such person as
representing action by the Employer until such third person shall
have been notified of the revocation of such authority.
8.2 Mutual Exclusion of Responsibility. Neither the Trustee nor the
Employer shall be obliged to inquire into or be responsible for any act or
failure to act, or the authority therefor, on the part of the other.
8.3 Uniformity of Discretionary Acts. Whenever in the administration or
operation of the Plan discretionary actions by the Employer are required or
permitted, such actions shall be consistently and uniformly applied to all
persons similarly situated, and no such action shall be taken that shall
discriminate in favor of any particular person or group of persons.
8.4 Litigation. Except as may be otherwise required by law, in any
action or judicial proceeding affecting the Plan, neither Executive nor
Beneficiary shall be entitled to any notice or service of process, and any
final judgment entered in such action shall be binding on all persons
interested in, or claiming under, the Plan.
8.5 Payment of Administration Expenses. All expenses incurred in the
administration and operation of the Plan and the Trust, including any taxes
payable by the Employer in respect of the Plan or Trust or payable by or from
the Trust pursuant to its terms, shall be paid by the Employer.
Article IX
Amendment
---------
9.1 Right to Amend. The Employer, by written instrument executed by the
Employer, shall have the right to amend the Plan, at any time and with respect
to any provisions hereof, and all parties hereto or claiming any interest
hereunder shall be bound by such amendment; provided, however, that no such
amendment shall deprive Executive or a Beneficiary of a right accrued hereunder
prior to the date of the amendment.
<PAGE> 6
9.2 Amendments to Ensure Proper Characterization of Plan.
Notwithstanding the provisions of Section 9.1, the Plan and the Trust Agreement
may be amended by the Employer at any time, retroactively if required, if found
necessary, in the opinion of the Employer, in order to ensure that the Plan is
characterized as an "excess benefit" plan as described under ERISA Section
3(36) and to conform the Plan to the provisions and requirements of any
applicable law (including ERISA and the Code). No such amendment shall be
considered prejudicial to any interest of Executive or a Beneficiary hereunder.
Article X
Miscellaneous
-------------
10.1 Limitations on Liability of Employer. Neither the establishment of
the Plan or any modification thereof, nor the creation of any account under the
Plan, nor the payment of any benefits under the Plan shall be construed as
giving to Executive or any other person any legal or equitable right against
the Employer, or any officer or employer thereof except as provided by law or
by any Plan provision. In no event shall the Employer, or any successor,
employee, officer, director, or stockholder of the Employer, be liable to
Executive on account of any claim arising by reason of the provisions of the
Plan or of any instrument or instruments implementing its provisions, or for
the failure of Executive, Beneficiary, or other person to be entitled to any
particular tax consequences with respect to the Plan, or any credit or
distribution hereunder.
10.2 Construction. If any provision of the Plan is held to be illegal or
void, such illegality or invalidity shall not affect the remaining provisions
of the Plan, but shall be fully severable, and the Plan shall be construed and
enforced as if said illegal or invalid provision had never been inserted
herein. For all purposes of the Plan, where the context admits, the singular
shall include the plural, and the plural shall include the singular. Headings
of Articles and Sections herein are inserted only for convenience of reference
and are not to be considered in the construction of the Plan. The laws of the
State of Connecticut shall govern, control, and determine all questions of law
arising with respect to the Plan and the interpretation and validity of its
respective provisions, except where those laws are preempted by the laws of the
United States. Participation under the Plan will not give Executive the right
to be retained in the service of the Employer nor any right or claim to any
benefit under the Plan unless such right or claim has specifically accrued
hereunder.
The Plan is intended to be and at all times shall be interpreted and
administered so as to qualify as an unfunded deferred compensation plan, and no
provision of the Plan shall be interpreted so as to give any individual any
right in any assets of the Employer, which right is greater than the rights of
a general unsecured creditor of the Employer.
<PAGE> 7
10.3 Spendthrift Provision. No amount payable to Executive or a
Beneficiary under the Plan will, except as otherwise specifically provided by
law, be subject in any manner to anticipation, alienation, attachment,
garnishment, sale, transfer, assignment (either at law or in equity), levy,
execution, pledge, encumbrance, charge, or any other legal or equitable
process, and any attempt to do so will be void; nor will any benefit be in any
manner liable for or subject to the debts, contracts, liabilities, engagements,
or torts of the person entitled thereto. Further, the withholding of taxes from
Plan benefit payments; the recovery under the Plan of overpayments of benefits
previously made to Executive or Beneficiary; if applicable, the transfer of
benefit payments to an account in a banking institution (if not actually part
of an arrangement constituting an assignment or alienation) shall not be
construed as an assignment or alienation.
In the event that Executive's or Beneficiary's benefits hereunder are
garnished or attached by order of any court, the Employer may bring an action
or a declaratory judgment in a court of competent jurisdiction to determine the
proper recipient of the benefits to be paid under the Plan. During the pendency
of said action, any benefits that become payable shall be held as credits to
Executive's or Beneficiary's Account or, if the Employer prefers, paid into the
court as they become payable, to be distributed by the court to the recipient
as the court deems proper a the close of said action.
IN WITNESS WHEREOF, this Employer has caused the Plan to be executed and
its seal to be affixed hereto, effective as of the 1st day of January, 1998.
ATTEST/WITNESS FARMSTEAD TELEPHONE GROUP, INC.
____________________________________ By: __________________________________
Print Name: ________________________ Print Name: __________________________
Date: ________________________________
[SEAL]
<PAGE> 8
I. Designation of Death Benefit Beneficiary/ies
I hereby revoke any prior designations of death benefit beneficiary/ies
under the Plan, and I hereby designate the following beneficiary/ies to receive
any benefit payable on account of my death under the Plan, subject to my right
to change this designation and subject to the terms of the Plan.
A. Primary Beneficiary/ies
<TABLE>
<S> <C> <C> <C> <C>
Name, Address, Relationship to Percent of Date of Social Security
Telephone Number Participant Plan Account Birth Number
- -------------------- --------------- ------------ ------- ---------------
</TABLE>
B. Contingent Beneficiary/ies (Will receive indicated portions of Plan
benefit if no Primary Beneficiary/ies survive the Participant)
<TABLE>
<S> <C> <C> <C> <C>
Name, Address, Relationship to Percent of Date of Social Security
Telephone Number Participant Plan Account Birth Number
- -------------------- --------------- ------------ -------- ---------------
</TABLE>
- -------------------------------- ------------------------------------
Date George J. Taylor, Jr.
<PAGE> 9
EXHIBIT 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
<TABLE>
<CAPTION>
Percent State or other jurisdiction of
Name Owned incorporation or organization
- --------------------------------------------------- ------- ------------------------------
<S> <C> <C>
Beijing Antai Communication Equipment Company, Ltd. 50% Peoples Republic of China
FTG Venture Corporation (1) 100% Delaware
TeleSolutions, Inc.(1) 40% Republic of the Philippines
<FN>
- -------------------
<F1> Inactive
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,102 3,161
<SECURITIES> 0 0
<RECEIVABLES> 5,656 4,037
<ALLOWANCES> 579 245
<INVENTORY> 2,583 3,111
<CURRENT-ASSETS> 9,503 11,472
<PP&E> 1,419 478
<DEPRECIATION> 484 292
<TOTAL-ASSETS> 10,829 12,074
<CURRENT-LIABILITIES> 4,793 4,439
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 5,766 7,632
<TOTAL-LIABILITY-AND-EQUITY> 10,829 12,074
<SALES> 20,559 16,306
<TOTAL-REVENUES> 20,559 16,306
<CGS> 15,460 11,866
<TOTAL-COSTS> 15,460 11,866
<OTHER-EXPENSES> 5,552 3,685
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 204 157
<INCOME-PRETAX> (557) 1,225
<INCOME-TAX> 43 19
<INCOME-CONTINUING> (600) 1,206
<DISCONTINUED> (1,266) (324)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,866) 882
<EPS-PRIMARY> (.57) .36
<EPS-DILUTED> (.57) .35
</TABLE>
