UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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: $27,738,000
As of February 26, 1999, 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 $5,627,334.
As of February 26, 1999, the registrant had 3,272,579 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 17, 1999 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]
<PAGE> 1
TABLE OF CONTENTS TO FORM 10-KSB
PART I
Page
----
Item 1. Business 3
Item 2. Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters 6
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 7. Financial Statements 11
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 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 13
Item 13. Exhibits and Reports on Form 8-K 13
<PAGE> 2
PART I
Item 1. Business
General
Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") was
incorporated in Delaware in 1986 and became publicly held in May 1987
following the completion of an initial public offering. The Company is
located at 22 Prestige Park Circle, East Hartford, CT 06108, and its
telephone number is (860) 610-6000. The Company is principally engaged as
(i) a secondary market reseller, and authorized Lucent Dealer of
remanufactured and refurbished Lucent Technologies, Inc. ("Lucent")
telecommunications parts and systems, and (ii) as an authorized Lucent
dealer for certain new telecommunications products. These Lucent products
are primarily customer premises-based private switching systems and
peripheral products, including voice processing systems. The Company also
provides telecommunications equipment repair and refurbishing, rental,
inventory management, and related value-added services. The Company sells
its products and services primarily to both large and small end-user
businesses, government agencies, and other secondary market dealers.
In January, 1994, the Company acquired certain operating assets of
Cobotyx Corporation, Inc., a designer, manufacturer and supplier of voice
processing systems. The Company expanded its entry into this marketplace
by concurrently forming a voice processing products division operating
under the trade name "Cobotyx." In December 1997, the Company decided to
begin the process of divesting itself from this business, and during 1998,
while actively looking for a buyer for certain of its assets and developed
technologies, significantly downsized all related operations, including
terminating product development activities. To date, the Company has not
located a qualified buyer for this business. The operations of the Cobotyx
business unit were not material to the Company's 1998 operating results.
For the years ended December 31, 1998 and 1997, Cobotyx generated revenues
of $605,000 and $1,479,000, 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. Due to declining revenues and continued operating
losses, effective October 1, 1997, the Company sold all of its ownership
interests in FAMS. During 1997, prior to the sale date, FAMS recorded
revenues of $799,000.
Products
The Company primarily sells remanufactured, refurbished (by the
Company or other equipment refurbishers) and new telecommunications parts
and systems manufactured by Lucent (See "Relationship with Lucent
Technologies" for further information on Lucent). These products are
primarily 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 telecommunication system parts and complete systems,
however the Company's revenues are predominantly from the sale of parts.
Parts sold include both digital and analog telephone sets and circuit
packs, and other system accessories and related products such as headsets,
consoles, speakerphones, paging systems and voice processing products
offered by Lucent.
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 Definity(R), System 75 and System 85.
Equipment sales revenues accounted for approximately 94% of
consolidated revenues from continuing operations in 1998 (93% in 1997),
while service revenues comprised 6% of consolidated revenues from
continuing operations in 1998
<PAGE> 3
(7% in 1997). Sales of PBX equipment and associated telephones and
peripherals comprised approximately 81% of equipment sales in 1998
(85% in 1997), while key equipment and other equipment sales comprised
19% (15% in 1997).
Relationship with 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 1998 consolidated revenues of $30.1
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.
Since February 1998, the Company has been operating under a Lucent-
sponsored "Authorized Remarketing Supplier" ("ARS") program as an ARS
Dealer, licensed under a three-year contract entered into in December 1998
(the "ARS Agreement") to sell "Classic Lucent(TM)" products to end users
nationwide. Classic Lucent products are defined as used Lucent key system
and PBX system parts, currently supported by Lucent, that have been
refurbished by the Company under Lucent quality standards. This
designation applies to substantially all of the used Lucent products which
the Company now sells. The Company is currently one of four companies
authorized to participate in this program. No company has been designated
an exclusive sales territory. The ARS Agreement also allows the Company to
sell certain new Lucent PBX products and voice processing products to end
users. Prior thereto, the Company was an "Authorized Distributor of
Selected Lucent - Remanufactured Products" since 1991.
In February 1999, in connection with the Company's appointment as an
ARS Dealer, the Company's new key system distributor agreement and
associated dealer base were transferred to another Lucent distributor. The
transfer reflects the Company's focus on developing its Classic Lucent
products business.
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 could be materially
adversely affected should Lucent decide to cancel the aforementioned
agreements.
Marketing and Customers
Telecommunications parts, systems and services are marketed through
the Company's direct sales staff, which includes salespersons located
throughout the east coast, Illinois and California, and through a network
of associate dealers (until February 25, 1999), to over 2,600 business
locations, with customers ranging from large, multi- location corporations,
to small companies and home offices, and to equipment wholesalers, dealers,
and government agencies and municipalities. Approximately 84% (90% in
1997) of the Company's revenues were generated by customers located in New
England, and along the east coast. End users accounted for approximately
87% of 1998 revenues (89 % in 1997), while sales to dealers and other
resellers accounted for approximately 13% of 1998 revenues (11% in 1997).
During the two years ended December 31, 1998, no single customer accounted
for more than 10% of revenues from continuing operations, except for
Lucent, which accounted for 15% of 1998 revenues. The Company's business is
not considered seasonal.
The Company had attempted over the last several years prior to 1998
to market telecommunications equipment in the People's Republic of China
and in the Republic of the Philippines. Its efforts, however, were not
successful, and by the end
<PAGE> 4
of 1997 the Company ceased pursuing these international markets. The Company
is currently focusing its sales efforts domestically.
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
equipment 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.
Inventory Management: The Company provides inventory storage,
accounting, and distribution services, acting as a centralized depot for
its customers' idle telecommunications equipment.
Equipment Rentals: The Company rents out equipment on a month-to-
month basis, servicing those customers that have temporary, short-term
equipment needs.
Other Services: The Company's technical staff currently provide
engineering, configuration, technical "hot line" telephone support and
limited on-site installation services. 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 6% of revenues
from continuing operations in 1998 and 7% in 1997. No individual service
category accounted for more than 5% of 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 Limited, other new
equipment distributors, as well as other secondary market equipment
resellers, of which the Company estimates there are over 100 nationwide.
In the sale of Classic Lucent products, the Company competes with the other
Lucent-designated ARS Dealers. The Company believes that key competitive
factors in its market are timeliness of delivery, service support, price
and product reliability. The Company also 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, distributors, leasing companies and end
users. In accordance with its agreements with Lucent, the Company is
required to purchase new products only from Lucent or Lucent-approved
distributors. The Company is not otherwise dependent upon any other single
supplier for telecommunications equipment. The Company believes that if
its Lucent agreements were to be terminated, it could obtain these products
from other suppliers. The Company believes that product availability in
the marketplace is presently sufficient to allow the Company to meet its
customers' equipment delivery requirements. See also "Relationship with
Lucent Technologies."
<PAGE> 5
Patents, Licenses and Trademarks
No patent or trademark is considered material to the Company's
continuing operations. Pursuant to 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.
Employees
As of December 31, 1998, the Company had 81 employees, of which 80
were employed on a full-time basis. 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, 1998, 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
The Company's securities are traded on the American Stock Exchange.
The Company's securities and their trading symbols are as follows: Common
Stock - "FTG"; Warrant issued in the Company's 1987 initial public offering
("IPO Warrants") - "FTG.WS"; Redeemable Class A Common Stock Purchase
Warrant - "FTG.WS.A"; Redeemable Class B Common Stock Purchase Warrant -
"FTG.WS.B". The following sets forth the range of quarterly high and low
sales prices for these securities, for the two years ended December 31,
1998:
<TABLE>
<CAPTION>
Common Stock: IPO Warrants:
1998 1997 1998 1997
-------------- -------------- ------------- ------------
Quarter Ended High Low High Low High Low High Low
- ------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $3.50 $1.81 $4.00 $2.75 $1.13 $.31 $.38 $.13
June 30 2.75 1.50 3.62 2.25 1.13 .63 .50 .13
September 30 2.25 1.25 2.56 1.69 .56 .38 .56 .31
December 31 2.81 1.13 2.94 1.62 .75 .31 .63 .38
<CAPTION>
Class A Warrants: Class B Warrants:
1998 1997 1998 1997
-------------- -------------- ------------- ------------
Quarter Ended High Low High Low High Low High Low
- ------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $ .38 $ .06 $ .75 $ .31 $ .19 $.03 $.50 $.19
June 30 .25 .06 .50 .19 .25 .03 .44 .13
September 30 .38 .13 .56 .19 .38 .06 .19 .06
December 31 .75 .25 .50 .13 .75 .19 .19 .06
</TABLE>
<PAGE> 6
There were 3,264,579 and 3,262,329 common shares outstanding at
December 31, 1998 and 1997, respectively. There were 183,579 IPO Warrants
and 1,137,923 Class A Warrants and Class B Warrants outstanding at December
31, 1998 and 1997. As of December 31, 1998 there were 580 holders of
record of the common stock representing approximately 3,900 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
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.
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
Results of Operations
Net Income (Loss)
The Company recorded net income of $571,000 for the year ended
December 31, 1998 as compared to a net loss of $1,866,000 for the year
ended December 31, 1997. The results for 1998 consisted of income from
continuing operations of $780,000, and a loss from discontinued operations
of $209,000. The results for 1997 consisted of a loss from continuing
operations of $600,000, and a loss from discontinued operations of
$1,266,000.
Due to declining revenues and resulting operating losses, effective
October 1, 1997, the Company sold its wholly-owned subsidiary, Farmstead
Asset Management Services, LLC ("FAMS") to FAMS, LLC, a newly formed New
Jersey corporation (the "Buyer") owned by a former employee for $40,000 in
cash and a $360,000 10% Note, payable in 60 monthly installments. In doing
so, the Company recorded in 1997 a loss on disposal of FAMS of $208,000.
Prior to the effective date of sale, FAMS incurred an operating loss of
approximately $578,000 in 1997, on revenues of $799,000. Included in the
loss from discontinued operations for 1998 is a $195,000 charge to reduce
the note receivable from FAMS, LLC to its estimated realizable value.
In December 1997, due to declining revenues and resulting operating
losses in the Cobotyx business unit, the Company began actively pursuing
divesting itself of this voice processing products business. To date, the
Company has not located a qualified buyer, however during 1998 the Company
significantly reduced all business operations, including the cessation of
internal product development activities. The loss from discontinued
operations attributable to Cobotyx operations was $14,000 for 1998, on
revenues of $605,000, as compared to a loss of $480,000 in 1997 on revenues
of $1,479,000. The Company expects revenues to continue to decline as
demand for the Cobotyx products diminish, however the Company does not
expect this to have a material impact on future operating results.
Discussion of the Results of Continuing Operations
Revenues
Revenues from continuing operations for the year ended December 31,
1998 were $27,738,000, an increase of $7,179,000 or 35% from the comparable
1997 period. During 1998 the Company established several new sales offices
throughout the country, and increased its sales force. The Company also
benefited from its appointment as a Lucent Authorized Remarketing Supplier
of Classic Lucent telephone equipment ("ARS"). These factors resulted in a
33% increase in end user equipment sales. The increase in revenues was
also attributable to 66% growth in equipment sales to dealers and other
resellers, and a 16% growth in service revenues, consisting principally of
installations, event coordination and equipment rentals. End user
equipment sales revenues accounted for 81% of revenues in 1998 (82% in
1997), while revenues from dealers and other equipment resellers accounted
for 13% (11% in 1997) and services accounted for 6% of revenues (7% in
1997). As a part of its agreement in becoming an ARS, in February 1999 the
Company transferred its new key system dealer base to another Lucent
distributor. Revenues from this dealer base accounted for 10% of revenues
in 1998 (8% in 1997). The Company anticipates that this loss in revenue
will be offset by increased revenues under the ARS agreement.
<PAGE> 7
Gross Profit
Gross profit from continuing operations for the year ended December
31, 1998 was $6,922,000, an increase of $1,823,000 or 36% from the
comparable 1997 period. The overall gross profit margin was 25% of
revenues during both 1998 and 1997. License fees paid in 1998 to Lucent
for equipment sales under the ARS program reduced the gross profit margin
by 1 percentage point however, this was offset by lower overhead costs per
sales dollar on the higher volume sales level. The Company anticipates
that the gross profit margin will remain at the current level for 1999.
Selling, General & Administrative ("SG&A") Expenses
SG&A expenses from continuing operations for the year ended December
31, 1998 were $5,926,000, an increase of $818,000 or 16% over the
comparable 1997 period. SG&A expenses were 21% of revenues in 1998, versus
25% for the comparable 1997 period. Sales and marketing expenses accounted
for 75% of the increase in SG&A due to increased sales compensation
expenses resulting from increased sales and sales support personnel and
commission payments on a higher sales volume, and from increased travel
expenses in connection with supporting its remote salespersons and
marketing the new ARS program to Lucent sales offices nationwide. Higher
facility occupancy costs, including increased depreciation expense from
fixed assets purchased in connection with the Company's 1997 business
relocation, accounted for approximately 20% of the SG&A growth over 1997.
Interest Expense and Other Income
Interest expense increased $68,000 or 33% in 1998 versus 1997. The
increase was attributable to higher average debt levels as compared with
the prior year. Other income from continuing operations for the years
ended December 31, 1998 and 1997 consisted principally of interest earned
on the Company's invested cash.
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
Net Income (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
<PAGE> 8
$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.
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
revenues in 1997 and in 1996, while service revenues comprised 7% of
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.
Selling, General & Administrative ("SG&A") Expenses
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.
Liquidity and Capital Resources
Working capital, defined as current assets less current liabilities,
at December 31, 1998 was $7,399,000, an increase of $959,000 from the
$6,440,000 of working capital at December 31, 1997. The working capital
ratio at December 31, 1998 was approximately 2.4 to 1 versus 3.1 to 1 at
December 31, 1997. The decline in the ratio was principally attributable
to the use of cash and short term borrowings to finance the increase in
inventories during the fourth quarter of 1998.
Operating activities used $2,424,000 during the year ended December
31, 1998, principally as a result of a $4,267,000 increase in inventories.
The increase in inventories was attributable to (i) a special purchase by
the Company of approximately $2 million of new equipment from Lucent in
advance of a scheduled price increase, (ii) higher stocking levels of
equipment refurbished by Farmstead to be sold under the Classic Lucent
trademark, and (iii) increased inventories of equipment acquired from
trade-ins and customer bids, requiring repair and refurbishing by Farmstead
before it can be sold.
Investing activities used $214,000 during the year ended December 31,
1998, from the purchase of telecommunications and computer equipment for
the Company's internal use. The Company has no material fixed asset
purchases planned for 1999.
<PAGE> 9
Financing activities generated $2,126,000 during the year ended
December 31, 1998, from advances under the Company's inventory financing
and revolving credit facilities. On October 1, 1998 the Company's credit
facility with Finova Capital Corporation ("Finova") was increased to $4
million, and on February 4, 1999 further increased to $5 million, until
March 31, 1999 at which time it will revert back to a $2 million facility.
The credit line has been used to finance Lucent products purchased directly
from Lucent or from approved Lucent distributors. Such advances are
repayable, interest-free, in either two or three equal monthly
installments, depending upon the product purchased. As of December 31,
1998, outstanding borrowings aggregated $3,082,000, and all borrowings are
secured by the Company's inventories.
The Company also maintains a $6 million revolving loan facility with
First Union National Bank, expiring May 30, 2000. Under the current
agreement, effective January 1, 1999, borrowings are advanced at 75% of
eligible accounts receivable, bear interest at LIBOR plus 2.75% (7.8% at
December 31, 1998) and are secured by all of the Company's assets excluding
inventories. The agreement requires the Company to maintain a minimum
tangible net worth of $5.75 million, increasing to $6 million at December
31, 1999, 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. As of December 31, 1998, the unused portion
of the credit facility was $4.3 million, of which approximately $1.2
million was available under the borrowing formula. The average and highest
amounts borrowed during the year ended December 31, 1998 were approximately
$2,329,000 and $3,673,000, respectively. Borrowings are dependent upon the
continuing generation of collateral, subject to the credit limit. The
weighted average interest rate on this facility debt was 9.5% for 1998 and
10.1% for 1997.
The Company believes that it has sufficient capital resources, in the
form of cash and availability under its credit facilities, to satisfy its
current working capital obligations, although there can be no assurances
that this will be the case. The Company is currently reviewing its working
capital financing needs with its current lenders, and expects to maintain
its facilities at their current levels. The Company believes it can obtain
similarly structured credit facilities from other credit providers on terms
not materially less favorable to the Company than its present terms.
Inflation has not been a significant factor in the Company's operations.
YEAR 2000 READINESS DISCLOSURES
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 Company
additionally set up a Year 2000 website at www.farmstead.com that provides
Year 2000 product information as well as information on the progress of the
Company's Year 2000 efforts.
The Company's significant internal computer-based systems consist of
hardware and packaged software purchased from outside vendors, which
operate in a Windows NT Local Area Network environment. The Company plans
to upgrade to Year 2000 compliant versions of these systems and equipment,
and upgrade its internal use personal computers, by the end of April, 1999.
The Company also plans to have a contingency plan developed by the end of
September, 1999 which will address potential operational problems and
customer support problems in the event an interruption in its normal
operating environment should occur. 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 distributes and resells telecommunications parts and
systems manufactured by Lucent. Lucent is also the Company's major
product supplier. As such, the Company relies upon representations made by
Lucent as to the Year 2000 compliance status of its products. Based upon
information disseminated by Lucent, the Company believes that those Lucent
products from which the Company principally derives its sales revenues are
either currently Year 2000 compliant, or can be upgraded to a compliant
version. For products determined to be non-compliant, our policy is to
assist our customers in obtaining Y2K compliant components or system
upgrades at a reasonable cost when, and if, Y2K compliant versions are
subsequently made available.
<PAGE> 10
To ensure the continued delivery of third party products and
services, Farmstead has sent surveys to its major suppliers and has been
assessing their responses. Since almost all of Farmstead's major suppliers
are still engaged in executing their own readiness plans, Farmstead cannot,
at this time, fully assess the Year 2000 risks to its supply chain. We
will continue to monitor the Year 2000 status of our major suppliers and
will develop appropriate contingent responses as these risks become
clearer.
The Company believes that it is taking the necessary steps to resolve
Year 2000 issues and to lessen the risks associated therein. The risks to
the Company from a failure to resolve Year 2000 issues, either in its
internal systems or from a failure on the part of its major suppliers and
key business partners, are perceived by management to be similar for other
businesses in the Company's industry and for other businesses generally.
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.
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.
Forward-Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-KSB report contain
certain statements, based on current expectations, estimates, forecasts and
projections about the industry in which the Company operates and
management's beliefs and assumptions, 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 certain
risks, uncertainties and assumptions which are difficult to predict. They
include, 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.
Item 7. Financial Statements
The following report and financial statements of the Company are
contained on the pages indicated:
Page
----
Report of Deloitte & Touche LLP 15
Consolidated Balance Sheets - December 31, 1998 and 1997 16
Consolidated Statements of Operations - Years Ended
December 31, 1998 and 1997 17
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1998 and 1997 18
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998 and 1997 19
Notes to Consolidated Financial Statements 20
<PAGE> 11
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. In the event the Company is
unable to file its proxy statement within such time, an amended Form 10-KSB
will be filed in lieu thereof.
Executive Officers of the Company
(Information as of January 1, 1999)
<TABLE>
<CAPTION>
First
Became An
Executive
Name Age Officer in Position(s) Held
- ----------------------- --- ---------- ----------------------------
<S> <C> <C> <C>
George J. Taylor, Jr. * 56 1984 Chairman of the Board,
President, Chief Executive
Officer
Robert G. LaVigne * 47 1988 Executive Vice President,
Chief Financial Officer,
Secretary, Treasurer
Alexander E. Capo 48 1987 Vice President - Sales
Joseph A. Novak, Jr. 55 1993 Vice President - Operations
Neil R. Sullivan 47 1994 Vice President- Accounting &
Administration, Assistant
Secretary
Robert L. Saelens 53 1997 Vice President - Marketing
- --------------------
<F*> Member of the Board of Directors.
</TABLE>
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 24, 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. ("ATC").
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.
<PAGE> 12
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.
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. In the event the
Company is unable to file its proxy statement within such time, an amended
Form 10-KSB will be filed in lieu thereof.
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. In the event the Company is
unable to file its proxy statement within such time, an amended Form 10-KSB
will be filed in lieu thereof.
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. In the event the Company is
unable to file its proxy statement within such time, an amended Form 10-KSB
will be filed in lieu thereof.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits: See Index to Exhibits on page 28.
(b) Reports on Form 8-K: The registrant did not file any reports on Form
8-K during the fourth quarter of 1998.
PAGE 13
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 19, 1999.
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 indicated as of March 19, 1999.
Signature Title
- --------- -----
/s/ George J. Taylor, Jr. Chairman of the Board,
- ------------------------------ Chief Executive Officer and
George J. Taylor, Jr. President
(Principal Executive Officer)
/s/ Robert G. LaVigne Executive Vice President, Chief
- ------------------------------ Financial Officer, Secretary and
Robert G. LaVigne 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
<PAGE> 14
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 subsidiary (the "Company") as of December 31,
1998 and 1997, 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
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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the 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 opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Farmstead Telephone Group,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 19, 1999
<PAGE> 15
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except share data) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 590 $ 1,102
Accounts receivable, less allowance for doubtful
accounts of $287 in 1998 and $579 in 1997 4,950 5,077
Inventories 6,850 2,583
Net assets of discontinued operations (Note 6) - 560
Other current assets 194 181
- -------------------------------------------------------------------------------
Total Current Assets 12,584 9,503
- -------------------------------------------------------------------------------
Property and equipment, net (Note 3) 845 935
Other assets 69 391
- -------------------------------------------------------------------------------
Total Assets $13,498 $10,829
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,442 $ 1,560
Borrowings under inventory finance agreement (Note 5) 3,082 889
Current portion of long-term debt (Note 5) 78 69
Accrued expenses and other current liabilities (Note 4) 583 545
- -------------------------------------------------------------------------------
Total Current Liabilities 5,185 3,063
- -------------------------------------------------------------------------------
Long-term debt (Note 5) 1,916 1,997
Other liabilities (Note 11) 53 -
- -------------------------------------------------------------------------------
Total Liabilities 7,154 5,060
- -------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
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 in 1998 and 1997, respectively 3 3
Additional paid-in capital 12,200 12,196
Accumulated deficit (5,859) (6,430)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 6,344 5,769
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $13,498 $10,829
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $27,738 $20,559
Cost of revenues 20,816 15,460
- ---------------------------------------------------------------------------------------
Gross Profit 6,922 5,099
Selling, general and administrative expenses 5,926 5,108
- ---------------------------------------------------------------------------------------
Operating Income (Loss) 996 (9)
- ---------------------------------------------------------------------------------------
Interest expense 272 204
Equity in losses of unconsolidated subsidiaries (Note 9) - 40
Write-down of investments in unconsolidated subsidiaries (Note 9) - 404
Other income (72) (100)
- ---------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 796 (557)
Provision for income taxes 16 43
- ---------------------------------------------------------------------------------------
Income (Loss) From Continuing Operations 780 (600)
- ---------------------------------------------------------------------------------------
Discontinued Operations (Note 6):
Loss from operations (14) (1,058)
Loss on sale of discontinued operation (195) (208)
- ---------------------------------------------------------------------------------------
Loss From Discontinued Operations (209) (1,266)
- ---------------------------------------------------------------------------------------
Net Income (Loss) $ 571 $(1,866)
=======================================================================================
Net Income (Loss) per Common Share
Basic and diluted net income (loss) per common share:
From continuing operations $ .23 $ (.18)
From discontinued operations (.06) (.39)
- ---------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ .17 $ (.57)
- ---------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding
Basic weighted average common shares 3,264 3,262
Dilutive effect of stock options 140 -
- ---------------------------------------------------------------------------------------
Diluted weighted average common and common equivalent shares 3,404 3,262
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional
---------------- paid-in Accumulated
(In thousands) Shares Amount capital deficit Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Stock options exercised 2 - 4 - 4
Net income - - - 571 571
- ---------------------------------------------------------------------------------------
Balance at December 31, 1998 3,264 $ 3 $12,200 $(5,859) $ 6,344
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 571 $(1,866)
Adjustments to reconcile net income (loss) to net cash flows
used by operating activities:
Depreciation and amortization 309 308
Equity in undistributed losses of unconsolidated subsidiaries - 40
Write-down of investments in unconsolidated subsidiaries - 77
Write-down of accounts receivable from unconsolidated subsidiary - 265
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 127 (1,550)
(Increase) decrease in inventories (4,267) 528
Decrease (increase) in other assets 303 (32)
Decrease in accounts payable, accrued expenses and
other current liabilities (27) (431)
Decrease in net assets of discontinued operations 560 462
- ------------------------------------------------------------------------------------------
Net cash used by operating activities (2,424) (2,199)
- ------------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment (214) (552)
Redemptions of coupons - 60
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (214) (492)
- ------------------------------------------------------------------------------------------
Financing Activities:
Bank and inventory finance borrowings 2,185 682
Repayments of capital lease obligation (63) (50)
Proceeds from exercise of stock options 4 -
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,126 632
- ------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (512) (2,059)
Cash and cash equivalents at beginning of year 1,102 3,161
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 590 $ 1,102
==========================================================================================
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 $ 272 $ 204
Income taxes 14 49
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") is
principally engaged as (i) a secondary market reseller, and authorized
Lucent Dealer of remanufactured and refurbished Lucent Technologies, Inc.
("Lucent") telecommunications parts and systems, and (ii) as an
authorized Lucent dealer for certain new telecommunications products. These
Lucent products are primarily customer premises-based private switching
systems and peripheral products, including voice processing systems. The
Company also provides telecommunications equipment repair and refurbishing,
rental, inventory management, and related value-added services. The
Company sells its products and services primarily to both large and small
end-user businesses, government agencies, and other secondary market
dealers. During the two years ended December 31, 1998, no single customer
accounted for more than 10% of revenues from continuing operations except
for Lucent, which accounted for 15% of 1998 revenues.
Principles of Consolidation
The consolidated financial statements presented herein include the
accounts of the Company and its wholly-owned subsidiary, FTG Venture
Corporation (inactive). 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.
All material intercompany transactions 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. Estimates are used when accounting for the
allowance for uncollectible accounts and notes receivable, inventory
obsolescence, depreciation, taxes and contingencies, among others.
Revenue Recognition
Revenues are recognized when products are shipped or when services
are 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 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. Due to the availability of net operating loss
carryforwards, federal tax expense consisted of alternative minimum taxes
in 1998 and 1997, and state income tax expense consisted of minimum taxes
in both years.
<PAGE> 20
Net Income (Loss) Per Share
Basic earnings (loss) per share was computed by dividing net income
(loss) (the numerator) by the weighted average number of common shares
outstanding (the denominator) during the period. Diluted earnings (loss)
per share was 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.
Segment Information
In the opinion of management, the Company operates in one industry
segment, which is the sale of telecommunications equipment.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 includes an investment
in a money market fund consisting of high quality short term instruments,
principally U.S. Government and Agency issues and commercial paper.
3. PROPERTY AND EQUIPMENT, NET
As of December 31, the components of property and equipment, net were
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Equipment $ 925 $ 820
Furniture and fixtures 84 102
Leasehold improvements 85 78
Leased equipment under capital lease 415 419
------------------------------------------------------------------
1,509 1,419
Less accumulated depreciation and amortization (664) (484)
------------------------------------------------------------------
Property and equipment, net $ 845 $ 935
==================================================================
</TABLE>
Leased equipment under capital lease at December 31, 1998 and 1997
consisted principally of office furniture, equipment and computer equipment
acquired in connection with the Company's 1997 facility relocation. The
accumulated amortization of the leased equipment was $150,000 and $61,000
at December 31, 1998 and 1997, respectively.
4. 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>
1998 1997
--------------------------------------------------------------
<S> <C> <C>
Salaries, commissions and benefits $501 $480
Other 82 65
--------------------------------------------------------------
Accrued expenses and other current liabilities $583 $545
==============================================================
</TABLE>
5. 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, in December 1997
was transferred to Finova Capital Corporation ("Finova"). The agreement
formally expired in April 1998, however it has since continued on a
discretionary basis. On October 1, 1998 the credit facility was increased
to $4 million, and on February 4, 1999 further increased to $5 million,
until March 31, 1999 at which time it will revert back to a $2 million
facility. The credit line has been used to finance Lucent products
purchased directly from Lucent or from approved Lucent distributors. Such
advances are repayable, interest-free, in either two or three equal
monthly
<PAGE> 21
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, 1998, outstanding borrowings aggregated $3,082,000, and all
borrowings are secured by the Company's inventories. The Company expects
to either maintain the Finova credit facility at its present level, or
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, long-term debt obligations consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------
<S> <C> <C>
Bank revolving credit agreement (a) $1,688 $1,697
Obligation under capital lease (b) 306 369
-------------------------------------------------------
1,994 2,066
Less current portion (78) (69)
-------------------------------------------------------
Long-term debt $1,916 $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 a $2.5 million agreement with First
Union. The agreement was further modified in December 1997 and, in October
1998, the credit facility was increased to $6 million and the expiration
date was extended to May 30, 2000. The current agreement, which became
effective January 1, 1999, reduced the rate charged on borrowings to LIBOR
plus 2.75% (7.8% at December 31, 1998), borrowings are advanced at 75% of
eligible accounts receivable and are secured by all of the Company's assets
excluding inventories. The agreement requires the Company to maintain a
minimum tangible net worth of $5.75 million, increasing to $6 million at
December 31, 1999, 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, 1998. As of December 31,
1998, the unused portion of the credit facility was $4.3 million, of which
approximately $1.2 million was available under the borrowing formula. The
average and highest amounts borrowed during the year ended December 31,
1998 were approximately $2,329,000 and $3,673,000, 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 9.5% for 1998 and 10.1% for 1997.
(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 facility
relocation. Monthly lease payments 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, 1998 the
future minimum annual lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------------------------
<S> <C>
1999 $115
2000 115
2001 115
2002 29
------------------------------------------
Total minimum lease payments 374
Less amount representing interest (68)
------------------------------------------
Present value of net minimum lease
payments under capital lease $306
==========================================
</TABLE>
<PAGE> 22
The carrying values of the Company's borrowings approximated their
fair values at December 31, 1998 and 1997.
6. 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 1997, 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 the assets of FAMS. For the
year ended December 31, 1997, the Company 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. During 1998 the Company recorded an
additional $195,000 charge to reduce the carrying value of the FAMS, LLC
note receivable to its estimated realizable value. During 1997, prior to
the effective date of sale, FAMS recorded revenues of $799,000 and
incurred an operating loss of approximately $578,000.
Voice Processing Products
--------------------------
In January, 1994, the Company acquired certain operating assets of
Cobotyx Corporation, Inc., a designer, manufacturer and supplier of voice
processing systems, and expanded its entry into this marketplace and formed
a voice processing products division operating under the trade name
"Cobotyx". In December 1997, the Company decided to begin the process of
divesting itself from this business, and during 1998, while actively
looking for a buyer for certain of its assets and developed technologies,
significantly downsized all related operations, including terminating
product development activities. To date, the Company has not located a
buyer for this business. For the years ended December 31, 1998 and 1997,
Cobotyx voice processing product revenues approximated $605,000 and
$1,479,000, respectively. The Company's loss from the operations of its
voice processing products business was approximately $14,000 in 1998 and
$480,000 in 1997. Net assets of discontinued operations at December 31,
1997 aggregated $560,000, and consisted principally of inventories and
fixed assets.
7. 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 ("ISOs") as defined under
Section 422 of the Internal Revenue Code, or non-qualified stock options
("NSOs"). ISOs 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. NSOs may be granted at no less
than 50% of market value at the time of granting, with a maximum of 10
years. The maximum number of shares issuable under the 1992 Plan, which
expires in 2002, is 3,500,000.
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 2008.
<PAGE> 23
A summary of stock option transactions for each of the two years in
the period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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 expired (914,150) 2.13 - 10.00 3.58
- ---------------------------------------------------------------------------
Outstanding at December 31, 1997 907,609 1.56 - 11.80 2.14
Granted 919,570 1.19 - 2.69 1.94
Exercised (2,250) 2.00 2.00
Canceled or expired (63,500) 1.56 - 2.38 1.95
- ---------------------------------------------------------------------------
Outstanding at December 31, 1998 1,761,429 $1.19 - 11.80 $2.04
==========================================================================
As of December 31, 1998:
Exercisable 1,168,587 $1.56 - 11.80 $2.08
Available for future grant 1,748,763
</TABLE>
The following summarizes information about stock options outstanding
and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted Avg.
Remaining
Range of Number Contractual Life Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding (Years) Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.19 - 2.00 1,727,079 8.5 $1.96 1,139,237 $1.97
$2.01 - 5.00 18,000 4.6 3.65 15,000 3.84
$5.01 - 11.80 16,350 5.0 8.33 14,350 8.47
</TABLE>
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>
1998 1997
--------------------- ---------------------
As As
Reported Pro forma Reported Pro forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $571 $(525) $(1,866) $(2,315)
Basic net income (loss) per share .17 (.16) (.57) (.71)
Diluted net income (loss) per share .17 (.15) (.57) (.71)
</TABLE>
The fair value of stock options used to compute pro forma net loss
and net loss per share disclosures was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for both 1998 and 1997; expected
volatility of 124% for 1998 (80% for 1997); risk-free interest rate of
4.93% for 1998 (5.37% for 1997), and an expected option holding period of 5
years for both 1998 and 1997.
<PAGE> 24
8. STOCKHOLDERS' EQUITY
As of December 31, 1998, the following securities were outstanding:
(a) 331,363 Underwriter Options, exercisable at $7.50 per unit, each
unit consisting of one share of common stock, and one warrant to purchase
1.07 shares of common stock at $4.67. These options, and the underlying
warrants, expire June 30, 2002. The Underwriter Options were issued in
connection with the Company's 1987 initial public offering.
(b) 183,579 warrants issued in connection with the Company's 1987
initial public offering, exercisable at $4.67 per share, and entitling the
holder to purchase 1.07 shares of common stock. The warrants expire June
30, 2002. The warrants are redeemable at the option of the Company at $.05
per warrant, provided the average of the last reported sales price for ten
consecutive business days, ending five days before notice of the redemption
is given, of the common stock exceeds $11.25 per share.
(c) 1,137,923 Redeemable Class A Common Stock Purchase Warrants
("Class A Warrant"), and 1,137,923 Redeemable Class B Common Stock Purchase
Warrants ("Class B Warrant"), each exercisable at $2.00 per share, and
entitling the holder to purchase one share of common stock. These warrants
expire August 12, 2001. The warrants are redeemable at the option of the
Company at $.10 per warrant, provided the average of the last reported
sales price for twenty consecutive business days, ending five days before
notice of the redemption is given, of the common stock exceeds $2.90 per
share.
Effective September 3, 1998, the Company obtained the written consent
of the holders of its Class A and Class B Warrants of a unified proposal to
(a) reduce the present exercise price of the Class A and Class B Warrants
from $5.28 and $6.09, respectively to $2.00, (b) reduce the Target Price
(as defined in the Warrant Agreements) of these Warrants from $6.09 and
$6.90, respectively, to $2.90, (c) establish the minimum period by which
the Company must notify holders of the Warrants of future modifications to
the Warrant Agreements at 20 calendar days, and (d) provide for
proportional increases and decreases in the Target Price of the Warrants
upon future changes (if any) in the exercise price of the Warrants without
the need of the Company to seek additional approval from the Warrant
holders. The primary purpose of 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.
(d) 89,948 Representative Warrants to purchase 89,948 units at an
exercise price of $2.90 per unit. Each unit consists of one share of
common stock, one Class A Warrant and one Class B Warrant. The
Representative Warrants were issued in 1986 to the Company's underwriter in
connection with a secondary offering of securities, at an original exercise
price of $6.70 per unit. During 1998 the Company's Board of Directors
voted to reduce the exercise price to $2.90 per unit. The Representative
Warrants expire September 16, 2001.
9. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
In May 1995, the Company acquired 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 Products Inc.
ATC, previously a distributor for the Company in the PRC, was acquired by
the Company to market, install and service telecommunications products
which were developed for use in the PRC. These products included used
Lucent PBX equipment, and central office equipment, consisting of
proprietary Chinese system software, proprietary digital and analog
interfaces, and a proprietary billing system, the combination of which
would enable the PBX equipment to be operated as a small central office.
In June 1997, due principally to fiscal year 1997 operating losses at 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, resulting in
a $342,000 non-cash charge against 1997 earnings. The Company expects to
divest its ownership interest in ATC in 1999.
In June 1996, the Company acquired a 40% interest in TeleSolutions,
Inc., formed in association with other Philippine investors for the purpose
of refurbishing, installing and selling telecommunications equipment in the
Republic of the Philippines. In June 1997, the owners decided to close the
operation. As a result, in 1997 the Company wrote off $52,000 of inventory
located at TeleSolutions, Inc., and expensed $10,000 in closing costs.
<PAGE> 25
The following table shows the changes in the Company's investment in
unconsolidated subsidiaries during the year ended December 31, 1997
($000's):
<TABLE>
<CAPTION>
1997
--------------------------------------------
<S> <C>
Investment at beginning of year $117
Equity in unconsolidated subsidiary:
Equity in net losses (34)
Amortization of excess of cost over
equity in net assets (6)
Write-down of investment balance (77)
--------------------------------------------
Investment at end of year $ -
============================================
</TABLE>
10. 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 into which it relocated its operations. Under the terms of
the lease agreement, the minimum monthly rental is $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. Rent expense
was $173,796 in 1998 and $197,000 in 1997. Future minimum lease payments
at December 31, 1998 are as follows: $172,348 for 1999, $181,036 for 2000,
$182,484 for 2001, and $30,414 for 2002, totaling $566,282.
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 severance pay for the CEO 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.
11. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company adopted a Supplemental
Executive Retirement Plan ("SERP") for the benefit of its CEO. The SERP is
a "target" benefit plan, structured to provide the CEO with an annual
retirement benefit, payable over 15 years beginning at age 65, in an amount
equal to one-third of the CEO's average final three-year salary, however in
no event less than $100,000 per year. The SERP is being funded through a
Company-owned life insurance policy which has a projected $50,000 annual
premium for ten years. The cash surrender value of this policy was $23,382
at December 31, 1998. For the year ended December 31, 1998, the Company
expensed $53,009, consisting of service cost of $49,541 and interest cost
of $3,468. The Company used the Projected Unit Credit Method and a 7%
interest rate in determining these amounts.
Effective July 1, 1998, the Company adopted a split dollar life
insurance program for its officers and certain key employees as a means of
providing a life insurance benefit and a future retirement benefit. Under
this program, the Company may make discretionary contributions of up to 10%
of each participant's annual compensation, which amounted to $46,248 in
1998. For the year ended December 31, 1998, the Company expensed $18,603.
The accumulated value of each participant's account vests with the
participant over a ten year period, based on years of service, with each
participant 100% vested upon the later of attainment of age 65 or the
completion of five years of service with the Company.
<PAGE> 26
12. INCOME TAXES
Current income tax expense attributable to income from continuing
operations consisted of state income tax expense of $6,000 and federal
income tax expense of $10,000 in 1998, and state income tax expense of
$24,000 and federal income tax expense of $19,000 in 1997. There was no
deferred federal or state income 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>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense (benefit) $199 $(634)
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of federal
income tax benefit 9 16
Nondeductible life insurance 20 -
Unutilized loss of foreign subsidiary - 133
(Realized) unrealized benefit of operating loss carryforwards (228) 506
Other 16 22
- -------------------------------------------------------------------------------
Income tax expense $ 16 $ 43
===============================================================================
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 221 $ 125
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 155 139
Net operating loss and capital loss carryforwards 961 1,133
Other 43 8
- ---------------------------------------------------------------------
Total gross deferred tax assets 1,380 1,405
Less valuation allowance (1,380) (1,405)
- ---------------------------------------------------------------------
Net deferred tax assets $ - $ -
=====================================================================
Deferred tax liabilities $ - $ -
=====================================================================
</TABLE>
The valuation allowance is considered prudent as of December 31, 1998
due to the Company's past history of cumulative operating losses. The
Company has net operating loss carryforwards for federal income tax
purposes of approximately $2,759,000 available at December 31, 1998. No
federal income tax provision has been made in the accompanying financial
statements, except for alternative minimum taxes, because of the presence
of these net operating loss carryforwards which expire on various dates
through 2017.
<PAGE> 27
INDEX TO EXHIBITS
The following documents are filed as Exhibits to this report on Form
10-KSB or incorporated by reference herein. Any document incorporated by
reference is identified by a parenthetical referencing the SEC filing which
included such document.
3(a) Certificate of Incorporation [Exhibit 3(a) to the S-18
Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B)]
3(b) Amendment of Certificate of Incorporation [Exhibit 3(a) to
Amendment No. 2 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103)]
3(c) By-Laws [Exhibit 3(b) to the S-18 Registration Statement of the
Company's securities declared effective on April 13, 1987 (File
No. 3-9556B)]
4(a) Form of Unit Warrant [ Exhibit 4(a) to the S-18 Registration
Statement of the Company's securities declared effective on April
13, 1987 (File No. 3-9556B)]
4(b) Amended Form of Underwriter's Option [ Exhibit 4(b) to the S-18
Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B)]
4(c) 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 [Exhibit 4(a) to the Form S-3
Registration Statement of the Company's securities declared
effective on October 29, 1992 (Registration No. 33-50432)]
4(d) 1992 Stock Option Plan [Exhibit 4(e) to the Annual Report on Form
10-K for the year ended December 31, 1992]
4(e) Form of Underwriter's Warrant Agreement (including Form of
Underwriter's Warrant) [Exhibit 4.2 to the SB-2 Registration
Statement dated June 3, 1996 (Registration No. 333-5103)]
4(f) Form of Warrant Certificate [Exhibit 4.1 to Amendment No. 2 to SB-2
Registration Statement dated July 22, 1996 (Registration No.
333-5103)]
4(g) Form of Warrant Agreement [Exhibit 4.3 to Amendment No. 2 to SB-2
Registration Statement dated July 22, 1996 (Registration No.
333-5103)]
4(h) Form of Unit Certificate [Exhibit 4.4 to Amendment No. 2 to SB-2
Registration Statement dated July 22, 1996 (Registration No.
333-5103)]
4(i) Resolutions adopted by the Company's Board of Directors June 18,
1998, amending terms of Warrants and Underwriter's Options
10(a) 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 [Exhibit 10.5 to the Annual Report for
the year ended December 31, 1988 on Form 10-K]
10(b) 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 [Exhibit 10.6 to the Annual Report
for the year ended December 31, 1988 on Form 10-K]
10(c) Certificate of Amendment of Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated July 10, 1991 [ Exhibit
10.12 to the Annual Report for the year ended December 31, 1991 on
Form 10-K]
10(d) Commercial Revolving Loan and Security Agreement dated June 5,
1995, between Farmstead Telephone Group, Inc. and Affiliated
Business Credit Corporation [Exhibit 10.2 to the Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1995]
10(e) Contract for Beijing Antai Communication Equipment Company Ltd.,
dated September 23, 1992 [Exhibit 10.3 to the Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1995]
10(f) 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 [Exhibit 10.1 to the Annual report on Form 10-KSB for
the year ended December 31, 1995]
10(g) Form of Underwriter's Consulting Agreement [ Exhibit 10.1 to the
SB-2 Registration Statement dated June 3, 1996 (Registration No.
333-5103)]
<PAGE> 28
10(h) Letter of Agreement dated June 3, 1996 between Farmstead Telephone
Group, Inc. and Lucent Technologies, Inc. [Exhibit 10.2 to
Amendment No. 1 to SB-2 Registration Statement dated July 22, 1996
(Registration No. 333-5103)]
10(i) Agreement of Lease By and between Tolland Enterprises and
Farmstead Telephone Group, Inc., dated November 5, 1996 [Exhibit
10.1 to the Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996]
10(j) 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 [Exhibit 10.1 to the Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997]
10(k) Third Amended and Restated Revolving Promissory Note, dated June
6, 1997, in the amount of $3,500,000 [Exhibit 10.2 to the
Quarterly Report on Form 10-QSB for the quarter ended June 30,
1997]
10(l) Agreement for Wholesale Financing, dated June 6, 1997, and related
letter agreement dated June 3, 1997 [Exhibit 10.3 to the Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1997]
10(m) 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 [Exhibit 10.1 to
the Annual report on Form 10-KSB for the year ended December 31,
1997]
10(n) 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 [Exhibit 10.2 to the Annual report on Form 10-
KSB for the year ended December 31, 1997]
10(o) FAMS, LLC Promissory Note, dated December 1, 1997 in the principal
amount of $360,000 [Exhibit 10.3 to the Annual report on Form
10-KSB for the year ended December 31, 1997]
10(p) 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
[Exhibit 10.4 to the Annual report on Form 10-KSB for the year
ended December 31, 1997]
10(q) Employment Agreement dated as of January 1, 1998 between Farmstead
Telephone Group, Inc. and George J. Taylor, Jr [Exhibit 10.5 to
the Annual report on Form 10-KSB for the year ended December 31,
1997]
10(r) Supplemental Executive Retirement Plan, effective as of January 1,
1998 [Exhibit 10.6 to the Annual report on Form 10-KSB for the
year ended December 31, 1997]
10(s) ARS Dealer Agreement Between Lucent Technologies and Farmstead
Telephone Group, Inc. For Business Communications Systems
10(t) ARS License Agreement Between Lucent Technologies and Farmstead
Telephone Group, Inc. For Authorized Remarketing Supplier Program
10(u) Letter agreement dated as of August 24, 1998 between Farmstead
Telephone Group, Inc. and First Union National Bank, amending the
Commercial Revolving Loan and Security Agreement dated June 5,
1995, as amended
10(v) Letter agreement dated as of September 29, 1998 between Farmstead
Telephone Group, Inc. and First Union National Bank, amending the
Commercial Revolving Loan and Security Agreement dated June 5,
1995, as amended
10(w) Letter agreement dated as of October 15, 1998 between Farmstead
Telephone Group, Inc.and First Union National Bank, amending the
Commercial Revolving Loan and Security Agreement dated June 5,
1995, as amended
10(x) Letter agreement dated as of January 1, 1999 between Farmstead
Telephone Group, Inc.and First Union National Bank, amending the
Commercial Revolving Loan and Security Agreement dated June 5,
1995, as amended
10(y) Finova Capital Corporation letter agreement dated October 5, 1998
10(z) Finova Capital Corporation letter agreement dated February 4, 1999
21 Subsidiaries of Small Business Issuer
27 Financial data schedule
<PAGE> 29
EXHIBIT 4(i)
Resolutions Adopted by the Company's Board of Directors on June 18, 1998,
Amending Terms of the Warrants and Underwriter Options
RESOLVED, that in connection with the following warrants, namely (i)
Redeemable Common Stock Purchase Warrants (the "IPO Warrants") under the
Warrant Agreement (IPO Warrants) entered into by and between this
Corporation the Warrant Agent, dated September 5, 1996, (the "IPO Warrant
Agreement"), (ii) Class A Redeemable Common Stock Purchase Warrants (the
"Class A Warrants") under the Warrant Agreement (Class A and Class B
Warrants) entered into by and between this Corporation and American
Securities Transfer and Trust, Inc. (the "Warrant Agent"), dated September
5, 1996, (the "Warrant Agreement") and (iii) Class B Redeemable Common
Stock Purchase Warrants (the "Class B Warrants") under the Warrant
Agreement, the Company is hereby authorized to cause to be mailed to each
class of warrant holder of record as of July 10, 1998, a solicitation of
written consents from said warrant holders in lieu of a special meeting, to
approve a unified proposal amending certain provisions of each Warrant
Agreement 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) if the exercise price of
the aforementioned warrants shall be further reduced or increased in any
respect and for whatever reason, the Target Price of the aforementioned
warrants shall be proportionately adjusted, without any further action of
the registered holders, by multiplying the increased or decreased exercise
price by 145%, and
RESOLVED FURTHER, that if the unified proposal is not approved for any
specific class of Warrants, there will be no changes,as proposed above, for
that specific class only, and
RESOLVED FURTHER, that except as hereinbefore provided, the said Warrant
Agreement and IPO Warrant Agreement shall remain materially unchanged and
in full force and effect, and
RESOLVED FURTHER, that the Underwriter Options granted to M.H. Meyerson &
Co. and to Bailey, Martin & Appel in connection with the Corporation's
initial public offering (the "IPO Underwriter Options") are hereby amended
as follows, to become effective only if the IPO Warrant Holders approve the
unified proposal:
Unit option price: to change from $7.50 to $2.90 per Unit
- ------------------
Warrant Target Price: to change from $11.25 to $2.90
- ---------------------
Underlying warrant exercise price: to change from $4.67 to $2.00
- ----------------------------------
Shares purchasable upon exercise of warrant: no change
- --------------------------------------------
RESOLVED FURTHER, that the Representative Warrants granted to Schneider
Securities, Inc. in connection with the Corporation's Standby Underwriting
on or about September 1996 are hereby amended as follows, to become
effective only if the Class A and Class B Warrant Holders approve their
unified proposals:
Unit option price: to change from $6.70 to $2.90 per Unit
- ------------------
Underlying warrant Target Price: see changes to the Class A and B warrants
- --------------------------------
Underlying warrant exercise price: see changes to the Clasas A and B warrants
- ------------------------------------
RESOLVED FURTHER, that the proper officers of this Corporation are hereby
authorized and instructed to do in the name of this Corporation all acts
and things necessary to carry this resolution into effect, including
obtaining the approval of the Warrant holders and causing the related
Warrant Agreements to be amended as deemed necessary by the Company's
Warrant Agent, and,
RESOLVED FURTHER, that the Corporation is authorized to (i) issue formal
notice to the Warrant Holders and solicit a "Consent in Lieu of a Special
Meeting of the Warrant Holders" for the purpose of obtaining the consent of
at least 51% of the Warrant Holders of record, (ii) set July 10, 1998 as
the Record Date for the determination of Warrant Holders entitled to vote
on the above matters, (iii) set the close of business on September 3, 1998
as the final date for votes to be cast, and (iv) in the event that at least
51% of the votes cast are in favor of the above changes and amendments,
then September 3, 1998 is hereby set as the "Effective Date" of said
changes and amendments, and,
RESOLVED FURTHER, that in the event any of the warrant consent
solicitations do not meet the required 51% minimum consent votes by the
Effective Date, then the proper officers of this Corporation are authorized
to extend the Effective Date for a period of up to thiry (30) days from the
Effective Date.
/s/ Robert G. LaVigne
- ---------------------
Robert G. LaVigne
Secretary
EXHIBIT 10(s)
Agreement No.: ARS-NED-99202
- -------------------------------------------------------------------------------
ARS DEALER AGREEMENT BETWEEN
LUCENT TECHNOLOGIES AND
FARMSTEAD TELEPHONE GROUP, INC.
FOR BUSINESS COMMUNICATIONS SYSTEMS
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
1.0 DEFINITIONS 2
2.0 DEALER APPOINTMENT 3
3.0 DEALER RESPONSIBILITIES 4
4.0 INSTALLATION, WARRANTY AND POST-WARRANTY SERVICES 7
5.0 DEALER ORDERS 8
6.0 DEALER CANCELLATION OF ORDERS 9
7.0 PRODUCT, PRODUCT COMPONENTS, AND SOFTWARE LICENSE CHANGES 9
8.0 DEALER PRICES AND DISCOUNTS 9
9.0 DEALER PRICE LIST AND DISCOUNT CHANGES 10
10.0 LUCENT BILLING AND DEALER PAYMENT 11
11.0 DEALER FORECAST AND REPORTS 11
12.0 TITLE AND RISK OF LOSS 11
13.0 INSURANCE 12
14.0 USE OF INFORMATION 12
15.0 LICENSE 13
16.0 TRADEMARKS 14
17.0 PRODUCT WARRANTY 14
18.0 LIMITATION OF LIABILITY 15
19.0 INDEMNITY 16
20.0 INFRINGEMENT 17
21.0 TERMINATION OF AGREEMENT 18
22.0 EFFECTS OF TERMINATION 19
23.0 SURVIVAL OF OBLIGATIONS 20
24.0 FORCE MAJEURE 20
25.0 SECURITY INTEREST 20
26.0 SEVERABILITY 20
27.0 ASSIGNMENT 21
28.0 NON-WAIVER 21
29.0 CHOICE OF LAW AND DISPUTES 21
30.0 NOTICES 22
31.0 ENTIRE AGREEMENT 22
32.0 TERM 22
APPENDIX: 24
ADDENDUM: ENDEAVOR(TM)
ARS OPERATION GUIDE
AGREEMENT NO.: ARS-NED 99202.
ARS DEALER AGREEMENT BETWEEN LUCENT TECHNOLOGIES AND
FARMSTEAD TELEPHONE GROUP, INC.
FOR BUSINESS COMMUNICATIONS SYSTEMS
This ARS Dealer Agreement ("Agreement") is effective as of December
16, 1998 and is between Lucent Technologies Inc. ("Lucent"), a Delaware
corporation, through its Business Communications Systems unit ("BCS"), with
offices at 211 Mount Airy Road, Basking Ridge, New Jersey 07020, and
Farmstead Telephone Group, Inc., ("Dealer"), with offices at 22 Prestige
Park Circle, East Hartford, CT 06108.
WHEREAS, Lucent desires in certain geographic areas of the United
States to have others with the necessary marketing capabilities, integrity
and dedication to End User satisfaction to assist Lucent in marketing
Business Communications Systems parts to End Users;
WHEREAS, Dealer represents that it has the necessary marketing
capabilities, integrity and dedication to sell forecast quantities of
Lucent Business Communications Systems parts to End Users located in
Dealer's Area.
WHEREAS, the parties represent that each will conduct its business in
a manner that reflects favorably on the quality image of itself, the other
party and Lucent's Products;
WHEREAS, Dealer represents that it has or will acquire the service
capabilities necessary to meet Lucent's quality standards for design,
installation, and provision of warranty and maintenance on-site services
for Lucent Products, if Dealer opts to provide such services;
WHEREAS, Lucent has relied upon these Dealer representations and
forecasts as the basis for granting Dealer the right to market its Lucent
Products in the Area;
NOW, THEREFORE, Lucent and Dealer hereby agree as follows:
<PAGE> 1
1.0 DEFINITIONS
- ----------------
For the purposes of this Agreement, the following terms and their
definitions shall apply:
1.1 "Area" means the specific geographic area in which Dealer has
agreed to market Lucent Products in accordance with this Agreement. The
specific geographic areas that comprise the Area are identified by city,
state, county and zip code or other appropriate description in Appendix:
Area.
1.2 "Dealer Service" means one or more of those services Dealer may
choose to perform itself for Lucent Products in the Area. Dealer Services
include system configuration to the End User, installation, warranty, and
provision of post-warranty on-site maintenance.
1.3 "End User" means a third party to whom Dealer markets or sells
Lucent Products within the Area for use by such third party in the ordinary
course of its business and not for resale; End User does not include any
Lucent BCS Global Account or any office, department, agency, or defense
installation of the United States Government except as allowed for in
separate agreements with Lucent Technologies.
1.4 "Lucent Product" means an item of Lucent equipment model in an
Appendix to this Agreement that Dealer has purchased directly from Lucent
through its BCS Distribution Development and Management group or an order
source within Lucent designated by the BCS Distribution Development and
Management group (collectively, "DDM") and that carries the standard Lucent
warranty when resold to an End User. Each Lucent Product consists of one or
more Product Components. The set of Product Components that may be used to
equip a Lucent Product is determined solely by Lucent, which has the right
to reject any order placed by Dealer that does not reflect rational
complete Lucent Products or reasonable inventory requirements.
1.5 "Lucent Service" means one or more of those services provided by
Lucent that Dealer may choose to resell as a Lucent Service Sales Agent,
including system configuration, installation, provision of post-warranty
and on-site and remote maintenance service, and Professional Services.
Lucent Service also includes post-warranty remote maintenance service
separate from post-warranty on-site maintenance service, which Dealer may
offer in conjunction with Dealer Service. Lucent Services, including the
prices at which they may be offered to end users and the commissions
payable on their sale, and the price at which Lucent will provide remote
maintenance service as a subcontractor for Dealer Service are described and
identified in the ARS Operational Guide.
1.6 "Product Component" means an item of equipment identified by a
Lucent equipment price element code or material code. To the extent that a
Product Component contains or consists of any firmware or software, an End
User shall have the right to use such firmware or software in accordance
with Section 15.0.
<PAGE> 2
1.7 "Software" means any computer program that is composed of
routines, subroutines, instructions, processes, algorithms, and like ideas
or know-how, owned by or licensed to Lucent and or one or more of its
suppliers, regardless of the medium of delivery, including revisions,
patches and updates of the same.
1.8 "Territory" means the United States of America, including the
District of Columbia but excluding 1) the Commonwealth of Puerto Rico and
all other territories, protectorates and possessions of the United States
of America, and 2) the geographical areas defined as the "Primary Area of
Responsibility" for Cincinnati Bell Telecommunication Services Inc. (the
operating area of Cincinnati Bell Telephone Company in the states of Ohio,
Indiana and Kentucky), and Progressive Communications of Hawaii, Inc. (the
state of Hawaii).
2.0 DEALER APPOINTMENT
- -----------------------
2.1 Lucent hereby appoints Dealer, and Dealer hereby accepts an
appointment, to be an authorized Lucent Dealer for the limited purpose of
marketing and selling the Lucent Product listed in the Appendix to End
Users within the Area and the Territory in accordance with the terms and
conditions of this Agreement. Dealer's authorized marketing location (s)
and shipping location (s) are set forth in the Appendix. Lucent's
appointment of Dealer is predicated on Dealer's agreement to market the
Lucent Product in the Area and to achieve the Area forecast submitted
pursuant to Section 11.0 of this Agreement. Lucent Products installed
outside the Area will not be considered by Lucent when determining whether
Dealer has achieved its Area forecast submitted pursuant to Section 11 of
this Agreement. Dealer's sales of Lucent Product Components outside the
Area (unless specifically permitted by this Section 2. 1), Dealer's failure
to limit its marketing efforts and sales of Lucent Product Components to
authorized locations or authorized End-Users, or Dealer's failure to
achieve levels of sales acceptable to Lucent in the Area shall, among
others, be grounds for termination or nonrenewal of this Agreement.
2.2 Dealer's sales of Lucent Products and Lucent Product Components
to other resellers shall be grounds for termination or nonrenewal of this
Agreement. Dealer agrees that it has no exclusive right to market the
Lucent Products set forth in the Appendix hereto in the Area or Territory,
and that no franchise is granted to Dealer herein. No payment of any fee or
equivalent charge is required of Dealer by Lucent as a condition of this
Agreement.
2.3 Lucent expressly reserves both the right to contract with others
to market Lucent Products in the Territory and the Area and to itself
directly engage in such marketing.
2.4 The relationship of the parties under this Agreement shall be,
and shall at all times remain, one of independent contractors and not that
of franchiser and franchisee, joint venturers, or principal and agent.
Neither party shall have any authority to assume or create obligations on
the other's behalf with respect to Lucent Products, and neither party shall
take any action that has the effect of creating the appearance of its
having such authority.
<PAGE> 3
2.5 All persons furnished by Dealer shall be considered solely
Dealer's employees, and Dealer shall be solely responsible for payment of
all their unemployment, Social Security and other payroll taxes including
contributions from Dealer when required by law.
2.6 Dealer may market Lucent Products only from the authorized
marketing locations set forth in the Appendix. During the term of this
Agreement, no new or additional Dealer marketing location(s) may be
established in or outside of the Area to market Lucent Products without
prior written authorization from Lucent.
2.7 Dealer may not market or sell Lucent Products to any Lucent BCS
Global Account, or any office, department, agency, or defense installation
of the United States Government except as allowed for in a separate
agreement with Lucent, and will use its best efforts to ensure that Dealer
does not market to present direct customers of Lucent who are under
warranty or with existing maintenance contracts for Lucent products or to
any entity that is considering a proposal from Lucent for products or
maintenance services, except that Dealer may respond to a request directed
to Dealer for a competitive bid, proposal, or quotation even if Lucent is
also responding.
3.0 DEALER RESPONSIBILITIES
- ----------------------------
3.1 Dealer has previously submitted to Lucent an "Authorized Dealer
Application". Dealer certifies and warrants that, to the best of its
knowledge, such information is current, accurate, complete and not
misleading. Dealer also agrees during the term of this Agreement to notify
Lucent immediately in writing and describe in detail any significant or
material change in such information.
3.2 Dealer agrees to devote its best efforts to promote and market
Lucent Products to End-Users within the Area. Dealer also warrants that it
will conduct its business in a manner that reflects favorably on the
quality image of Lucent Products and on the good name, goodwill or
reputation of Lucent and will not employ deceptive, misleading or unethical
practices that are or might be detrimental to Lucent or its Products.
3.3 Dealer shall not purchase or otherwise obtain Lucent Products
for resale from any source other than DDM unless a Lucent Product is not
available from BCS on a timely basis, in which case Dealer may purchase
that Lucent Product from the Lucent Catalogs, provided that such purchases
are only to meet a specific customer need. Unless agreed to in writing as
stated in Section 3 1.0, Dealer's purchase or resale of an unused product
originally manufactured by Lucent that, if purchased from DDM, would be a
Lucent Product under this Agreement, shall be grounds for termination of
this Agreement as stated in Section 21.2.
3.4 Dealer shall provide and consistently maintain a staff of
adequately trained and competent sales personnel, knowledgeable of the
specifications, features and advantages of the Lucent Products. Such
personnel shall be made aware of the restrictions on use of Lucent's
Information as set forth in Section 14.0. All marketing or Lucent Product
training requested by the Dealer and offered by Lucent, will be furnished
to Dealer at Lucent's standard rates, terms and conditions.
<PAGE> 4
3.5 If Dealer chooses to provide Dealer Service, Dealer shall
provide and consistently maintain a staff of services personnel, trained on
the Lucent Products to Lucent's specifications. Such personnel shall be
made aware of the restrictions on use of Lucent's Information as set forth
in Section 14.0. All services training that Lucent requires Dealer
personnel to undergo, or other services training requested by the Dealer
and offered by Lucent, will be furnished to Dealer at Lucent's standard
rates, terms and conditions. If Dealer has subcontracted with Lucent to
perform all or part of Dealer Service to an End User and Dealer installs
unused product (s) manufactured by Lucent but not purchased from DDM as
part of that End User's system, in addition to any other remedies available
to Lucent, Lucent may terminate any Dealer licenses to use Lucent
maintenance software and may also terminate its subcontracts with Dealer to
perform Dealer Service. If Dealer has sold a Lucent Product and a Lucent
Post-Warranty Maintenance service contract to an End User, Dealer will
advise such End User that addition of unused product (s) to the Lucent
Product system may void Lucent's warranty and cause Lucent to terminate the
service contract.
3.6 Dealer agrees to purchase and maintain a working Lucent system
either as a demonstration model or as Dealer's primary telecommunications
system at each of Dealer's principal marketing locations.
3.7 n/a
3.8 Dealer shall inform End Users of the Services available from
Dealer.
3.9 Dealer shall report promptly to Lucent all known or suspected
Lucent Product defects or safety problems and keep Lucent informed of End
User complaints with respect to Lucent Products or Services.
3.10 Dealer shall provide Lucent reasonable access to Dealer's
premises during normal business hours to inspect and verify Dealer
performance of its obligations under this Agreement, including the right to
inspect and audit Dealer's records relating to Lucent Product transactions
in and out of Dealer's Area, Dealer's purchases and sales of unused
products, Distribution Functions and Dealer Services.
3.11 Dealer shall comply with all applicable requirements of
federal, state and local laws, ordinances, administrative rules and
regulations, including, by way of illustration and not limitation, all
requirements of Part 68 of the Federal Communication Commission's (FCC)
Rules and Regulations and the Federal Export Administration Act of 1969, 50
U.S.C. app. Sections 2401-2414.
<PAGE> 5
3.12 To ensure timely delivery to End Users, Dealer shall maintain,
subject to availability from Lucent, an adequate inventory of Lucent
Products. Upon request, Dealer shall make available to Lucent the status of
Dealer's current inventory of Lucent Product Components.
3.13 Dealer shall have the capability of providing End Users
reasonable financing alternatives to facilitate the procurement of Lucent
Products and Dealer Services. Dealer shall furnish evidence of such
capability to Lucent upon request.
3.14
a. To ensure fulfillment of Lucent's Product and Software
warranties to End Users, to ensure End User safety, to ensure End
Users receive the latest information concerning the use of Lucent
Products and enhancements thereto, to maintain End User satisfaction,
and to assist Lucent in tracking equipment maintenance obligations
and materiel accountability, Dealer agrees to maintain and make
available to Lucent on reasonable request an accurate and complete
list of Dealer's Lucent Product and Software End Users by name,
installation address, the Lucent Product Components furnished to each
End User, the transaction date, and (for End Users who elect to
install their own systems only), all serial numbers associated with
the new Lucent Products, Software or new Lucent Product Components.
The obligation to maintain and make such information available to
Lucent shall survive expiration or termination of this Agreement..
Lucent will use this information solely for the purposes set forth in
this Section 3.14.
b. If Lucent is to install the Products, Dealer shall give the
information described in 3.14 a., above, to the Lucent Branch where
the End User is located, in the agreed format, as soon as Dealer's
order process is completed. This will enable the customer to receive
the Lucent Warranty on the new Lucent Products and Software, and if
the customer has a Post Warranty Maintenance contract and has like
products, the new Lucent Products will automatically be added to that
contract when the Warranty expires.
3.15 Dealer shall keep accurate accounts, books and records relating
to the business of Dealer with respect to Lucent Products and Dealer
Services in accordance with generally accepted commercial and business
accounting principles and practices that are sufficient for Lucent to
ascertain Dealer's compliance with its obligations under this Agreement.
3.16 Dealer agrees to participate in Lucent's Customer Satisfaction
Surveys. Lucent may conduct performance reviews of all Dealer
responsibilities.
3.17 By the fifth (5th) business day of each month, in a format to
be provided by Lucent to Dealer, Dealer will submit a point-of-sale report
of sales made the previous month, by ZIP code, year, month, Pecode,
quantity.
<PAGE> 6
4.0 INSTALLATION, WARRANTY AND POST-WARRANTY SERVICES
- ------------------------------------------------------
4.1 Lucent agrees to furnish any Lucent Services required by End
Users purchasing Lucent Products from Dealer, as Dealer requests, until
Dealer's installation and maintenance personnel have completed training to
the satisfaction of Lucent. During such interim period, Dealer agrees to
propose Lucent, and only Lucent, Services in connection with each End User
purchase of Lucent Products under this Agreement, and Dealer will apply for
appointment as a Lucent Service Sales Agent. Connection of unused product
(s) manufactured by Lucent to the Lucent Product system may void Lucent's
warranty to such End User and cause Lucent to terminate the Lucent Services
contract with such End User.
4.2 After such training has been completed, Services may be
furnished by the Dealer for Lucent Products under this Agreement, as
required by End Users purchasing such Lucent Products. To ensure Dealer
provision of high quality Services to End Users, Dealer shall: (i) perform
Services directly and not through a non-Lucent independent contractor or
agent except with Lucent's specific permission; and (ii) perform such
Services competently and in accordance with any applicable Lucent
standards. The indemnity obligations of Dealer under Section 19.1 shall
apply to any Services furnished by Dealer to End-Users. If Dealer desires
to have Lucent perform certain Services for Dealer's End Users, Dealer may
continue to function as a Lucent Service Sales Agent.
4.3 Lucent's appointment of Dealer to market Lucent Products
hereunder is predicated on Dealer's agreement that it will hold itself out
as authorized by Lucent to provide Services only as to Lucent Products
hereunder and will, to the sole satisfaction of Lucent, clearly distinguish
its authorization to provide Services for such Lucent Products and its lack
of authorization to provide Services for other Lucent-manufactured
equipment, unless such authorization is provided by written agreement with
Lucent. Dealer also agrees to inform End Users of such distinction in
Dealer's marketing (including brochures or other printed or written
materials) of Lucent Products and of any other Lucent equipment. In
addition to any other events of termination set forth in this Agreement,
Dealer's failure to distinguish between its authorization to offer Services
as to Lucent Products and its lack of authorization to offer Services as to
other Lucent equipment or to inform End Users of such distinction shall
entitle Lucent to terminate this Agreement upon written notice to Dealer.
5 Dealer may incorporate Lucent's remote maintenance support features
in its Services Offers to End-Users. Lucent will serve as Dealer's
subcontractor for such remote maintenance. NO LICENSE IS GRANTED, AND
NO TITLE OR OTHER OWNERSHIP RIGHTS IN LUCENT'S INTELLECTUAL PROPERTY
RELATED TO LUCENT'S PROVISION OF REMOTE MAINTENANCE SUPPORT SHALL
PASS TO DEALER UNDER THIS AGREEMENT OR AS A RESULT OF ANY PERFORMANCE
HEREUNDER. Dealer agrees to provide Lucent with accurate information
on End User port capacity, software attachments, and other
information required in order for Lucent to invoice Dealer accurately
for such remote support. Failure to provide such accurate information
or to update it on a timely basis shall entitle Lucent to terminate
this Agreement upon written notice to Dealer. Except as
<PAGE> 7
agreed to in writing as stated in Section 3 1.0, connection of unused
product (s) manufactured by Lucent but not purchased from DDM as part
of an End User's system may, in addition to any other remedies
available to Lucent, permit Lucent to terminate any Dealer licenses
to use Lucent maintenance software and also terminate its subcontract
(s) with Dealer to perform Dealer Service.
5.0 DEALER ORDERS
- ------------------
5.1 Orders for Lucent Products submitted by Dealer shall refer to
this Agreement's identification number and shall contain the information
necessary for proper delivery and invoicing of Product Components
including, without limitation, the date of the order, a description of and
the price element code for Product Components to be furnished and any
shipping instructions. All orders submitted by Dealer shall be deemed to
incorporate and are subject to the terms and conditions of this Agreement
as well as any supplemental terms and conditions agreed to in a writing
signed by the authorized representatives of both parties. All other terms
and conditions contained on any order form or correspondence originated by
Dealer are rejected and shall have no effect. Lucent may require that
Product Components be ordered only in factory-packed quantities or in
minimum order amounts. Lucent reserves the right to reject any order or
portion thereof, which right will not be exercised unreasonably..
5.2 Lucent will ship Lucent Products ordered by Dealer only to the
authorized shipping location(s) within the Area specified in the Appendix:
Addresses, or only if Lucent is installing the Products, to the premises of
an End User within the Area.
<PAGE> 8
6.0 DEALER CANCELLATION OF ORDERS
- ----------------------------------
Dealer may, upon prior written notice to Lucent, cancel any order or
portion thereof except with respect to Lucent Product that have already
been delivered by Lucent to a carrier for shipment to Dealer. Dealer agrees
to pay to Lucent, upon any such cancellation, a liquidated amount equal to
fifteen percent (15%), if the canceled order is not for a configured system
or systems, or twenty percent (20%), if the canceled order is for a
configured system or systems, of the purchase price of the canceled portion
of the order to compensate Lucent for its costs and expenses associated
with such cancellation. If an order is delayed or suspended for more than
two months at the request of, or for reasons attributable to, Dealer, such
order shall be considered as having been canceled and will be subject to
the cancellation charges set forth in this Section.
7.0 PRODUCT, PRODUCT COMPONENTS AND SOFTWARE LICENSE CHANGES
- -------------------------------------------------------------
7.1 Lucent may without the consent of Dealer, but with thirty (30)
days advance written notice to Dealer, delete any Lucent Product from the
Appendix.
7.2 Lucent may, at any time without advising Dealer, make changes in
the Lucent Products or modify the drawings and specifications relating
thereto, or substitute Lucent Products of later design to fill an order,
provided the changes, modifications or substitutions under normal and
proper use do not adversely impact upon form, fit or function or are
recommended by Lucent to enhance safety. Lucent may, at any time with ten
days advance written notice to Dealer, change the terms of its End User
Software License.
8.0 ARS DEALER PRICES AND DISCOUNTS
- ------------------------------------
8.1 The prices applicable to Dealer orders requesting shipment
within Lucent's then current Lucent Product shipment intervals shall be
determined in accordance with: (i) Lucent's Dealer List prices in effect on
the date an order is accepted by Lucent (i.e., the date it is entered in
Lucent's order processing system); (ii) the ARS discount schedule in effect
on the date the order is accepted by Lucent; and (iii) the provisions of
this Section 8.0. Lucent's ARS discount and rebate schedules are contained
in the ARS Operational Guide. Dealer orders requesting delayed shipment
(i.e., shipment on dates beyond Lucent's then current Lucent Product
shipment intervals) shall be subject to price increases and discount
decreases that become effective before shipment.
8.2 The discount applicable to Dealer orders placed, and not
subsequently canceled, during the term of this Agreement and any subsequent
term of a substantially similar Agreement, will be determined based on the
then effective discount schedule and the actual dollar value, based on
Dealer List Prices, of all orders placed and not subsequently canceled
during the immediately preceding quarter. The otherwise applicable discount
percentage will be reduced by an amount set forth in the then effective
discount schedule for the quarter following any quarter
<PAGE> 9
in which Lucent learns of Lucent Product sales by Dealer not in conformance
with the terms of Section 2.1 of this Agreement.
8.3 Lucent may verify or audit Dealer's Lucent Product and Lucent
Product Component sales records or rebate calculations and request copies
of invoices, shipping documents, payment records and the like in connection
with such audits, which requests will not be unreasonably refused.
9.0 DEALER PRICE LIST AND ARS DISCOUNT CHANGES
- -----------------------------------------------
9.1 Lucent may decrease Dealer list prices or increase discounts or
rebates in the ARS discount or rebate schedules without advance notice to
or the consent of Dealer. Lucent agrees to provide written notice of any
such price or discount changes and the effective date thereof. Lucent
agrees to provide to Dealer on previously ordered Lucent Products either a)
a recomputation of the amounts payable for all orders accepted by Lucent
within sixty (60) days prior to the effective date of the applicable price
decrease or discount increase, or b) a recomputation of Dealer charges
based on actual inventory held by Dealer at Dealer's authorized shipping
location on the date Dealer receives notification of the applicable price
decrease or discount increase, whichever is greater. Lucent reserves the
right to audit associated inventory levels. The difference between the
recomputed amounts and previously invoiced amounts will be reflected as a
credit to Dealer's account. Lucent also may institute promotional price
decreases or discount increases at any time under such terms and conditions
as Lucent in its sole discretion shall determine are appropriate.
Promotional prices and discounts shall apply only during the period
specified by Lucent and there shall be no recomputation of amounts payable
by Dealer for orders placed prior to such period.
9.2 Lucent may, without the prior consent of Dealer, increase Dealer
list prices or decrease discounts or rebates in the Dealer discount or
rebate schedules provided Lucent furnishes Dealer written notice of any
such changes thirty (30) days in advance of the effective date.
9.3 Unless expressly stated to the contrary, Dealer list prices do
not include taxes or Lucent's charges for related domestic transportation
or storage services. Lucent's Dealer list prices do include its standard
packing for domestic shipment. All Lucent Product prices are F.O.B.
Lucent's shipping point. Unless Dealer furnishes Lucent a valid tax
exemption certificate, Dealer shall pay all applicable taxes, however
designated, resulting from this Agreement or any activities hereunder
(exclusive of any tax based on or measured by net income).
<PAGE> 10
10.0 LUCENT BILLING AND DEALER PAYMENT
- ---------------------------------------
Invoices for Lucent Products will be sent by Lucent upon shipment, or
as soon thereafter as practicable. Unless Dealer is otherwise notified by
Lucent in writing, Dealer shall pay the invoiced amount in full on receipt
of Lucent's invoice. Payments not received within thirty (30) days of the
invoice date may, at Lucent's option, incur a late payment charge that
shall be computed at the rate of one and one-half percent (1-1/2%) of the
overdue amount per month or the maximum lawful rate, whichever is lower.
The amount of Dealer credit or terms of payment may be changed or credit
withdrawn by Lucent at any time upon notice to Dealer in writing, unless
Dealer provides Lucent with adequate assurance of performance, as that
phrase is used in Section 2-609 of the Uniform Commercial Code as adopted
in Delaware within ten days of any such written notice.
11.0 DEALER FORECAST AND REPORTS
- ---------------------------------
11.1 Upon execution of this Agreement, Dealer shall submit to Lucent
a forecast of total Lucent Product orders to be placed by Dealer during the
contract term. The forecast must specify, for each quarter, the total
dollar order volume (based on Dealer Price List prices) to be ordered. In
the event of price increases or discount decreases, as described in Section
9.2 hereof, Dealer may amend its current forecast within 30 days of the
receipt of written notice of such price changes.
11.2 Lucent may reject any forecast submitted by Dealer if, in
Lucent's sole judgment, such forecast does not project either: (1) the
level of Lucent Product orders Lucent reasonably requires of Dealer to
achieve its marketing objectives in the Area; or (2) a realistic assessment
of Dealer's potential successful marketing opportunities in the Area during
the forecast period. Lucent shall notify Dealer in writing within thirty
(30) days of receipt of Dealer's forecast if Lucent has rejected such
forecast or it will be deemed to have been accepted by Lucent.
11.3 Dealer shall submit the forecast of Lucent Product orders in a
format specified by Lucent.
12.0 TITLE AND RISK OF LOSS
- ----------------------------
12.1 Title (except for firmware and software) and risk of loss or
damage to Lucent Products shall pass to Dealer: (i) at the time Lucent or
its supplier delivers possession of the Lucent Products to a carrier; or
(ii) if there is no carrier, at the time Dealer takes possession of the
Lucent Products at Lucent's or its supplier's plant or warehouse or other
facility. Claims for shortages or for merchandise damaged during shipment
must be filed with the freight carrier by Dealer. Lucent will cooperate
with Dealer but will not assume responsibility for the processing or
collection of claims. Dealer may make no deductions from invoices for
claims against a carrier.
<PAGE> 11
12.2 TO BE EFFECTIVE, DEALER REJECTION OR REVOCATION OF ACCEPTANCE
OF NONCONFORMING GOODS MUST BE MADE BY WRITTEN NOTICE TO LUCENT WITHIN TEN
(10) DAYS AFTER DELIVERY. LUCENT PRODUCTS REJECTED OR NOT ACCEPTED BY
DEALER MUST BE RETURNED WITHIN THIRTY (30) DAYS IN THEIR ORIGINAL PACKAGING
IN ACCORDANCE WITH LUCENT'S INSTRUCTIONS. A restocking charge in the amount
of twenty percent (20%) of the purchase price will apply to returns,
accepted by Lucent, of products ordered in error by Dealer.
13.0 INSURANCE
- ---------------
Dealer shall maintain, during the term of this Agreement, all
insurance and bonds required by any applicable law, including but not
limited to: (1) workers' compensation insurance as prescribed by the laws
of all states in which work pursuant to this Agreement is performed; (2)
employer's liability insurance with limits of at least $1 million per
occurrence; and (3) comprehensive personal liability insurance coverage
(including products liability coverage and comprehensive automobile
liability coverage) with limits of at least $1 million for bodily injury,
including injury to any one person and $1 million on account of any single
occurrence, and $1 million for each occurrence of property damage, or in
lieu of such limits, bodily injury and property damage liability insurance
(including products liability and comprehensive automobile coverage) with a
combined single limit of at least $2 million per occurrence. Dealer shall
name Lucent as an Additional Insured on all such policies.. Upon request of
Lucent, Dealer shall furnish adequate proof of such insurance.
14.0 USE OF INFORMATION
- ------------------------
All technical and business information, Dealer List prices, ARS
discounts or rebates, and trade secrets in any form, furnished to Dealer
under or in contemplation of this Agreement and identified as or known by
Dealer to be proprietary to Lucent (all hereinafter designated
"Information") shall remain the property of Lucent. Unless Lucent otherwise
expressly agrees in writing, such Information: (i) shall be treated in
confidence by Dealer and used by Dealer only for the purposes of performing
Dealer's obligations under this Agreement; (ii) shall not be disclosed to
anyone, except to employees of Dealer and End Users to whom such disclosure
is necessary to the use for which rights are granted hereunder; (iii) shall
not be reproduced or copied in whole or in part, except as necessary for
use as authorized in this Agreement; and (iv) shall, together with any
copies thereof, be returned, be destroyed or, if recorded on an erasable
storage medium, be erased when no longer needed or when this Agreement
terminates, whichever occurs first. Any copies made as authorized herein
shall contain the same copyright notice or proprietary notice or both that
appear on the Information copied. The above conditions do not apply to any
part of the Information (i) which is or becomes known to the receiving
party or its affiliates free of any obligation to keep same in confidence;
(ii) which is or becomes generally available to the public without breach
of this Agreement; or (iii) which is developed by the receiving party or
its affiliates. The obligation of confidentiality and restrictions on use
of Information shall exist for a period of (i) five (5) years after the
termination of this Agreement, or (ii) ten (10) years after the receipt of
such Information, whichever is longer.
<PAGE> 12
All technical and business information and trade secrets in any form,
furnished to Lucent under or in contemplation of this Agreement and
identified as or known by Lucent to be proprietary to Dealer (all
hereinafter designated "Information") shall remain the property of Dealer.
Unless Dealer otherwise expressly agrees in writing, such Information: (i)
shall be treated in confidence by Lucent and used by Lucent only for the
purposes of performing Lucent's obligations under this Agreement; (ii)
shall not be disclosed to anyone, except to employees of Lucent and End
Users to whom such disclosure is necessary to the use for which rights are
granted hereunder; (iii) shall not be reproduced or copied in whole or in
part, except as necessary for use as authorized in this Agreement; and (iv)
shall, together with any copies thereof, be returned, be destroyed or, if
recorded on an erasable storage medium, be erased when no longer needed or
when this Agreement terminates, whichever occurs first. Any copies made as
authorized herein shall contain the same copyright notice or proprietary
notice or both that appear on the Information copied. The above conditions
do not apply to any part of the Information (i) which is or becomes known
to the receiving party or its affiliates free of any obligation to keep
same in confidence; (ii) which is or becomes generally available to the
public without breach of this Agreement; or (iii) which is developed by the
receiving party or its affiliates. The obligation of confidentiality and
restrictions on use of Information shall exist for a period of (i) five (5)
years after the termination of this Agreement, or (ii) ten (10) years after
the receipt of such Information, whichever is longer.
15.0 LICENSE
- -------------
15.1 Upon delivery of Lucent Product firmware and software to
Dealer, Lucent grants to Dealer a personal and non-exclusive right to use
such licensed materials ("Licensed Materials") in the Area and Territory
solely to fulfill its duties and obligations under this Agreement. NO TITLE
OR OTHER OWNERSHIP RIGHTS IN INTELLECTUAL PROPERTY OR OTHERWISE IN THE
LICENSED MATERIAL OR ANY COPY THEREOF SHALL PASS TO DEALER UNDER THIS
AGREEMENT OR AS A RESULT OF ANY PERFORMANCE HEREUNDER.
15.2 Dealer agrees: (i) to make only those copies of Software
necessary for its use under this Agreement and assure that such copies
contain any proprietary or copyright notice appearing on the Software being
copied; (ii) not to reverse engineer, decompile or disassemble the Licensed
Materials or otherwise attempt to learn the source code, structure,
algorithms or ideas underlying the Licensed Materials; (iii) not to export
the Licensed Materials out of the Territory, and (iv) not to use the
Software directly for any third person or permit any third person to use
the Software except as necessary under this Agreement.
15.3 Lucent further grants to Dealer the right to furnish Licensed
Materials to End Users coincident with the sale of Lucent Products
utilizing such Licensed Materials, provided, however, that unless the
Licensed Materials come with a limited use license, which may be in the
form of a shrink-wrap (break-the-seal) agreement, provided by Lucent,
Dealer obtains agreement
<PAGE> 13
in writing from the End User, before or at the time of furnishing each copy
of Licensed Materials, in the form set forth in an Appendix to this
Agreement.
16.0 TRADEMARKS
- ----------------
16.1 Lucent grants Dealer permission to utilize certain Lucent
designated trademarks, insignia, and symbols ("Marks") in Dealer's
advertising and promotion of Lucent Products furnished hereunder, provided
such use conforms to Lucent's standards and guidelines. Dealer shall not do
business under any Mark or any derivative or variation thereof, and Dealer
shall not directly or indirectly hold itself out as having any relationship
to Lucent or its affiliates other than as an "Authorized Lucent ARS Dealer"
or other Lucent approved term. Except as provided in Section 22.2.2, Marks
may only be used by Dealer to advertise and promote the Lucent Products
during the term of this Agreement. Marks are not to be used by Dealer in
any way to imply Lucent's endorsement of products, licensed materials or
services not furnished hereunder, such as used or unused products
originally manufactured by Lucent. Except as agreed in writing as stated in
Section 3 1.0 Marks are not to be used by Dealer in advertising or
marketing materials, including print, radio, television, broadcast
facsimile, telemarketing or Internet websites, that reach End User
prospective customers outside Dealer's Area. Such uses of Marks will be
cause for immediate termination of this Agreement. Dealer will not alter or
remove any Mark applied to Lucent Products without the prior written
approval of Lucent. Nothing in this Agreement creates in Dealer and Dealer
agrees not to assert, any rights in the Marks.,
16.2 All Dealer-initiated advertisements or promotions using Marks
or any reference thereto, whether under a promotional allowance program or
otherwise, shall receive to prepublication review and approval by Lucent
with respect to, but not limited to context, style, appearance,
composition, timing and media.
16.3 This Agreement does not give Dealer any rights to use the logo
or trademark of AT&T Corp. Such rights cannot be obtained under this
Agreement or any other Agreement with Lucent Technologies Inc.
17.0 PRODUCT WARRANTY
- ----------------------
17.1 Dealer may, but is not required to, provide warranties and
remedies in addition to but not less than the warranties and remedies set
forth in Section 17.2. Dealer shall inform the End User of Lucent's
Limitation of Liability as set forth in Section 18 of this Agreement, in a
reasonable manner. Lucent hereby warrants to Dealer the title of the Lucent
Products purchased under this Agreement. This warranty of title is the only
warranty provided to Dealer.
17.2 Dealer shall, before or at the time of delivery of Lucent
Products, advise an End User of the following:
(i) that the Lucent Products may contain remanufactured parts
that are equivalent to new in performance and appearance;
<PAGE> 14
(ii) that there is a toll fraud exclusion in Lucent's
warranty, with a specific reference to the words of that exclusion
and an explanation of the meaning of those words;
(iii) that the Lucent Products are warranted by Lucent to End
User on the Delivery or In-Service Date, whichever is applicable, and
for a period of one (1) year thereafter to operate in accordance with
Lucent's standard published specifications and if any Lucent Products
are not operational during the warranty period, that the End User
shall notify the Dealer who at its option will replace or repair
those Lucent Products without charge. Replaced Lucent Products become
the property of Dealer; and upon their return to Lucent by Dealer,
Lucent will replace or repair those Lucent Products at no charge to
the Dealer or issue a credit to the account of the Dealer;
(iv) THAT LUCENT AND ITS AFFILIATES AND SUPPLIERS MAKE NO
OTHER WARRANTIES EXPRESS OR IMPLIED AND SPECIFICALLY DISCLAIM ANY
WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A PARTICULAR PURPOSE.
17.3 EXCEPT FOR THE WARRANTY OF TITLE TO DEALER AND THE LIMITED
PRODUCT WARRANTY TO DEALER'S END USERS REFERENCED IN THIS SECTION, LUCENT,
ITS AFFILIATES AND SUPPLIERS MAKE NO , WARRANTIES EXPRESS OR IMPLIED AND
SPECIFICALLY DISCLAIM ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A
PARTICULAR PURPOSE.
17.4 The indemnity obligations of Dealer under Section 19.1 shall
apply to Dealer's provision of End User warranty assistance services and to
any failure to refer to and explain the toll fraud exclusion to an End
User.
18.0 LIMITATION OF LIABILITY
- -----------------------------
EXCEPT FOR PERSONAL INJURY AND EXCEPT FOR THE LIABILITY EXPRESSLY
ASSUMED BY LUCENT UNDER SECTIONS 19 AND 20 OF THIS AGREEMENT, THE LIABILITY
OF LUCENT AND ITS PARENT OR AFFILIATES FOR ANY CLAIMS, LOSSES, DAMAGES OR
EXPENSES FROM ANY CAUSE WHATSOEVER (INCLUDING CLAIMS OF INFRINGEMENT AND
ACTS OR OMISSIONS OF THIRD PARTIES) REGARDLESS OF THE FORM OF ACTION,
WHETHER IN CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE LESSER OF THE
DIRECT DAMAGES PROVEN OR THE REPAIR, REPLACEMENT COSTS (INCLUDING THE COSTS
OF COVER) OR PURCHASE PRICE OF THE PRODUCTS OR SERVICE THAT DIRECTLY GIVES
RISE TO THE CLAIM. IN NO EVENT SHALL LUCENT OR ITS PARENT OR AFFILIATES BE
LIABLE TO DEALER OR TO ANY OTHER COMPANY OR ENTITY FOR ANY INCIDENTAL,
RELIANCE, CONSEQUENTIAL OR ANY OTHER INDIRECT LOSS OR DAMAGE (INCLUDING
LOST PROFITS OR REVENUES OR CHARGES FOR
<PAGE> 15
COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED
THROUGH OR CONNECTED TO PRODUCTS ["TOLL FRAUD"]) ARISING OUT OF THIS
AGREEMENT. NO ACTION OR PROCEEDING AGAINST LUCENT MAY BE COMMENCED MORE
THAN TWELVE (12) MONTHS AFTER THE CAUSE OF ACTION ACCRUES. THIS SECTION
SHALL SURVIVE FAILURE OF AN EXCLUSIVE REMEDY.
EXCEPT FOR PERSONAL INJURY, THE LIABILITY OF DEALER AND ITS PARENT OR
AFFILIATES FOR ANY CLAIMS, LOSSES, DAMAGES OR EXPENSES FROM ANY CAUSE
WHATSOEVER (INCLUDING CLAIMS OF INFRINGEMENT AND ACTS OR OMISSIONS OF THIRD
PARTIES) REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT OR
OTHERWISE, SHALL NOT EXCEED THE LESSER OF THE DIRECT DAMAGES PROVEN OR THE
REPAIR, REPLACEMENT COSTS (INCLUDING THE COSTS OF COVER) OR PURCHASE PRICE
OF THE PRODUCTS OR SERVICE THAT DIRECTLY GIVES RISE TO THE CLAIM. IN NO
EVENT SHALL DEALER OR ITS PARENT OR AFFILIATES BE LIABLE TO LUCENT OR TO
ANY OTHER COMPANY OR ENTITY FOR ANY INCIDENTAL, RELIANCE, CONSEQUENTIAL OR
ANY OTHER INDIRECT LOSS OR DAMAGE (INCLUDING LOST PROFITS OR REVENUES OR
CHARGES FOR COMMON CARRIER TELECOMMUNICATION SERVICES OR FACILITIES
ACCESSED THROUGH OR CONNECTED TO PRODUCTS ["TOLL FRAUD"]) ARISING OUT OF
THIS AGREEMENT. NO ACTION OR PROCEEDING AGAINST DEALER MAY BE COMMENCED
MORE THAN TWELVE (12) MONTHS AFTER THE CAUSE OF ACTION ACCRUES. THIS
SECTION SHALL SURVIVE FAILURE OF AN EXCLUSIVE REMEDY.
19.0 INDEMNITY
- ---------------
19.1 Dealer will indemnify Lucent for the full amount of any
settlement or final judgment that arises out of a claim or suit by a third
party to the extent that such claim or suit is based on strict tort
liability, breach of a warranty provided by Dealer, or the intentional or
negligent acts or omissions of Dealer. Dealer's obligation to indemnify
Lucent will be reduced in proportion to which the settlement or final
judgment is attributable to the strict tort liability of Lucent, breach of
a Lucent warranty, or the intentional or negligent acts or omissions of
Lucent, unless liability for such acts or omissions of Lucent is otherwise
excluded in other sections of this Agreement, or the negligent acts or
omissions of any other third party not under Dealer's direct control.
Dealer's obligation to indemnify Lucent shall be contingent upon: (1)
Lucent promptly notifying Dealer in writing of the existence of any claim
or suit that may result in a settlement or judgment for which Dealer may be
obligated to indemnify Lucent; (2) Lucent giving Dealer full opportunity
and authority to assume sole responsibility to settle and defend any such
claim or suit; and (3) Lucent furnishing to Dealer upon reasonable request
all information and assistance that Dealer deems to be reasonably required
to settle or defend such claim or suit. These indemnities are in lieu of
all other obligations of Dealer, express or implied, in law or in equity,
to indemnify Lucent for claims or suits covered by this section. Dealer's
liability to indemnify Lucent shall in no event exceed $500,000.
<PAGE> 16
19.2 Unless Lucent's liability is otherwise limited or excluded in
other sections of this Agreement, Lucent will indemnify Dealer for the full
amount of any settlement or final judgment that arises out of a claim or
suit by a third party to the extent that such claim or suit is based on the
strict tort liability of Lucent, breach of a Lucent warranty, or the
intentional or negligent acts or omissions of Lucent. Lucent's obligation
to indemnify Dealer shall be reduced in proportion to which the settlement
or final judgment is attributable to the strict tort liability of Dealer,
breach of a Dealer warranty, or the intentional or negligent acts or
omissions of Dealer or any other third party not under Lucent's direct
control. Lucent's obligation to indemnify Dealer will be contingent upon:
(1) Dealer promptly notifying Lucent in writing of the existence of any
claim or suit that may result in a settlement or final judgment for which
Lucent may be obligated to indemnify Dealer; (2) Dealer giving Lucent full
opportunity and authority to assume sole responsibility to settle or defend
any such claim or suit; and (3) Dealer furnishing to Lucent upon reasonable
request all information and assistance available to Dealer that Lucent
deems to be reasonably required to settle or defend such claim or suit.
THIS INDEMNITY IS IN LIEU OF ALL OTHER OBLIGATIONS OF LUCENT, EXPRESS OR
IMPLIED, IN LAW OR IN EQUITY, TO INDEMNIFY DEALER FOR CLAIMS OR SUITS
COVERED BY THIS SECTION. LUCENT'S LIABILITY TO INDEMNIFY DEALER SHALL IN NO
EVENT EXCEED $500,000.
19.3 The party electing to take responsibility for settling or
defending any claim or suit covered by this Section 19.0 will be
responsible for the attorney's fees and costs incurred by said party to
settle or defend such claim or suit.
20.0 INFRINGEMENT
- ------------------
20.1 Lucent will defend or settle, at its own expense, any action
brought against Dealer or an End User, to the extent that it is based on a
claim that the normal use or sale of any Lucent Products provided under
this Agreement infringe any United States patent, trademark or copyright,
that any licensed materials provided under this Amendment infringe any
United States copyright or violate the trade secret of a third party.
Lucent will pay those costs, damages and attorneys' fees finally awarded
against Dealer or an End User in any such action attributable to any such
claim, but such defense, settlements and payments are conditioned on the
following: (i) that Lucent shall be notified promptly in writing by Dealer
or an End User of any such claim; (ii) that Lucent shall have sole control
of the defense of any action on such claim and of all negotiations for its
settlement or compromise; (iii) that Dealer or End User shall cooperate in
a reasonable way to facilitate the settlement or defense of such claim, and
that Dealer or End User has made no statement or taken any action that
might hamper or undermine Lucent's defense or settlement; (iv) that such
claim does not arise from modifications to Lucent Products or licensed
materials not authorized by Lucent or from use or combination of the Lucent
Products with software and/or apparatus or equipment not supplied or
specified by Lucent; (v) that such claim does not arise from adherence to
Dealer's or End User's instructions or the use of items, materials or
information of Dealer's or End User's origin, design or selection; and (vi)
that should Lucent Products or licensed materials become, or in Lucent's
opinion, be likely to become, the subject of such claim of infringement,
then Dealer or End User shall permit Lucent, at Lucent's option and
<PAGE> 17
expense, either to: (1) procure for Dealer or End User the right to
continue using the Lucent Products or licensed materials, or (2) replace or
modify the same so that it is not subject to such claim and is functionally
equivalent or (3) upon failure of (1) and (2) above despite the reasonable
efforts of Lucent, remove the infringing Lucent Product or terminate
Dealer's or End User's rights under the license and refund the purchase
price or fee paid less a reasonable allowance for use, damage and
obsolescence. In the event that a claim of infringement arises for which
the liability of Lucent is excepted under (iv) or (v) above, Dealer or End
User will defend and save Lucent harmless to the same extent and subject to
the same limitations as apply to Lucent when Lucent is liable hereunder.
This Section 20.0 states the entire liability of Lucent with respect to
infringement by Lucent Products or licensed materials provided hereunder.
21.0 TERMINATION OF AGREEMENT
- ------------------------------
21.1 Dealer must give written notice to Lucent of its intent to
renew ninety (90) days in advance of the termination date.
21.2 Lucent may terminate this Agreement upon thirty (30) days prior
written notice to Dealer if. (i) Dealer markets or sells Lucent Products
outside the Area except as specifically permitted in Section 1. 1; (ii)
Dealer fails to limit its marketing efforts to authorized locations or End-
Users as defined in Section 1.3; (iii) Dealer materially fails to make
reasonable commercial efforts to achieve levels of sales that comply with
the Lucent Product forecasts for the Area submitted pursuant to Section
11.0; (iv) Dealer fails to provide an acceptable quality of service to End
Users in accordance with Lucent's Quality Policy; (v) there occurs any
material change in the management or control of Dealer; (vi) Dealer sold or
attempted to resell Lucent Products to any third party other than an End
User; (vii) Dealer appointed or attempted to appoint any unauthorized
manufacturer's representatives for Lucent Products; (viii) Dealer purchased
unused products manufactured by Lucent from a source other than DDM or sold
or attempted to resell any unused products manufactured by Lucent that, if
purchased through DDM, would be a Lucent Product under this Agreement; (ix)
Dealer misrepresented, by statement or by omission, Dealer's authority to
resell under this or any other written agreement with Lucent that is
limited to specific Lucent products or services, by stating or implying, by
use of a Lucent Mark otherwise, that the authority granted in this or such
other agreement applies to any Lucent product or service not covered by
this or such other agreement; or (x) Dealer failed to comply with Lucent's
guidelines for the proper use of Lucent's Marks.
21.3 Except as otherwise provided in this Agreement, either party
may terminate this Agreement upon thirty (30) days prior written notice if
the other party has defaulted in the performance or has breached its
obligations under this Agreement, and such breach or default remains
uncured for a period of twenty (20) business days following receipt of
notice of such breach or default.
21.4 Lucent may terminate this Agreement upon twenty-four (24) hours
written notice if Dealer has: (i) become insolvent, invoked as a debtor any
laws relating to the relief of debtors'
<PAGE> 18
or creditors' rights, or has had such laws invoked against it; (ii) become
involved in any liquidation or termination of its business; (iii) been
involved in an assignment for the benefit of its creditors; (iv) remotely
accessed PBX locations maintained by Lucent directly; or (v) activated
software features without compensation to Lucent.
21.5 Dealer may terminate this Agreement on twenty-four (24) hours
written notice if Lucent has: (i) become insolvent, invoked as a debtor any
laws relating to the relief of debtors' or creditors' rights, or has had
such laws invoked against it; or (ii) become involved in any liquidation or
termination of its business; (iii) been involved in an assignment for the
benefit of its creditors.
21.6 Notwithstanding such termination rights, each party reserves
all of its legal rights and equitable remedies, including without
limitation those under the Uniform Commercial Code.
21.7 Neither party shall be liable to the other on account of
termination of this Agreement, either for compensation or for damages of
any kind or character whatsoever, on account of the loss by Lucent or
Dealer of present or prospective profits on sales or anticipated sales,
good will, or expenditures, investments or commitments made in connection
therewith or in connection with the establishment, development or
maintenance of Dealer's business.
22.0 EFFECTS OF TERMINATION
- ----------------------------
22.1 Notwithstanding any other provisions of this Agreement,
termination or expiration of this Agreement shall automatically accelerate
the due date of all invoices for Lucent Products, such that they shall
become immediately due and payable not later than the effective date of
termination.
22.2 Upon termination or expiration of this Agreement, Dealer shall
immediately:
22.2.1 provide Lucent with the first right to repurchase any
Lucent Products in Dealer's possession or control and not already
identified to an executed End User contract or outstanding proposal.
The price Lucent shall pay to Dealer to repurchase Lucent Products
shall be the price paid by Dealer. Dealer shall make such Lucent
Products available to Lucent within ten (10) business days of
Lucent's notice to Dealer of its intent to exercise such right;
22.2.2 discontinue any and all use of Marks, including but not
limited- to such use in advertising or business material of Dealer,
except to identify the Lucent Products; provided that if Lucent does
not repurchase Dealer's remaining inventory, Dealer may continue
using Marks as authorized in this Agreement for an additional ninety
(90) days for the limited purpose of marketing such inventory to End
Users after termination is effective;
22.2.3 remove and return to Lucent or destroy at Lucent's
request, any and all promotional materials supplied without charge by
Lucent except those necessary for the limited purpose of marketing
existing Dealer inventory pursuant to Section 22.2.2;
<PAGE> 19
22.2.4 return all Lucent proprietary Information, Licensed
Materials and Software, except that which Lucent determines is
necessary to operate and maintain previously furnished Lucent
Products;
22.2.5 cease holding itself out, in any manner, as a Lucent
authorized Dealer of the Lucent Products; and
22.2.6 notify and arrange for all publishers and others
(including, but not limited to, publisher of telephone and business
directories) who may identify, list or publish Dealer's name as a
Lucent authorized Dealer of Lucent Products, to discontinue such
listings.
23.0 SURVIVAL OF OBLIGATIONS
- -----------------------------
The respective obligations of Dealer and Lucent under this Agreement
that by their nature would continue beyond the termination, cancellation or
expiration of this Agreement, shall survive termination, cancellation or
expiration hereof, such as, by way of example only, the obligations
pursuant to the following Sections: USE OF INFORMATION, LICENSE,
TERMINATION OF AGREEMENT, LIMITATION OF LIABILITY, INDEMNITY and
TRADEMARKS.
24.0 FORCE MAJEURE
- -------------------
Except for Dealer's obligation to make timely payments, neither party
shall be held responsible for any delay or failure in performance to the
extent that such delay or failure is caused by fires, embargoes,
explosions, labor disputes, government requirements, civil or military
authorities, acts of God, inability to secure raw materials or
transportation facilities, acts or omissions of carriers or suppliers or
any other causes beyond the parties' control whether or not similar to the
foregoing.
25.0 SECURITY INTEREST
- -----------------------
n/a
26.0 SEVERABILITY
- ------------------
If any section, or clause thereof, in this Agreement is held to be
unenforceable, then the meaning of such section or clause will be construed
so as to render it enforceable, to the extent feasible; and if no
reasonable interpretation would save such section or clause, it will be
severed from this Agreement and the remainder will remain in full force and
effect. However, in the event such section or clause is considered an
essential element of this Agreement by either Lucent or Dealer, the parties
shall promptly negotiate a replacement therefor.
<PAGE> 20
27.0 ASSIGNMENT
- ----------------
Dealer shall not assign any right or interest under this Agreement or
delegate any work or other obligation to be performed or owed by Dealer
under this Agreement without the prior written consent of Lucent, which
consent shall not be unreasonably withheld. Any assignment or delegation by
Dealer without such consent shall be void and ineffective. By the provision
of notice thereof in accordance with this Agreement, Lucent shall have the
right to assign this Agreement and to assign its rights and delegate its
obligations and liabilities under this Agreement, either in whole or in
part (an "Assignment"), to any entity that is, or that was immediately
preceding such Assignment, a current subsidiary, business unit, division or
other affiliate of Lucent. The notice of Assignment shall state the
effective date thereof. Upon the effective date and to the extent of the
Assignment, Lucent shall be released and discharged from all obligations
and liabilities under this Agreement. Such Assignment, release and
discharge shall be complete and shall not be altered by the termination of
the affiliation between Lucent and the entity assigned rights or delegated
obligations and liabilities under this Agreement.
28.0 NON-WAIVER
- ----------------
No course of dealing, course of performance or failure of either
party strictly to enforce any term, right or condition of this Agreement
shall be construed as a waiver of any term, right or condition.
29.0 CHOICE OF LAW AND DISPUTES
- --------------------------------
29.1 The construction, interpretation and performance of this
Agreement shall be governed by the local laws of the State of Delaware.
29.2 Any controversy or claim, whether based on contract, tort,
strict liability, fraud, misrepresentation, or any other legal theory,
related directly or indirectly to this Agreement (the "Dispute") shall be
resolved solely in accordance with the terms of this Section, except as set
forth in paragraph 29.6 below.
29.3 If the Dispute cannot be settled by good faith negotiation
between the parties, Lucent and Dealer will submit the Dispute to non-
binding mediation. If complete agreement cannot be reached within thirty
(30) days of submission to mediation, any remaining issues will be resolved
by binding arbitration in accordance with paragraphs 28.4 and 28.5 below.
The Federal Arbitration Act, 9 U.S.C. Sections 1 to 15, not state law, will
govern the arbitrability of all Disputes.
29.4 A single arbitrator who is knowledgeable in the
telecommunications products field or in commercial matters will conduct the
arbitration. The arbitrator's decision and award will be final and binding
and maybe entered in any court with jurisdiction. The arbitrator will not
have authority to limit, expand or otherwise modify the terms of this
Agreement.
<PAGE> 21
29.5 The mediation and, if necessary, the arbitration will be
conducted under the then current rules of the alternate dispute resolution
(ADR) firm selected by the parties, or if the parties are unable to agree
on an ADR firm, the parties will conduct the mediation and, if necessary,
the arbitration under the then current rules and supervision of the
American Arbitration Association (AAA). Lucent and Dealer will each bear
its own attorneys' fees associated with the mediation and, if necessary,
the arbitration. Lucent and Dealer will pay all other costs and expenses of
the mediation/arbitration as the rules of the selected ADR firm provide.
The parties and their representatives shall hold the existence, content and
result of the mediation and arbitration in confidence.
29.6 Unless both parties agree otherwise, Disputes relating to
Dealer's compliance with Section 16 of this Agreement (Trademarks) shall be
exempt from the dispute resolution processes described in this Section.
30.0 NOTICES
- -------------
All notices under this Agreement shall be in writing and shall be
given in person, by facsimile, by receipted courier or by certified U.S.
mail, addressed to the addresses set forth at the beginning of this
Agreement or to such other address as either party may designate by written
notice to the other. All written notices sent by mail shall be sent first
class or better, postage prepaid. All notices shall be deemed to have been
given on the earlier of the date actually received or the fifth day after
mailing.
31.0 ENTIRE AGREEMENT
- ----------------------
The terms and conditions contained in this Agreement supersede all
prior oral or written understandings between the parties and constitute the
entire Agreement between them concerning the subject matter of this
Agreement and shall not be contradicted, explained or supplemented by any
course of dealing between Lucent or any of its affiliates and Dealer or any
of its affiliates. This Agreement shall not be modified or amended except
by a writing signed by an authorized representative of the party to be
charged. An authorized representative is one who has authority to execute
this Agreement or an assignee.
32.0 TERM
- ----------
This Agreement shall be effective as of December 16, 1998-and shall
have a term ending on December 31, 2001.
<PAGE> 22
IN WITNESS WHEREOF the parties have caused this Agreement to be signed by
their duly authorized representatives.
Lucent Technologies Inc. Farmstead Telephone Group, Inc.
By: /s/ James A. Albertini By: /s/ George J. Taylor, Jr.
------------------------------ -------------------------------
Name: James A. Albertini Name: George J. Taylor, Jr.
Title: General Manager Remarketing Title: Chairman and CEO
Date: 12/16/98 Date: 12/16/98
<PAGE> 23
Appendix:
- ---------
1. Addresses:
a. Marketing Location:
-------------------
22 Prestige Park Circle
-----------------------
East Hartford, CT 06108
-----------------------
b. Shipping Location:
------------------
22 Prestige Park Circle
-----------------------
East Hartford, CT 06108
-----------------------
2. Area authorized for ARS Dealer:
Area is the Territory as stated in Section 1.8. "Territory" means the
United States of America, including the District of Columbia but
excluding 1) the Commonwealth of Puerto Rico and all other
territories, protectorates and possessions of the United States of
America, and 2) the geographical areas defined as the "Primary Area
of Responsibility" for Cincinnati Bell Telecommunication Services
Inc. (the operating area of Cincinnati Bell Telephone Company in the
states of Ohio, Indiana and Kentucky), and Progressive Communications
of Hawaii, Inc. (the state of Hawaii).
3. Product:
Lucent Product Components authorized for ARS Dealer
Terminals, circuit cards, and other adjuncts for:
Definity
Merlin Legend
Partner ACS
4. Software License:
The following is the End User Software License referred to in Section 15 of
the Agreement:
END USER SOFTWARE LICENSE
-------------------------
LIMITED WARRANTY AND LIMITED LIABILITY
--------------------------------------
Compatibility. THE SOFTWARE IS NOT WARRANTED FOR NONCOMPATIBLE SYSTEMS.
<PAGE> 24
Software. Lucent Technologies warrants that if the Software does not
substantially conform to its specifications, the end-user customer ("You")
may return it to the place of purchase within 90 days after the date of
purchase, provided that You have deployed and used the Software solely in
accordance with this License Agreement and the applicable Lucent
Technologies installation instructions. Upon determining that the returned
Software is eligible for warranty coverage, Lucent Technologies will either
replace the Software or, at Lucent Technologies's option, will offer to
refund the License Fee to You upon receipt from You of all copies of the
Software and Documentation. In the event of a refund, the License shall
terminate.
DISCLAIMER OF WARRANTIES. LUCENT TECHNOLOGIES MAKES NO WARRANTY,
REPRESENTATION, OR PROMISE TO YOU NOT EXPRESSLY SET FORTH IN THIS
AGREEMENT. LUCENT TECHNOLOGIES DISCLAIMS AND EXCLUDES ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. LUCENT
TECHNOLOGIES DOES NOT WARRANT THAT THE SOFTWARE OR DOCUMENTATION WILL
SATISFY YOUR REQUIREMENTS, THAT THE SOFTWARE OR DOCUMENTATION ARE WITHOUT
DEFECT OR ERROR, OR THAT THE OPERATION OF THE SOFTWARE WILL BE
UNINTERRUPTED. ALSO, LUCENT TECHNOLOGIES DOES NOT WARRANT THAT THE SOFTWARE
WILL PREVENT, AND LUCENT TECHNOLOGIES WILL NOT BE RESPONSIBLE FOR,
UNAUTHORIZED USE (OR CHARGES FOR SUCH USE) OF COMMON CARRIER
TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED THROUGH OR CONNECTED TO
THE SOFTWARE (TOLL FRAUD). Some states do not allow the exclusion of
implied warranties or limitations on how long an implied warranty lasts, so
the above limitation may not apply to You. This warranty gives You specific
legal rights which vary from state to state.
EXCLUSIVE REMEDY AND LIMITATION OF LIABILITY. EXCEPT FOR BODILY INJURY
PROXIMATELY CAUSED BY LUCENT TECHNOLOGIES'S NEGLIGENCE, YOUR EXCLUSIVE
REMEDY AND LUCENT TECHNOLOGIES'S ENTIRE LIABILITY ARISING FROM OR RELATING
TO THIS LICENSE AGREEMENT OR TO THE SOFTWARE OR DOCUMENTATION SHALL BE
LIMITED TO DIRECT DAMAGES IN AN AMOUNT NOT TO EXCEED $ 10,000. LUCENT
TECHNOLOGIES SHALL NOT IN ANY CASE BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
CONSEQUENTIAL, INDIRECT, OR PUNITIVE - DAMAGES, EVEN IF LUCENT TECHNOLOGIES
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. LUCENT TECHNOLOGIES IS
NOT RESPONSIBLE FOR LOST PROFITS OR REVENUE OR SAVINGS, LOSS OF USE OF THE
SOFTWARE, LOSS OF DATA, COSTS OF RECREATING LOST DATA, THE COST OF ANY
SUBSTITUTE EQUIPMENT OR PROGRAM, CHARGES FOR COMMON CARRIER
TELECOMMUNICATION SERVICES OR FACILITIES ACCESSED THROUGH OR CONNECTED TO
THE SOFTWARE (TOLL FRAUD), OR CLAIMS BY ANY PERSON OTHER THAN YOU. THESE
LIMITATIONS OF
<PAGE> 25
LIABILITY SHALL APPLY NOTWITHSTANDING THE FAILURE OF AN EXCLUSIVE REMEDY.
Some states do not allow the exclusion or limitation of incidental or
consequential damages, so the above limitation or exclusion may not apply
to You.
Lucent Technologies grants You a personal, non-transferable and non-
exclusive right to use, in object code form, all software and related
documentation furnished under the Agreement between Lucent Technologies and
[Dealer]. This grant shall be limited to use with the equipment for which
the software was obtained or, on a temporary basis, on back-up equipment
when the original equipment is inoperable. Use of software on multiple
processors is prohibited unless otherwise agreed to in writing by Lucent
Technologies. You agree to use your best efforts to see that your employees
and users of all software licensed under this Agreement comply with these
terms and conditions and You will refrain from taking any steps, such as
reverse assembly or reverse compilation, to derive a source code equivalent
of the software.
You are permitted to make a single archive copy of software. Any copy must
contain the same copyright notice and proprietary marking as the original
software. Use of software on any equipment other than that for which it was
obtained, removal of the software from the United States, or any other
material breach shall automatically terminate this license.
If the terms of this license differ from the terms of any license packaged
with the software, the terms of the license packaged with the software
shall govern.
<PAGE> 26
EXHIBIT 10(t)
AGREEMENT NO: ARS-LA- 99102
- -------------------------------------------------------------------------------
ARS LICENSE AGREEMENT BETWEEN LUCENT
TECHNOLOGIES AND
FARMSTEAD TELEPHONE GROUP, INC.
FOR AUTHORIZED REMARKETING SUPPLIER PROGRAM
- -------------------------------------------------------------------------------
Table of Contents
page
ARTICLE I - DEFINITIONS 1
ARTICLE II - LICENSE GRANT 2
ARTICLE III - AGREEMENT PERSONAL 3
ARTICLE IV - LICENSES TO OTHERS AND 3
OWNERSHIP
ARTICLE V - LICENSED TERRITORY 3
ARTICLE VI - QUALITY CONTROL 3
ARTICLE VII - REMEDIES FOR NONCOMPLIANCE 5
WITH CONTROL SPECIFICATIONS
ARTICLE VIII - PROTECTION OF LICENSED SERVICE 6
MARKS & LICENSED TRADE DRESS
ARTICLE IX - TERMINATION 7
ARTICLE X - INDEMNITIES 8
ARTICLE XI - ARS FORECAST AND REPORTS 9
ARTICLE XII - NOTICES 10
ARTICLE XIII - COMPLIANCE WITH LAW 10
ARTICLE XIV - TERM OF AGREEMENT 10
ARTICLE XV - ENTIRE AGREEMENT 11
SCHEDULE B - STANDARDS OF QUALITY 12
SCHEDULE C - MARKETING, ADVERTISING, 13
AND PROMOTION
SCHEDULE D - CORPORATE IDENTIFICATION 14
MARK
SCHEDULE E - PRODUCTS LIST 15
SCHEDULE G - LICENSED MARK 16
AGREEMENT NO: ARS-LA - 99102
Authorized Remarketing Supplier License Agreement between
Lucent Technologies and
Farmstead Telephone Group, Inc.
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, is effective as of October 1, 1998 and is by
and between Lucent Technologies Inc., by and for its Business
Communications Systems unit ("Lucent" or "Licensee'), and Farmstead
Telephone Group, Inc. ("ARS" or "Licensee"). Capitalized terms used herein
shall have the respective meanings assigned to them in Article I hereof.
WHEREAS, this License Agreement is to allow ARS to refurbish and
resell used business premises communications products also known as
customer premise equipment (CPE) manufactured by Lucent or Lucent's
predecessor companies, AT&T Corp. or American Telephone and Telegraph
Company (collectively, AT&T) and to minimize customer confusion that might
otherwise arise as a result of the continued use of the AT&T name and
marks, or the Lucent name or marks, by requiring ARS to remove such AT&T or
Lucent name and marks and to apply a single distinctive Lucent mark (the
"Licensed Mark") to such products
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
For the purpose of this License Agreement, the following terms shall
have the following meanings:
1.1 Control Specifications means standards of quality (including
performance parameters) applicable to the refurbishing, testing,
performance, provision, and support of a Product under the Licensed Mark or
Licensed Trade Dress, as set forth or referenced in Schedule B, and the
standards applicable to the marketing, advertising, and promotion of a
Product under the Licensed Mark or Trade Dress, as set forth or referenced
in Scheduled C.
1.2 Corporate Identification Mark means the Licensor's house mark
and related trade dress used to identify and distinguish Licensor from
other persons, as identified in Schedule D hereto.
1.3 Lucent Products means any product described in Schedule E hereto
that are being refurbished by Licensee pursuant to this License Agreement.
<PAGE> 1
1.4 Licensed Mark or Licensed Trade Dress means the mark Classic
Lucent" as identified in Schedule G hereto.
1.5 Licensed Territory has the meaning set forth in Article V
hereof.
1.6 Mark means any word, name, symbol or device, or any combination
thereof, used or intended to be used by a person to identify and
distinguish the products or services of that person from the products or
services of others and to indicate the source of such goods or services,
even if that source is unknown.
1.7 End User means a third party to whom ARS markets or sells Lucent
ARS refurbished Products within the Licensed Territory for use by such
third party in the ordinary course of its business and not for resale.
ARTICLE II
LICENSE GRANT
2.1 License Grant. Subject to the terms and conditions of this
License Agreement, Licensor grants Licensee a personal, non-transferable,
non-sublicensable, non-exclusive license to use the Licensed Mark in
connection with the refurbishing, marketing, promotion, distribution and
sale of Lucent Products commencing on the date of this License Agreement
and ending December 31, 2001.
2.2 Extension of Grant. If Licensee is interested in licensing the
Licensed Mark beyond the initial license period set forth above, Licensee
shall notify Licensor no later than three (3) months prior to the
expiration of such period. Upon such notification, Licensor and Licensee
agree to negotiate in good faith whether to extend the license granted in
this License Agreement and, if so, the terms and conditions of such an
extension, including a commercially reasonable royalty for the use of the
Licensed Mark. Notwithstanding the foregoing, neither Licensor nor Licensee
shall have any obligation to enter into such extension.
2.3 Limitations on Grant. The Licensed Mark may not be used by
Licensee in connection with any product or service except as expressly set
forth in this License Agreement.
2.4 No Use in Licensee's Name. Licensee shall not use the Licensed
Mark in Licensee's corporate, partnership, doing business as, or fictitious
name at any time.
2.5 No Other Marks To Be Used. Licensee shall not use any other
name, mark, indication of origin or trade dress of Licensor in connection
with the refurbishing, remanufacture, marketing, promotion, distribution,
sale or lease of any product or service without Licensor's express written
consent.
2.6 Modification of Licensed Mark. If Licensor modifies or replaces
the Licensed Mark or Licensed Trade Dress as used in any substantial
portion of Licensor's business, and if Licensor requests Licensee to adopt
and use the modified or replaced Licensed
<PAGE> 2
Mark and Licensed Trade Dress, Licensee shall within sixty (60) days
adopt and use such modified or replaced Licensed Mark or Licensed Trade
Dress and such modified or replaced Licensed Mark or Licensed Trade Dress
shall be considered the Licensed Mark and Licensed Trade Dress as defined
in this License Agreement; provided, however, that Licensee may exhaust its
inventory bearing the original Licensed Mark and Licensed Trade Dress.
2.7 Payments of Fees. Licensee will pay Licensor a fee of 10% of
all sales of Classic Lucent(TM) product. Payment will be to Licensor and
will be received by Licensor by the 15th working day of the month following
the sale.
ARTICLE III
AGREEMENT PERSONAL
3.1 Personal Nature of Agreement. The parties agree that the
rights, obligations and benefits of this License Agreement shall be
personal to Licensee, and Licensor shall not be required to accept
performance from, or render performance to an entity other than Licensee.
Pursuant to II U.S.C. [SECTION] 365 (c) (1) (A) (as it may be amended from
time to time, and including any successor to such provision), in the event
of the bankruptcy of Licensee, this License Agreement may not be assigned
or assumed by Licensee, or any successor, and Licensor shall be excused
from rendering performance to, or accepting performance from Licensee or
any successor.
3.2 Sublicensing/Assignment. Licensee may not sublicense or assign
the rights and obligations of this License Agreement without Licensor's
express written consent.
ARTICLE IV
LICENSES TO OTHERS AND OWNERSHIP
4.1 Nonexclusive License. Nothing in this License Agreements
creates, and Licensee agrees not to assert, that Licensee has an exclusive
license in the Licensed Mark.
4.2 Retention of Rights. Except as otherwise expressly provided in
this License Agreement, Licensor shall retain all rights in and to the
Licensed Mark, including without limitation:
(a) All rights of ownership in and to the Licensed Mark;
(b) The right to use (including the right of Licensor's
Affiliates to use) the Licensed Mark, either alone or in combination
with other marks, in connection with the marketing, offer or
provision of any product or service, including any product or service
which competes with Products; and
(c) The right to license others to use the Licensed Mark.
<PAGE> 3
ARTICLE V
LICENSED TERRITORY
5.1 Licensed Territory. The Licensed Territory for the licenses
granted in Article 11 of this License Agreement shall include the
contiguous 48 states in the domestic United States of America plus Alaska
but excluding Hawaii.
ARTICLE VI
QUALITY CONTROL
6.1 General. Licensee acknowledges that the Lucent Products covered
by this License Agreement must be of sufficiently high quality as to
provide maximum enhancement to and protection of the Licensed Mark and the
good will they symbolize. Licensee further acknowledges that the
maintenance of high quality Products is of the essence of this License
Agreement and that it will utilize only marketing materials which do not
disparage or place in disrepute Licensor, its businesses or its business
reputation, or adversely affect or detract from Licensor's good will.
6.2 Control Specifications. Licensee shall use the Licensed Mark,
only in connection with the refurbishing, remanufacture, marketing,
distribution, promotion, sale and lease of Lucent Products that meet the
Control Specifications. The Control Specifications shall consist of
Technical Performance and Customer Satisfaction Specifications attached
referenced in Schedule B hereto or provided to and accepted by Licensor,
and the Marketing Specifications referenced in Schedule C hereto. Control
Specifications shall be treated as proprietary information and shall be
subject to the confidentiality provisions hereof referenced in Schedule H.
6.3 Customer Care Provisions. The parties recognize that customer
complaints, inquiries, requests, orders, returns and similar communications
regarding the products or services of one of them may be directed by
customers or otherwise transmitted to the other. The parties agree jointly
to develop and comply with written policies and procedures for handling
such communications, in order to ensure that customer communications are
addressed expeditiously regardless of the initial recipient.
6.4 Changes to Marketing Specifications. The Marketing
Specifications referenced in Schedule C hereto may be reasonably amended,
modified or supplemented from time to time by Licensor upon giving Licensee
sixty (60) days' prior written notice. Following any such amendment,
modification or supplement to the Marketing Specifications, Licensee shall
comply with such amendments, modifications or supplements.
6.5 Quality Control Reviews; Right of Inspection. Licensor shall
have the right to designate from time to time, one or more Quality Control
Representatives, who shall have the right from time to time but at least
once per calendar quarter, without notice to Licensee, to conduct during
regular business hours, and without disrupting Licensee's normal business
operations, an inspection, test, survey and review of Licensee's facilities
and otherwise to
<PAGE> 4
determine compliance with the applicable Control Specifications. At
Licensor's request, Licensee agrees to furnish or make available for
inspection to the Quality Control Representatives: (i) samples of any
Lucent Product that is marketed or provided under the Licensed Mark for
inspections, surveys, tests and reviews to assure conformance with the
applicable Control Specifications; (ii) performance data in its control
relating to the conformance of Lucent Products with the applicable Control
Specifications, and (iii) samples of marketing materials, product
packaging, instruction and warranty materials that use the Licensed Mark.
Any such data provided to Licensor shall be treated as proprietary
information subject to the confidentiality provisions. Licensor may
independently conduct continuous customer satisfaction surveys to determine
if Licensee is meeting the Control Specifications. Licensee shall cooperate
with Licensor fully in the distribution of such surveys. Licensor shall, at
the request of Licensee, provide Licensee with copies of customer surveys
used by Licensor to determine if Licensee is meeting the Control
Specifications. If Licensee learns that it is not complying with any
Control Specifications, it shall notify Licensor and the provisions of
Article VII shall apply to such noncompliance.
6.6 Sponsorship. Licensee shall not use the Licensed Mark to
sponsor, endorse, or claim affiliation with any event, meeting, charitable
endeavor or any other undertaking without obtaining the express written
permission of Licensor. Any breach of this provision shall be deemed a
Significant Breach by Licensee.
6.7 Costs. Costs associated with monitoring compliance with and
enforcing these quality control provisions, and with administering this
License Agreement, shall be borne by Licensor. The ARS is to be responsible
for the costs incurred for performing the required additional product and
process audits resulting from Corrective Actions Requests. Process audits
shall occur no more than once per calendar year. However, if the process
audit results in Corrective Actions Request(s) (CARs) being issued wherein
said expense is required and shall occur within eight months of the
original audit date. Lucent Technologies and the ARS agree to negotiate in
good faith the exact date of the follow-up audit. Product audits shall
occur not more than four times per calendar year. Three successive audits
with no lot rejections and no CARs issued shall result in a revised audit
schedule of no more than two product audits per calendar year. However,
should a future product audit result in the issuance of a CAR, Lucent
reserves the right to re-invoke the more stringent ARS funded four audit
per calendar year cycle. The cost of any audit visit, whether product or
process, shall not exceed $3,000 each. Licensor will fund one process audit
at $3,000 and two products audit at $3,000 per calendar year. These three
Licensor funded audits are the minimum number of audits that can be reached
with no CARs.
6.8 Product Exists. Lucent Technologies exists support of products
over time. When a product is no longer supported by Lucent Technologies,
the ARS will no longer apply the Classic Lucent(TM) label to it. The ARS
will be notified of exit dates by Lucent DDM Remarketing.
<PAGE> 5
ARTICLE VII
REMEDIES FOR NONCOMPLIANCE WITH CONTROL SPECIFICATIONS
7.1 Initial Cure Period. If Licensor becomes aware that Licensee is
not complying with any Control Specifications, Licensor shall notify
Licensee in writing, setting forth, in reasonable detail, a written
description of the noncompliance and any suggestions for curing such
noncompliance. Licensee shall then have twenty (20) days after receipt of
such notice (the "Initial Cure Period") to correct or submit to Licensor a
written plan to correct such noncompliance.
7.2 Second Cure Period. If noncompliance with the Control
Specifications continues beyond the Initial Cure Period, Licensee and
Licensor shall each promptly appoint a representative to negotiate in good
faith actions that may be necessary to correct such noncompliance. The
parties shall have twenty-five (25) days following the expiration of the
Initial Cure Period (the "Second Cure Period") to agree on corrective
actions.
7.3 Final Cure Period. If the noncompliance with the Technical
Performance, Customer Satisfaction or Marketing Control Specifications
continues beyond the Second Cure Period, Licensee shall either: (i) cease
offering Lucent Products under the Licensed Mark until it can comply with
the Control Specifications; or (ii) be deemed to be in Significant Breach
of this License Agreement.
7.4 Arbitration. In the event any dispute regarding compliance with
Control Specifications continues beyond the Initial and Second Cure Periods
described above, then either Licensor or Licensee may deliver to the other
party an Arbitration Demand Notice or pursue any other rights or remedies
expressly contemplated hereby, notwithstanding its failure to deliver an
Escalation Notice. Any such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association..
7.5 Potential Injury to Persons or Property. Notwithstanding the
foregoing, in the event that Licensor reasonably determines that any
noncompliance creates a material threat of personal injury or injury to
property of any third party, upon written notice thereof by Licensor to
Licensee, Licensee shall either cease offering Lucent Products under the
Licensed Mark until it can comply with the Control Specifications, or be
deemed to be in Significant Breach of this License Agreement.
ARTICLE VIII
PROTECTION OF LICENSED SERVICE MARKS AND LICENSED TRADE DRESS
8.1 Ownership and Rights. Licensee will not contest the validity
of, and agrees not to challenge the ownership or validity of, the Licensed
Mark. Licensee shall not disparage, dilute or adversely affect the validity
of the Licensed Mark. Licensee agrees that any and all goodwill and other
rights that may be acquired by the use of the Licensed Mark by Licensee
shall inure to the sole benefit of Licensor. Licensee will not grant or
attempt to grant a security interest in the Licensed Mark or this License
Agreement, or to record any such security interest in the United
<PAGE> 6
States Patent and Trademark Office or elsewhere, against any trademark
application or registration belonging to Licensor. Licensee agrees to
execute all documents reasonably requested by Licensor to effect further
registration of, maintenance and renewal of the Licensed Mark, and recordal
of the license relationship between Licensor and Licensee and recordal of
Licensee as a Registered User. For purposes of this License Agreement,
Licensee shall not be considered a "related company" under the U.S.
Trademark Act, 15 U.S.C. [SECTION] 1051 et seq.
8.2 Similar Marks. Licensee further agrees not to register in any
country any Mark resembling or confusingly similar to the Licensed Mark,
and not to use the Licensed Mark or any part thereof as part of its
corporate name, nor use any Mark confusingly similar, deceptive or
misleading with respect to the Licensed Mark. Licensee further agrees not
to use or register in any country any Mark similar to the Licensed Mark, or
which dilutes the Licensed Mark. If any application for registration is, or
has been, filed in any country by Licensee which relates to any Mark which,
in the sole opinion of Licensor, is confusingly similar, deceptive or
misleading with respect to the Licensed Mark, or which dilutes the Licensed
Mark, Licensee shall, at Licensor's sole discretion, immediately abandon
any such application or registration or assign it to Licensor. If Licensee
uses any Mark which, in the sole opinion of Licensor, is confusingly
similar, deceptive or misleading with respect to the Licensed Mark, or
which dilutes the Licensed Mark, or if Licensee uses the Licensed Mark in
connection with any product, or in connection with any service not
specifically authorized hereunder, Licensee shall, immediately upon
receiving a written request from Licensor, permanently cease such use.
8.3 Infringement. In the event that Licensee learns of any
infringement or threatened infringement of the Licensed Mark, or any unfair
competition, passing-off or dilution with respect to the Licensed Mark, or
any third party alleges or claims that either the Licensed Mark is liable
to cause deception or confusion to the public, or is liable to dilute or
infringe any right of such third party, Licensee shall immediately notify
Licensor or its authorized representative giving particulars thereof, and
Licensee shall provide necessary information and assistance to Licensor or
its authorized representatives in the event that Licensor decides that
proceedings should be commenced or defended. Licensor shall have exclusive
control of any litigation, opposition, cancellation or related legal
proceedings; provided Licensor shall indemnify and hold harmless Licensee
from any costs or expenses, including reasonable attorney fees, arising out
of such litigatory proceedings. The decision whether to bring, defend,
maintain or settle any such proceedings shall be at the exclusive option
and expense of Licensor, and all recoveries shall belong exclusively to
Licensor. Licensee will not initiate any such litigation, opposition,
cancellation or related legal proceedings in its own name, but, at
Licensor's request and sole expense, agrees to be joined as a party in any
action taken by Licensor to enforce its rights in the Licensed Mark.
Nothing in this License Agreement shall require or be deemed to require
Licensor to enforce the Licensed Marks against others.
8.4 Compliance With Laws. In the performance of this License
Agreement, Licensee shall comply with all applicable laws and regulations,
including those laws and regulations particularly pertaining to the proper
use and designation of Marks in the Licensed Territory. Should Licensee be
or become aware of any applicable laws or regulations which are
inconsistent with the provisions of this License Agreement, Licensee shall
promptly notify
<PAGE> 7
Licensor of such inconsistency. In such event, Licensor may, at its option,
either waive the performance of such inconsistent provisions, or negotiate
with Licensee to make changes in such provisions to comply with applicable
laws and regulations.
ARTICLE IX
TERMINATION
9.1 Breach by Licensee. Licensor may terminate this License
Agreement at any time in the event of a Significant Breach by Licensee. A
"Significant Breach by Licensee" shall mean any event expressly specified
in this License Agreement to be a "Significant Breach," and any of the
following (after exhaustion of any cure periods set forth in Article VII
hereof to the extent such cure periods are applicable):
(a) Licensee's use of any Mark (including the Licensed Mark)
contrary to the provisions of this License Agreement;
(b) Licensee's use of the Licensed Mark in connection with any
marketing materials, or the offering, marketing or provision of any
Lucent Product which fails to meet the standards set forth in the
Control Specifications; provided, however, that the failure of a
particular product to comply with the Control Specifications shall be
grounds for termination only as to that product; and, further
provided that continued use of the Licensed Mark by Licensee in
connection with such product shall be grounds for termination of the
License Agreement as to all Products;
(c) Licensee's refusing or neglecting a request as provided in
this Agreement by Licensor for access to Licensee's facilities or
marketing materials;
(d) Licensee's licensing, assigning, transferring, disposing
of or relinquishing (or purporting to license, assign, transfer,
dispose of or relinquish) any of the rights granted in this License
Agreement to others;
(e) The bankruptcy or insolvency of Licensee or an Affiliate
of Licensee;
(f) Licensee's failure to obtain Licensor's permission to
sponsor any undertaking as provided in Section 6.6 of this License
Agreement.
9.2 Termination Obligations. In the event Licensor terminates this
License Agreement pursuant to this Article:
(a) Licensee shall, for a period of up to ninety (90) days
from receipt of the first written notice of termination, continue to
have use of the Licensed Mark and Licensed Trade Dress for the
purpose of fulfilling existing customer orders, selling its remaining
inventory and exhausting its supply of packaging materials containing
such Licensed Mark and Trade Dress, then immediately cease all use of
the Licensed Trade Mark and Licensed Trade Dress, except
<PAGE> 8
that Licensor, in its sole discretion, may allow Licensee to continue
use of the Licensed Mark for a period of up to two (2) months as
directed by Licensor;
(b) Except as provided in section 9.2 (a), Licensee shall have
no further rights under this License Agreement.
9.3 n/a
9.4 Lucent may terminate this Agreement upon thirty (30) days prior
written notice to ARS if: (i) ARS markets or sells Lucent Products outside
the Licensed Territory except as specifically permitted in Section 5. 1;
(ii) ARS fails to limit its marketing efforts to authorized locations or
End-Users as defined in Section 1.7; (iii) ARS materially fails to provide
End Users with forecasted stream of licensed products and to achieve levels
of sales that comply with the Lucent ARS Product forecasts for the Area
submitted pursuant to Section 11.0; (iv) ARS fails to provide payment in a
reasonable time for reported sales to End Users; (v) there occurs any
material change in the management or control of ARS; (vi) except if
approved in writing by Lucent as stated in Section 15.1 sold or attempted
to resell Classic Lucent(TM) refurbished Lucent Products to any third party
other than an End User; (vii) purchased unused products manufactured by
Lucent from a source other than DDM or sold or attempted to resell any
unused products manufactured by Lucent that, if purchased through DDM,
would be a Lucent Product under this Agreement; (viii) misrepresented, by
statement or by omission, ARS's authority to resell under this or any other
written agreement with Lucent that is limited to specifi6 Lucent products
or services, by stating or implying, by use of a Lucent Mark or otherwise,
that the authority granted in this or such other agreement applies to any
Lucent product or service not covered by this or such other agreement, or
(ix) failed to comply with Lucent's guidelines for the proper use of
Lucent's Marks.
9.5 Except as otherwise provided in this Agreement, either party may
terminate this Agreement upon thirty (30) days prior written notice if the
other party has defaulted in the performance or has breached its
obligations under this Agreement, and such breach or default remains
uncured for a period of twenty (20) business days following receipt of
notice of such breach or default.
9.6 Lucent may terminate this Agreement upon twenty-four (24) hours
written notice if Dealer has: (i) become insolvent, invoked as a debtor any
laws relating to the relief of debtors' or creditors' rights, or has had
such laws invoked against it; (ii) become involved in any liquidation or
termination of its business; (iii) been involved in an assignment for the
benefit of its creditors; (iv) remotely accessed PBX locations maintained
by Lucent directly; (vii) activated software features without compensation
to Lucent.
9.7 ARS may terminate this Agreement on twenty-four (24) hours
written notice if Lucent has: (i) become insolvent, invoked as a debtor any
laws relating to the relief of debtors' or creditors' rights, or has had
such laws invoked against it; or (ii) become involved in any liquidation or
termination of its business; or (iii) been involved in an assignment for
the benefit of its creditors.
<PAGE> 9
9.8 Notwithstanding such termination rights, each party reserves all
of its legal rights and equitable remedies, including without limitation
those under the Uniform Commercial Code.
9.9 Neither party shall be liable to the other on account of
termination of this Agreement, either for compensation or for damages of
any kind or character whatsoever, on account of the loss by Lucent or
Dealer of present or prospective profits on sales or anticipated sales,
good will, or expenditures, investments or commitments made in connection
therewith or in connection with the establishment, development or
maintenance of ARSs business.
ARTICLE X
INDEMNITIES
10.1 Except as provided in Section 10.2 below, Licensee shall
defend, indemnify and hold Licensor harmless against all claims, suits,
proceedings, costs, damages and judgments incurred, claimed or sustained by
third parties, whether for personal injury or otherwise, arising from or in
connection with Licensee's marketing, sale, lease or use of Lucent Products
bearing the Licensed Mark after the date of this License Agreement to the
extent such injury is caused by Licensee, and shall indemnify Licensor and
each Indemnitee for all damages, losses, costs and expenses (including
reasonable attorneys' fees) due to such use, sale, lease or marketing to
the extent caused by Licensee and also for any improper or unauthorized use
of the Licensed Mark by Licensee. The above indemnity obligation of
Licensee will not apply to the extent any injury is caused by Licensee's
compliance with the Quality Control Specifications, Marketing
Specifications or other written directives by Licensor to Licensee;
10.2 Licensee shall notify Licensor, in writing, in the event that
any third party claims, by suit, proceeding, action or otherwise, that
Licensee's use of the Licensed Mark in connection with Lucent Products as
provided in this License Agreement constitutes or amounts to a trademark,
service mark or trade dress infringement, unfair competition or dilution,
and, at Licensor's option, Licensee may be directed to tender the defense
of such claims to Licensor. Licensor will indemnify and hold harmless
Licensee against all claims, suits, proceedings, costs (including
reasonable attorneys' fees), damages, and judgments incurred by Licensee as
a result of such third party claims described above in this Section 10.2.
10.3 In the event that Licensor becomes aware of a claim that it
believes is or may be subject to indemnification under Section 10. 1 above,
it shall promptly give notice to Licensee of such claim. In order for a
claim to be eligible for indemnification under Section 10. 1, Licensee must
receive such prompt notice of any claim. Licensee shall have the right to
control the defense and possible settlement of any such claim, and the
Licensor shall cooperate in connection with defense.
10.4 In no event will either party have any liability to the other
for any consequential or incidental damages in connection with this License
Agreement.
<PAGE> 10
ARTICLE XI
ARS FORECAST AND REPORTS
11.1 Upon execution of this Agreement, ARS shall submit to Lucent a
forecast of total Lucent ARS Refurbished Product sales to be made by ARS
during the contract term. The forecast must specify, for each quarter, the
total dollar sale volume (based on ARS prices to End Users
11.2 Lucent may reject any forecast submitted by ARS if, in Lucent's
sole judgment, such forecast does not project either: (1) the level of
Lucent ARS Refurbished Product sales Lucent reasonably requires of ARS to
achieve its marketing objectives in the Area; or (2) a realistic assessment
of ARS's potential successful marketing opportunities in the Area during
the forecast period. Lucent shall notify ARS in writing within thirty (30)
days of receipt of ARS's forecast if Lucent has rejected such forecast or
it will be deemed to have been accepted by Lucent.
11.3 ARS shall submit the forecast of Lucent ARS Refurbished Product
sales and actual Lucent ARS Refurbished Product installation data specified
in Section 11.1 in a format specified by Lucent. This Sales Report is due
to be received by Lucent Technologies by the fifth working day of the month
following the month of sales activity.
ARTICLE XII
NOTICES
All notices or other communications under this License Agreement
shall be in writing and shall be deemed to be duly given when (a) delivered
in person, or (b) sent by telecopy, telegram or telex, or (c) deposited in
the United States mail or private express mail, postage prepaid, addressed
as follows:
(i) If to Licensor: Branch Manager - Remarketing
Lucent Technologies Inc.
211 Mt. Airy Road
Room IC315
Basking Ridge. NJ 07920
with a copy to:
Trademark and Copyright Counsel
Lucent Technologies Inc.
150 Allen Road
Liberty Comer, NJ 07938
(ii) If to Licensee: Mr. George Taylor
Farmstead Telephone Group, Inc.
22 Prestige Park Circle
East Hartford, CT 06108
<PAGE> 11
Either party may, by notice to the other party, change the address to which
such notices are to be given.
ARTICLE XIII
COMPLIANCE WITH LAW
13.1 General. Nothing in this License Agreement shall be construed
to prevent Licensor or Licensee from complying fully with all applicable
laws and regulations, whether now or hereafter in effect. The construction,
interpretation and performance of this Agreement shall be governed by the
local laws of the State of Delaware.
13.2 Governmental Licenses, Permits and Approvals. Licensee, at its
expense, shall be responsible for obtaining and maintaining all licenses,
permits and approvals which are required by all Governmental Authorities
with respect to this License Agreement, and to comply with any requirements
of such Governmental Authorities for the registration or recording of this
License Agreement. Licensee shall furnish to Licensor written evidence from
such Governmental Authorities of any such licenses, permits, clearances,
authorizations, approvals, registration or recording.
ARTICLE XIV
TERM OF AGREEMENT
14.1 Term. The term of this agreement will be starting October 1,
1998 running through December 31, 2001.
ARTICLE XV
ENTIRE AGREEMENT
15.1 Entire Agreement. The terms and conditions contained in this
Agreement supercede all prior oral and written understandings between the
parties and constitute the entire Agreement between them concerning the
subject matter of this Agreement and shall not be contradicted, explained
or supplemented by any course of dealing between Lucent or any of its
affiliates and Licensee or any of its affiliates. This Agreement shall not
be modified or amended except by a writing signed by an authorized
representative of the party to be charged. An authorized representative is
one who has the authority to execute this document or an assignee of that
person.
IN WITNESS WHEREOF, the parties have caused this License Agreement to
be executed by their duly authorized representatives.
Lucent Technologies Inc. Farmstead Telephone Group, Inc.
By: /s/ James A. Albertini By: /s/ George J. Taylor, Jr.
------------------------------ -------------------------------
Name: James A. Albertini Name: George J. Taylor, Jr.
Title: General Manager Remarketing Title: Chairman and CEO
Date: 12/16/98 Date: 12/16/98
<PAGE> 12
SCHEDULE B
STANDARDS OF QUALITY
Quality Control Specifications
The average Acceptable Quality Level (AQL) required by Lucent
Technologies for refurbished product is 1%. Refurbished product is
never to exceed an AQL of 2.5%. AQL calculations include proper
function, appearance, packaging, and labeling.
The vendor must have a written quality plan that will be used to
ensure that final refurbished product meets Lucent Technologies'
standards. The plan must address how the vendor incorporates the
following elements into the repair and refurbishment process:
* Test procedures, documentation, and control
* Quality assurance, documentation, and control
* Final product sampling and inspection (audits)
* Quality data collection, tracking, and reporting
* Corrective actions
Lucent Technologies requires that the vendor perform, on an on-going
basis, final product quality assurance audits, using an agreed upon
valid sampling strategy and Lucent Technologies-approved testing
procedures, appearance, packaging, and labeling standards. Results of
these audits are to be provided to Lucent Technologies in an agreed
upon electronic form at least monthly. In addition, Lucent
Technologies reserves the right to perform its own audits of both the
refurbished product and the repair process. Refurbished product may
be inspected by Lucent Technologies unannounced on the vendor site,
or at any distribution center around the world, at any time. Process
audits, conducted at least yearly, will be scheduled in advance with
the vendor.
The vendor is required to track its customer satisfaction and report
the results to the Lucent Technologies' Repair Management Quality
Organization at least yearly. In addition, the vendor is required to
track its Defective On Arrival (DOA) rate per comcode per month,
which is calculated as the number of DOA's per month divided by the
number of units sent to customers that month. When a product's DOA
rate exceeds Lucent Technologies' AQL limits of 2.5%, the vendor is
expected to perform a root cause analysis, report results to Lucent
Technologies, and implement corrective actions to reduce the DOA rate
to an acceptable level.
The ARS will not remove any UL listed labels that appear on any of
the products that are covered by this agreement.
<PAGE> 13
SCHEDULE C
MARKETING, ADVERTISING, AND PROMOTION
Licensed Mark
The Licensed Mark, Classic Lucent(TM), will always be bolded or
italicized when it appears in print. The Classic Lucent identifier
must always stand out or show differently from the rest of the text.
When using the Classic Lucent mark the trade mark indicator of a
superscripted TM will follow only after the first appearance of the
mark in text. After the first appearance the Classic Lucent mark will
be differentiated but not followed by the TM.
The Classic Lucent Licensed Mark will always be used as an adjective
or describing term; as in the Classic Lucent terminal or the Classic
Lucent circuit card. The Authorized Refurbishers supply Classic
Lucent products.
Promotional Signature
The Promotional Signature as described in Schedule D may be used by
Authorized Refurbishers only if-
* The Authorized Refurbisher has executed a written contract with
Lucent Technologies
* The contract entitles the Authorized Refurbisher to use the
signature
* The Authorized Refurbisher abides by the Guidelines as they apply
to this signature and the contract is in effect.
For Maximum visibility and impact, a clear area around the promotion
al signature must be maintained. This clear area must be one-fourth
the diameter of the Lucent Technologies innovation ring. No copy or
design element may encroach into this clear area.
While reproduction of the signature is one color (black) is
permissible, two color reproduction is preferred, with the Lucent
Technologies ligature in black and the innovation ring in Lucent Red.
Additional copy should be black. Pantone 186C may be substituted for
Lucent Red.
<PAGE> 14
SCHEDULE D
CORPORATE IDENTIFICATION MARK
Promotional Signature
The Promotional Signature for the Authorized Remarketing Supplier Program
consists of the Lucent Innovation Ring framed on the top with the word
"AUTHORIZED" and on the bottom with the word "REFURBISHER." A sample is
shown below.
- - INSERT LUCENT LOGO -
The use of the Promotional Signature for the Authorized Remarketing
Supplier Program is subject to the same restrictions and guidelines as all
Lucent Promotional Signatures.
<PAGE> 15
SCHEDULE E
PRODUCTS LIST
The Products List presented here in Schedule E represents the Lucent
Products that may be rebranded to the Classic Lucent(TM) brand. This List
includes Products that have been manufactured or sold by Lucent
Technologies or it's predecessor AT&T.
Only product that is Year 2000 Compliant may be refurbished or sold.
Product that is not Year 2000 Compliant may not be refurbished or sold.
This prerequisite supersedes the Schedule E Products List. Licensee will
not sell any Lucent product set forth below for which it has received
written notice from Lucent that such Lucent product is not Year 2000
Compliant.
Lucent Technologies exists support of products over time. When a product is
no longer supported by Lucent Technologies, the ARS will no longer apply
the Classic Lucent(TM) label to it. The ARS will be notified of exit dates
by Lucent DDM Remarketing.
Until Licensor is notified by Licensee of non-compliant and exited
products, there will be violation of this Agreement.
The Products List includes terminals, circuit cards, and other adjuncts
for:
Key Systems
EKTS
Horizon
Dimension
System 25
System 75
System 85
Definity
Merlin
Partner
Non-compliant products
The following is a list of non-compliant products: all Definity systems
prior to R6, all Dimension systems, all Horizon systems, System 25 (pre
R3V4), all System 85; all Centralized System Management systems, all
CenterVu CMS systems, Merlin Legend CMS; all Integrated Solution I, II, or
III on Definity, System 25 or Merlin Legend systems, all Conversant
systems; all Audix Voice Power systems, Definity Audix prior to 3. 1,
Intuity Audix R2.0, 3.3, 4.0, 4. 1, 4.2, Intuity Interchange, Intuity IMG,
Intuity Lodging, Message Manager pre 4.3, all AUDIX systems; all 3132
Message Server, all Classic Mail, Merlin Mail prior to R3.05, Partner Mail
RI.9 and earlier; all VMX 100/200/300; all call accounting systems, all
system management systems.
<PAGE> 16
SCHEDULE G
LICENSED MARK
Trade Mark
The new brand for the Authorized Remarketing Supplier program is "Classic
Lucent.(TM) This new brand will be trademarked. Until the trademark is
registered we will use the superscript TM after the full name "Classic
Lucent as the following shows: Classic Lucent(TM)
Brand Logo
The Authorized Remarketing Supplier program which is run by licensed
Authorized Refurbishers will buy, refurbish, and sell used Lucent BCS/AT&T
equipment. The equipment will be rebranded with the new Lucent brand
Classic Lucent(TM).
A rebranding label will have the word Classic appear over the word Lucent.
The word Classic will be in outline form when it is in this label but the
word Lucent will be solid. There will be no "(TM)" on the branding label.
When the term Classic Lucent(TM) is used in text, the term is followed by
the superscripted (TM) the first time it appears in context and Classic
Lucent is either italicized or bolded to stand out. After the first use in
context the Classic Lucent will appear either bolded or italicized without
the superscripted (TM). When the trademark is registered the (TM) will be
replaced with a circled R for a registered trademark. The "Classic Lucent"
will always be used as an adjective, such as Classic Lucent sets or Classic
Lucent circuit cards.
The Label will be used to rebrand AT&T and Lucent BCS logoed equipment. The
label should cover The AT&T with globe or Lucent with Innovation Ring
- - INSERT CLASSIC LUCENT LOGO -
<PAGE> 17
EXHIBIT 10(u)
August 24, 1998
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") to
First Union National Bank (successor-in-interest to Affiliated Business
Credit Corporation) ("First Union").
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, as of May 30, 1997, as of December 1, 1997,
and May 6, 1998 (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 August 24, 1998 is $2,871,861.30 plus
interest accrued and accruing thereon and costs and expenses of collection,
including without limitation, attorneys' fees (collectively, the
"Indebtedness"). Additionally, 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.
Borrower has requested that First Union extend to the Borrower the
following accommodation (the "Additional Accommodation"): a temporary
$500,000 increase in the maximum dollar amount of indebtedness that may be
outstanding under the Loan Agreement from $3,500,000 to $4,000,000, which
temporary increase shall be available from the date hereof through
September 30, 1998. 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:
<PAGE> 1
1. As an inducement to and in consideration of First Union's
agreements contained herein, the Borrower represents, warrants and
acknowledges 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 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 Borrower
party or by which it 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 Borrower.
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) (1) from August 24, 1998 through September 30, 1998, FOUR
MILLION DOLLARS ($4,000,000), and (2) from and after October 1,
1998, THREE MILLION FIVE HUNDRED THOUSAND ($3,500,000), or, in
either case, (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 exceeds the then amount due
from Borrower to AT&T shall be eligible pursuant to this
subsection (2)(B)).".
<PAGE> 2
3. Borrower acknowledges and affirms that it shall be able to
request the Additional Accommodation only to the extent that Borrower has
borrowing availability pursuant to Section (ii) of the definition of
"Borrowing Base" as currently set forth in the Loan Agreement.
4. Contemporaneously herewith, the Borrower shall execute and/or
deliver to First Union a $500,000 Demand Promissory Note to evidence the
indebtedness that may arise in connection with the Additional
Accommodation, which Note shall be in the form of Exhibit A annexed hereto.
5. 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, including without
limitation the promissory note from FAMS, LLC to Borrower dated December 1,
1997 and all security therefor.
6. 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.
Very truly yours,
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Robert G. LaVigne
Its Executive Vice President & CFO
Reviewed and Agreed to:
FIRST UNION NATIONAL BANK
By:
-------------------------------
Its
<PAGE> 3
STATE OF CONNECTICUT
ss: East Hartford
COUNTY OF HARTFORD
On this the 24th day of August, 1998 before me, the undersigned
officer, personally appeared Robert G. LaVigne who acknowledged that
he is the Executive Vice President and CFO of Farmstead Telephone
Group, Inc., a Delaware corporation, and that he as such officer,
being authorized so to do, executed the foregoing instrument for the
purposes therein contained, as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand.
Notary Public
My Commission Expires 4/30/2003
<PAGE> 4
Exhibit A
REVOLVING PROMISSORY NOTE
$500,000 August 24, 1998
For value received, the undersigned, FARMSTEAD TELEPHONE GROUP, INC.,
a Delaware corporation ("Maker"), promises to pay to FIRST UNION BANK OF
CONNECTICUT (SUCCESSOR-IN-INTEREST TO AFFILIATED BUSINESS CREDIT
CORPORATION), or order ("Lender") at its office at 205 Church Street, New
Haven, Connecticut 06510, or at such other place as the holder hereof
(including Lender, hereinafter referred to as "Holder") may designate, the
sum of up to FIVE HUNDRED THOUSAND DOLLARS ($500,000), together with
interest on the unpaid balance of this Note, beginning as of the date
hereof, before or after maturity or judgment, at the rate of one half of
one percentage point (.5%) per annum above the Prime Rate on a floating
basis, which rate shall be computed daily and payable monthly in arrears on
the basis of a Three Hundred Sixty (360) day year and actual days elapsed,
together with all taxes levied or assessed on this Note or the debt
evidenced hereby against the Holder, and together with all costs, expenses
and attorneys' and other professional fees incurred in any action to
collect this Note or to enforce, preserve, realize or foreclose any
mortgage, security agreement or other agreement securing this Note or to
preserve, enforce, protect or sustain the lien of said mortgage, security
agreement or other agreement or in any litigation or controversy arising
from or connected with said mortgage, security agreement or other agreement
or this Note. The term "Prime Rate" as used herein shall mean that rate
announced by the Lender from time to time as its Prime Rate and is one of
several interest rate bases used by Lender. Lender lends at rates both
above and below Lender's Prime Rate, and Maker acknowledges that Lender's
Prime Rate is not represented or intended to be the lowest or most
favorable rate of interest offered by Lender. Any change in the interest
rate because of a change in the Prime Rate shall become effective, without
notice or demand, immediately following any change in the Prime Rate.
The principal amount of this Note shall be advanced, at the sole
discretion of Holder, pursuant to a Commercial Revolving Loan and Security
Agreement between Maker and Lender dated June 5, 1995, as amended by
various letter agreements between Maker and Lender, the most recent of
which is dated as of the date hereof (collectively, the "CRLSA") and is
subject in all respects to the terms and conditions of the CRLSA,
including, but not limited to, the repayment terms and the termination date
set forth in the CRLSA. Advances and payments on this Note may be evidenced
by borrowing certificates, a grid (if any) attached to this Note or similar
certificates or documents, or by an internal
<PAGE> 5
ledger account of Lender which shall set forth, among other things, the
principal amount of any advances and payments thereof. Interest shall be
paid on the first business day of each and every month commencing on
September 1, 1998. Holder may, in its sole discretion, charge any amounts
due hereunder to Maker's revolving loan account maintained with Holder
pursuant to the CRLSA.
Maker agrees that (i) if any installment of interest, principal or
other sum due hereunder is not paid when it is due under this Note, the
CRLSA or under any instrument evidencing any other obligation of Maker to
Holder; or (ii) if Maker or Holder shall terminate the CRLSA; or (iii) if
Maker or any guarantor of any obligation of Maker hereunder shall make an
assignment for the benefit of creditors or suffer or permit the appointment
of a receiver for any part of its property or suffer or permit the filing
by or against it of any petition for adjudication, arrangement,
reorganization or the like under any bankruptcy or insolvency law; or (iv)
if an Event of Default shall occur under the CRLSA or any mortgage,
security agreement or any other agreement securing this Note, any other
note by Maker to Holder, or in the performance of any other obligation to
Holder or any other entity or person; or (v) if there shall be any material
adverse change from the present condition or affairs (financial or
otherwise) of Maker or any of the guarantors of the obligations of Maker,
that in Holder's reasonable opinion materially impairs its security or
increases its risk; then an Event of Default shall have occurred hereunder
and, upon the happening of any such event, the entire indebtedness with
accrued interest thereon due under this Note shall, at the option of
Holder, be immediately due and payable without notice. Failure to exercise
such option shall not constitute a waiver of the right to exercise the same
in the event of any subsequent default. Upon the occurrence and during the
continuance of such an Event of Default, the interest rate on this Note
shall automatically increase without notice to a floating per annum rate
equal to two percentage points (2.0%) above the rate otherwise in effect
hereunder.
In the event of Maker's failure to pay any installment of interest,
and/or to pay any other sum due hereunder or under the CRLSA for more than
ten (10) days after the date it is due and payable, without in any way
affecting Holder's right to declare an event of default to have occurred, a
late charge equal to five percent (5%) of such late payment shall be
assessed against Maker and shall be due and payable immediately.
Notwithstanding any provisions of this Note, it is the understanding
and agreement of Maker and Holder (and any guarantors of Maker's
liabilities) that the maximum rate of interest to be paid by Maker (or
guarantors of Maker's liabilities) to Holder shall not exceed the highest
or the maximum rate of interest permissible to be charged by a commercial
lender such as Lender to a commercial borrower such as Maker under the laws
of the State of Connecticut. Any amount paid in excess of such rate shall
be considered to have been payments in reduction of principal.
Maker, and each and all guarantors of this Note hereby give Holder a
lien and right of setoff for all Maker's liabilities upon and against all
the deposits, credits, collateral and property of Maker and guarantors, now
or hereafter in the possession or control of Holder or in transit to it.
Holder may, upon the occurrence of an event of default hereunder or upon
demand for payment of any demand indebtedness owing from Maker to Holder,
apply or set off the same, or any part thereof, to any liability of Maker
even though unmatured.
Failure by Holder to insist upon the strict performance by Maker of
any terms and provisions herein shall not be deemed to be a waiver of any
terms and provisions herein, and Holder shall retain the right thereafter
to insist upon strict performance by Maker of any and all terms and
provisions of this Note or any document securing the repayment of this
Note.
MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT,
ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY
RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR
THE ENFORCEMENT OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT
LIMITATION, TORT CLAIMS.
MAKER AND EACH AND ALL GUARANTORS OF THIS NOTE ACKNOWLEDGE THAT THE
LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND WAIVES ITS
RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL
STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT
TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO USE, AND FURTHER
WAIVES ITS RIGHTS TO REQUEST THAT HOLDER POST A BOND, WITH OR WITHOUT
SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. Maker further, waive
diligence, demand, presentment for payment, notice of nonpayment, protest
and notice of protest, and notice of any renewals or extensions of this
Note, and all rights under any statute of limitations, and all guarantors
agree that the time for payment of this Note may be extended at Holder's
sole discretion, without impairing their liability thereon, and further
consent to the release of all or any part of the security for the payment
hereof, at the discretion of Holder, or the release of any party liable for
this obligation without affecting the liability of the other parties
hereto.
MAKER ACKNOWLEDGES THAT IT MAKES THE WAIVERS SET FORTH IN THE TWO
PRECEDING PARAGRAPHS KNOWINGLY,
<PAGE> 6
VOLUNTARILY AND WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE
RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEYS. MAKER FURTHER
ACKNOWLEDGES THAT LENDER HAS NOT AGREED WITH OR REPRESENTED TO MAKER THAT
THE PROVISIONS OF THE TWO PRECEDING PARAGRAPHS WILL NOT BE FULLY ENFORCED
IN ALL INSTANCES.
This Note shall be governed by and construed in accordance with the
laws of the State of Connecticut (but not its conflicts of law provisions).
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Its
<PAGE> 7
STATE OF CONNECTICUT )
ss: East Hartford
COUNTY OF HARTFORD )
On this the 24th day of August, 1998 before me, the undersigned officer,
personally appeared Robert G. LaVigne who acknowledged that he is the
Executive Vice President and CFO of Farmstead Telephone Group, Inc., a
Delaware corporation, and that he as such officer, being authorized so to
do, executed the foregoing instrument for the purposes therein contained,
as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand.
Notary Public
My Commission Expires: April 30, 2003
<PAGE> 8
EXHIBIT 10(v)
As of September 29, 1998
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") to
First Union National Bank (successor-in-interest to Affiliated Business
Credit Corporation) ("First Union").
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 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, as of May 30, 1997, as of
December 1, 1997, May 6, 1998 and August 24, 1998 (collectively, the "Loan
Agreement"), a $3,500,000 Third Amended and Restated Revolving Promissory
Note dated June 6, 1997 (the "Third Amended and Restated Revolving
Promissory Note"), and a $500,000 Revolving Promissory Note dated August
24, 1998 (the "$500,000 Note") (the Third Amended and Restated Revolving
Promissory Note and the $500,000 Note are collectively referred to herein
as the "Notes"). The current principal balance of the Notes as of September
23, 1998 is $3,380,505.08, plus interest accrued and accruing thereon and
costs and expenses of collection, including without limitation, attorneys'
fees (collectively, the "Indebtedness"). Additionally, 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.
Borrower has requested that First Union extend the availability of
the $500,000 temporary increase in the maximum dollar amount of
indebtedness that may be outstanding under the Loan Agreement, and
evidenced by the $500,000 Note, for the period through October 31, 1998
(the "Accommodation"). Capitalized terms used herein that are not defined
herein have the meanings ascribed to them in the Loan Agreement.
<PAGE> 1
1. As an inducement to and in consideration of First Union's
agreements contained herein, the Borrower represents, warrants and
acknowledges 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 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 Borrower
party or by which it 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 Borrower.
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) (1) from September 30, 1998 through October 31, 1998, FOUR
MILLION DOLLARS ($4,000,000), and (2) from and after November
1, 1998, THREE MILLION FIVE HUNDRED THOUSAND DOLLARS and (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 exceeds the then amount due from Borrower to AT&T
shall be eligible pursuant to this subsection (2)(B))."
<PAGE> 2
3. Borrower acknowledges and affirms that it shall be able to
request the Additional Accommodation only to the extent that Borrower has
borrowing availability pursuant to Section (ii) of the definition of
"Borrowing Base" as currently set forth in the Loan Agreement.
4. 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 Notes, 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,
including without limitation the promissory note from FAMS, LLC to Borrower
dated December 1, 1997 and all security therefor.
5. 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.
Very truly yours,
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Robert G. LaVigne
Its Executive Vice President & CFO
Reviewed and Agreed to:
FIRST UNION NATIONAL BANK
By:
-------------------------------
Its
<PAGE> 3
STATE OF CONNECTICUT
ss: East Hartford
COUNTY OF HARTFORD
On this the 30th day of September, 1998 before me, the undersigned
officer, personally appeared Robert G. LaVigne who acknowledged that
he is the Executive Vice President and CFO of Farmstead Telephone
Group, Inc., a Delaware corporation, and that he as such officer,
being authorized so to do, executed the foregoing instrument for the
purposes therein contained, as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand.
Notary Public
My Commission Expires 4/30/2003
<PAGE> 4
EXHIBIT 10(w)
As of October 15, 1998
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") to
First Union National Bank (successor-in-interest to Affiliated Business
Credit Corporation) ("First Union").
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
$4,000,000 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, as of May 30, 1997, as of December 1, 1997,
May 6, 1998, August 24, 1998 and as of September 29, 1998 (collectively,
the "Loan Agreement"), a $3,500,000 Third Amended and Restated Revolving
Promissory Note dated June 6, 1997 (the "Third Amended and Restated
Revolving Promissory Note"), and a $500,000 Revolving Promissory Note dated
August 24, 1998 (the "$500,000 Note") (the Third Amended and Restated
Revolving Promissory Note and the $500,000 Note are collectively referred
to herein as the "Notes"). Borrower acknowledges that the aggregate
outstanding principal balance of the Notes on October 13, 1998 was
$3,644,360.48 ($3,500,000.00 with respect to the Third Amended and Restated
Revolving Promissory Note and $ $144,360.48 with respect to the $500,000
Note), plus interest accrued and accruing thereon and costs and expenses of
collection, including -without limitation, attorneys' fees (collectively,
the "Indebtedness"). Additionally, 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.
<PAGE> 1
Borrower has requested that First Union increase the maximum dollar
amount of indebtedness that may be outstanding under the Loan Agreement
from $4,000,000 to $6,000,000, and extend the Term of the Revolving Loan
for the period through and including May 30, 2000 (the "Accommodation"').
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 Borrower represents, warrants and
acknowledges 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 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) 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 Borrower is a party or by which it
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 Borrower.
2. The Loan Agreement is hereby amended as follows:
(a) All references in the Loan Agreement to "$3,500,000" are
hereby deleted in their entirety and "$6,000,000" is substituted in
lieu thereof.
(b) 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) SIX MILLION DOLLARS ($6,000,000), and
<PAGE> 2
(ii) an amount equal to seventy-five percent (75%) of Eligible
Accounts."
(c) Section 6.27 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 (a) $5,750,000 at any time through
and including December 31, 1998, and (b) $600,000 at
December 31, 1999 and any time thereafter. As used herein
"Tangible Net Worth" shall mean at any time the sum of
(i) the 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 debt that has been subordinated to
the Lender by express written agreement between the
Lender and the holder of such debt."
(d) The reference to May 30, 1999 in Section 12.1 (a) is
hereby deleted and "May 30, 2000" is substituted in lieu thereof.
(e) All references in the Loan Agreement to the Third Amended
and Restated Revolving Promissory Note are hereby deleted and "Fourth
Amended and Restated Revolving Promissory Note" is substituted
therefor. The copy of the Third Amended and Restated Revolving
Promissory Note attached to the Loan Agreement as Exhibit A is hereby
deleted and a copy of the Fourth Amended and Restated Revolving
Promissory Note annexed hereto as Schedule A is attached in lieu
thereof.
3. 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 Notes, 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,
including without limitation the promissory note from FAMS, LLC to Borrower
dated December 1, 1997 and all security therefor.
4. The Borrower has reviewed the areas within its business and
operations which could be adversely affected by, and has developed or is
developing a program to address on a timely basis, the risk that computer
applications used by the Borrower may be unable to recognize and perform
properly
<PAGE> 3
date-sensitive functions involving certain dates prior to and any date
after December 31, 1999 (the "Year 2000 Problem"). Based upon such review,
the Borrower reasonably believes that the "Year 2000 Problem" will not have
any materially adverse effect on the business or financial condition of the
Borrower. Borrower shall take all action necessary to assure that
Borrower's computer based systems are able to operate and effectively
process data including dates on and after January 1, 2000. At the request
of First Union, Borrower shall provide First Union with assurance
acceptable to First Union of Borrower's Year 2000 compatibility.
5. On or before the date hereof, Borrower shall pay or have paid
to First Union (i) a facility fee in the amount of $3,750 representing one
quarter of one percent (0.25%) of the increased commitment under the
Revolving Loan, and (ii) all fees and expenses and other costs incurred by
First Union in connection with the Accommodations contemplated herein
(including without limitation, all attorney's and other professional fees
and expenses).
6. Disbursements of Revolving Loan advances shall be made by
crediting the amount thereof to an account of Borrower maintained at First
Union, as specified by Borrower.
7. Contemporaneously herewith, (a) the Borrower shall execute and
deliver to First Union a $6,000,000 Fourth Amended and Restated Revolving
Promissory Note (the "Fourth Amended and Restated Revolving Promissory
Note"), which shall supersede and replace the Notes, and (b) the Borrower
shall execute and deliver to
First Union resolutions authorizing this Agreement and the transactions
described herein, all of which shall be in form and content satisfactory to
First Union.
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.
<PAGE> 4
If the foregoing is in accordance with your agreement, please
indicate the same by signing below.
Very truly yours,
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Its
Reviewed and Agreed to:
FIRST UNION NATIONAL BANK
By
--------------------------------
Its Vice President
STATE OF CONNECTICUT )
ss: East Hartford
COUNTY HARTFORD
On this the 19th day of October, 1998 before me, the undersigned
officer, personally appeared Robert G. LaVigne, who acknowledged that he is
the Executive Vice President and CFO of Farmstead Telephone Group, Inc., a
Delaware corporation, and that he as such officer, being authorized so to
do, executed the foregoing instrument for the purposes therein contained,
as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand
Notary Public
My Commission Expires 5/31/2002
<PAGE> 5
Schedule A
----------
FOURTH AMENDED AND RESTATED
REVOLVING PROMISSORY NOTE
$6,000,000 As of October 15, 1998
For value received, the undersigned, FARMSTEAD TELEPHONE GROUP, INC.,
a Delaware corporation ("Maker"), promises to pay to FIRST UNION NATIONAL
BANK (SUCCESSOR-IN-INTEREST TO AFFILIATED BUSINESS CREDIT CORPORATION), or
order ("Lender") at its office at 205 Church Street, New Haven, Connecticut
06510, or at such other place as the holder hereof (including Lender,
hereinafter referred to as "Holder") may designate, the sum of up to SIX
MILLION DOLLARS ($6,000,000), together with interest on the unpaid balance
of this Note, beginning as of the date hereof, before or after maturity or
judgment, at the rate of one half of one percentage point (0.5%) per annum
above the Prime Rate on a floating basis, which rate shall be computed
daily and payable monthly in arrears on the basis of a Three Hundred Sixty
(360) day year and actual days elapsed, together with all taxes levied or
assessed on this Note or the debt evidenced hereby against the Holder, and
together with all costs, expenses and attorneys' and other professional
fees incurred in any action to collect this Note or to enforce, preserve,
realize or foreclose any mortgage, security agreement or other agreement
securing this Note or to preserve, enforce, protect or sustain the lien of
said mortgage, security agreement or other agreement or in any litigation
or controversy arising from or connected with said mortgage, security
agreement or other agreement or this Note. The term "Prime Rate" as used
herein shall mean that rate announced by the Lender from time to time as
its Prime Rate and is one of several interest rate bases used by Lender.
Lender lends at rates both above and below Lender's Prime Rate, and Maker
acknowledges that Lender's Prime Rate is not represented or intended to be
the lowest or most favorable rate of interest offered by Lender. Any change
in the interest rate because of a change in the Prime Rate shall become
effective, without notice or demand, immediately following any change in
the Prime Rate.
The principal amount of this Note shall be advanced, at the sole
discretion of Holder, pursuant to a Commercial Revolving Loan and Security
Agreement between Maker and Lender dated June 5, 1995, as amended by
various letter agreements between Maker and Lender dated March 11, 1996,
May 1, 1996, September 6, 1996, as of May 30, 1997, as of December 1, 1997,
May 6, 1998, August 24, 1998, September 29, 1998 and as of the date hereof
(collectively, the "CRLSA") and is subject in all respects to the terms and
conditions of the CRLSA, including, but not limited to, the repayment terms
and the termination date set forth in the CRLSA. Advances and payments on
this Note may be evidenced by borrowing certificates, a grid (if any)
attached to this Note or
<PAGE> 6
similar certificates or documents, or by an internal ledger account of
Lender which shall set forth, among other things, the principal amount of
any advances and payments thereof. Interest shall be paid on the first
business day of each and every month commencing on November 1, 1998. Holder
may, in its sole discretion, charge any amounts due hereunder to Maker's
revolving loan account maintained with Holder pursuant to the CRLSA.
Maker agrees that (i) if any installment of interest, principal or
other sum due hereunder is not paid when it is due under this Note, the
CRLSA or under any instrument evidencing any other obligation of Maker to
Holder; or (ii) if Maker or Holder shall terminate the CRLSA; or (iii) if
Maker or any guarantor of any obligation of Maker hereunder shall make an
assignment for the benefit of creditors or suffer or permit the appointment
of a receiver for any part of its property or suffer or permit the filing
by or against it of any petition for adjudication, arrangement,
reorganization or the like under any bankruptcy or insolvency law; or (iv)
if an Event of Default shall occur under the CRLSA or any mortgage,
security agreement or any other agreement securing this Note, any other
note by Maker to Holder, or in the performance of any other obligation to
Holder or any other entity or person; or (v) if there shall be any material
adverse change from the present condition or affairs (financial or
otherwise) of Maker or any of the guarantors of the obligations of Maker,
that in Holder's reasonable opinion materially impairs its security or
increases its risi; then an Event of Default shall have occurred hereunder
and, upon the happening of any such event, the entire indebtedness with
accrued interest thereon due under this Note shall, at the option of
Holder, be immediately due and payable without notice. Failure to exercise
such option shall not constitute a waiver of the right to exercise the same
in the event of any subsequent default. Upon the occurrence and during the
continuance of such an Event of Default, the interest rate on this Note
shall automatically increase without notice to a floating per annum rate
equal to two percentage points (2.0%) above the rate otherwise in effect
hereunder.
In the event of Maker's failure to pay any installment of interest,
and/or to pay any other sum due hereunder or under the CRLSA for more than
ten (10) days after the date it is due and payable, without in any way
affecting Holder's right to declare an event of default to have occurred, a
late charge equal to five percent (5%) of such late payment shall be
assessed against Maker and shall be due and payable immediately.
Notwithstanding any provisions of this Note, it is the understanding
and agreement of Maker and Holder (and any guarantors of Maker's
liabilities) that the maximum rate of interest to be paid by Maker (or
guarantors of Maker's liabilities) to Holder shall not exceed the highest
or the maximum rate of interest permissible to be charged by a commercial
lender such as Lender to a commercial borrower such as Maker under the laws
of the State of Connecticut.
<PAGE> 7
Any amount paid in excess of such rate shall be considered to have been
payments in reduction of principal.
Maker, and each and all guarantors of this Note hereby give Holder a
lien and right of setoff for all Maker's liabilities upon and against all
the deposits, credits, collateral and property of Maker and guarantors, now
or hereafter in the possession or control of Holder or in transit to it.
Holder may, upon the occurrence of an event of default hereunder or upon
demand for payment of any demand indebtedness owing from Maker to Holder,
apply or set off the same, or any part thereof, to any liability of Maker
even though unmatured.
Failure by Holder to insist upon the strict performance by Maker of
any terms and provisions herein shall not be deemed to be a waiver of any
terms and provisions herein, and Holder shall retain the right thereafter
to insist upon strict performance by Maker of any and all terms and
provisions of this Note or any document securing the repayment of this
Note.
MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT,
ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY
RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR
THE ENFORCEMENT OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT
LIMITATION, TORT CLAIMS.
MAKER AND EACH AND ALL GUARANTORS OF THIS NOTE ACKNOWLEDGE THAT THE
LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND WAIVES ITS
RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL
STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT
TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO USE, AND FURTHER
WAIVES ITS RIGHTS TO REQUEST THAT HOLDER POST A BOND, WITH OR WITHOUT
SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. Maker further, waive
diligence, demand, presentment for payment, notice of nonpayment, protest
and notice of protest, and notice of any renewals or extensions of this
Note, and all rights under any statute of limitations, and all guarantors
agree that the time for payment of this Note may be extended at Holder's
sole discretion, without impairing their liability thereon, and further
consent to the release of all or any part of the security for the payment
hereof, at the discretion of Holder, or the release of any party liable for
this obligation without affecting the liability of the other parties
hereto.
MAKER ACKNOWLEDGES THAT IT MAKES THE WAIVERS SET FORTH IN THE TWO
PRECEDING PARAGRAPHS KNOWINGLY,
<PAGE> 8
VOLUNTARILY AND WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE
RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEYS. MAKER FURTHER
ACKNOWLEDGES THAT LENDER HAS NOT AGREED WITH OR REPRESENTED TO MAKER THAT
THE PROVISIONS OF THE TWO PRECEDING PARAGRAPHS WILL NOT BE FULLY ENFORCED
IN ALL INSTANCES.
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Its
STATE OF CONNECTICUT )
ss: East Hartford
COUNTY OF HARTFORD )
On this the _____ day of October, 1998 before me, the undersigned officer,
personally appeared Robert G. LaVigne who acknowledged that he is the
Executive Vice President and CFO of Farmstead Telephone Group, Inc., a
Delaware corporation, and that he as such officer, being authorized so to
do, executed the foregoing instrument for the purposes therein contained,
as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand.
Notary Public
My Commission Expires:
<PAGE> 9
EXHIBIT 10(x)
As of January 1, 1999
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") to
First Union National Bank (successor-in-interest to Affiliated Business
Credit Corporation) ("First Union").
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
$6,000,000 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, as of May 30, 1997, as of December 1, 1997,
May 6, 1998, August 24, 1998, as of September 29, 1998 and as of October
15, 1998 (collectively, the "Loan Agreement") and a $6,000,000 Fourth
Amended and Restated Revolving Promissory Note dated as of October 15, 1998
(the "Fourth Amended and Restated Revolving Promissory Note") (the Fourth
Amended and Restated Revolving Promissory Note sometimes referred to herein
as the "Note"). Borrower acknowledges that the outstanding principal
balance of the Note on December 31, 1998 was $1,815,437.39, plus interest
accrued and accruing thereon and costs and expenses of collection,
including without limitation, attorneys' fees (collectively, the
"Indebtedness"). Additionally, 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.
The Borrower has requested that First Union modify the interest rate
on the Revolving Loan so as to convert the Revolving Loan from a base rate
loan to a loan with interest computed using a LIBOR market index rate (the
"Accommodation").
Capitalized terms used herein that are not defined herein have the
meanings ascribed to them in the Loan Agreement.
<PAGE> 1
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 Borrower represents, warrants and
acknowledges 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 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) 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 Borrower is a party or by which it
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 Borrower.
2. The Loan Agreement is hereby amended as follows:
(a) All references in the Loan Agreement to the Fourth
Amended and Restated Revolving Promissory Note are hereby deleted and
"Fifth Amended and Restated Revolving Promissory Note" is substituted
therefor. The copy of the Fourth Amended and Restated Revolving
Promissory Note attached to the Loan Agreement as Exhibit A is hereby
deleted and a copy of the Fifth Amended and Restated Revolving
Promissory Note annexed hereto as Schedule A is attached in lieu
thereof.
(b) By deleting Section 3.1(a) in its entirety and
substituting therefor the following:
"(a) Interest Rate. The Revolving Loan shall bear
interest (from the date made through and including the date of
payment in full), at the per annum rates set forth in the
Note."
3. 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 Notes, 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,
including without limitation the
<PAGE> 2
promissory note from FAMS, LLC to Borrower dated December 1, 1997 and all
security therefor.
4. On or before the date hereof, Borrower shall pay or have paid
to First Union all fees and expenses and other costs incurred by First
Union in connection with the Accommodation contemplated herein (including
without limitation, all attorney's and other professional fees and
expenses).
5. Contemporaneously herewith, (a) the Borrower shall execute and
deliver to First Union a $6,000,000 Fifth Amended and Restated Revolving
Promissory Note (the "Fifth Amended and Restated Revolving Promissory
Note"), which shall supersede and replace the Fourth Amended and Restated
Revolving Promissory Note, and (b) the Borrower shall execute and deliver
to First Union a certificate of Connecticut transaction, all of which shall
be in form and content satisfactory to First Union.
6. 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.
Very truly yours,
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Its
Reviewed and Agreed to:
FIRST UNION NATIONAL BANK
By
--------------------------------
Its Vice President
<PAGE> 3
STATE OF CONNECTICUT )
ss: East Hartford
COUNTY HARTFORD
On this the 22nd day of January, 1999 before me, the undersigned
officer, personally appeared Robert G. LaVigne, who acknowledged that he is
the Executive Vice President and CFO of Farmstead Telephone Group, Inc., a
Delaware corporation, and that he as such officer, being authorized so to
do, executed the foregoing instrument for the purposes therein contained,
as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand
Notary Public
My Commission Expires 5/31/2002
<PAGE> 4
Schedule A
----------
FIFTH AMENDED AND RESTATED REVOLVING PROMISSORY NOTE
$6,000,000 As of January 1, 1999
For value received, the undersigned, FARMSTEAD TELEPHONE GROUP, INC.,
a Delaware corporation ("Maker"), promises to pay to FIRST UNION NATIONAL
BANK (SUCCESSOR-IN-INTEREST TO AFFILIATED BUSINESS CREDIT CORPORATION), or
order ("Lender") at its office at 205 Church Street, New Haven, Connecticut
06510, or at such other place as the holder hereof (including Lender,
hereinafter referred to as "Holder") may designate, the sum of up to SIX
MILLION DOLLARS ($6,000,000), together with interest on the unpaid balance
of this Note, beginning as of the date hereof, before or after maturity or
judgment, beginning as of the date hereof, before or after maturity or
judgment, at the rate equal to the LIBOR Market Index Rate plus two and
three-quarters percent (2.75%) per annum, as that rate may change from day
to day in accordance with changes in the Libor Market Index Rate. Interest
shall be calculated daily on the basis of the actual number of days elapsed
over a 360 day year, together with all taxes levied or assessed on this
Note or the debt evidenced hereby against the Holder, and together with all
costs, expenses and attorneys' and other professional fees incurred in any
action to collect this Note or to enforce, preserve, realize or foreclose
any mortgage, security agreement or other agreement securing this Note or
to preserve, enforce, protect or sustain the lien of said mortgage,
security agreement or other agreement or in any litigation or controversy
arising from or connected with said mortgage, security agreement or other
agreement or this Note. As used herein, "LIBOR Market Index Rate" means,
for any day, the rate for 1-month U.S. dollar deposits as reported on
Telerate page 3750 as of 11:00 a.m., London time, on such day, or if such
day is not a London business day, then the immediately preceding London
business day (or if not so reported, then as determined by Lender from
another recognized source or interbank quotation).
The principal amount of this Note shall be advanced, at the sole
discretion of Holder, pursuant to a Commercial Revolving Loan and Security
Agreement between Maker and Lender dated June 5, 1995, as amended by
various letter agreements between Maker and Lender dated March 11, 1996,
May 1, 1996, September 6, 1996, as of May 30, 1997, as of December 1, 1997,
May 6, 1998, August 24, 1998, September 29, 1998, as of October 15, 1998
and as of the date hereof (collectively, the "CRLSA") and is subject in all
respects to the terms and conditions of the CRLSA, including, but not
limited to, the repayment terms and the termination date set forth in the
CRLSA. Advances and payments on this Note may be evidenced by borrowing
certificates, a grid (if any) attached to
<PAGE> 5
this Note or similar certificates or documents, or by an internal ledger
account of Lender which shall set forth, among other things, the principal
amount of any advances and payments thereof. Interest shall be paid on the
first business day of each and every month commencing on February 1, 1999.
Holder may, in its sole discretion, charge any amounts due hereunder to
Maker's revolving loan account maintained with Holder pursuant to the
CRLSA.
Maker agrees that (i) if any installment of interest, principal or
other sum due hereunder is not paid when it is due under this Note, the
CRLSA or under any instrument evidencing any other obligation of Maker to
Holder; or (ii) if Maker or Holder shall terminate the CRLSA; or (iii) if
Maker or any guarantor of any obligation of Maker hereunder shall make an
assignment for the benefit of creditors or suffer or permit the appointment
of a receiver for any part of its property or suffer or permit the filing
by or against it of any petition for adjudication, arrangement,
reorganization or the like under any bankruptcy or insolvency law; or (iv)
if an Event of Default shall occur under the CRLSA or any mortgage,
security agreement or any other agreement securing this Note, any other
note by Maker to Holder, or in the performance of any other obligation to
Holder or any other entity or person; or (v) if there shall be any material
adverse change from the present condition or affairs (financial or
otherwise) of Maker or any of the guarantors of the obligations of Maker,
that in , Holder's reasonable opinion materially impairs its security or
increases its risk; then an Event of Default shall have occurred hereunder
and, upon the happening of any such event, the entire indebtedness with
accrued interest thereon due under this Note shall, at the option of
Holder, be immediately due and payable without notice. Failure to exercise
such option shall not constitute a waiver of the right to exercise the same
in the event of any subsequent default. Upon the occurrence and during the
continuance of such an Event of Default, the interest rate on this Note
shall automatically increase without notice to a floating per annum rate
equal to two percentage points (2.0%) above the rate otherwise in effect
hereunder.
In the event of Maker's failure to pay any installment of interest,
and/or to pay any other sum due hereunder or under the CRLSA for more than
ten (10) days after the date it is due and payable, without in any way
affecting Holder's right to declare an event of default to have occurred, a
late charge equal to five percent (5%) of such late payment shall be
assessed against Maker and shall be due and payable immediately.
Notwithstanding any provisions of this Note, it is the understanding
and agreement of Maker and Holder (and any guarantors of Maker's
liabilities) that the maximum rate of interest to be paid by Maker (or
guarantors of Maker's liabilities) to Holder shall not exceed the highest
or the maximum rate of interest permissible to be charged by a commercial
lender such as Lender to a commercial borrower such as Maker under the laws
of the State of Connecticut.
<PAGE> 6
Any amount paid in excess of such rate shall be considered to have been
payments in reduction of principal.
Maker, and each and all guarantors of this Note hereby give Holder a
lien and right of setoff for all Maker's liabilities upon and against all
the deposits, credits, collateral and property of Maker and guarantors, now
or hereafter in the possession or control of Holder or in transit to it.
Holder may, upon the occurrence of an event of default hereunder or upon
demand for payment of any demand indebtedness owing from Maker to Holder,
apply or set off the same, or any part thereof, to any liability of Maker
even though unmatured.
Failure by Holder to insist upon the strict performance by Maker of
any terms and provisions herein shall not be deemed to be a waiver of any
terms and provisions herein, and Holder shall retain the right thereafter
to insist upon strict performance by Maker of any and all terms and
provisions of this Note or any document securing the repayment of this
Note.
MAKER HEREBY WAIVES TRIAL BY JURY IN ANY COURT AND IN ANY SUIT,
ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY
RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS NOTE IS A PART AND/OR
THE ENFORCEMENT OF ANY OF HOLDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT
LIMITATION, TORT CLAIMS.
MAKER AND EACH AND ALL GUARANTORS OF THIS NOTE ACKNOWLEDGE THAT THE
LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND WAIVES ITS
RIGHTS TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL
STATUTES, OR AS OTHERWISE ALLOWED BY ANY STATE OR FEDERAL LAW WITH RESPECT
TO ANY PREJUDGMENT REMEDY WHICH HOLDER MAY DESIRE TO USE, AND FURTHER
WAIVES ITS RIGHTS TO REQUEST THAT HOLDER POST A BOND, WITH OR WITHOUT
SURETY, TO PROTECT SAID MAKER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY HOLDER. Maker further, waive
diligence, demand, presentment for payment, notice of nonpayment, protest
and notice of protest, and notice of any renewals or extensions of this
Note, and all rights under any statute of limitations, and all guarantors
agree that the time for payment of this Note may be extended at Holder's
sole discretion, without impairing their liability thereon, and further
consent to the release of all or any part of the security for the payment
hereof, at the discretion of Holder, or the release of any party liable for
this obligation without affecting the liability of the other parties
hereto.
MAKER ACKNOWLEDGES THAT IT MAKES THE WAIVERS SET FORTH IN THE TWO
PRECEDING PARAGRAPHS KNOWINGLY,
<PAGE> 7
VOLUNTARILY AND WITHOUT DURESS AND ONLY AFTER CONSIDERATION OF THE
RAMIFICATIONS OF SUCH WAIVERS WITH ITS ATTORNEYS. MAKER FURTHER
ACKNOWLEDGES THAT LENDER HAS NOT AGREED WITH OR REPRESENTED TO MAKER THAT
THE PROVISIONS OF THE TWO PRECEDING PARAGRAPHS WILL NOT BE FULLY ENFORCED
IN ALL INSTANCES.
This Note shall be governed by and construed in accordance with the
laws of the State of Connecticut (but not its conflicts of law provisions).
FARMSTEAD TELEPHONE GROUP, INC.
By:
--------------------------------
Its
STATE OF CONNECTICUT )
ss: East Hartford
COUNTY OF HARTFORD )
On this the _____ day of January, 1999 before me, the undersigned
officer, personally appeared ____________________________, who
acknowledged that he is the __________________________ of Farmstead
Telephone Group, Inc., a Delaware corporation, and that he as such officer,
being authorized so to do, executed the foregoing instrument for the
purposes therein contained, as his and its free act and deed.
IN WITNESS WHEREOF, I hereunto set my hand.
Commissioner of the Superior Court
Notary Public
My Commission Expires:
<PAGE> 8
EXHIBIT 10(y)
Monday, October 05, 1998
Dir#: 2568
Farmstead Telephone Group, Inc.
ATTN: Robert LaVigne
22 Prestige Park Circle
East Hartford, CT 06108
RE: Seasonal Uplift
Dear Robert LaVigne:
FINOVA Capital Corporation is pleased to advise you that Farmstead
Telephone Group, Inc. has been approved for a fourth (4th) quarter increase
in its line of credit. Effective October 1, 1998, your credit line will be
increased to $4,000,000.00. Please note the increase is temporary and will
expire on January 31, 1999. All terms and conditions of your existing
agreement with FINOVA Capital Corporation remain in force.
FINOVA is happy to extend this additional credit to you as we enter into
the last quarter of 1998. We are committed to helping your business grow
and look forward to a long-term relationship between Farmstead Telephone
Group, Inc. and FINOVA Capital Corporation. If you have any questions,
please feel free to contact me at (800) 777-3731-x8491. Thank you.
Respectfully,
/s/Mitchell J. Reaver
- ---------------------
Mitchell J. Reaver
Account Executive
INVENTORY FINANCE
Cc: Dealer File
Credit File K. Guest
EXHIBIT 10(z)
Thursday, February 04, 1999
2568
Farmstead Telephone Group, Inc.
Mr. Robert LaVigne
22 Prestige Park Circle
East Hartford, CT 06108
Re: Temporary increase to Line of Credit
With FINOVA Capital Corporation
Dear Mr. LaVigne,
FINOVA Capital Corporation ("FINOVA") is pleased to advise you of our
commitment to offer Farmstead Telephone Group, Inc. (the "Borrower") a
$3,000,000.00 temporary increase in your line of credit from $2,000,000.00
to $5,000,000.00 (the "Line of Credit") for the period through March 31,
1999. After such time, the line shall return back to its original amount
and continue as stated herein.
FINOVA maintains a common due date program whereas all payments are due in
our office on the 1st, 10th, & 20th of each month. The terms under which such
financing will be provided to your are 3pay90 from invoice date, with
interest to accrue per annum ADB at 2.5% above Prime for those programs not
fully rate supported for 90 days by the vendor. Of course the option is
always available to avoid those interest charges by accepting shorter terms
actually sponsored by the vendor. The default (maturity) rate commences on
the day following the due date of each unpaid invoice. Offsets to payments
to your account are not to be made unless previously authorized in writing
by FINOVA. Unauthorized deductions shall be charged the default rate until
the offset has been satisfied. From time to time, FINOVA may offer
different terms to you after notice.
This commitment is made subject to the following terms and conditions:
A. Amount of Line of Credit
------------------------
The Line of Credit shall be in a maximum amount of $5,000,000.00 (as
described above). FINOVA may from time to time finance sums above
the committed line at its sole discretion. Further, any such
additional advances are not intended to be and should not be
construed as a permanent commitment above the approved line and are
subject to immediate repayment, at our sole option, upon notice by
FINOVA. There shall be no minimum extension of credit required of
FINOVA under this commitment. All extensions of credit shall be made
in the sole and complete discretion of FINOVA. The outstanding
balance under the Line of Credit shall be computed by adding the
principal outstanding amount and the amount of unpurchased approvals.
B. Line of Credit Utilization
--------------------------
FINOVA will set aside up to $500,000.00 of Farmstead's line of
credit. This portion of the Line of Credit will be used to finance
Borrower's open account inventory purchases (Other Eligible
Inventory).
C. Other Eligible Inventory
------------------------
FINOVA will finance other Eligible Inventory as follows:
* Repayment terms shall be 1/2 30, 1/2 60 from the advance date;
* Rate of Prime plus 1.5 percent (1.5%) per annum ADB from
advance date;
* Advances shall be in FINOVA's sole discretion and shall be made
directly to Farmstead on a per invoice basis upon FINOVA's
receipt of all appropriate support documentation;
* Advance rate shall be up to 50 percent (50%) of the wholesale
value of the invoice;
* FINOVA reserves the right to approve vendors for advances on
Other Eligible Inventory;
* There shall be a per advance transaction fee equivalent to 0.10
percent (0.1%) of invoice amount;
* No minimum balance requirement.
D. Duration of Line of Credit
--------------------------
The term of the Line of Credit shall continue through March 31, 1999
("Expiration") at which time the Line of Credit shall terminate and
revert back to its original amount of $2,000,000.00 through 03/31/99.
Currently FINOVA is considering a $5,000,000.00 permanent inventory
credit line for your account projected to be effective after such
time for a period of one year. FINOVA will annually review the line
for renewal based on our receipt and satisfactory review of your next
fiscal year end financial statement. FINOVA may, in its sole and
absolute discretion extend the Line of Credit for such additional
periods of time and under such terms and conditions as FINOVA
determines to be appropriate. No advances will be made by FINOVA
until FINOVA actually receives executed copies of any and all
documentation required by FINOVA.
E. Early Termination
-----------------
The Line of Credit may be terminated by FINOVA at any time prior to
the Expiration specified above if:
1. The Borrower fails to execute and/or deliver any and all
financing documents required by FINOVA, which financing
documents shall include, but shall not be limited to, a Dealer
Loan Security Agreement, Certificate of Corporate Borrowing
Resolutions, and a UCC-1 broad lien on all assets.
2. The Borrower is in breach of any of the provisions of any of the
financing documents required by FINOVA, or is in default under
any such document.
3. There has occurred any adverse change in the financial
condition, structure, ownership, or business prospects of the
Borrower (or any guarantor of the Borrower's indebtedness to
FINOVA), or if FINOVA shall learn of any misrepresentation or
omission of a fact or circumstance by the Borrower (or any
guarantor of the Borrower's indebtedness to FINOVA) which FINOVA
deems to be material. The Borrower and all guarantors shall be
obligated to notify FINOVA Capital Corporation in writing of any
change in either their financial condition, structure,
ownership, or business prospects.
4. The Borrower is in breach of any of the Conditions as set forth
by FINOVA, and itemized below.
F. Recurring Conditions:
---------------------
1. Collateral Covenants:
a) The ratio of total collateral available to FINOVA after
deduction of senior liens to total FINOVA indebtedness must
be at least 1.5 to 1 (1.5:1).
b) The ratio of Other Eligible Inventory to advances on Other
Eligible Inventory must be at least 2 to 1 (2:1).
> In the event of a collateral shortfall, an immediate
paydown shall be required.
2. Reporting Requirements:
a) Monthly collateral reports of Accounts Receivable, Accounts
Payable, and Inventory valuation reports are to be provided
within 10 business days after the end of each month.
b) Monthly Borrowing Base to accompany collateral reports.
c) Quarterly 10-QSB's, if not easily obtainable by FINOVA.
3. Operational Requirements:
a) Evidence of Casualty insurance in an amount greater than,
or equal to the credit facility, accompanied by a Lender's
Loss Payable clause favoring FINOVA Capital Corp.
G. Current Conditions [to be satisfied within the next 30 days]:
-------------------------------------------------------------
1. Conversion of all required documentation from our predecessor,
AT&T Capital Corporation, to that of our current name, FINOVA
Capital Corporation.
2. Completion of the Y2K survey provided by FINOVA.
3. Satisfactory Audit, tentatively scheduled for the first week of
March 1999.
4. Updated insurance certificate. The policy shows continued
through 10/99, but FINOVA needs an actual copy of the insurance
certificate to evidence the amount of contents coverage.
Additionally, the Loss Payee name should be amended from AT&T to
that of FINOVA.
5. Conversion of Intercreditor document with First Union (formerly
Affiliated Business Credit) to amend our corporate name change
from AT&T to FNV.
H. No Assignment
-------------
This commitment may not be assigned by the Borrower without the prior
written consent of FINOVA, which consent shall be granted or withheld
in the sole and absolute discretion of FINOVA.
We look forward to a continuing relationship!
Respectfully,
/s/Mitchell J. Reaver
- ---------------------
Mitchell J. Reaver
Account Executive
INVENTORY FINANCE
Accepted: /s/ Robert G. LaVigne
------------------------
(Name)
Executive Vice president
------------------------
(Title)
2/8/99
------------------------
(Date)
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. Ltd. 50% Peoples Republic of China
FTG Venture Corporation 100% Delaware
TeleSolutions, Inc. 40% Republic of the Philippines
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 590 1,102
<SECURITIES> 0 0
<RECEIVABLES> 5,237 5,656
<ALLOWANCES> 287 579
<INVENTORY> 6,850 2,583
<CURRENT-ASSETS> 12,584 9,503
<PP&E> 1,509 1,419
<DEPRECIATION> 664 484
<TOTAL-ASSETS> 13,498 10,829
<CURRENT-LIABILITIES> 5,185 3,063
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 6,341 5,766
<TOTAL-LIABILITY-AND-EQUITY> 13,498 10,829
<SALES> 27,738 20,559
<TOTAL-REVENUES> 27,738 20,559
<CGS> 20,816 15,460
<TOTAL-COSTS> 20,816 15,460
<OTHER-EXPENSES> 5,926 5,552
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 272 204
<INCOME-PRETAX> 796 (557)
<INCOME-TAX> 16 43
<INCOME-CONTINUING> 780 (600)
<DISCONTINUED> (209) (1,266)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 571 (1,866)
<EPS-PRIMARY> .17 (.57)
<EPS-DILUTED> .17 (.57)
</TABLE>
