UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1999
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. [X]
State issuer's revenues for its most recent fiscal year: $32,871,000.
As of March 3, 2000, the aggregate market value of the Common Stock of the
issuer held by non-affiliates, based upon the last sale price of the
issuer's Common Stock on such date, was $4,502,000.
As of March 3, 2000, the issuer 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 15, 2000 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
----
[S] [S] [C]
Item 1. Description of Business 3
Item 2. Description of Properties 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 11
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 11
Item 10. Executive Compensation 12
Item 11. Security Ownership of Certain Beneficial Owners and Management 12
Item 12. Certain Relationships and Related Transactions 12
Item 13. Exhibits and Reports on Form 8-K 12
<PAGE> 2
PART I
Item 1. Description of 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's main
offices are located at 22 Prestige Park Circle, East Hartford, CT 06108,
and its telephone number is (860) 610-6000. The Company is principally
engaged as a secondary market reseller, and Authorized Remarketing Supplier
of Classic Lucent[TRADEMARK] and new Lucent Technologies, Inc. ("Lucent")
business communication products. These products are primarily customer
premises-based private switching systems and peripheral telecommunications
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, 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 began the process of divesting
itself from this business, completing the process in 1998.
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.
Products
The Company primarily sells both refurbished (by the Company or other
equipment refurbishers) and new telecommunications parts manufactured by
Lucent (See "Relationship with Lucent Technologies" for further information
on Lucent). Refurbished products are primarily sold under the Classic
Lucent[TRADEMARK] label, pursuant to a licensing agreement with Lucent. The
Company's products are primarily components of 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. 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 include: Merlin[REGISTERED MARK],
Spirit[REGISTERED MARK], and Partner[REGISTERED MARK], Lucent PBX equipment
sold by the Company include Definity[REGISTERED MARK], and System 75.
Equipment sales revenues accounted for approximately 92% of
consolidated revenues from continuing operations in 1999 (94% in 1998),
while service revenues accounted for 8% of consolidated revenues from
continuing operations in 1999 (6% in 1998). Sales of PBX equipment and
associated telephones and peripherals accounted for approximately 76% of
total equipment sales in 1999 (81% in 1998), while key equipment and other
equipment sales, including data equipment, accounted for 24% of total
equipment sales in 1999 (19% in 1998).
<PAGE> 3
Relationship with Lucent Technologies
Lucent was formed in 1995 from the systems and technology units that
were formerly a part of AT&T Corp., including the research and development
capabilities of Bell Laboratories. In April 1996, Lucent completed the
initial public offering of its common stock and on September 30, 1996,
became independent of AT&T when AT&T distributed to its shareholders all of
its Lucent shares. With 1999 consolidated revenues in excess of $38
billion ($8.5 billion in revenues generated by the 'Enterprise Networks'
business segment, within which market segment the Company participates),
Lucent is one of the world's leading designers, developers and
manufacturers of communications systems, software and products.
Since 1985, AT&T/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
relationships with a number of companies throughout the United States who
can provide such installation and maintenance services.
Since February 1998, the Company has been operating under a Lucent-
sponsored Authorized Remarketing Supplier ("ARS") program as an ARS Dealer,
pursuant to a three-year contract entered into in December 1998 (the "ARS
Agreement") to sell Classic Lucent[TRADEMARK] products to end-users
nationwide. Classic Lucent[TRADEMARK] 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 appointed ARS
Dealers, none of whom has been granted an exclusive territory. The ARS
Agreement also allows the Company to sell certain new Lucent PBX products
and voice processing products to end-users, including government agencies.
In February 1999, as a condition of its agreement with Lucent to become an
ARS Dealer, the Company's new key system distributor agreement was
terminated, and its associated dealer base was transferred to another
Lucent distributor. Prior to the ARS Agreement, the Company was an
"Authorized Distributor of Selected Lucent - Remanufactured Products" since
1991. In January 2000, the Company's direct supplier relationship with
Lucent was assigned to Catalyst Telecom, a Lucent distributor, from whom
the Company now purchases its new telecommunications products.
The Company believes that its relationship with Lucent is
satisfactory and has no indication that Lucent has any intention of
terminating the ARS Agreement with the Company. The Company could be
materially adversely affected should Lucent decide to terminate this
agreement.
Marketing and Customers
Telecommunications parts and value added services are marketed
nationally through the Company's direct sales staff, which includes
salespersons located throughout the Eastern Seaboard, Illinois, Ohio, Texas
and California, and through a network of associate dealers (until February
1999). During 1999, the Company shipped products to approximately 6,000
business locations, with customers ranging from large, multi-location
corporations, to small companies, and to equipment wholesalers, dealers,
and government agencies and municipalities. In addition, during 1999 the
Company started-up a call center sales operation at its East Hartford, CT
facility, and shipped products to approximately 7,000 business locations.
Approximately 67% (84% in 1998) of the Company's revenues were generated by
customers located in New England, and along the Eastern Seaboard. End-users
accounted for approximately 96% of 1999 revenues (87% in 1998), while sales
to dealers and other resellers accounted for approximately 4% of 1999
revenues (13% in 1998). During the two years ended December 31, 1999, no
single customer accounted for more than 10% of revenues from continuing
operations, except for Lucent, which accounted for approximately 15% of
both 1999 and 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 Peoples Republic of China and
in the Republic of the Philippines. Its efforts, however, were not
successful, and by the end of 1997 the Company ceased pursuing these
international markets. The Company is currently focusing its sales efforts
to markets within the United States.
<PAGE> 4
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
these services help differentiate it 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.
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 8% of revenues
from continuing operations in 1999 and 6% in 1998. 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[TRADEMARK] 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.
As the industry further develops voice and data convergence products, the
Company anticipates that it will encounter a broader variety of
competitors, including new entrants from related computer and communication
industries.
Suppliers
Lucent has historically been the Company's largest supplier of new
telecommunication products and, until 1999, was one of its largest
suppliers of refurbished products. In January 2000, the Company's direct
supplier relationship with Lucent was assigned to Catalyst Telecom, a
Lucent distributor, from whom the Company now purchases its new
telecommunications products. The Company acquires used equipment from a
variety of sources, depending upon price and availability at the time of
purchase. These sources include other secondary market equipment dealers,
leasing companies and end-users. The equipment so acquired may be in a
refurbished state and ready for resale, or it may be purchased "as-is",
requiring repair and/or refurbishing prior to its resale. The Company is
dependent upon its relationships and agreements with Catalyst and Lucent
for the provision of new equipment for resale. The Company is not
otherwise dependent upon any other single supplier for used equipment. The
Company believes that the availability of used equipment in the marketplace
is presently sufficient to allow the Company to meet its customers' used
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. In October 1998, the Company entered into a
license agreement with Lucent, under which the Company was granted a non-
exclusive license to use the Classic Lucent[TRADEMARK] trademark in
connection with the refurbishing, marketing and sale of Lucent products sold
under the ARS Agreement. Under this agreement, the Company is obligated to
pay Lucent a fee, ranging from 8.5% to 10% of the sales price, on Classic
Lucent product sold by the Company. The license expires December 31, 2001.
Employees
At December 31, 1999, the Company had 141 employees, of which 139
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. Description of Properties
At December 31, 1999, the Company operated two facilities under long-
term lease agreements, occupying in excess of 49,000 square feet of
warehouse and office space in East Hartford, CT. The lease agreements
expire December 31, 2004. The Company also occupied an additional 11,000
square feet of warehouse space under a month-to-month rental agreement. 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,
under the following symbols: 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, 1999:
<TABLE>
<CAPTION>
Common Stock: IPO Warrants:
1999 1998 1999 1998
--------------- -------------- ------------- --------------
Quarter Ended High Low High Low High Low High Low
------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $2.75 $1.44 $3.50 $1.81 $.81 $.41 $1.13 $.31
June 30 1.88 1.31 2.75 1.50 .50 .25 1.13 .63
September 30 1.75 1.13 2.25 1.25 .25 .25 .56 .38
December 31 1.50 .88 2.81 1.13 .25 .25 .75 .31
<PAGE> 6
<CAPTION>
Class A Warrants: Class B Warrants:
1999 1998 1999 1998
----------------- ------------ ----------------- ------------
Quarter Ended High Low High Low High Low High Low
------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 $.88 $.38 $.38 $.06 $.75 $.31 $.19 $.03
June 30 .56 .19 .25 .06 .56 .25 .25 .03
September 30 .44 .19 .38 .13 .25 .13 .38 .06
December 31 .38 .13 .75 .25 .19 .13 .75 .19
</TABLE>
There were 3,272,579 and 3,264,579 common shares outstanding at
December 31, 1999 and 1998, respectively. There were 183,579 IPO Warrants,
1,137,923 Class A Warrants and 1,137,923 Class B Warrants outstanding at
December 31, 1999 and 1998. As of December 31, 1999 there were 562 holders
of record of the common stock representing approximately 3,500 beneficial
stockholders. The Company has paid no dividends and does not expect to pay
dividends in the foreseeable future as it intends to retain earnings to
finance the growth of its operations. Pursuant to a revolving credit
agreement with Deutsche Financial Services Corporation ("DFS"), 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, 1999 Compared With Year Ended December 31, 1998
Revenues
Revenues from continuing operations for 1999 were $32,871,000, an
increase of $5,133,000 or 19% from $27,738,000 recorded in 1998.
Telecommunications equipment sales revenues accounted for 92% of 1999
revenues from continuing operations (94% in 1998), while service revenues
accounted for 8% of 1999 revenues from continuing operations (6% in 1998).
Telecommunications equipment sales revenues in 1999 increased by 17%
overall from 1998, as sales to end-users increased by 30% while dealer
sales declined by 61%. The increase in end-user sales was attributable to
further expansion of the Company's remote sales offices, increased sales
under the Company's ARS agreement with Lucent, and to the start-up of a
call center sales operation. The end-user revenue gains were partially
offset by the discontinuance of the Company's dealer channel at the end of
February 1999. As a part of its agreement with Lucent in becoming an ARS
Dealer, the Company transferred its new key system dealer base to another
Lucent distributor. Revenues from this channel were $535,000 for 1999, as
compared to $2,820,000 (10% of revenues) for 1998. Service revenues
increased by 40% over 1998 primarily due to increases in both equipment
repair and refurbishing, and installation services. In June 1999, the
Company entered into an agreement with Lucent to repair and refurbish
certain specified Lucent-owned voice terminals and other telecommunications
equipment. The agreement expires December 31, 2001. Revenues under this
agreement were $290,000 for 1999.
Cost of Revenues and Gross Profit
Total cost of revenues from continuing operations in 1999 was
$25,840,000, an increase of $5,024,000, or 24.1%, compared with
$20,816,000 in 1998. The gross profit from continuing operations in 1999
was $7,031,000, an increase of $109,000, or 1.6%, compared with $6,922,000
in 1998. The gross profit margin was 21.4% of revenues in 1999, compared
with 25.0% in 1998, due to (i) $1,530,000 in license fees paid to Lucent in
1999, compared with $301,000 paid in 1998, pursuant to the ARS Dealer
program; (ii) labor, facility and other overhead costs incurred in the
third and fourth quarters of 1999 in the start-up of a separate facility
for the repair and refurbishing of certain telecommunications equipment
under a contract with Lucent, and in connection with the current ARS
Dealer program; and (iii) product sales mix, principally higher revenues
generated by sales of new equipment at profit margins below those generated
by used equipment sales. The overall decline in gross profit margin for
the year principally arose from a 14.3% gross profit margin realized in the
fourth quarter of 1999 due to the reasons stated above.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses from continuing operations in 1999 were $6,663,000, an
increase of $737,000, or 12.4%, compared with $5,926,000 in 1998. SG&A
expenses were 20.3% of 1999 revenues, compared with 21.4% of 1998 revenues.
The increase in SG&A expenses was primarily attributable to costs
associated with increased sales and
<PAGE> 7
sales support personnel, and associated compensation and travel expenses, as
the Company opened additional sales offices and started-up a call center
sales operation. Higher employment levels overall from a year ago have also
resulted in increased insurance expense, office expense, depreciation on
computer and office equipment, and higher telephone expense. These
additional expenses were partially offset by reduced marketing, public
relations, and outside consulting expenses.
Interest Expense and Other Income
Interest expense was $349,000 in 1999, an increase of $77,000, or
28.3%, compared with $272,000 for 1998. The increase was due to higher
average borrowings under the Company's credit facilities.
Other income was $36,000 in 1999, a decrease of $36,000, or 50%,
compared with 1998. Other income in each period consisted principally of
interest earned on invested cash, and has declined due to a lower average
invested cash balance.
(Benefit) Provision for Income Taxes
The $2,000 income tax benefit recorded for 1999 included a $19,000
credit arising from the overpayment of prior year state taxes. The $16,000
income tax provision recorded in 1998 consisted of state income tax expense
of $6,000 and federal income tax expense of $10,000.
Year Ended December 31, 1998 Compared With 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. The Company
could not locate 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%
<PAGE> 8
(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 increased revenues
under the ARS agreement will offset the loss in revenue from the dealer
base.
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.
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.
Liquidity and Capital Resources
Working capital, defined as current assets less current liabilities,
was $10,150,000 at December 31, 1999, an increase of $2,751,000, or 37.2%,
compared with $7,399,000 at December 31, 1998. The working capital ratio
was 3.2 to 1 at December 31, 1999, compared with 2.4 to 1 at December 31,
1998. The increase in working capital was due to an increase in accounts
receivable attributable to higher sales volume, an increase in inventories,
and a reduction in total debt maturing within one year as a result of the
refinancing of the Company's revolving credit facility under a two year
agreement with DFS.
Operating activities used $644,000 during 1999, compared with a use
of $2,424,000 in 1998. Accounts receivable increased by $1,715,000, or
34.6%, in 1999, primarily due to higher sales volume during the fourth
quarter of 1999 than during the fourth quarter of 1998. Inventories
increased by $689,000, or 10.1% in 1999, due to higher stocking levels of
used telecommunications equipment, including used equipment requiring
repair and/or refurbishing, partially offset by lower stocking levels of
new telecommunications equipment. Cash used by operating activities was
partially offset by a $1,320,000, or 63.5%, increase in accounts payable,
accrued expenses and other liabilities.
Investing activities used $282,000 during 1999, compared with a use
of $214,000 in 1998. The use of cash in both periods was due to purchases
of fixed assets, principally computer equipment.
Financing activities provided $782,000 during 1999, compared with
$2,126,000 in 1998. Increased borrowings under revolving credit facilities
provided $2,751,000 during 1999, while the Company reduced its inventory
finance program borrowings by $1,907,000 in 1999. On June 14, 1999, the
Company entered into a two-year, $10 million business financing agreement
(the "Credit Agreement") with DFS, replacing a $6 million revolving credit
line with First Union National Bank and a $4 million inventory credit line
with Finova. The Credit Agreement contains the following credit sublimits:
(i) a $10 million accounts receivable-based credit line, (ii) a $10 million
inventory floorplan credit line to finance product purchased directly
from Lucent or an approved Lucent distributor, and (iii) a $1.5 million
supplemental inventory-based credit line. Borrowings under the accounts
receivable line are advanced at 80% of eligible receivables (primarily
receivables that are less than 90 days old), while borrowings under the
supplemental inventory-based line are advanced at 50% of the cost of
eligible
<PAGE> 9
refurbished inventory, and between 50-100% of the cost of new
equipment purchased from Lucent, or an approved Lucent distributor, through
DFS's floorplan financing program. These borrowings are at prime plus .50%
(9.0% at December 31, 1999). Borrowings under the $10 million inventory
floorplan credit line, which were $1,174,843 at December 31, 1999, are
repayable, interest-free in either two or three equal monthly installments.
The facility calls for a commitment fee, payable annually, of .09% of the
aggregate credit line. Since it is the Company's intent to maintain the DFS
facility for longer than one year, borrowings are classified as long-term
debt, except for borrowings under the inventory floorplan portion of the
credit line which are classified as current. There are no compensating
balance requirements.
The Credit Agreement restricts the Company from the payment of
dividends without the consent of DFS, and requires the Company to maintain
a minimum tangible net worth of $5.75 million on and after December 31,
1999. The Credit Agreement also contains covenants requiring the Company
to maintain certain debt-to-equity, interest coverage and current asset
ratios, and minimum profitability levels. As of December 31, 1999, the
Company was in violation of its minimum annual profitability requirement of
$300,000, and its annual interest coverage ratio requirement. The Company
subsequently received waivers from DFS of these covenant violations for
1999. As of December 31, 1999, the unused portion of the DFS facility was
$4,386,000, of which $883,000 was available under various borrowing
formulas. The average and highest amounts borrowed during the year ended
December 31, 1999 were $3,195,000 and $5,700,000, respectively. The average
and highest amounts borrowed during the year ended December 31, 1998 were
$2,329,000 and $3,673,000, respectively. Borrowings are dependent upon the
continuing generation of collateral, subject to the aggregate $10 million
credit limit. The weighted average interest rate on the Company's credit
facilities (excluding floorplan borrowings repayable under interest-free
installments) was 8.9% in 1999 and 9.5% in 1998.
The Company is currently dependent upon its existing credit
agreements and accounts receivable collection experience, to provide cash
to satisfy its working capital requirements. Material changes in the
Company's lending agreements, or a slowdown in the collection of accounts
receivable could negatively impact the Company. The Company can give no
assurance that it will have sufficient cash resources to finance future
growth, and it may become necessary to seek additional financing for such
purpose. The Company does not currently have any material commitments for
capital expenditures.
Forward-Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-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.
<PAGE> 10
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 14
Consolidated Balance Sheets - December 31, 1999 and 1998 15
Consolidated Statements of Operations - Years Ended
December 31, 1999 and 1998 16
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1999 and 1998 17
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999 and 1998 18
Notes to Consolidated Financial Statements 19
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, 2000)
<TABLE>
<CAPTION>
First
Became An
Executive
Name Age Officer in Position(s) Held
---- --- ---------- ----------------
<S> <C> <C> <C>
George Taylor, Jr.* 57 1984 Chairman of the Board, President, Chief Executive
Officer
Robert G. LaVigne* 48 1988 Executive Vice President, Chief Financial Officer,
Secretary, Treasurer
Alexander E. Capo 49 1987 Vice President - Sales
Joseph A. Novak, Jr. 56 1993 Vice President - Operations (until 2/29/2000)
Neil R. Sullivan 48 1994 Vice President - Accounting & Administration,
Assistant Secretary
Robert L. Saelens 54 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,
<PAGE> 11
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.
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. Mr. Novak retired from the Company on February 29,
2000 and is currently providing consulting services to the Company.
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.
Director of Marketing from May 1996 through May 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 27.
(b) Reports on Form 8-K: The registrant did not file any reports on Form
8-K during the fourth quarter of 1999.
<PAGE> 12
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 21, 2000.
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 21, 2000.
Signature Title
--------- -----
[S] [S]
/s/ George J. Taylor, Jr. Chairman of the Board, Chief Executive
- ------------------------------ Officer and President
George J. Taylor, Jr. (Principal Executive Officer)
/s/ Robert G. LaVigne Executive Vice President, Chief Financial
- ------------------------------ Officer, Secretary and Director
Robert G. LaVigne (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> 13
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,
1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years then ended.
These 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Hartford, Connecticut
February 21, 2000
<PAGE> 14
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 446 $ 590
Accounts receivable, less allowance for doubtful
accounts of $266 in 1999 and $287 in 1998 6,665 4,950
Inventories 7,539 6,850
Other current assets 49 194
- -----------------------------------------------------------------------------------------
Total Current Assets 14,699 12,584
- -----------------------------------------------------------------------------------------
Property and equipment, net (Note 3) 774 845
Other assets 184 69
- -----------------------------------------------------------------------------------------
Total Assets $15,657 $13,498
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,451 $ 1,442
Debt maturing within one year (Note 5) 1,264 3,160
Accrued expenses and other current liabilities (Note 4) 834 583
- -----------------------------------------------------------------------------------------
Total Current Liabilities 4,549 5,185
- -----------------------------------------------------------------------------------------
Long-term debt (Note 5) 4,578 1,916
Other liabilities (Note 10) 113 53
- -----------------------------------------------------------------------------------------
Total Liabilities 9,240 7,154
- -----------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
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 in 1999
and 1998, respectively 3 3
Additional paid-in capital 12,216 12,200
Accumulated deficit (5,802) (5,859)
- -----------------------------------------------------------------------------------------
Total Stockholders' Equity 6,417 6,344
- -----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $15,657 $13,498
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 15
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $32,871 $27,738
Cost of revenues 25,840 20,816
- ------------------------------------------------------------------------------------
Gross profit 7,031 6,922
Selling, general and administrative expenses 6,663 5,926
- ------------------------------------------------------------------------------------
Operating income 368 996
Interest expense 349 272
Other income (36) (72)
- ------------------------------------------------------------------------------------
Income from continuing operations before income taxes 55 796
(Benefit) provision for income taxes (2) 16
- ------------------------------------------------------------------------------------
Income from continuing operations 57 780
- ------------------------------------------------------------------------------------
Discontinued operations (Note 6):
Loss from operations - (14)
Loss on sale of discontinued operation - (195)
- ------------------------------------------------------------------------------------
Loss from discontinued operations - (209)
- ------------------------------------------------------------------------------------
Net income $ 57 $ 571
====================================================================================
Net income (loss) per common share:
Basic and diluted net income (loss) per common share:
From continuing operations $ .02 $ .23
From discontinued operations - (.06)
- ------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ .02 $ .17
====================================================================================
Weighted average common shares outstanding:
Basic weighted average common shares 3,272 3,264
Dilutive effect of stock options 2 140
- ------------------------------------------------------------------------------------
Diluted weighted average common and common equivalent shares 3,274 3,404
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Additional Accum-
----------------- paid-in ulated
(In thousands) Shares Amount capital deficit Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Stock options exercised 8 - 16 - 16
Net income - - - 57 57
- -----------------------------------------------------------------------------------------
Balance at December 31, 1999 3,272 $3 $12,216 $(5,802) $6,417
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 57 $ 571
Adjustments to reconcile net income to net cash flows
used by operating activities:
Depreciation and amortization 358 309
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,715) 127
Increase in inventories (689) (4,267)
Decrease in other assets 25 303
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 1,320 (27)
Decrease in net assets of discontinued operations - 560
- -----------------------------------------------------------------------------------
Net cash used by operating activities (644) (2,424)
- -----------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment (282) (214)
- -----------------------------------------------------------------------------------
Net cash used in investing activities (282) (214)
- -----------------------------------------------------------------------------------
Financing Activities:
(Repayments) borrowings under inventory finance agreement (1,907) 2,193
Borrowings (repayments) under revolving credit lines 2,751 (8)
Repayments of capital lease obligation (78) (63)
Proceeds from exercise of stock options 16 4
- -----------------------------------------------------------------------------------
Net cash provided by financing activities 782 2,126
- -----------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (144) (512)
Cash and cash equivalents at beginning of year 590 1,102
- -----------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 446 $ 590
===================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 349 $ 272
Income taxes 10 14
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
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 a secondary market reseller, and Authorized
Remarketing Supplier of Classic Lucent[TRADEMARK] and new Lucent Technologies,
Inc. ("Lucent") business telecommunication products. Its 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 to both large and small end-user businesses,
government agencies, and other secondary market companies. During the two
years ended December 31, 1999, no single customer accounted for more than
10% of revenues from continuing operations except for Lucent, which
accounted for 15% of both 1999 and 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.
In 1997, the Company's 50% ownership in Beijing Antai Communications
Equipment Co., Ltd. was written down to zero due to its history of
operating losses. All material intercompany transactions have been
eliminated.
Use of Estimates
The preparation of financial statements and related disclosures 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 financial statements and the reported
amounts of revenues and expenses during the period reported. Actual
results could differ from those estimates. Estimates are used in
accounting for allowances for uncollectible receivables, inventory
obsolescence, depreciation, taxes and contingencies, among others.
Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the financial statements in the period they are
determined to be necessary.
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, and are valued
on an average cost basis.
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 1999 and 1998, and state income tax expense consisted of minimum taxes
in both years.
<PAGE> 19
Net Income (Loss) Per Share
Basic net income (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 net income (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, 1999 and 1998 includes an
investment in a money market fund consisting of high quality short term
instruments, principally US 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>
1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Equipment $1,029 $ 925
Furniture and fixtures 116 84
Leasehold improvements 103 85
Leased equipment under capital lease 394 415
--------------------------------------------------------------------
1,642 1,509
Less accumulated depreciation and amortization (868) (664)
--------------------------------------------------------------------
Property and equipment, net $ 774 $ 845
====================================================================
</TABLE>
Leased equipment under capital lease at December 31, 1999 and 1998
consisted principally of office furniture, equipment and computer
equipment. The accumulated amortization of the leased equipment was
$217,000 and $150,000 at December 31, 1999 and 1998, 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>
1999 1998
----------------------------------------------------------------
<S> <C> <C>
Salaries, commissions and benefits $668 $501
License fees payable to Lucent (Note 9) 114 -
Other 52 82
----------------------------------------------------------------
Accrued expenses and other current liabilities $834 $583
================================================================
</TABLE>
5. DEBT OBLIGATIONS
Debt Maturing Within One Year
-----------------------------
As of December 31, debt obligations maturing within one year
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------
<S> <C> <C>
Inventory financing program borrowings $1,175 $3,082
Current portion of long-term debt 89 78
------------------------------------------------------------
Total debt maturing within one year $1,264 $3,160
============================================================
</TABLE>
<PAGE> 20
In December 1997, the Company obtained a $2 million line of credit
with Finova Capital Corporation ("Finova") for the purpose of financing
Lucent products purchased directly from Lucent or approved Lucent
distributors. During 1998 the credit line was increased to $4 million. On
June 14, 1999, the Company repaid all amounts owed Finova under the credit
line, and obtained a similar financing arrangement as a part of a larger
credit facility with Deutsche Financial Services Corporation, a unit of
Deutsche Bank Group ("DFS"), as further described below.
Long-term Debt
--------------
As of December 31, long-term debt obligations consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------
<S> <C> <C>
Revolving credit agreement(a) $4,439 $1,688
Obligation under capital lease(b) 228 306
-------------------------------------------------------
4,667 1,994
Less current portion (89) (78)
-------------------------------------------------------
Long-term debt $4,578 $1,916
=======================================================
</TABLE>
(a) On June 14, 1999, the Company entered into a two-year, $10
million business financing agreement (the "Credit Agreement") with DFS,
replacing a $6 million revolving credit line with First Union National Bank
and a $4 million inventory credit line with Finova. The Credit Agreement
contains the following credit sublimits: (i) a $10 million accounts
receivable-based credit line, (ii) a $10 million inventory floorplan credit
line to finance product purchased directly from Lucent Technologies, Inc.
("Lucent") or an approved Lucent distributor, and (iii) a $1.5 million
supplemental inventory-based credit line. Borrowings under the accounts
receivable line are advanced at 80% of eligible receivables (primarily
receivables that are less than 90 days old), while borrowings under the
supplemental inventory-based line are advanced at 50% of the cost of
eligible refurbished inventory, and between 50-100% of the cost of new
equipment purchased from Lucent, or an approved Lucent distributor, through
DFS's floorplan financing program. These borrowings are at prime plus .50%
(9.0% at December 31, 1999). Borrowings under the $10 million inventory
floorplan credit line, which were $1,174,843 at December 31, 1999, are
repayable, interest-free in either two or three equal monthly installments.
The facility calls for a commitment fee, payable annually, of .09% of the
aggregate credit line. Since it is the Company's intent to maintain the DFS
facility for longer than one year, borrowings are classified as long-term
debt, except for borrowings under the inventory floorplan portion of the
credit line which are classified as current. There are no compensating
balance requirements.
The Credit Agreement restricts the Company from the payment of
dividends without the consent of DFS, and requires the Company to maintain
a minimum tangible net worth of $5.75 million on and after December 31,
1999. The Credit Agreement also contains covenants requiring the Company
to maintain certain debt-to-equity, interest coverage and current asset
ratios, and minimum profitability levels. As of December 31, 1999, the
Company was in violation of its minimum annual profitability requirement of
$300,000, and its interest coverage ratio requirement. The Company
subsequently received waivers from DFS of these covenant violations. As of
December 31, 1999, the unused portion of the DFS facility was $4,386,000,
of which $883,000 was available under various borrowing formulas. The
average and highest amounts borrowed during the year ended December 31,
1999 were $3,195,000 and $5,700,000, respectively. The average and highest
amounts borrowed during the year ended December 31, 1998 were $2,329,000
and $3,673,000, respectively. Borrowings are dependent upon the continuing
generation of collateral, subject to the aggregate $10 million credit
limit. The weighted average interest rate on the Company's credit
facilities (excluding floorplan borrowings repayable under interest-free
installments) was 8.9% in 1999 and 9.5% in 1998.
(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, 1999 the
future minimum annual lease payments are as follows (in thousands):
<PAGE> 21
<TABLE>
<CAPTION>
Year ending December 31:
-------------------------------------------
<S> <C>
2000 $115
2001 115
2002 38
-------------------------------------------
Total minimum lease payments 268
Less amount representing interest (40)
-------------------------------------------
Present value of net minimum lease
payments under capital lease $228
===========================================
</TABLE>
The carrying values of the Company's borrowings approximated their
fair values at December 31, 1999 and 1998.
6. DISCONTINUED OPERATIONS
FAMS
----
In December 1997, the Company sold its subsidiary, Farmstead Asset
Management Services, LLC ("FAMS") to FAMS, LLC, a newly formed New Jersey
corporation owned by a former management employee for $40,000 in cash and a
$360,000 10% Note, payable in 60 monthly installments. The Note was
secured by the assets of FAMS. During 1998 the Company recorded a
$195,000 charge to reduce the carrying value of the FAMS, LLC note
receivable to its estimated realizable value, which the Company received in
1999 in the form of inventory and equipment.
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 began the process of divesting
itself from this business, completing the process in 1998. For the year
ended December 31, 1998, Cobotyx voice processing product revenues
approximated $605,000. The Company's loss from the operations of its voice
processing products business was approximately $14,000 in 1998.
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 term 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 2009. A summary of stock option transactions for
each of the two years in the period ended December 31, 1999 is as follows:
<PAGE> 22
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
Granted 92,017 1.12 - 2.56 1.89
Exercised (8,000) 2.00 2.00
Canceled or expired (53,100) 1.19 - 6.70 2.42
- --------------------------------------------------------------------------
Outstanding at December 31, 1999 1,792,346 $1.12 - 11.80 $2.02
==========================================================================
As of December 31, 1999:
Exercisable 1,366,000 $1.19 - 11.80 $2.05
Available for future grant 1,709,846
</TABLE>
The following summarizes information about stock options outstanding
and exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life(Yrs) Exercise Price Exercisable Exercise Price
- --------------- ----------- --------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.19 - 2.00 1,748,246 7.7 $1.95 1,326,400 $1.96
$2.01 - 5.00 29,750 5.2 3.13 25,250 3.23
$5.01 - 11.80 14,350 4.4 8.55 14,350 8.55
Total 1,792,346 7.6 $2.02 1,366,000 $2.05
</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>
1999 1998
--------------------- ---------------------
As As
Reported Pro forma Reported Pro forma
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 57 $(262) $571 $(525)
Basic net income (loss) per share .02 (.08) .17 (.16)
Diluted net income (loss) per share .02 (.08) .17 (.15)
</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 1999 and 1998; expected
volatility of 194% for 1999 (124% for 1998); risk-free interest rate of
5.5% for 1999 (4.9% for 1998), and an expected option holding period of 5
years for both 1999 and 1998. The weighted average fair value of options
granted during 1999 and 1998 was $1.59 and $1.66, respectively.
<PAGE> 23
8. STOCKHOLDERS' EQUITY
As of December 31, 1999, the following securities were outstanding:
(a) 33,136 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 1996 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. LEASES AND OTHER COMMITMENTS AND CONTINGENCIES
The Company leases 49,897 square feet of office and warehouse space
under non-cancelable leases expiring December 31, 2004. The leases contain
two, three-year renewal options. As of December 31, 1999, future minimum
annual rental payments were as follows: $248,699 for 2000, $250,146 for
2001, $255,945 for 2002, $257,104 for 2003 and $257,104 for 2004. Rent
expense, which includes short-term rentals of warehouse space, was $225,229
in 1999 and $173,796 in 1998.
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, the CEO's
contractual minimum annual base salary is $200,000 for 1998, $250,000 for
1999, and $300,000 annually for 2000 to 2002. 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
<PAGE> 24
grant, and $1,500,000 in life insurance for the benefit of the CEO's named
designee. The agreement also 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.
In October 1998, the Company entered into a license agreement with
Lucent, under which the Company was granted a non-exclusive license to use
the Classic Lucent[TRADEMARK] trademark in connection with the refurbishing,
marketing and sale of Lucent products sold under the ARS Agreement. Under
this agreement, the Company is obligated to pay Lucent a fee, ranging from
8.5% to 10% of the sales price, on Classic Lucent product sold by the
Company. The license expires December 31, 2001. The Company recorded
approximately $1,530,000 and $301,000 of license fee expense in 1999 and
1998, respectively.
10. 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 $72,665
at December 31, 1999 and $23,382 at December 31, 1998. The Company used
the Projected Unit Credit Method and a 7% interest rate in determining
these amounts. The following shows the changes in the benefit obligation
in each of the two years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------
<S> <C> <C>
Benefit obligation at beginning of year $ 53 $ -
Service cost 53 50
Interest cost 7 3
Benefit obligation at end of year $113 $53
</TABLE>
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, amounting to $67,660 in 1999 and
$46,248 in 1998. The Company recognized expense of $26,928 in 1999 and
$18,603 in 1998. 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.
11. INCOME TAXES
Current income tax expense attributable to income from continuing
operations consisted of a state tax benefit of approximately $2,000 in
1999, and state income tax expense of $6,000 and federal income tax expense
of $10,000 in 1998. 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 US federal income tax rate of 34 percent
to pretax income as a result of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Computed "expected" tax expense $ 19 $ 199
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of federal
income tax benefit (1) 9
Nondeductible life insurance 33 20
Realized benefit of operating loss carryforwards (74) (228)
Other 21 16
- ------------------------------------------------------------------
Income tax (benefit) expense $ (2) $ 16
==================================================================
</TABLE>
<PAGE> 25
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $ 212 $ 221
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 190 155
Net operating loss and capital loss carryforwards 818 961
Other 73 43
- -----------------------------------------------------------------------
Total gross deferred tax assets 1,293 1,380
Less valuation allowance (1,293) (1,380)
- -----------------------------------------------------------------------
Net deferred tax assets $ - $ -
=======================================================================
Deferred tax liabilities $ - $ -
=======================================================================
</TABLE>
The valuation allowance is considered prudent as of December 31, 1999
due to the Company's past history of cumulative operating losses. The
valuation allowance was reduced by $87,000 and $25,000 for the years ended
December 31, 1999 and 1998, respectively. The Company has net operating
loss carryforwards for federal income tax purposes of approximately
$2,395,000 available at December 31, 1999. No federal income tax provision
has been made in the accompanying financial statements, because of the
presence of these net operating loss carryforwards which expire on various
dates through 2017.
<PAGE> 26
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 [Exhibit 4(i) to the Annual Report for the year ended
December 31, 1998 on Form 10KSB]
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) 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(f) Form of Underwriter's Consulting Agreement [Exhibit 10.1 to
the SB-2 Registration Statement dated June 3, 1996
(Registration No. 333-5103)]
10(g) 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)]
<PAGE> 27
10(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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(q) 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(r) ARS Dealer Agreement Between Lucent Technologies and
Farmstead Telephone Group, Inc. For Business Communications
Systems [Exhibit 10(s) to the Annual report on Form 10-KSB
for the year ended December 31, 1998]
10(s) ARS License Agreement Between Lucent Technologies and
Farmstead Telephone Group, Inc. For Authorized Remarketing
Supplier Program [Exhibit 10(t) to the Annual report on Form
10-KSB for the year ended December 31, 1998]
10(t) 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 [Exhibit 10(u) to
the Annual report on Form 10-KSB for the year ended December
31, 1998]
10(u) 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 [Exhibit 10(v) to
the Annual report on Form 10-KSB for the year ended December
31, 1998]
10(v) 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 [Exhibit 10(w) to
the Annual report on Form 10-KSB for the year ended December
31, 1998]
10(w) 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 [Exhibit 10(x) to
the Annual report on Form 10-KSB for the year ended December
31, 1998]
<PAGE> 28
10(x) Finova Capital Corporation letter agreement dated October 5,
1998 [Exhibit 10(y) to the Annual report on Form 10-KSB for
the year ended December 31, 1998]
10(y) Finova Capital Corporation letter agreement dated February 4,
1999 [Exhibit 10(z) to the Annual report on Form 10-KSB for
the year ended December 31, 1998]
10(aa) Finova Capital Corporation letter agreement dated March 24,
1999 [Exhibit 10(aa) to the Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1999]
10(bb) Business Financing Agreement, dated June 14, 1999, between
Deutsche Financial Services Corporation and Farmstead
Telephone Group, Inc. [Exhibit 10(bb) to the Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1999]
10(cc) Rider #1 to Lease Dated November 5, 1996 By and Between
Tolland Enterprises ("Landlord") and Farmstead Telephone
Group, Inc. ("Tenant"), attached as of May 27, 1999
10(dd) First Amendment of Lease, dated June 30, 1999, By and Between
Tolland Enterprises ("Landlord") and Farmstead Telephone
Group, Inc. ("Tenant")
21 Subsidiaries of Small Business Issuer
27 Financial data schedule
<PAGE> 29
EXHIBIT 10(CC)
RIDER #1 TO LEASE DATED NOVEMBER 5, 1996 BY AND BETWEEN TOLLAND
ENTERPRISES, OF 183 PRESTIGE PARK ROAD, EAST HARTFORD, CONNECTICUT 06108
("LANDLORD") AND FARMSTEAD TELEPHONE GROUP, INC., HAVING A MAILING ADDRESS
AT 22 PRESTIGE PARK CIRCLE, EAST HARTFORD, CONNECTICUT 06108 ("TENANT"),
ATTACHED AS OF MAY 27, 1999.
- ---------------------------------------------------------------------------
WHEREAS, Landlord and the Tenant entered into a Lease dated November
5, 1996 (the "Lease") with respect to the Tenant's present premises (the
"Premises") at 22 Prestige Park Circle, East Hartford, CT 06108: and
WHEREAS, for valuable consideration the receipt and sufficiency of
which the Parties hereby acknowledge, the Parties desire to attach thereto
a RIDER #1 whereby a space defined herein shall be added to said Lease on
the terms specified herein and in the Lease.
1. The premises in the Lease shall be increased by 15,137 square
feet ("Rider #1 Space") as shown on Exhibit A-1 attached hereto-
adding 672 Tolland Street, East Hartford, CT, for the period
August 19, 1999 or upon delivery to December 31, 2004 (the Rider
#1 Space Period").
2. The minimum rent for the Rider #1 Space shall be at the annual
rate as follows commencing upon delivery.
$4.47 PSF; $5,638.53 Month; $67,662.39 Year
3. The Tenant's proportionate share for the Rider #1 Space shall
be:
Real Estate Taxes: 27.45%
Snowplowing: 35.26%
CAM: 100.00%
Insurance: 100.00%
4. The Security Deposit specified in Section 1.2 of the Lease shall
be increased by the sum of "$2,500.00" to be paid upon execution
hereof.
5. The Rider #1 Space will be delivered to and taken by Tenant in
its "as is" condition, except as specified on Exhibit B attached
hereto. Landlord shall perform improvements as specified on
Exhibit B for the Rider #1 Space at the Tenant's request in the
amount of $62,875.00 of which $31,025.00 will be Tenant's
maximum cost amortized over the initial Term of the Lease for
the Premises covered by this Rider #1 at an interest rate of
eight and one half percent (8.50%).
<PAGE> 1
6. Provided the Tenant has performed all its obligations hereunder
or cured any default and is not in default; Tenant shall have
one (1) option to extend the Term for the Premises covered by
this Rider #1 for a further period of three (3) years and no
months provided however, that Tenant shall give Landlord notice
of its intention to extend not less than six (6) months prior to
the expiration of the original Term of this Lease. Said notice
shall be effective only if given in the timely manner described
(time being of the essence in relation to said notice) and
provided Tenant is not in default under the Lease on the date of
the notice nor on the date the original Term of the Lease is
scheduled to expire. Such extended term shall be subject to all
of the agreements, covenants and conditions set forth in this
Lease except for further Options to Extend, as to which there
shall be one. The rental rate for the extended term shall be
$4.47 per SF NNN, $67,662.39 per year, $5,638.53 per month.
7. Provided the Tenant has performed all its obligations hereunder
or cured any default and is not in default and further provided
Tenant has validly exercised its First Option to extend, Tenant
shall have one (1) option to extend the term for the Premises
covered by this Rider #1 for a further period of three (3) years
and no months provided, however, that Tenant shall give Landlord
written notice of its intention to extend not less than six (6)
months prior to the Expiration of the original term of this
Lease as extended by the First Option to Extend. Said notice
shall be effective only if given in the timely manner described
(time being of the essence in relation to said notice) and
provided Tenant is not in default under the Lease on the date of
the notice nor on the date the original term of the Lease is
scheduled to expire as extended by the First Option to Extend.
Such extended term shall be subject to all of the agreements,
covenants and conditions set forth in this Lease except for (i)
the Minimum Rent payable pursuant to Article III hereof which
shall be as set forth hereinafter, and except for (ii) further
Options to Extend, as to which there shall be none. It is
agreed and understood that the annual Minimum Rent for the
extended period shall be equal to $4.74 per SF NNN, $71,749.38
per year, $5,979.12 per month, as of the commencement date of
the extended term hereof.
Submission of this instrument for examination or signature is without
prejudice and does not constitute a reservation or option and it is not
effective until execution and delivery by both Landlord and Tenant.
THIS document contains all of the agreements of the Parties with
respect to the subject matter thereof and supersedes all prior dealings
between them with respect to such subject matters.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
in three counterpart copies, each of which counterpart copy shall be deemed
an original for all purposes, as of the date and year first written above.
WITNESS: LANDLORD:
TOLLAND ENTERPRISES,
a Connecticut general partnership
_________________________________ BY: ________________________________
TENANT:
FARMSTEAD TELEPHONE GROUP, INC.,
a Delaware corporation
_________________________________ BY: ________________________________
Taxpayer ID No. ____________________
<PAGE> 3
EXHIBIT 10(DD)
FIRST AMENDMENT OF LEASE
------------------------
This First Amendment of Lease made this 30th day of June, 1999, by and
between TOLLAND ENTERPRISES, a Connecticut general partnership, of 183
Prestige Park Road, East Hartford, Connecticut 06108 ("Landlord") and
FARMSTEAD TELEPHONE GROUP, INC., a Delaware corporation having a mailing
address at 22 Prestige Park Circle, East Hartford, CT 06108 ("Tenant").
WHEREAS, Landlord and the Tenant entered into a Lease dated November
5, 1996 (the "Lease") with respect to the Tenant's present premises (the
"Premises") at 22 Prestige Park Circle, East Hartford, CT 06108: and
WHEREAS, the parties desire to amend the terms of said Lease;
NOW THEREFORE, for valuable consideration the receipt and sufficiency
of which the parties hereby acknowledge, the parties agree effective upon
execution of this Amendment, the said Lease shall be amended as follows,
viz.:
1. The Lease Term as specified in Sections 1.2 and 2.2 shall be
extended to December 31, 2004.
2. For the period March 1, 2002 to December 31, 2004, the Minimum
Rent as specified in Sections 1.2 and 3.1 is deemed to be
$189,442.00 year, $15,786.83 month, $5.45 PSF.
3. Article XXXVIII ("First Option to Extend") shall be modified as
follows:
Fair Market rental value together with all references to the
process of appraisers and subparagraphs 2, 3 and 4 shall be
deleted and the following shall be inserted in place thereof:
"It is agreed and understood that the annual Minimum Rent for
the extended period shall equal to $5.78/PSF, $200,912.80 per
year, $16,742.73 per month, as of the commencement date of the
extended term hereof".
4. Article XXXIX ("Second Option to Extend") shall be modified as
follows:
Fair Market rental value together with all references to the
process of appraisers and subparagraphs 2, 3 and 4 shall be
deleted and the following shall be inserted in place thereof:
"It is agreed and understood that the annual Minimum Rent for
the extended period shall be equal to $6.14/PSF, $213,426.40 per
year, $17,785.53 per month, as of the commencement date of the
extended term hereof".
<PAGE> 1
Except as otherwise expressly amended, modified and provided for in
this Amendment, all of the terms and conditions of said Lease are hereby
ratified and shall be deemed to be incorporated herein and made part hereof
and shall continue in full force and effect.
Submission of this instrument for examination or signature is without
prejudice and does not constitute a reservation or option and it is not
effective until execution and delivery by both Landlord and Tenant.
THIS document contains all of the agreements of the parties with
respect to the subject matter thereof and supersedes all prior dealings
between them with respect to such subject matters.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
in three counterpart copies, each of which counterpart copy shall be deemed
an original for all purposes, as of the date and year first written above.
WITNESS: LANDLORD:
TOLLAND ENTERPRISES,
a Connecticut general partnership
________________________________ BY: ________________________________
TENANT:
FARMSTEAD TELEPHONE GROUP, INC.,
a Delaware corporation
________________________________ BY: ________________________________
Taxpayer ID No. ____________________
EXHIBIT 21
EXHIBIT 21. SUBSIDIARIES OF THE SMALL BUSINESS ISSUER
<TABLE>
<CAPTION>
Percent State or other jurisdiction of
Name Owned Incorporation or organization
- --------------------------------------------------- ------- ------------------------------
<S> <C> <C>
Beijing Antai Communication Equipment Company, LTD. 50% Peoples Republic of China
FTG Venture Corporation 100% Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 446
<SECURITIES> 0
<RECEIVABLES> 6,931
<ALLOWANCES> 266
<INVENTORY> 7,539
<CURRENT-ASSETS> 14,699
<PP&E> 1,642
<DEPRECIATION> 868
<TOTAL-ASSETS> 15,657
<CURRENT-LIABILITIES> 4,549
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 6,414
<TOTAL-LIABILITY-AND-EQUITY> 15,657
<SALES> 32,871
<TOTAL-REVENUES> 32,871
<CGS> 25,840
<TOTAL-COSTS> 25,840
<OTHER-EXPENSES> 6,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 349
<INCOME-PRETAX> 55
<INCOME-TAX> (2)
<INCOME-CONTINUING> 57
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
