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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission file number 0-15938
FARMSTEAD TELEPHONE GROUP, INC.
(Exact name of registrant as specified 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)
Registrant's telephone number, including area code: (860) 610-6000
Securities registered under Section 12(b) of the Act:
Title of each class Name of each Exchange on which registered
- ----------------------------- -----------------------------------------
Common Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
As of February 28, 2001, the aggregate market value of the Common Stock of
the registrant held by non-affiliates, based upon the last sale price of
the registrant's Common Stock on such date, was $6,046,800.
As of February 28, 2001, the registrant had 3,272,579 shares of its $0.001
par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement for the
Annual Meeting of Stockholders to be held on June 14, 2001 are incorporated
by reference in Items 10 through 13 of Part III of this Annual Report on
Form 10-K.
1
TABLE OF CONTENTS TO FORM 10-K
PART I
Page
----
Item 1. Business 3
Item 2. 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 Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners and Management 12
Item 13. Certain Relationships and Related Transactions 13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13
2
PART I
Item 1. Business
General
Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") was
incorporated in Delaware in 1986 and became publicly held in May 1987
following the completion of an initial public offering. The Company'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 Avaya(TM) and new Avaya Inc. ("Avaya") 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 March, 2001, the Company entered into a joint venture relationship
with TriNet Systems, Inc. , and a company to be operated under the name of
InfiNet Systems, LLC ("InfiNet") was formed. InfiNet, which has been
appointed as an Avaya Dealer, will be involved in the sale and installation
of Avaya telecommunications systems and solutions primarily in the State of
Connecticut and certain metropolitan counties in New York.
Products
The Company sells both refurbished (by the Company or other equipment
refurbishers) and new telecommunications products manufactured by Avaya
(See "Relationship with Avaya Inc./Lucent Technologies" for further
information on the Company's relationship with these companies).
Refurbished products are primarily sold under the Classic Avaya(TM) label,
pursuant to a licensing agreement with Avaya. 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
Avaya.
Avaya key systems include: Merlin(R), Spirit(R) and Partner(R). Avaya
PBX equipment sold by the Company includes Definity(R) and System 75.
Equipment sales revenues accounted for approximately 93% of
consolidated revenues from continuing operations in 2000, 92% in 1999 and
94% in 1998, while service revenues accounted for 7% of consolidated
revenues from continuing operations in 2000, 8% in 1999 and 6% in 1998.
Sales of PBX equipment and associated telephones and peripherals accounted
for approximately 86% of total equipment sales in 2000, 76% in 1999 and 81%
in 1998, while key equipment and other equipment sales, including data
equipment, accounted for 14% of total equipment sales in 2000, 24% in1999
and 19% in 1998.
Relationship with Avaya Inc./Lucent Technologies
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.
On September 30, 2000, Lucent completed the spin-off of its
Enterprise Networks Group business segment (essentially its PBX business,
and within which market segment the Company participates), as well as its
SYSTIMAX(R) cabling and LAN-based data businesses to Lucent shareholders,
forming a separate company named Avaya Inc. ("Avaya") that will focus
directly and independently on the enterprise networking market. According
to
3
Lucent, Avaya has started out as an $8 billion Fortune 200 company with a
#1 position in the U.S. call center and voice communications systems
markets. The Company's contractual relationships with Lucent are being
continued with Avaya.
Since 1985, AT&T, Lucent, and now Avaya, have provided support to the
secondary market by offering installation and maintenance services for its
products purchased by end-users through equipment resellers. Equipment
resellers such as the Company may also, with various restrictions, utilize
Avaya documentation, technical information and software. Avaya also
generally provides up to a one-year warranty on products purchased from
them for resale. The installation and maintenance of Avaya equipment is
generally provided directly by Avaya. The Company does, however,
coordinate the installation scheduling directly with Avaya if requested to
do so by its customers. The Company also has relationships with a number of
companies throughout the United States who can also provide such
installation and maintenance services.
The Company operates in an Avaya-sponsored Authorized Remarketing
Supplier ("ARS") program as an ARS Dealer (the "ARS Agreement"), selling
Classic Avaya(TM) products to end-users nationwide. On February 2, 2001,
the ARS Agreement was amended to extend its expiration date to December 31,
2003. Classic Avaya(TM) products are defined as used Avaya PBX system and
key system parts, currently supported by Avaya, that have been refurbished
by the Company under Avaya quality standards. This designation applies to
substantially all of the used Avaya 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 Avaya PBX products and voice processing
products to end-users, including government agencies. In February 1999, as
a condition of its initial 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 (and now Avaya) distributor, from whom the Company now
purchases its new telecommunications products.
The Company believes that its relationship with Avaya is satisfactory
and has no indication that Avaya has any intention of terminating its ARS
Agreement with the Company. The Company could be materially adversely
affected should Avaya 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. The Company also sells its products through a call center
operation started up in 1999. During 2000, the Company shipped products to
approximately 10,000 businesses, with customers ranging from large, multi-
location corporations, to small companies, and to equipment wholesalers,
dealers, and government agencies and municipalities. End-users accounted
for approximately 91% of the Company's revenues in 2000, 96% in 1999 and
87% in 1998, while sales to dealers and other resellers accounted for
approximately 9%, 4% and 13% of revenues during the same three year period.
During the year ended December 31, 2000, no single customer accounted for
more than 10% of revenues. One customer, Lucent Technologies Inc.,
accounted for approximately 15% of the Company's revenues during the years
ended December 31, 1999 and 1998. The Company's business is not considered
seasonal.
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. Services include:
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.
4
Installation services: The Company utilizes Avaya and other equipment
installation companies on a subcontract basis to install telecommunication
parts and systems, as well as equipment moves, adds and changes.
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, and technical "hot line" telephone support
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 7% of revenues
from continuing operations in 2000, 8% 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 Avaya and other new
equipment manufacturers such as Nortel Networks Corporation, 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 Avaya(TM) products, the Company competes with the
other Avaya-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, and since October 1, 2000 Avaya, have historically been the
Company's largest suppliers 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 former Lucent, and now an Avaya distributor, from
whom the Company has since purchased 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 Avaya 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 Avaya Inc./Lucent Technologies."
Patents, Licenses and Trademarks
No patent or trademark is considered material to the Company's
continuing operations. Pursuant to agreements in effect with Avaya, the
Company may utilize, during the term of these agreements, certain Avaya
designated trademarks, insignia and symbols in the Company's advertising
and promotion of Avaya products. The Company operates under a license
agreement with Avaya, in which the Company was granted a non-exclusive
license to use the Classic Avaya(TM) trademark in connection with the
refurbishing, marketing and sale of Avaya products sold under the ARS
Agreement. Under this agreement, the Company is obligated to pay Avaya a
fee, amounting to 10% of the sales price, on Classic Avaya products sold by
the Company. The license agreement and ARS Agreement were recently amended on
February 2, 2001 extending the expiration date to December 31, 2003.
5
Research and Development
The Company did not incur any research and development expenses
during the three years ended December 31, 2000, and research and
development activities are not material to the Company's business.
Backlog
The backlog of unshipped orders was approximately $1,556,000 at
December 31, 2000 and $889,000 at December 31, 1999.
Employees
At December 31, 2000, the Company had 116 full-time employees. The
Company's employees are not represented by any organized labor union and
are not covered by any collective bargaining agreements.
Item 2. Properties
At December 31, 2000, 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 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
From time to time the Company is involved in legal proceedings
arising in the ordinary course of business. The Company believes there is
no litigation pending that could have, individually or in the aggregate, a
material adverse effect on its financial position, results of operations or
cash flows.
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 Registrant's Common Equity and Related Stockholder Matters
The Company's securities are traded on the American Stock Exchange,
under the following symbols: Common Stock - "FTG"; Warrants issued in the
Company's 1987 initial public offering ("IPO Warrants") - "FTG.WS";
Redeemable Class A Common Stock Purchase Warrants - "FTG.WS.A"; Redeemable
Class B Common Stock Purchase Warrants - "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, 2000:
Common Stock: IPO Warrants:
2000 1999 2000 1999
----------------- -------------- ----------------- ------------
Quarter Ended High Low High Low High Low High Low
------------- ---- --- ---- --- ---- --- ---- ---
March 31 $2.13 $1.13 $2.75 $1.44 $.50 $.25 $.81 $.41
June 30 1.69 1.00 1.88 1.31 .38 .25 .50 .25
September 30 1.50 1.00 1.75 1.13 .38 .25 .25 .25
December 31 1.81 1.06 1.50 .88 .13 .13 .25 .25
6
Class A Warrants: Class B Warrants:
2000 1999 2000 1999
----------------- -------------- ----------------- ------------
Quarter Ended High Low High Low High Low High Low
------------- ---- --- ---- --- ---- --- ---- ---
March 31 $.56 $.13 $.88 $.38 $.56 $.13 $.75 $.31
June 30 .31 .13 .56 .19 .31 .13 .56 .25
September 30 .13 .06 .44 .19 .31 .06 .25 .13
December 31 .38 .13 .38 .13 .50 .06 .19 .13
There were 3,272,579 common shares outstanding at December 31, 2000
and 1999. There were 183,579 IPO Warrants, 1,137,923 Class A Warrants and
1,137,923 Class B Warrants outstanding at December 31, 2000 and 1999. As of
December 31, 2000 there were 540 holders of record of the common stock
representing approximately 3,200 beneficial stockholders, based upon the
number of proxy materials distributed in connection with the 2000 Annual
Meeting of 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 First Union National Bank, the Company is prohibited
from declaring or paying any dividends or making any other distribution on
any of the shares of its capital stock, without the prior consent of the
lender.
Item 6. Selected Financial Data
(In thousands, except per share amounts) Years ended December 31
- -----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(1)(3) (2)(3)
Revenues $42,786 $32,871 $27,738 $20,559 $16,306
Income (loss) from continuing operations 1,753 57 780 (600) 1,206
Income (loss) from continuing
operations per common share:
Basic .54 .02 .23 (.18) .49
Diluted .54 .02 .23 (.18) .48
Total Assets 15,494 15,657 13,498 10,829 12,074
Long term debt 1,726 4,578 1,916 1,997 -
Stockholders' equity 8,202 6,417 6,344 5,769 7,635
Dividends paid - - - - -
- --------------------
Loss from continuing operations includes charges of $444 from losses
of unconsolidated subsidiaries and the writeoff of the Company's
investments in, and accounts receivable from, these subsidiaries.
Income from continuing operations includes a $124 charge from losses
of unconsolidated subsidiaries, and $627 of income from the
redemption of equipment purchase coupons issued by AT&T as a result
of a class action lawsuit settlement.
Total assets included $560 in 1997 and $848 in 1996 in net assets of
discontinued operations.
Item 7. 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 8 of this
Report.
Year Ended December 31, 2000 Compared With Year Ended December 31, 1999
Results of Operations
Revenues
Revenues in 2000 were $42,786,000, an increase of $9,915,000 or 30%
as compared to revenues of $32,871,000 in 1999. Telecommunications
equipment sales revenues accounted for 93% of 2000 revenues as compared to
92% of 1999 revenues. Revenues from service operations accounted for 7% of
total revenues in 2000 as compared to 8% of total revenues in 1999. For the
year ended December 31, 2000, end-user equipment sales accounted for 73% of
the revenue increase, while sales to other equipment resellers, and service
revenues, accounted for 24% and 3% of the revenue increase respectively.
End-user equipment revenue growth was primarily
7
attributable to the Company's expanding participation in Avaya's Business
Partner program, which includes the Company's designation as an Authorized
Remarketing Supplier of Classic Avaya(TM) equipment ("ARS"). This has led
to increased "partnering" with, and sales referrals from, Avaya Account
Managers and Account Executives, resulting in increased sales of both new
and used equipment. Revenues generated through the Company's Call Center
increased by 6% over the prior year, thereby contributing to the growth in
end-user equipment revenues.
Cost of Revenues and Gross Profit
Total cost of revenues in 2000 were $32,716,000, an increase of
$6,876,000 or 26.6%, as compared to $25,840,000 in 1999. The gross profit
in 2000 was $10,070,000, an increase of $3,039,000 or 43%, as compared to
$7,031,000 in 1999. As a percentage of revenue, the gross profit margin
increased from 21.4% in 1999 to 23.5% in 2000. The improvement in gross
profit margin was primarily attributable to product sales mix, particularly
a higher percentage of used equipment sales over new equipment sales, and
to favorable used equipment purchase costs. Lower labor and overhead costs
as a percent of revenues also contributed to the improved gross profit
margin.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses in 2000 were $8,454,000, an increase of $1,791,000 or
27%, as compared to $6,663,000 in 1999. The increase in SG&A expenses in
2000 was primarily attributable to higher sales and administrative
compensation, including higher sales commissions from increased sales
volume and profit margins. The Company also incurred increased costs
associated with consulting fees and expenses relating to business
performance improvement projects, higher insurance costs, and higher bad
debt and account collection expenses, while incurring lower levels of
depreciation, marketing and public relations expenses. As a percent of
revenues, SG&A expenses decreased from 20.3% in 1999 to 19.8% in 2000.
Interest Expense and Other Income
Interest expense in 2000 was $302,000, a decrease of $47,000 or 13%
as compared to $349,000 in 1999. The decrease in interest expense is
attributable to lower average borrowings under the Company's revolving
credit facilities, partially offset by higher borrowing costs during 2000
as compared to 1999. During 2000 average borrowings under all revolving
credit facilities were approximately $2,708,000 at an average borrowing
rate of 10.1%. This compares to average borrowings of $3,195,000 at an
average borrowing rate of 8.9% during 1999. Other income consists primarily
of interest earned on invested cash for both 2000 and 1999.
(Benefit) Provision for Income Taxes
The Company recorded a net tax benefit of $395,000 in 2000, as
compared to a net tax benefit of $2,000 in 1999. The net tax benefit in
2000 principally resulted from a $455,000 reduction in a deferred tax asset
valuation allowance. The valuation allowance was reduced by 50%, from a
full 100% reserve at December 31, 1999, as a result of positive earnings in
2000 and resulting partial utilization of net operating loss carryforwards.
Liquidity and Capital Resources
Working capital was $8,895,000 at December 31, 2000, a decrease of
$1,255,000 or 12% from $10,150,000 at December 31, 1999. The working
capital ratio was 2.7 to 1 at December 31, 2000 as compared to 3.2 to 1 at
December 31, 1999. The reduction in working capital was primarily
attributable to lower year end balances in accounts receivable and
inventories, coupled with higher year end balances in accounts payable and
accrued compensation.
Operating activities provided $4,105,000 net cash flow in 2000
primarily from income from operations and an increase in accounts payable,
accrued expenses and other liabilities. Investing activities used $163,000
in 2000 for the purchase of fixed assets. Financing activities used
$4,014,000 in 2000 as the Company reduced its borrowings under revolving
credit lines and capital lease agreement, and repaid all amounts
outstanding under an inventory finance agreement.
On September 27, 2000, the Company entered into a two-year, $8
million revolving loan agreement (the "Loan Agreement") with First Union
National Bank ("FUNB"), replacing a $10 million revolving credit line with
Deutsche Financial Services Corporation. Under the terms of the FUNB Loan
Agreement, borrowings are advanced at 75% of eligible accounts receivable
(primarily receivables that are less than 90 days old), and at 50% of the
value of eligible inventory (inventory that was purchased new or
refurbished and ready for sale), provided that the amount advanced against
eligible inventory shall not exceed $2 million. The interest rate
charged the Company on outstanding borrowings is the LIBOR Market Index
Rate plus 2.5% (9.06 % at December 31, 2000). The Company
8
is also charged an availability fee equal to .25% per annum on the unused
portion of the credit line. Since it is the Company's intent to maintain
this credit facility for longer than one year, borrowings are classified as
long-term debt. The Loan Agreement restricts the Company from the payment
of dividends without the consent of FUNB, and requires the Company to
maintain a minimum tangible net worth of $6 million at all times. The Loan
Agreement also contains financial covenants requiring the Company to
maintain certain debt-to-equity and funds flow coverage ratios. The Company
was in compliance with its loan requirements at December 31, 2000. As of
December 31, 2000, the unused portion of the credit facility was approximately
$6.3 million, of which approximately $4.1 million was available under various
borrowing formulas. The average and highest amounts borrowed under all
revolving credit facilities during the year ended December 31, 2000 were
approximately $2,708,000 and $5,145,000 respectively.
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 its credit
agreements, or a slowdown in the collection of accounts receivable, could
negatively impact the Company. No assurances can be given that the Company
will have sufficient cash resources to finance future growth, and it may
become necessary to seek additional financing for such purpose. There are
currently no material commitments for capital expenditures.
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 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.
9
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.
Safe Harbor Forward-Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-K 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 Private
Securities Litigation Reform Act of 1995 ("the Act"). Forward-looking
statements include, without limitation, any statement that may predict,
forecast, indicate, or imply future results, performance, or achievements,
and may contain the words "believe," "will be," "will continue," "will
likely result," "anticipates," "seeks to," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar words, expressions
or phrases of similar meaning. 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. The risks and uncertainties are detailed from time to time in
reports filed by the Company with the Securities and Exchange Commission
("SEC"), including Forms 8-K, 10-Q, and 10-K, and 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, the ability of the
Company to sustain, manage or forecast its growth and inventories, performance
and reliability of products, customer service, adverse publicity, business
disruptions; increased costs of freight and transportation to meet delivery
deadlines, changes in business strategy or development plans, turnover of key
employees, 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 made or incorporated by reference from time to
time by the Company or its representatives in this report, other reports,
filings with the SEC, press releases, conferences, or otherwise are
forward-looking statements within the meaning of the Act. 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.
The risks included here are not exhaustive. Other sections of this
report may include additional factors which could adversely affect the
Company's business and financial performance. Moreover, the Company
operates in a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for management to
predict all such risk factors, nor can it assess the impact of all such
risk factors on its business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
Investors should also be aware that while the Company does, from time
to time, communicate with securities analysts, it is against the Company's
policy to disclose to them any material information unless such information
shall have been previously or is simultaneously disclosed in a manner
intended to provide broad, nonexclusionary distribution of the information
to the public. Accordingly, shareholders should not assume that the Company
agrees with any statement or report issued by any analyst irrespective of
the content of the statement or report. Furthermore, the Company has a
policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities
analysts contain any projections, forecasts or opinions, such reports are
not the responsibility of the Company.
10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risks which have the potential to affect the Company's
earnings and cash flows result primarily from changes in interest rates.
The Company's cash equivalents, which consist of an investment in a money
market fund consisting of high quality short term instruments, principally
US government and agency issues and commercial paper, are subject to
fluctuating interest rates. A 10 percent change in such current interest
rates would not have a material effect on the Company's results of
operations or cash flow.
The Company is also exposed to market risk from changes in the
interest rate related to its revolving credit facility, which is based upon
the LIBOR Market Index Rate, which is a floating interest rate. Assuming an
average borrowing level of $2.7 million (which amount approximated the
average amount borrowed under all revolving credit facilities during the
year ended December 31, 2000), each 1 percentage point increase in the
LIBOR Market Index Rate would result in $27,000 of additional annual
interest charges. The Company does not currently use interest rate
derivative instruments to manage exposure to interest rate changes.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedule in
Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers of the Company
(Age as of January 1, 2001)
First
Became An
Executive
Name Age Officer in Position(s) Held
---- --- ---------- ----------------
George Taylor, Jr.* 58 1984 Chairman of the Board, President,
Chief Executive Officer
James E. Cooke, III 52 2000 Chief Operating Officer
Robert G. LaVigne* 49 1988 Executive Vice President, Chief
Financial Officer, Secretary, Treasurer
Alexander E. Capo 50 1987 Executive Vice President - New Business
Development
Robert L. Saelens 55 1997 Vice President - Marketing
Peter J. Marzano 50 2001 Vice President - Sales
- --------------------
* Member of the Board of Directors.
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.),
11
a business products and automobile leasing company, from 1981 to 1993. Vice
President - Marketing and Sales for National Telephone Company from 1977 to
1981. Director of Beijing Antai Communication Equipment Company, Ltd.
("ATC"). Mr. Taylor was one of the founders of the National Association of
Telecommunication Dealers, has been a member of, or advisor to, its Board
of Directors since its inception in 1986, and for two years served as its
President and Chairman. Brother of Mr. Hugh M. Taylor, a Director of the
Company.
James E. Cooke, III, Chief Operating Officer since August 2000. From
1988 through 1999 he filled various executive positions with Executone
Information Systems, Inc., including Vice President, Sales and Operations.
President of an interconnect company from 1985 until 1988. General Manager
and Regional Manager of the Jarvis Corporation from 1981 to 1985. For eight
years prior thereto he worked at Xerox Corporation in various sales and
management positions.
Robert G. LaVigne, Executive Vice President since July 1997. Chief
Financial Officer, Corporate Secretary, Treasurer and Director since 1988. Vice
President - Finance & Administration from 1988 until July 1997. 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, Executive Vice President - New Business
Development since May 2000. Vice President - Sales from July 1997 until May
2000. Vice President - Sales and 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.
Robert L. Saelens, Vice President - Marketing from June 1997 to May
2000, and since March 2001. Vice President - Sales & Marketing from May 2000
to March 2001. 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.
Peter J. Marzano, Vice President of Sales since March 2001. Executive
Director of MDU ("multiple dwelling unit") Sales for AT&T Broadband, a
division of AT&T Corporation from January 1999 to March 2001. AT&T Broadband
is a provider of residential and commercial cable TV, high speed data
services and local and long-distance telephone services. Director of Sales
for Teleport Communications Group (a Certified Local Exchange Carrier, or
"CLEC", acquired by AT&T in May 1998) from January 1995 to January 1999.
Prior thereto, Mr. Marzano served in various sales and sales management
capacities for various companies including Quodata Corporation, United
Technologies Corporation, and GD Stromberg-Carlson.
The other information required by Item 10 is included in the
Company's definitive proxy statement filed pursuant to regulation 14A on or
before April 30, 2001. Such information is incorporated herein by
reference, pursuant to General Instruction G(3).
Item 11. Executive Compensation
The information required by Item 11 is included in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A
on or before April 30, 2001. Such information is incorporated herein by
reference, pursuant to General Instruction G(3).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is included in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A
on or before April 30, 2001. Such information is incorporated herein by
reference, pursuant to General Instruction G(3).
12
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is included in the Company's
definitive proxy statement which will be filed pursuant to Regulation 14A
on or before April 30, 2001. Such information is incorporated herein by
reference, pursuant to General Instruction G(3).
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Financial Statements and Financial Statement Schedule
Page
----
Report of Deloitte & Touche LLP 15
Consolidated Balance Sheets - December 31, 2000 and 1999 16
Consolidated Statements of Operations -
Years Ended December 31, 2000, 1999 and 1998 17
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 2000, 1999 and 1998 18
Consolidated Statements of Cash Flows -
Years Ended December 31, 2000, 1999 and 1998 19
Notes to Consolidated Financial Statements 20
Financial Statement Schedule:
Report of Deloitte & Touche LLP 28
Schedule II - Valuation and Qualifying Accounts 29
(b) Exhibits: See Index to Exhibits on page 30.
(c) Reports on Form 8-K: The registrant did not file any reports on Form
8-K during the fourth quarter of 2000.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on March
23, 2001.
FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ George J. Taylor, Jr.
-------------------------------
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 23, 2001.
Signature Title(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
14
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,
2000 and 1999, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 2000. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Hartford, Connecticut
February 21, 2001
15
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(In thousands, except share amounts) 2000 1999
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 374 $ 446
Accounts receivable, less allowance for doubtful
accounts of $244 in 2000 and $266 in 1999 6,527 6,665
Inventories 7,181 7,539
Deferred income taxes (Note 11) 107 -
Other current assets 90 49
- -------------------------------------------------------------------------------
Total Current Assets 14,279 14,699
- -------------------------------------------------------------------------------
Property and equipment, net (Note 3) 632 774
Non-current deferred income taxes (Note 11) 348 -
Other assets 235 184
- -------------------------------------------------------------------------------
Total Assets $15,494 $15,657
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,789 $ 2,451
Debt maturing within one year (Note 5) 102 1,264
Accrued expenses and other current liabilities (Note 4) 1,493 834
- -------------------------------------------------------------------------------
Total Current Liabilities 5,384 4,549
- -------------------------------------------------------------------------------
Long-term debt (Note 5) 1,726 4,578
Other liabilities (Note 10) 182 113
- -------------------------------------------------------------------------------
Total Liabilities 7,292 9,240
- -------------------------------------------------------------------------------
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 shares issued and outstanding
in 2000 and 1999, respectively 3 3
Additional paid-in capital 12,248 12,216
Accumulated deficit (4,049) (5,802)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 8,202 6,417
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $15,494 $15,657
===============================================================================
See accompanying notes to consolidated financial statements.
16
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------
Revenues $42,786 $32,871 $27,738
Cost of revenues 32,716 25,840 20,816
- --------------------------------------------------------------------------------------
Gross profit 10,070 7,031 6,922
Selling, general and administrative expenses 8,454 6,663 5,926
- --------------------------------------------------------------------------------------
Operating income 1,616 368 996
Interest expense 302 349 272
Other income (44) (36) (72)
- --------------------------------------------------------------------------------------
Income from continuing operations before income taxes 1,358 55 796
(Benefit) provision for income taxes (395) (2) 16
- --------------------------------------------------------------------------------------
Income from continuing operations 1,753 57 780
- --------------------------------------------------------------------------------------
Discontinued operations (Note 6):
Loss from operations - - (14)
Loss on sale of discontinued operation - - (195)
- --------------------------------------------------------------------------------------
Loss from discontinued operations - - (209)
- --------------------------------------------------------------------------------------
Net income $ 1,753 $ 57 $ 571
======================================================================================
Net income (loss) per common share:
Basic and diluted net income (loss) per common share:
From continuing operations $ .54 $ .02 $ .23
From discontinued operations - - (.06)
- --------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ .54 $ .02 $ .17
======================================================================================
Weighted average common shares outstanding:
Basic weighted average common shares 3,272 3,272 3,264
Dilutive effect of stock options 3 2 140
- --------------------------------------------------------------------------------------
Diluted weighted average common and
common equivalent shares 3,275 3,274 3,404
======================================================================================
See accompanying notes to consolidated financial statements.
17
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Common Stock Additional
---------------- Paid-in Accumulated
(In thousands) Shares Amount Capital deficit Total
- --------------------------------------------------------------------------------------------
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
Compensatory stock options issued - - 32 - 32
Net income - - - 1,753 1,753
- --------------------------------------------------------------------------------------------
Balance at December 31, 2000 3,272 $3 $12,248 $(4,049) $8,202
============================================================================================
See accompanying notes to consolidated financial statements.
18
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(In thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 1,753 $ 57 $ 571
Adjustments to reconcile net income to net cash
flows provided (used) by operating activities:
Depreciation and amortization 305 358 309
Deferred income taxes (455) - -
Value of compensatory stock options issued 32 - -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 138 (1,715) 127
Decrease (increase) in inventories 358 (689) (4,267)
(Increase) decrease in other assets (92) 25 303
Increase (decrease) in accounts payable 1,338 1,009 (118)
Increase in accrued expenses and other liabilities 728 311 91
Decrease in net assets of discontinued operations - - 560
- --------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 4,105 (644) (2,424)
- --------------------------------------------------------------------------------------------
Investing Activities:
Purchases of property and equipment (163) (282) (214)
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (163) (282) (214)
- --------------------------------------------------------------------------------------------
Financing Activities:
(Repayments) borrowings under inventory finance agreement (1,175) (1,907) 2,193
(Repayments) borrowings under revolving credit lines (2,750) 2,751 (8)
Repayments of capital lease obligation (89) (78) (63)
Proceeds from exercise of stock options - 16 4
- --------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (4,014) 782 2,126
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (72) (144) (512)
Cash and cash equivalents at beginning of year 446 590 1,102
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 374 $ 446 $ 590
============================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 302 $ 349 $ 272
Income taxes 15 10 14
See accompanying notes to consolidated financial statements.
19
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations
Farmstead Telephone Group, Inc. ("Farmstead" or the "Company") is
principally engaged as a secondary market reseller, and Authorized
Remarketing Supplier of Classic Avaya(TM) and new Avaya Inc. ("Avaya")
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 year ended December 31, 2000, no
single customer accounted for more than 10% of revenues. One customer,
Lucent Technologies, Inc. accounted for 15% of the Company's revenues
during the years ended December 31, 1999 and December 31, 1998.
Principles of Consolidation
The consolidated financial statements presented herein include the
accounts of the Company and its wholly- owned inactive subsidiary, FTG
Venture Corporation. Investments in companies in which ownership interests
range from 20-50% and over which the Company exercises significant
influence but does not control, are accounted for under the equity method.
All material intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United
States of America 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.
20
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. The following table shows securities outstanding as of
December 31 that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per
share because to do so would have been antidilutive (in thousands):
2000 1999 1998
-----------------------
Stock Options 1,948 1,790 1,621
Warrants 2,472 2,472 2,472
Underwriter Options and Warrants to
acquire Units (Note 8) 339 339 339
-----------------------
Total 4,759 4,601 4,432
=======================
Segment Information
In the opinion of management, the Company operates in one industry
segment, which is the sale of telecommunications equipment.
Reclassification
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2000 and 1999 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):
2000 1999
--------------------------------------------------------------------
Equipment $1,161 $1,029
Furniture and fixtures 76 116
Leasehold improvements 127 103
Leased equipment under capital lease 381 394
--------------------------------------------------------------------
1,745 1,642
Less accumulated depreciation and amortization (1,113) (868)
--------------------------------------------------------------------
Property and equipment, net $ 632 $ 774
====================================================================
Leased equipment under capital lease at December 31, 2000 and 1999
consisted principally of office furniture, equipment and computer
equipment. The accumulated amortization of the leased equipment was
$277,000 and $217,000 at December 31, 2000 and 1999, 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):
2000 1999
----------------------------------------------------------------
Salaries, commissions and benefits $1,137 $668
License fees payable to Avaya (Note 9) 210 114
Other 146 52
----------------------------------------------------------------
Accrued expenses and other current liabilities $1,493 $834
================================================================
21
5. DEBT OBLIGATIONS
Debt Maturing Within One Year
-----------------------------
As of December 31, debt obligations maturing within one year
consisted of the following (in thousands):
2000 1999
--------------------------------------------------------
Inventory financing program borrowings $ - $1,175
Current portion of long-term debt 102 89
--------------------------------------------------------
Total debt maturing within one year $102 $1,264
========================================================
During 1999, the Company participated in an interest-free inventory
financing program sponsored by Lucent Technologies, and in connection
therewith, maintained a $4 million line of credit with Finova Capital
Corporation ("Finova") to finance inventory purchases under this program.
In June 1999, the Finova credit facility was replaced with a similar $10
million credit facility obtained from Deutsche Financial Services
Corporation ("DFS") as further described below. In January 2000, the
Company's participation in the inventory financing program ended,
concurrent with the transfer of the Company's supplier relationship with
Lucent to Catalyst Telecom, an authorized Lucent distributor.
Long-term Debt
--------------
As of December 31, long-term debt obligations consisted of the
following (in thousands):
2000 1999
-----------------------------------------------------
Revolving credit agreement(a) $1,689 $4,439
Obligation under capital lease(b) 139 228
-----------------------------------------------------
1,828 4,667
Less current portion (102) (89)
-----------------------------------------------------
Long-term debt $1,726 $4,578
=====================================================
(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
contained 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 were advanced at 80% of eligible receivables, while
borrowings under the supplemental inventory-based line were 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. Borrowings were at
prime plus .50% (9.0% at December 31, 1999). Borrowings under the $10
million inventory floorplan credit line, which were $1,175,000 at December
31, 1999, were repayable, interest-free in either two or three equal
monthly installments. The facility called for a commitment fee of .09% of
the aggregate credit line. There were no compensating balance requirements.
The Credit Agreement restricted the Company from the payment of dividends
without the consent of DFS, and required the Company to maintain a minimum
tangible net worth of $5.75 million on and after December 31, 1999. The
Credit Agreement also contained covenants requiring the Company to maintain
certain debt-to-equity, interest coverage and current asset ratios, and
minimum profitability levels.
On September 27, 2000, the Company entered into a two-year, $8
million revolving loan agreement (the "Loan Agreement") with First Union
National Bank ("FUNB"), replacing the DFS credit facility. Under the terms
of the FUNB Loan Agreement, borrowings are advanced at 75% of eligible
accounts receivable (primarily receivables that are less than 90 days old),
and at 50% of the value of eligible inventory (inventory that was purchased
new or refurbished and ready for sale), provided that the amount advanced
against eligible inventory shall not exceed $2 million. The interest rate
charged the Company on outstanding borrowings is the LIBOR Market
Index Rate plus 2.5% (9.06 % at December 31, 2000). The Company is also
charged an availability fee equal to .25% per annum on the unused portion
of the credit line. Since it is the Company's intent to maintain this
credit facility for longer than one year, borrowings are classified as
long-term debt. The Loan Agreement restricts the Company from the
22
payment of dividends without the consent of FUNB, and requires the Company to
maintain a minimum tangible net worth of $6 million at all times. The Loan
Agreement also contains financial covenants requiring the Company to maintain
certain debt-to-equity and funds flow coverage ratios. The Company was in
compliance with its loan requirements at December 31, 2000. As of December
31, 2000, the unused portion of the credit facility was approximately $6.3
million, of which approximately $4.1 million was available under various
borrowing formulas. The average and highest amounts borrowed under all
revolving credit facilitiesduring the year ended December 31, 2000 were
approximately $2,708,000 and $5,145,000, respectively.
(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, 2000 the future minimum
annual lease payments are as follows (in thousands):
Year ending December 31:
------------------------------------------
2001 $115
2002 38
------------------------------------------
Total minimum lease payments 153
Less amount representing interest (14)
------------------------------------------
Present value of net minimum lease
payments under capital lease $139
==========================================
The carrying values of the Company's borrowings approximated their
fair values at December 31, 2000 and 1999.
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
grant, 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 2010. A summary of stock option transactions for each
of the three years in the period ended December 31, 2000 is as follows:
23
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
- ---------------------------------------------------------------------------
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
Granted 366,900 1.19 - 2.00 1.42
Canceled or expired (208,210) 1.12 - 2.69 1.92
- ---------------------------------------------------------------------------
Outstanding at December 31, 2000 1,951,036 $1.12 - 11.80 $1.92
===========================================================================
As of December 31, 2000:
Exercisable 1,435,536 $1.12 - 11.80 $2.01
Available for future grant 1,551,156
The following summarizes information about stock options outstanding
and exercisable as of December 31, 2000:
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
- --------------- ----------- ---------------------- -------------- ----------- --------------
$1.12 - 2.00 1,908,186 7.4 $1.85 1,395,436 $1.92
$2.01 - 5.00 28,500 4.1 3.15 25,750 3.21
$5.01 - 11.80 14,350 3.4 8.55 14,350 8.55
- ------------------------------------------------------------------------------------------------------
Total 1,951,036 7.4 $1.92 1,435,536 $2.01
======================================================================================================
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 amounts):
2000 1999 1998
--------------------- --------------------- ---------------------
As As As
Reported Pro forma Reported Pro forma Reported Pro forma
-------- --------- -------- --------- -------- ---------
Net income (loss) $1,753 $1,380 $ 57 $(262) $571 $(525)
Basic net income (loss) per share .54 .42 .02 (.08) .17 (.16)
Diluted net income (loss) per share .54 .42 .02 (.08) .17 (.16)
===========================================================================================================
The fair value of stock options used to compute pro forma net income
(loss) and net income (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 2000, 1999
and 1998; expected volatility of 117% for 2000, 194% for 1999 and124% for
1998; risk-free interest rate of 5.7% for 2000, 5.5% for 1999 and 4.9% for
1998, and an expected option holding period of 5 years for 2000, 1999 and
1998. The weighted average fair value of options granted during 2000, 1999
and 1998 was $1.17, $1.59 and $1.66, respectively.
24
8. STOCKHOLDERS' EQUITY
As of December 31, 2000, 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.
(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.
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, 2000, future minimum
annual rental payments were as follows: $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 $277,624 in 2000, $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"). The
Limited Period commences January 1, 2003. The CEO's contractual minimum
annual base salary is $300,000 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, 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. Upon execution of the ageement, the CEO
was granted an option to purchase up to 500,000 shares of common stock at
the fair market value on the date of grant.
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(TM) trademark in connection with the refurbishing,
marketing and sale of Lucent products sold under the ARS Agreement. In
October 2000, the license agreement was transferred to Avaya and, on
February 2, 2001 both the ARS and license agreements were extended to
December 31, 2003. Under the license agreement, the Company is required to
pay Avaya a fee equal to 10% of the sales price, on Classic Avaya products
sold by the Company. The Company recorded in cost of revenues
approximately $2,097,000, $1,530,000 and $301,000 of fee expense in 2000,
1999 and 1998, respectively.
25
10. EMPLOYEE BENEFIT PLANS
The Company maintains 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 $128,078 and $72,665 at
December 31, 2000 and 1999, respectively. 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):
2000 1999
-------------------------------------------------------
Benefit obligation at beginning of year $113 $ 53
Service cost 57 53
Interest cost 12 7
-------------------------------------------------------
Benefit obligation at end of year $182 $113
=======================================================
The Company provides a split dollar life insurance program for
certain of its officers 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, and such contributions amounted to $71,167 in 2000, $67,660
in 1999 and $46,248 in 1998. The Company recognized expense of $45,849 in
2000, $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
The following table provides a summary of the current and deferred
components of the (benefit) provision for federal and state income taxes
attributable to earnings before income taxes for the three years ended
December 31 ( in thousands):
2000 1999 1998
--------------------------------------------------------------
Federal income tax expense:
Current $ 37 $ - $ 6
Deferred (406) - -
State income tax expense
Current 23 (2) 10
Deferred (49) - -
--------------------------------------------------------------
(Benefit) provision for income taxes $(395) $(2) $16
==============================================================
Differences between the tax (benefit) expense reflected in the
financial statements and the amounts calculated at the federal statutory
income tax rate of 34% for the three years ended December 31 are as follows
(in thousands):
2000 1999 1998
-------------------------------------------------------------------
Income tax provision at statutory rate $ 458 $ 19 $ 199
Increase (reduction) in income taxes
resulting from:
State and local income taxes, net of
federal income tax benefit (66) 12 9
Non-deductible life insurance 24 33 20
Non-deductible meals and entertainment 26 20 20
Utilization of net operating loss (690) (125) (242)
Change in valuation allowance (148) 38 14
Other 1 1 (4)
-------------------------------------------------------------------
(Benefit) provision for income taxes $(395) $ (2) $ 16
===================================================================
26
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities at December 31,
2000 and 1999 are as follows (dollars in thousands):
2000 1999
- ----------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 98 $ 212
Inventory capitalization and allowances 380 190
Accrued vacation 84 76
Other 73 29
Net operating loss and capital loss carryforwards 275 786
- ----------------------------------------------------------------------
Total gross deferred tax assets 910 1,293
Less: Valuation allowance (455) (1,293)
- ----------------------------------------------------------------------
Net deferred tax assets $ 455 $ -
======================================================================
The Company has federal net operating loss carryforwards of
approximately $620,000 which expire in 2017. A full valuation allowance of
the entire net deferred tax asset was warranted for 1999 and 1998 due to
the Company's history of cumulative operating losses. In 2000, the
valuation allowance was reduced to approximately $455,000 as a result of
positive earnings in 2000 and partial utilization of the Company's net
operating loss carryforwards. Management believes that a partial valuation
allowance is still warranted primarily due to the historical volatility of
earnings.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2000 and 1999 is as follows
(in thousands except earnings (loss) per share):
Quarter
- -----------------------------------------------------------------------------------------------
2000 First Second Third Fourth
- -----------------------------------------------------------------------------------------------
Net Sales $9,449 $11,125 $11,068 $11,144
Gross Profit 1,952 2,141 2,921 3,056
Net income 23 179 607 944
Basic and diluted earnings per common share .01 .05 .19 .29
Weighted average common shares outstanding - Basic 3,276 3,273 3,273 3,273
Weighted average common shares outstanding - Diluted 3,276 3,274 3,274 3,274
===============================================================================================
Quarter
- -----------------------------------------------------------------------------------------------
1999 First Second Third Fourth
- -----------------------------------------------------------------------------------------------
Net Sales $6,328 $7,118 $10,177 $9,248
Gross Profit 1,472 1,833 2,401 1,325
Net income (loss) (97) 118 426 (390)
Basic and diluted earnings (loss) per common share (.03) .04 .13 (.12)
Weighted average common shares outstanding - Basic 3,593 3,273 3,273 3,272
Weighted average common shares outstanding - Diluted 3,593 3,274 3,273 3,274
===============================================================================================
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Farmstead Telephone Group, Inc.
East Hartford, Connecticut
We have audited the consolidated financial statements of Farmstead
Telephone Group, Inc. and subsidiary (the "Company") as of December 31,
2000 and 1999, and for each of the three years in the period ended December
31, 2000, and have issued our report thereon dated February 21, 2001; such
report is included elsewhere in this Form 10-K. Our audits also included
the financial statement schedule of Farmstead Telephone Group, Inc., listed
in Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 21, 2001
28
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column C- Additions
-------------------------
Column B- (1) (2) Column E-
Balance at Charged to Charged to Balance at
beginning of costs and other Column D- End of
Column A- Description period expenses accounts Deductions* period
--------------------- ------------ ---------- ---------- ----------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2000 $266 $ 92 $114 $244
Year ended December 31, 1999 287 23 44 266
Year ended December 31, 1998 579 36 328** 287
Inventory valuation reserves:
Year ended December 31, 2000 128 947 140 935
Year ended December 31, 1999 57 155 84 128
Year ended December 31, 1998 45 82 70 57
- --------------------
* Represents write-offs of inventories and uncollectible accounts
receivable.
** Includes a $315 reclassification to net assets held for sale.
29
INDEX TO EXHIBITS
The following documents are filed as Exhibits to this report on Form
10-K 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) Certificate of 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) Certificate of Amendment of Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated July 10, 1991 [
Exhibit 10.12 to the Annual Report on Form 10-K for the year
ended December 31, 1991]
3(d) Amended and Restated By-Laws
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) Amended 1992 Stock Option Plan [Exhibit to the Proxy
Statement on Schedule 14A filed April 14, 1998 (File No.
001-12155)]
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 on Form 10-KSB for
the year ended December 31, 1998]
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 on Form 10-K for the year ended December 31,
1988]
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 on Form 10-K for the year ended December
31, 1988]
10(c) 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(d) 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(e) Form of Underwriter's Consulting Agreement [ Exhibit 10.1 to
the SB-2 Registration Statement dated June 3, 1996
(Registration No. 333-5103)]
10(f) 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)]
30
10(g) 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(h) 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(i) 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(j) 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(k) 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(l) 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(m) 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(n) 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(o) 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(p) 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(q) 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(r) 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(s) 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(t) 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(u) 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(v) 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]
31
10(w) 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(x) 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(y) 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(z) 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(aa) 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(bb) First Amendment of Lease, dated June 30, 1999, By and Between
Tolland Enterprises ("Landlord") and Farmstead Telephone
Group, Inc. ("Tenant")
10(cc) Loan Agreement, dated September 27, 2000 between First Union
National Bank and Farmstead Telephone Group, Inc. [Exhibit
10(ee) to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000]
10(dd) Promissory Note, dated September 27, 2000 between First Union
National Bank and Farmstead Telephone Group, Inc. [Exhibit
10(ff) to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000]
10(ee) Employment Agreement dated as of January 1, 2000 between
Farmstead Telephone Group, Inc. and Robert G. LaVigne
10(ff) Amendment to Lucent ARS License Agreement Between Lucent
Technologies Inc. and Farmstead Telephone Group, Inc., dated
February 2, 2001.
10(gg) Amendment to Lucent ARS Dealer Agreement Between Lucent
Technologies Inc. and Farmstead Telephone Group, Inc., dated
February 2, 2001.
21 Subsidiaries [Exhibit 21 to the Annual Report on Form 10-KSB
for the year ended December 31, 1999]
23 Consent of Deloitte & Touche LLP
32