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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File Number: 0-15938
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Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle
East Hartford, CT 06108
(Address of principal executive offices) (Zip Code)
(860) 610-6000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 30, 1998, there were 3,264,579 shares of the issuer's $.001
par value Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I - FINANCIAL INFORMATION
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except number of shares) 1998 1997
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 796 $ 1,102
Accounts receivable, less allowance for doubtful accounts 7,425 5,077
Inventories 4,461 2,583
Net assets of discontinued operations (Note 3) 258 560
Other current assets 258 181
-----------------------
Total current assets 13,198 9,503
Property and equipment, net 801 935
Other assets 200 391
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Total assets $14,199 $10,829
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,383 $ 1,560
Borrowings under inventory financing agreement (Note 2) 2,358 889
Current portion of long-term debt 76 69
Accrued compensation and benefits 636 480
Other current liabilities 57 65
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Total current liabilities 4,510 3,063
Long-term debt (Note 2) 3,452 1,997
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Total liabilities 7,962 5,060
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Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares authorized;
3,264,579 and 3,262,329 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 3 3
Additional paid-in capital 12,200 12,196
Accumulated deficit (5,966) (6,430)
-----------------------
Total stockholders' equity 6,237 5,769
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Total liabilities and stockholders' equity $14,199 $10,829
=======================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997
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<S> <C> <C>
Revenues $ 9,006 $4,965
Cost of revenues 6,683 3,787
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Gross profit 2,323 1,178
Selling, general and administrative expenses 1,787 1,291
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Operating income (loss) 536 (113)
Interest expense (80) (59)
Other (expense) income (3) 25
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Income (loss) from continuing operations before income taxes 453 (147)
(Benefit) provision for income taxes (16) 11
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Income (loss) from continuing operations 469 (158)
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Discontinued operations (Note 3):
Income (loss) from operations 59 (312)
Provision for loss on disposal of discontinued operations (69) (329)
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Loss from discontinued operations (10) (641)
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Net income (loss) $ 459 $ (799)
==================
Basic and diluted net income (loss) per common share:
From continuing operations $ .14 $ (.05)
From discontinued operations - (.20)
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Basic and diluted net income (loss) per common share $ .14 $ (.25)
==================
Weighted average common shares outstanding:
Basic and diluted 3,265 3,262
==================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Revenues $21,759 $14,866
Cost of revenues 16,253 11,314
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Gross profit 5,506 3,552
Selling, general and administrative expenses 4,666 3,769
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Operating income (loss) 840 (217)
Interest expense (192) (150)
Equity in losses of unconsolidated subsidiaries - (40)
Write-down of investments in unconsolidated subsidiaries - (404)
Other income 58 79
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Income (loss) from continuing operations before income taxes 706 (732)
Provision for income taxes 5 22
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Income (loss) from continuing operations 701 (754)
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Discontinued operations (Note 3):
Loss from operations (93) (931)
Provision for loss on disposal of discontinued operations (144) (329)
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Loss from discontinued operations (237) (1,260)
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Net income (loss) $ 464 $(2,014)
==================
Basic and diluted net income (loss) per common share:
From continuing operations $ .21 $ (.23)
From discontinued operations (.07) (.39)
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Basic and diluted net income (loss) per common share $ .14 $ (.62)
==================
Weighted average common shares outstanding:
Basic 3,264 3,262
==================
Diluted 3,391 3,262
==================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands) 1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 464 $(2,014)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Depreciation and amortization 229 124
Provision for estimated costs of disposal of discontinued
operation 144 329
Equity in undistributed losses of unconsolidated subsidiaries - 40
Write-down of investments in unconsolidated subsidiaries - 404
Changes in operating assets and liabilities:
Increase in accounts receivable (2,348) (628)
Increase in inventories (1,878) (139)
Decrease in other assets 110 228
Increase in accounts payable, accrued compensation and
benefits and other current liabilities (29) (744)
Decrease (increase) in net assets of discontinued operations 158 (169)
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Net cash used in operating activities (3,150) (2,569)
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Cash flows from investing activities:
Purchases of property and equipment (91) (293)
Redemptions of coupons - 75
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Net cash used in investing activities (91) (218)
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Cash flows from financing activities:
Proceeds from bank and inventory finance borrowings 2,983 903
Repayments of capital lease obligation (52) (31)
Proceeds from exercise of stock options 4 -
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Net cash provided by financing activities 2,935 872
Net decrease in cash and cash equivalents (306) (1,915)
Cash and cash equivalents at beginning of period 1,102 3,161
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Cash and cash equivalents at end of period $ 796 $ 1,246
==================
Supplemental schedule of non-cash financing and investing activities:
Purchase of equipment under capital lease obligation $ - $ 419
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 192 150
Income taxes 14 49
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements are presented on a consolidated
basis, consisting of the accounts of Farmstead Telephone Group, Inc. and its
wholly-owned subsidiary, FTG Venture Corporation (the "Company"). The
interim financial statements presented herein are unaudited, however in the
opinion of management reflect all adjustments, consisting of adjustments
that are of a normal recurring nature, which are necessary for a fair
statement of results for the interim periods presented. As further
described in Note 3 contained herein, the Company has presented its voice
processing products business as a discontinued operation, and certain
amounts previously reported for accompanying prior year periods have been
restated for comparison purposes. This Form 10-QSB should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
2. DEBT OBLIGATIONS
Borrowings Under Inventory Financing Agreement
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On April 30, 1998 the original one year term of the Company's $2
million inventory finance agreement with Finova Capital Corporation
("Finova") expired, however it is being continued on a discretionary basis.
On October 1, 1998, the credit line was temporarily increased to $4,000,000
until January 31, 1999. All other lending terms and conditions remain the
same as in the original agreement. The Company expects to negotiate a
longer term agreement with Finova prior to the expiration of the temporary
facility. The average amounts borrowed under this facility during the three
and nine months ended September 30, 1998 were approximately $1,795,000 and
$1,418,000, respectively. Amounts borrowed are repaid, interest-free, in
either two or three equal monthly installments, depending upon the product
purchased.
Long-term Debt
--------------
Long-term debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
9/30/98 12/31/97
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<S> <C> <C>
Bank revolving credit agreement (a) $3,211 $1,697
Obligation under capital lease 317 369
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3,528 2,066
Less current portion (76) (69)
------------------
Long-term debt $3,452 $1,997
==================
</TABLE>
(a) On September 29, 1998, the Company's $3,500,000 revolving credit
facility with First Union National Bank ("FUNB") was temporarily increased
by $500,000 to $4,000,000 until October 31, 1998. On October 15, 1998, the
credit facility was increased to $6,000,000, and the term of the facility
was extended to May 30, 2000. In addition, the tangible net worth covenant
was amended to require a minimum level of $5,750,000 at December 31, 1998
and $6,000,000 at December 31, 1999. As of September 30, 1998, the unused
portion of this facility was $789,000 all of which was available under the
borrowing formula. The average amounts borrowed under this credit facility
during the three and nine months ended September 30, 1998 were approximately
$2,772,000 and $2,162,000, respectively. Had the increased credit limit
been in effect at September 30, 1998, an additional $690,000 would have been
available to borrow. Borrowings are dependent upon the continuing
generation of collateral, subject to the credit limit. The weighted average
interest rate on the outstanding borrowings was 9.6% for the nine months
ended September 30, 1998. As of September 30, 1998, the Company was in
compliance with its loan covenants. Since the term of the facility was
extended to May 30, 2000, borrowings have been classified as a long term
liability at September 30, 1998.
3. DISCONTINUED OPERATIONS
In December 1997, the Company began actively pursuing divesting itself
of its Cobotyx voice processing products business. To date, the Company has
not located a buyer for the business, however assets offered for sale
include inventories, fixed assets, and certain other current assets which,
as of September 30, 1998 aggregated approximately $258,000, plus all related
technologies developed by the Company, tradenames, and other contract
rights. For the three months ended September 30, 1998 and 1997, voice
processing product revenues approximated $384,000 and $329,000,
respectively. For the nine months ended September 30, 1998 and 1997, voice
processing product revenues approximated $511,000 and $1,140,000,
respectively. The voice processing products business incurred a $10,000 loss
for the three months ended September 30, 1998. This business incurred a
$237,000 loss for the nine months ended September 30, 1998, consisting of a
$93,000 operating loss and a $144,000 charge to accrue estimated costs of
discontinuing the business.
The $641,000 loss from discontinued operations for the three months
ended September 30, 1997 consisted of a $136,000 loss from the voice
processing products business, and a $505,000 loss from the operations and
sale of Farmstead Asset Management Services, LLC ("FAMS"), sold in December
1997. The $1,260,000 loss from discontinued operations for the nine months
ended September 30, 1997 consisted of a $353,000 loss from the voice
processing products business, and a $907,000 loss from the operations and
sale of FAMS.
By June 30, 1998, the Company had significantly reduced personnel
levels and other operating expenses associated with the Cobotyx Division so
that future operations through the disposal of this business would not
materially impact the Company. The Company has restated prior year
information contained in the consolidated financial statements and notes
thereto as a result of the discontinued operations presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income (Loss)
The Company recorded net income of $459,000 for the three months ended
September 30, 1998, consisting of income from continuing telephone equipment
operations of $469,000, and a $10,000 loss from discontinued voice
processing equipment operations. This compares to a net loss of $799,000
for the three months ended September 31, 1997, consisting of a $158,000 loss
from continuing operations, and a $641,000 loss from discontinued
operations. The loss from discontinued operations for the three months
ended September 30, 1997 consisted of a $136,000 loss from the voice
processing products business, and a $505,000 loss from the operations and
sale of FAMS, sold in December 1997.
The Company recorded net income of $464,000 for the nine months ended
September 30, 1998, consisting of income from continuing telephone equipment
operations of $701,000, and a $237,000 loss from discontinued voice
processing equipment operations. This compares to a net loss of $2,014,000
for the nine months ended September 30, 1997, consisting of a $754,000 loss
from continuing operations, and a $1,260,000 loss from discontinued
operations. The loss from discontinued operations for the nine months ended
September 30, 1997 consisted of a $353,000 loss from the voice processing
products business, and a $907,000 loss from the operations of FAMS.
In December 1997, the Company began actively pursuing divesting itself
of its Cobotyx voice processing products business. To date, the Company has
not located a buyer for the business, however assets offered for sale
include inventories, fixed assets, and certain other current assets which,
as of September 30, 1998 aggregated approximately $258,000, plus all related
technologies developed by the Company, tradenames, and other contract
rights. By June 30, 1998, the Company had significantly reduced personnel
levels and other operating expenses associated with the Cobotyx Division so
that future operations through the disposal of this business would not
materially impact the Company.
Discussion of the Results of Continuing Operations
Revenues
Revenues from continuing operations for the three months ended
September 30, 1998 were approximately $9,006,000, an increase of $4,041,000
or 81% from the comparable 1997 period. The increase was attributable to
(i) increased end user sales, principally as a result of expanded sales
offices and a larger sales staff, and in part in connection with the
Company's appointment by Lucent Technologies as an Authorized Remarketing
Supplier of Classic LucentTM business telephone equipment, under a trial
agreement that currently expires November 30, 1998 (the "ARS Program"), (ii)
increased sales to the Company's associated dealers and (iii) increased
equipment rental and installation revenues. Parts and system sales
comprised 87% of revenues from continuing operations for the three months
ended September 30, 1998 (94% in the comparable 1997 period), while service
revenues accounted for 13% of revenues from continuing operations in 1998
(6% in 1997).
Revenues from continuing operations for the nine months ended
September 30, 1998 were approximately $21,759,000, an increase of $6,893,000
or 46% from the comparable 1997 period. The increase was attributable to
(i) increased end user sales, principally as a result of expanded sales
offices and a larger sales staff, and in part in connection with the
Company's participation in the ARS Program, (ii) increased sales to the
Company's associated dealers and (iii) increased equipment rental revenues.
Parts and system sales comprised 92% of revenues from continuing operations
for the three months ended September 30, 1998 (93% in the comparable 1997
period), while service revenues accounted for 8% of revenues from continuing
operations in 1998 (7% in 1997).
Gross Profit
The gross profit from continuing operations for the three months ended
September 30, 1998 was $2,323,000, an increase of $1,145,000 or 97% from the
comparable 1997 period. The gross profit margin was 26% of revenues in the
1998 period as compared to 24% in the 1997 period. The two percentage
point increase in gross profit margin was primarily due to lower labor and
other overhead costs per revenue dollar, and to higher than average margins
on equipment rental revenues.
The gross profit from continuing operations for the nine months ended
September 30, 1998 was $5,506,000, an increase of $1,954,000 or 55% from the
comparable 1997 period. The gross profit margin was 25% of revenues in the
1998 period as compared to 24% of revenues in the 1997 period. The one
percentage point increase in gross profit margin was due to lower labor and
other overhead costs per revenue dollar, and to higher than average margins
on equipment rental revenues.
Selling, General & Administrative ("SG&A") Expenses
SG&A expenses for the three months ended September 30, 1998 were
$1,787,000, an increase of $496,000 or 38% over the comparable 1997 period.
Sales and marketing expenses accounted for approximately 72% of the growth
in SG&A as the Company increased its sales and customer support personnel,
incurred higher sales commission expenses on the increased sales volume, and
incurred higher travel expenses in connection with expanding its outside
sales offices and customer base. Higher facility occupancy costs, including
increased depreciation expense from fixed assets purchased in connection
with the Company's March 1997 relocation to a larger headquarters in East
Hartford, Connecticut, accounted for approximately 9% of the SG&A growth
over the prior year quarter. The remainder of the SG&A growth was
principally attributable to personnel increases, higher insurance costs and
bad debt reserves. SG&A expenses were 20% of revenues for the three months
ended September 30, 1998, compared to 26% of revenues for the comparable
1997 period.
SG&A expenses for the nine months ended September 30, 1998 were
$4,666,000, an increase of $897,000 or 24% over the comparable 1997 period.
Sales and marketing expenses accounted for approximately 69% of the growth
in SG&A as the Company increased its sales and customer support personnel,
incurred higher sales commission expenses on the increased sales volume, and
incurred higher travel expenses in connection with expanding its outside
sales offices and customer base. Higher facility occupancy costs, including
increased depreciation expense from fixed assets purchased in connection
with the Company's March 1997 business relocation accounted for
approximately 18% of the SG&A growth over the prior year period. The
remainder of the SG&A growth was principally attributable to personnel
increases, higher insurance, legal and data processing costs, and increased
bad debt reserves. SG&A expenses were 21% of revenues for the nine months
ended September 30, 1998, compared to 25% of revenues for the comparable
1997 period.
Interest Expense
Interest expense for the three months ended September 30, 1998 was
$80,000, as compared to $59,000 in the comparable 1997 period. Interest
expense for the nine months ended September 30, 1998 was $192,000, as
compared to $150,000 in the comparable 1997 period. The increase in the
current three and nine month period was attributable to higher average
borrowings under the Company's revolving credit facility to finance the
Company's revenue growth.
Liquidity and Capital Resources
Working capital at September 30, 1998 was $8,688,000 a 35% increase
from $6,440,000 at December 31, 1997. The working capital ratio at
September 30, 1998 was 2.9 to 1 as compared to 3.1 to 1 at December 31,
1997. The increase in working capital was attributable to increases in both
accounts receivable and inventories.
Operating activities used $3,150,000 during the nine months ended
September 30, 1998 principally due to an increase in accounts receivable of
$2,348,000, due to higher sales volume, and an increase in inventories of
approximately $1,878,000. The increase in inventories resulted from (i) the
replenishment of an unusually low inventory level at December 31, 1997 which
resulted from strong year end sales activities and (ii) the Company's
decision to stock higher inventory levels for current and anticipated higher
end user and dealer sales volumes and for the ARS Program.
Investing activities used $91,000 during the nine months ended
September 30, 1998 from the purchase of telecommunications and computer
equipment for the Company's internal use. The Company currently has no
material capital expenditure plans, however as further described below, the
Company plans to upgrade its internal computer system and personal
computers to Year 2000 compliant systems by the end of February 1999 at an
estimated cost of $25,000.
Financing activities generated $2,935,000 during the nine months ended
September 30, 1998, principally from advances under its FUNB revolving loan
agreement, and from advances under its Finova inventory finance agreement.
On September 29, 1998, the Company's $3,500,000 revolving credit
facility with FUNB was temporarily increased by $500,000 to $4,000,000 until
October 31, 1998. On October 15, 1998, the credit facility was increased to
$6,000,000, and the term of the facility was extended to May 30, 2000. In
addition, the tangible net worth covenant was amended to require a minimum
level of $5,750,000 at December 31, 1998 and $6,000,000 at December 31,
1999. As of September 30, 1998, the unused portion of this facility was
$789,000 all of which was available under the borrowing formula. The
average amounts borrowed under this credit facility during the three and
nine months ended September 30, 1998 were approximately $2,772,000 and
$2,162,000, respectively. Had the increased credit limit been in effect at
September 30, 1998, an additional $690,000 would have been available to
borrow. Borrowings are dependent upon the continuing generation of
collateral, subject to the credit limit. The weighted average interest rate
on the outstanding borrowings was 9.6% for the nine months ended September
30, 1998. As of September 30, 1998, the Company was in compliance with its
loan covenants. Since the term of the facility was extended to May 30, 2000,
borrowings have been classified as a long term liability at September 30, 1998.
On April 30, 1998 the original one year term of the Company's $2
million inventory finance agreement with Finova expired, however it is being
continued on a discretionary basis. On October 1, 1998, the credit line was
temporarily increased to $4,000,000 until January 31, 1999. All other
lending terms and conditions remain the same as in the original agreement.
The Company expects to negotiate a longer term agreement with Finova prior
to the expiration of the temporary facility. The average amounts borrowed
under this facility during the three and nine months ended September 30,
1998 were approximately $1,795,000 and $1,418,000, respectively.
Effective September 3, 1998, the Company obtained the written consent
of the holders of its Class A Redeemable Common Stock Purchase Warrants
("Class A Warrants") and Class B Redeemable Common Stock Purchase Warrants
("Class B Warrants") of a unified proposal to (a) reduce the present
exercise price of the Warrants to $2.00, (b) reduce the Target Price (as
defined in the Warrant Agreements) of the Warrants to $2.90, (c) establish
the minimum period by which the Company must notify holders of the Warrants
of future modifications to the Warrant Agreements at 20 calendar days, and
(d) provide for proportional increases and decreases in the Target Price of
the Warrants upon future changes (if any) in the exercise price of the
Warrants without the need of the Company to seek additional approval from
the Warrant holders. As of September 30, 1998, there were 1,137,923 Class A
Warrants and 1,137,923 Class B Warrants outstanding. The primary purpose of
soliciting the consent of the warrant holders was to raise capital in the
near term for general working capital purposes, by increasing the likelihood
that, due to the proposed reductions in the exercise prices and Target
Prices, the warrants may be exercised sooner than as currently contemplated
under their present exercise and Target Prices.
The Company believes that it has sufficient capital resources, in the
form of cash and availability under its credit facilities, to satisfy its
working capital requirements, although there can be no assurance that this
will be the case.
Year 2000 Compliance
The Company considers "Year 2000 ("Y2K") compliant" products to be
those which, when used in accordance with their associated documentation,
will not fail to perform in accordance with their specifications or as
otherwise warranted, in any manner that is material and adverse to the
customer, as relating to the product's handling of calendar dates, provided
however, that the products are used only with services, products and/or
software that are themselves Y2K Compliant and which properly exchange
accurate date data with each other. During 1998, the Company formed a Y2K
Project Team to conduct an assessment of its internal business systems and
products. The Team is directed by the Company's Vice President of
Operations and includes other members of senior management. The assessment
includes, for products manufactured by third parties, communication with the
Company's key suppliers and key business partners and, for Company
manufactured products, internal testing of these products. For products
determined to be non-compliant, the Company will assist its customers in
obtaining Y2K Compliant components or system upgrades at a reasonable cost
when, and if, Y2K Compliant versions are subsequently made available. The
Y2K Project Team is also committed to ensuring that the Company will not
experience any material internal business interruptions relating to the
"Year 2000 issue".
The Company's significant internal computer-based systems utilize
software developed by outside vendors. The Company plans to upgrade to Y2K
compliant versions of these systems, personal computers and other computer
hardware by the end of February, 1999. The Company currently estimates that
the costs to upgrade its internal use computer-based systems and associated
computer hardware to Y2K compliant products will not exceed $25,000.
The Company primarily distributes and resells telecommunications parts
and systems manufactured by Lucent Technologies, Inc. (formerly a part of
AT&T) ("Lucent"). Lucent is also the Company's major product supplier. The
Company will be relying solely upon representations made by Lucent as to the
Y2K compliance status of its products and their timetable to provide Y2K
compliant product or migration/upgrade solutions. The principal products
from which the Company derives most of its revenues and profits are
currently being represented by Lucent as being already Y2K compliant. A copy
of Lucent's most recent Year 2000 Product Compliance Status report may be
directly accessed from Lucent's Internet address:
www.lucent.com/enterprise/sig/yr2000/status.html.
The Company is reliant upon its outside vendors to provide Y2K
compliant upgrades to the Company's internal computer systems. The failure
of the Company to obtain such Y2K compliant products could result in a
temporary inability to process transactions, ship product, send invoices, or
engage in similar normal operating activities on a timely basis. In such
event, the Company's operating results, including sales levels or cash flow
could be adversely affected. The Company believes, however, that this is
mitigated somewhat by the Company's relatively small size and transaction
volumes, such that manual processing procedures could be quickly implemented
to accommodate most significant internal processes.
While the Company is in the process of initiating formal contact with
its key vendors and customers as to their state of readiness to handle
potential Y2K related problems impacting their businesses, the Company can
give no guarantee that the systems of other companies upon which the Company
relies will be converted on time, or that a significant operating problem
caused by a Y2K problem would not have a material adverse effect on the
Company. Since the Company is a distributor of Lucent products, and Lucent
is the Company's key supplier, the Company could be materially adversely
impacted by Y2K problems which impact Lucent's ability to supply product to
the Company on time, or to supply product that is Y2K compliant. It is
presently unknown to what extent the Company could be materially adversely
impacted by any of such scenarios. The Company currently does not have a
contingency plan for Y2K problems, however it plans to develop one by mid
1999.
Forward Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-QSB contain certain
statements which are not historical facts and are considered forward-looking
statements within the meaning of the Federal Securities laws. The Company's
actual results could differ materially from those projected in the forward-
looking statements as a result of, among other factors, general economic
conditions and growth in the telecommunications industry, competitive
factors and pricing pressures, changes in product mix, product demand, risk
of dependence on third party suppliers, Y2K problems and other risk factors
detailed in this report, described from time to time in the Company's other
Securities and Exchange Commission filings, or discussed in the Company's
press releases. In addition, other written or oral statements which
constitute forward-looking statements may be made by or on behalf of the
Company. All forward-looking statements included in this document are based
upon information available to the Company on the date hereof. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Certain terms of the Class A Redeemable Common Stock Purchase Warrants
("Class A Warrants") and Class B Redeemable Common Stock Purchase Warrants
("Class B Warrants") were modified by action of the Warrant Holders as
described in Item 4 below.
Item 4. Submission of Matters to a Vote of Security Holders
The holders of record, as of July 10, 1998, of the Company's initial
public offering Redeemable Common Stock Purchase Warrants ("Public
Warrants"), Class A Warrants, and Class B Warrants (collectively the
"Warrants") voted on the following unified proposal containing the following
proposed amendments to the Warrant agreements: (1) to reduce the exercise
price of the Public Warrants, Class A Warrants and Class B Warrants to $2.00
per share from their then current exercise prices of $4.67, $5.28 and $6.09
per share, respectively; (2) to reduce the target price at which the Company
can call the Warrants for redemption to $2.90 from $11.25, $6.09 and $6.90
per share, respectively; (3) to establish 20 days as the minimum period by
which the Company must notify holders of the Warrants of any future
modifications to the Warrant agreements; and (4) to provide for proportional
increases and decreases in the target price of the Warrants upon future
changes, if any, in the exercise price of the Warrants. The voting was
conducted by means of a written consent vote in lieu of a special meeting of
each class of warrant holders, and required the affirmative vote of at least
51% of each class of outstanding warrant. The voting results were as
follows:
<TABLE>
<CAPTION>
Withheld % of
Consented Consent Outstanding
(For) (Against) Abstained Consenting
--------------------------------------------------
<S> <C> <C> <C> <C>
Public Warrants 48,981 82,606 700 26.7%
Class A Warrants 585,099 26,101 926 51.4%
Class B Warrants 587,870 40,206 926 51.7%
</TABLE>
Based upon the voting results, the unified proposal was passed for the
Class A and Class B Warrants only.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: October 30, 1998 /s/ Robert G. LaVigne
-----------------------------------
Robert G. LaVigne
Executive Vice President, Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 796
<SECURITIES> 0
<RECEIVABLES> 7,425
<ALLOWANCES> 0
<INVENTORY> 4,461
<CURRENT-ASSETS> 13,198
<PP&E> 801
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,199
<CURRENT-LIABILITIES> 4,510
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 6,234
<TOTAL-LIABILITY-AND-EQUITY> 14,199
<SALES> 21,759
<TOTAL-REVENUES> 21,759
<CGS> 16,253
<TOTAL-COSTS> 16,253
<OTHER-EXPENSES> 4,666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 706
<INCOME-TAX> 5
<INCOME-CONTINUING> 701
<DISCONTINUED> (237)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 464
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
