U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number: 0-15938
Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle
East Hartford, CT 06108
(Address of principal executive offices) (Zip Code)
(860) 610-6000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
As of April 30, 1999, there were 3,272,579 shares of the issuer's $.001 par
value Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands, except share data) 1999 1998
- ------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 463 $ 590
Accounts receivable, less allowance for doubtful accounts 4,842 4,950
Inventories 6,226 6,850
Other current assets 178 194
- ---------------------------------------------------------------------------------------------------
Total Current Assets 11,709 12,584
- ---------------------------------------------------------------------------------------------------
Property and equipment, net 805 845
Other assets 128 69
- ---------------------------------------------------------------------------------------------------
Total Assets $12,642 $13,498
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,411 $ 1,442
Borrowings under inventory finance agreement (Note 2) 1,758 3,082
Current portion of long-term debt (Note 2) 81 78
Accrued compensation and benefits 462 501
Other current liabilities 34 82
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 3,746 5,185
- ---------------------------------------------------------------------------------------------------
Long-term debt (Note 2) 2,561 1,916
Other liabilities 72 53
- ---------------------------------------------------------------------------------------------------
Total Liabilities 6,379 7,154
- ---------------------------------------------------------------------------------------------------
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;
3,272,579 and 3,264,579 shares issued and outstanding at March 31,
1999 and December 31, 1998, respectively 3 3
Additional paid-in capital 12,216 12,200
Accumulated deficit (5,956) (5,859)
- ---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 6,263 6,344
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $12,642 $13,498
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Revenues $6,328 $5,620
Cost of revenues 4,856 4,259
- -------------------------------------------------------------------------
Gross profit 1,472 1,361
Selling, general and administrative expenses 1,510 1,355
- -------------------------------------------------------------------------
Operating income (loss) (38) 6
Interest expense 67 61
Other income (8) (31)
- -------------------------------------------------------------------------
Loss from continuing operations before income taxes (97) (24)
Provision for income taxes - 11
- -------------------------------------------------------------------------
Loss from continuing operations (97) (35)
- -------------------------------------------------------------------------
Discontinued operations (Note 3):
Loss from operations - (83)
Provision for estimated costs of disposal - (75)
- -------------------------------------------------------------------------
Loss from discontinued operations - (158)
- -------------------------------------------------------------------------
Net loss $ (97) $ (193)
=========================================================================
Basic and diluted net loss per common share:
From continuing operations $ (.03) $ (.01)
From discontinued operations - (.05)
- -------------------------------------------------------------------------
Basic and diluted net loss per common share $ (.03) $ (.06)
=========================================================================
Diluted weighted average common shares 3,593 3,263
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (97) $ (193)
Adjustments to reconcile net loss to net cash flows
provided by operating activities:
Depreciation and amortization 86 72
Provision for estimated costs of disposal of discontinued operation - 75
Changes in operating assets and liabilities:
Decrease in accounts receivable 108 290
Decrease (increase) in inventories 624 (771)
Increase in other assets (44) (49)
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (118) 631
Increase in other liabilities 19 -
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 578 55
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (45) (62)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (45) (62)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Bank and inventory finance borrowings (repayments) (646) 95
Repayments of capital lease obligation (30) (18)
Proceeds from exercise of stock options 16 4
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (660) 81
- ----------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (127) 74
Cash and cash equivalents at beginning of period 590 1,102
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 463 $1,176
==============================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 67 $ 62
Income taxes 16 6
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The interim financial statements are presented on a consolidated
basis, consisting of the accounts of Farmstead Telephone Group, Inc. and its
wholly owned subsidiary, FTG Venture Corporation (the "Company"). The
interim financial statements presented herein are unaudited, however in the
opinion of management reflect all adjustments, consisting of adjustments
that are of a normal recurring nature, which are necessary for a fair
statement of results for the interim periods presented. This Form 10-QSB
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998.
Note 2. Debt Obligations
Long-term Debt
--------------
As of March 31, 1999, long-term debt obligations consisted of the
following (in thousands):
<TABLE>
<S> <C>
Bank revolving credit agreement $2,365
Obligation under capital lease 277
----------------------------------------------
2,642
Less current portion (81)
----------------------------------------------
Long-term debt $2,561
==============================================
</TABLE>
As of March 31, 1999, the unused portion of the Company's revolving
credit facility was $3,635,000, of which approximately $782,000 was
available under the borrowing formula. The average and highest amounts
borrowed under this credit facility during the three months ended March 31,
1999 were approximately $1,986,000 and $2,505,000, respectively. Borrowings
are dependent upon the continuing generation of collateral, subject to the
credit limit. The weighted average interest rate on this outstanding debt
was approximately 7.7% for the three months ended March 31, 1999. As of
March 31, 1999, the Company was in violation of its debt service coverage
financial covenant, principally as a result of the net loss for the period.
The Company was subsequently granted a waiver of this violation from the
bank.
The Company is currently negotiating the terms of a $10 million working
capital financing agreement with a commercial lending institution. This
agreement, if consummated, would replace the $6 million revolving credit line
with First Union National Bank ("First Union") and the $4 million inventory
financing credit line with Finova Capital Corporation ("Finova"). The Company
expects to obtain lending terms and conditions that are materially similar to
its current credit agreements, and this facility will include an additional
inventory-based credit line. The Company expects to complete its
negotiations and have the new facility in place by the beginning of June.
The proposed new facility is expected to significantly increase the Company's
collateral base, generating increased borrowing availability.
Inventory Financing Agreement
-----------------------------
On March 24, 1999 the Company's temporary $5 million inventory
financing credit line with Finova was replaced with a $4 million credit line
expiring April 30, 2000. As a condition of this credit line, the Company is
required to maintain a minimum $5 million tangible net worth, and the
maintenance of a total liabilities to tangible net worth ratio of a maximum
of 3 to 1. As of March 31, 1999, the Company was in compliance with these
covenants. As previously described above, on April 28, 1999 the Company is
currently negotiating with a commercial lending institution for a working
capital credit line which will be used in part to replace the Finova credit
line.
Note 3. Discontinued Operations
The loss from discontinued operations for the three months ended March
31, 1998 consisted of an $83,000 operating loss from the voice processing
products business and a $75,000 charge to accrue estimated costs of
discontinuing the business.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Loss
The Company recorded a net loss of $97,000 for the three months ended
March 31, 1999, all of which was attributable to continuing operations. This
compares to a net loss of $193,000 for the three months ended March 31,
1998, which consisted of a $35,000 loss from continuing operations and a
$158,000 loss from discontinued operations. The loss from discontinued
operations in the 1998 period consisted of an $83,000 operating loss from
the voice processing products business, due to declining revenues, and a
$75,000 charge to accrue estimated costs of discontinuing the business.
Discussion of the Results of Continuing Operations
Revenues
Revenues from continuing operations for the three months ended March
31, 1999 were $6,328,000, an overall increase of $708,000 or 13% from the
comparable 1998 period. Equipment sales revenues accounted for $421,000 of
the revenue increase, and were 8% higher than the comparable 1998 period as
a result of a 3% increase in end-user sales and a 47% increase in sales to
dealers and equipment wholesalers. The increase of only 3% in end-user
equipment sales over the comparable prior year period reflected the impact
of the loss of two salespersons during the current period. Service revenues
accounted for $287,000 of the revenue increase, and were 92% higher than the
comparable 1998 period primarily due to increases in both short-term
equipment rentals and telecommunications coordination services. Equipment
sales revenues comprised 91% of consolidated revenues from continuing
operations for the three months ended March 31, 1999 (94% in the comparable
1998 period), while service revenues accounted for 9% of consolidated
revenues from continuing operations in 1999 (6% in 1998).
As a part of its agreement with Lucent Technologies in becoming an
Authorized Remarketing Supplier of Classic Lucent(TM) telephone equipment
("ARS"), in February 1999 the Company transferred its new key system dealer
base to another Lucent distributor. Revenues from this dealer base
accounted for 7% of revenues in both the three months ended March 31, 1999
and 1998. The Company anticipates that the loss of future revenues from
this dealer base will be offset by increased revenues under the ARS
agreement.
Gross Profit
The gross profit from continuing operations for the three months ended
March 31, 1999 was $1,472,000, an increase of $111,000 or 8% over the
comparable prior year period. The overall gross profit margin was 23% of
revenues in the 1999 period, compared to 24% for the comparable 1998 period.
License fees paid in the 1999 period to Lucent for equipment sales under the
ARS program had the effect of reducing the gross profit margin by 3
percentage points. In addition, higher labor and other overhead costs per
revenue dollar in the 1999 period reduced the comparative gross profit
margin by approximately 1 percentage point. The higher labor costs were the
result of the expansion of the Company's equipment repair and refurbishing
resources in connection with the ARS program. The Company however, recorded
higher profit margins on 1999 dealer sales and service revenues.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses from continuing operations for the three months ended
March 31, 1999 were $1,510,000, an increase of $155,000 or 11% over the
comparable 1998 period. SG&A expenses were 24% of revenues in each period.
The increase in SG&A expenses was primarily attributable to higher sales and
sales support compensation, and increased insurance and depreciation
expenses, partially offset by lower marketing expenses.
Interest Expense and Other Income
Interest expense for the three months ended March 31, 1999 was
$67,000, as compared to $61,000 for the comparable 1998 period. The
increase was attributable to short term borrowings from Finova to finance
inventory purchases. Other income for the three months ended March 31, 1999
was $8,000, as compared to $31,000 for the three months ended March 31,
1998. Other income in each period consisted principally of interest earned
on invested cash.
Liquidity and Capital Resources
Working capital at March 31, 1999 was $7,963,000, an 8% increase from
$7,399,000 at December 31, 1998. The working capital ratio was 3.1 to 1 at
March 31, 1999, as compared with 2.4 to 1 at December 31, 1998.
Operating activities generated $578,000 during the three months ended
March 31, 1999 principally due to a reduction in inventories and accounts
receivable.
Investing activities used $45,000 during the three months ended March
31, 1999 from the purchase of fixed assets, principally computer hardware
and software.
Financing activities used $660,000 during the three months ended March
31, 1999, principally from $1.3 million net repayments of advances under the
Company's inventory financing credit line with Finova, offset by $678,000
net borrowings under the Company's revolving loan facility with First Union.
As of March 31, 1999, the Company had approximately $782,000 of
availability, pursuant to borrowing formulas, under the First Union
facility. The average and highest amounts borrowed under the First Union
credit facility during the three months ended March 31, 1999 were
approximately $1,986,000 and $2,505,000, respectively. Borrowings are
dependent upon the continuing generation of collateral, subject to the
credit limit. The weighted average interest rate on the outstanding debt to
First Union was approximately 7.7% for the three months ended March 31,
1999. As of March 31, 1999, the Company was in violation of its debt
service coverage financial covenant, principally as a result of the net loss
for the period. The Company subsequently was granted a waiver of this
violation from the bank.
The Company is currently negotiating the terms of a $10 million working
capital financing agreement with a commercial lending institution. This
agreement, if consummated, would replace the $6 million revolving credit line
with First Union National Bank ("First Union") and the $4 million inventory
financing credit line with Finova Capital Corporation ("Finova"). The Company
expects to obtain lending terms and conditions that are materially similar to
its current credit agreements, and this facility will include an additional
inventory-based credit line. The Company expects to complete its
negotiations and have the new facility in place by the beginning of June.
The proposed new facility is expected to significantly increase the Company's
collateral base, generating increased borrowing availability.
The Company believes that it has sufficient capital resources, in the
form of cash and availability under its credit facilities, to satisfy its
present working capital requirements. The Company does not currently have
any material commitments for capital expenditures.
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 May, 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 $40,000, of
which approximately $20,000 has been incurred to date.
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.
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-QSB contain certain
statements which are not historical facts and are considered forward-looking
statements within the meaning of the Federal Securities laws. The Company's
actual results could differ materially from those projected in the forward-
looking statements as a result of, among other factors, general economic
conditions and growth in the telecommunications industry, competitive
factors and pricing pressures, changes in product mix, product demand, risk
of dependence on third party suppliers, and other risk factors detailed in
this report, described from time to time in the Company's other Securities
and Exchange Commission filings, or discussed in the Company's press
releases. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on behalf of the Company. All
forward-looking statements included in this document are based upon
information available to the Company on the date hereof. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities:
The Company hereby incorporates by reference the information set forth
in Part I, Item 2 of this Form 10-QSB regarding the default under the loan
agreement with First Union.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10(aa) Finova Capital Corporation letter agreement dated
March 24, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended March 31, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
/s/ Robert G. LaVigne
-----------------------------------
Dated: May 3, 1999 Robert G. LaVigne
Executive Vice President, Chief
Financial Officer
EXHIBIT 10 (aa)
Wednesday, March 24, 1999
Farmstead Telephone Group, Inc.
ATTN: Mr. Robert LaVigne
22 Prestige Park Circle
East Hartford, CT 06108
Re: 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
$2,000,000.00 increase in your line of credit from $2,000.000.00 to
$4,000.000.00 (the "Line of Credit") for the period through April 30, 2000.
FINOVA maintains a common due date whereas all payments are due in our
office on the 8th, 15th, 23rd, & 30th of each month. The terms under which
such financing will be provided to you are 3pay90 from invoice date, with
interest to accrue per annum ADB at 2.50% 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 $4,000,000.00 (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 (Non-FINOVA Inventory Line - Other
Eligible Inventory).
C. Non-FINOVA Inventory Line - 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;
<PAGE> 1
* 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;
* Acceptability of Other Eligible Inventory to be determined by pre-
funding audit;
* No minimum balance requirement.
D. Duration of Line of Credit
--------------------------
The term of the Line of Credit shall continue through April 30, 2000
("Expiration") at which time the Line of Credit shall terminate and
expire. 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. There is any transfer, distribution, loan, or payment of money
or property to any affiliate or principal, except as immediately
follows:
* Farmstead Telephone Group, Inc. may engage in transactions
with affiliates in the normal course of business, in
amounts and upon terms which are fully disclosed to FINOVA
and which are no less favorable to borrower than would be
obtainable in a comparable transaction with an entity that
is not an affiliate.
5. 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) Eligible Collateral coverage equivalent to 150% of the
FINOVA outstandings. Available collateral shall be
determined by and include 80% of eligible Account
Receivable, 100% of eligible FINOVA floorplanned inventory
[new], 75% of eligible non-FINOVA inventory [new], & 30%
eligible inventory [other] after deduction of senior
liens.
b) In the case where FINOVA would be advancing on the non-
FINOVA Inventory Line (Other Eligible Inventory), eligible
collateral coverage must be equivalent to 200%.
* In the event of a collateral shortfall, an immediate
paydown shall be required.
2. Financial Covenants:
a) Tangible Net Worth is to be greater than, or equal to,
$5,000,000.00.
b) Leverage Ratio (Debt to Tangible Capital Funds) is not to
exceed 2 to 1.
<PAGE> 2
3. Reporting Requirements:
a) Monthly collateral reports of Accounts Receivable,
Accounts Payable, and Inventory valuation reports are to
be provided within 15 business days after the end of each
month. These may be provided in summary at the end-user
level and should be provided for all locations aged-out in
30-day increments.
b) Monthly Borrowing Base to accompany collateral reports.
c) Monthly internally prepared Financial Statements to be
provided within 30 days of the end of each monthly,
Quarterly IO-QSB's, and annual FYE 10-K financial
statements.
4. Operational Requirements:
a) Quarterly Field Examinations (Audits), at the expense of
FINOVA until such time as otherwise indicated.
b) Evidence of Casualty insurance to cover the floorplanned
inventory for an amount equal to the average inventory
levels accompanied by a Lender's Loss Payable clause
favoring FINOVA Capital Corporation.
G. Current Conditions:
-------------------
1. Conversion of all required documentation from our predecessor,
AT&T Capital Corporation to that of our current name, FINOVA
Capital Corporation (including, but not limited to: Dealer Loan
Security Agreement, Corporate Borrowing Resolutions, Insurance
Authorization, Credit Release Authorization, Y2K Survey,
Landlord Waiver, UCC assignments, & Intercreditor assignments).
2. Completion of the Y2K survey provided by FINOVA.
3. Conversion of Intercreditor document with First Union [formerly
Affiliated Business Credit] to amend our corporate name change
from AT&T to FNV.
4. Affiliate Confirmations to be verified in writing by Farmstead
Telephone Group, Inc.:
* That Cobotyx was never a separate entity from Farmstead,
simply a division thereof and that it has since been
closed and merged back-into the main operations of FTG.
* That Farmstead is currently negotiating selling off the
affiliate, "Telesolutions" [40% ownership], to other
partner.
* That affiliate [50% owned], "Beijing Antai
Communications", has been inactive & since written-off the
books of FTG.
* That "FTG Venture Corp." is only a shell company that was
formed to hold FAMS, which has since been liquidated;
hence inactive.
5. Satisfactory credit references.
6. 12/31/98 draft Fiscal year-end Financials & 12/31/98 10-K
financial statements.
7. 2/28/99 collateral reports of Accounts Receivable, Accounts
Payable, and Inventory valuation along with Bank's 2/28/99
Borrowing Base Certificate.
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,
Mitchell J. Reaver
Account Executive
Distribution & Channel Finance
<PAGE> 3
Accepted: /s/ Robert G. LaVigne
----------------------
(Name)
Exec. V.P. & CFO
----------------
(Title)
4-23-99
-------
(Date)
<PAGE> 4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 463
<SECURITIES> 0
<RECEIVABLES> 5,156
<ALLOWANCES> 314
<INVENTORY> 6,226
<CURRENT-ASSETS> 11,709
<PP&E> 1,554
<DEPRECIATION> 749
<TOTAL-ASSETS> 12,624
<CURRENT-LIABILITIES> 3,746
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 6,260
<TOTAL-LIABILITY-AND-EQUITY> 12,642
<SALES> 6,328
<TOTAL-REVENUES> 6,328
<CGS> 4,856
<TOTAL-COSTS> 4,856
<OTHER-EXPENSES> 1,510
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> (97)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
