U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number: 0-15938
Farmstead Telephone Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle
East Hartford, CT 06108
(Address of principal executive offices) (Zip Code)
(860) 610-6000
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(Registrant's telephone number)
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 past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X ] No [
]
As of April 28, 2001, the registrant had 3,272,579 shares of its
$0.001 par value Common Stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands) 2001 2000
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 694 $ 374
Accounts receivable, less allowance for doubtful accounts 4,937 6,527
Inventories 8,550 7,181
Deferred income taxes 107 107
Other current assets 175 90
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Total Current Assets 14,463 14,279
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Property and equipment, net 584 632
Non-current deferred income taxes 348 348
Other assets 278 235
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Total Assets $15,673 $15,494
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,613 $ 3,789
Debt maturing within one year (Note 2) 102 102
Accrued expenses and other current liabilities (Note 3) 644 1,493
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Total Current Liabilities 4,359 5,384
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Long-term debt (Note 2) 2,630 1,726
Other liabilities 201 182
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Total Liabilities 7,190 7,292
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Minority Interest in Subsidiary (Note 4) 117 -
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 at March 31, 2001
and December 31, 2000, respectively 3 3
Additional paid-in capital 12,258 12,248
Accumulated deficit (3,895) (4,049)
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Total Stockholders' Equity 8,366 8,202
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Total Liabilities and Stockholders' Equity $15,673 $15,494
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See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 2001 and 2000
(In thousands, except per share amounts) 2001 2000
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Revenues $9,294 $9,449
Cost of revenues 6,869 7,497
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Gross profit 2,425 1,952
Selling, general and administrative expenses 2,131 1,822
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Operating income 294 130
Interest expense (41) (115)
Other income 11 10
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Income before income taxes and minority interest
in income of subsidiary 264 25
Provision for income taxes 18 2
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Income before minority interest in income of subsidiary 246 23
Minority interest in income of subsidiary 92 -
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Net income $ 154 $ 23
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Basic and diluted net income per common share $ .05 $ .01
Weighted average common shares outstanding:
Basic 3,273 3,273
Diluted 3,357 3,276
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See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, 2001 and 2000
(In thousands) 2001 2000
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Cash flows from operating activities:
Net income $ 154 $ 23
Adjustments to reconcile net income to net cash flows
(used in) provided by operating activities:
Depreciation and amortization 62 88
Minority interest in income of subsidiary 92 -
Value of compensatory stock options issued 10 -
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,590 407
(Increase) decrease in inventories (1,369) 817
Increase in other assets (128) (138)
(Decrease) increase in accounts payable (176) 503
(Decrease) increase in accrued expenses
and other current liabilities (849) 996
Increase in other liabilities 19 18
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Net cash (used in) provided by operating activities (595) 2,714
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Cash flows from investing activities:
Purchases of property and equipment (14) (18)
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Net cash used in investing activities (14) (18)
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Cash flows from financing activities:
Repayments of inventory finance borrowings - (1,159)
Borrowings (repayments) under revolving credit line 930 (1,472)
Repayments of capital lease obligation (26) (32)
Capital contribution from minority interest partner 25 -
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Net cash provided by (used in) financing activities 929 (2,663)
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Net increase in cash and cash equivalents 320 33
Cash and cash equivalents at beginning of period 374 446
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Cash and cash equivalents at end of period $ 694 $ 479
==============================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 41 $ 115
Income taxes 77 5
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The interim financial statements are presented on a consolidated basis,
consisting of the accounts of Farmstead Telephone Group, Inc., its wholly
owned subsidiary, FTG Venture Corporation (inactive) and InfiNet Systems,
LLC, a subsidiary in which the company has a 50.1% ownership interest (the
"Company"). See Note 4 for further information on InfiNet. The interim
financial statements presented herein are unaudited, however in the opinion
of management these statements reflect all adjustments, consisting of
adjustments that are of a normal recurring nature, which are necessary for
a fair statement of results for the interim periods presented. This Form
10-Q should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
Note 2. Debt Obligations
Long-term Debt
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Long-term debt obligations consisted of the following (in thousands):
March 31, December 31,
2001 2000
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Revolving credit agreement $2,619 $1,689
Obligation under capital lease 113 139
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2,732 1,828
Less current portion (102) (102)
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Long-term debt $2,630 $1,726
=========================================================
As of March 31, 2001, the unused portion of the revolving credit
facility was approximately $5,381,000, of which approximately $1,728,000
was available under various borrowing formulas. The average and highest
amounts borrowed during the three months ended March 31, 2001 were
approximately $1.9 million and $2.6 million, respectively. The Company was
in compliance with its loan covenants as of March 31, 2001.
Note 3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following (in thousands):
March 31, December 31,
2001 2000
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Salaries, commissions and benefits $433 $1,137
License fees payable to Avaya 92 210
Other 119 146
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Accrued expenses and other current liabilities $644 $1,493
========================================================================
Note 4. Formation of Subsidiary
Effective February 1, 2001, the Company entered into a joint venture
agreement with TriNet Business Trust ("TriNet"), forming a limited
liability corporation operating under the name of InfiNet Systems, LLC
("InfiNet"). Under the agreement, the Company has a 50.1% ownership
interest, and TriNet has a 49.9% ownership interest. Incorporated under the
laws of the State of Delaware, and with operations currently based in East
Hartford, CT, InfiNet was organized for the purpose of selling new Avaya
telecommunications systems primarily to customers within the State of
Connecticut and various counties in the State of New York. InfiNet was
initially funded by an aggregate capital contribution of $50,000. InfiNet
recorded revenues of $949,000 and net income of $183,000 from its inception
to March 31, 2001. InfiNet's total assets at March 31, 2001 were
$1,074,000.
Since the Company owns greater than a 50% interest in, and exercises
significant control over, InfiNet, the financial statements of InfiNet have
been consolidated herein. All intercompany balances and transactions have
been eliminated.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income
Net income for the three months ended March 31, 2001 was $154,000,
compared with $23,000 for the three months ended March 31, 2000. Net income
for the current year period includes $92,000 representing the Company's
50.1% interest in the net income of InfiNet, which was organized in
February 2001. In its first months of operations, InfiNet recorded net
income of $183,000 on revenues of $949,000. See the notes to consolidated
financial statements contained elsewhere herein, for further information on
InfiNet.
Revenues
Revenues for the three months ended March 31, 2001 were $9,294,000, a
decrease of $155,000 or 1.6% from the three months ended March 31, 2000.
End-user equipment sales revenues in the current year amounted to
$7,540,000, a decrease of $32,000 or .4% from the comparable 2000 period.
Equipment sales to other resellers in the current year amounted to
$1,090,000, a decrease of $16,000 or 1.4% from the comparable 2000 period,
while service revenues amounted to $664,000, a decrease of $107,000 or
13.9% from the comparable 2000 period. Revenues for the three months ended
March 31, 2001 included $949,000 of end-user system sales and installation
revenues generated by InfiNet. Excluding revenues generated by InfiNet,
revenues were 11.7% below the comparable period of 2000. The Company
believes this is primarily a reflection of current economic conditions and
the resulting slowdown in capital spending for technology products, and to
some extent the result of a reduction in the Company's sales force due to
turnover.
Gross Profit
Total cost of revenues for the three months ended March 31, 2001 were
$6,869,000, a decrease of $628,000 or 8.4% from the three months ended
March 31, 2000. The gross profit for the three months ended March 31, 2001
was $2,425,000, an increase of $473,000 or 24.2% over the comparable 2000
period. As a percentage of revenue, the gross profit margin increased to
26.1% in the current year period, from 20.7% for the prior year period. The
improvement in the gross profit margin was attributable to several factors
including a shift in product mix (higher percentage of the more profitable
used equipment vs. new equipment); lower labor and overhead costs as a
percent of revenues; an improvement in product pricing; and the
discontinuance of an unprofitable equipment repair contract in the prior
year.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the three months ended March 31, 2001 were
$2,131,000, an increase of $309,000 or 17.0% over the three months ended
March 31, 2000. As a percentage of revenues, SG&A expenses were 22.9% and
19.3%, respectively, for the three months ended March 31, 2001 and 2000.
The increase in SG&A expenses in the current year period was primarily
attributable to higher compensation levels, expenses incurred in locating
and hiring new personnel, increased business and employee insurance costs,
and higher bank charges from increased credit card sales volume, offset by
lower fixed asset depreciation expense. The Company also incurred higher
than normal legal fees during the current year period, principally in
connection with amending the Company's By-laws and Certificate of
Incorporation, establishing a proposed employee stock purchase plan for
approval at the June 14, 2001 annual stockholders meeting, and in various
other corporate governance matters. Also included in the increase in SG&A
expenses for the current year period, are $35,000 of salary, commission and
other overhead expenses incurred by InfiNet.
Interest Expense, Other Income and Minority Interest
Interest expense for the three months ended March 31, 2001 was
$41,000, as compared to $115,000 for the three months ended March 31, 2000.
The decrease in interest expense in the current year period was
attributable to both lower average bank borrowings, and lower borrowing
costs. During the current year period, average borrowings approximated
$1,900,000 at an average borrowing rate of 8%, compared with average
borrowings approximating $4,500,000 at an average borrowing rate of 9.5%
for the same period of 2000.
Other income for the three months ended March 31, 2001 and 2000
consisted primarily of interest earned on invested cash.
Minority interest of $92,000 for the three months ended March 31,
2001 represents the 49.9% share of the net income of InfiNet accruing to
its minority partner.
Liquidity and Capital Resources
Working capital was $10,104,000 at March 31, 2001, an increase of
$1,209,000 or 13.6% from $8,895,000 at December 31, 2000. The working
capital ratio was 3.3 to 1 at March 31, 2001, compared with 2.7 to 1 at
December 31, 2000.
Operating activities used $595,000 during the three months ended
March 31, 2001, principally as a result of an increase in inventory and a
reduction in accrued expenses, partially offset by a decrease in accounts
receivable. Investing activities used $14,000 in the purchase of property
and equipment.
Financing activities provided $929,000, principally from an increase
in bank borrowings. The Company's loan agreement with its bank contains
certain financial covenants, and the Company was in compliance with these
covenants at March 31, 2001. As of March 31, 2001, the unused portion of
the credit facility was approximately $5,381,000 of which approximately
$1,728,000 was available under various borrowing formulas. The average and
highest amounts borrowed during the three months ended March 31, 2001 were
approximately $1.9 million and $2.6 million, respectively. Financing
activities also included a $25,000 capital contribution to InfiNet from its
minority partner.
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.
Safe Harbor Forward-Looking Statements
The Company's prospects are subject to certain uncertainties and
risks. The discussions set forth in this Form 10-Q 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
SEC 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 Securities and Exchange Commission, 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.
Item 3. Quantitative and Qualitative Disclosure 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
a 30-day average LIBOR rate. Assuming an average borrowing level of $1.9
million (which amount represented the average amount borrowed under the
revolving credit facility during the three months ended March 31, 2001),
each 1 percentage point increase in the bank's lending rate would result in
$19,000 of additional annual interest charges. Under its current policies,
the Company does not use interest rate derivative instruments to manage
exposure to interest rate changes.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 28, 2001, the Board of Directors of the Company amended
and restated the By-laws of the Company in order to, among other things, (i)
adopt an advanced notice provision for nominations or other business to be
properly brought before an annual meeting by Stockholders; (ii) eliminate
the right of Stockholders to call special meetings; (iii) provide that a
quorum is a majority of shares entitled to vote, present, in person, or
represented by a proxy; (iv) amend the section pertaining to
indemnification of officers, directors, and employees; (v) require a super
majority vote of Stockholders to further amend the Amended and Restated By-
laws, in certain instances. A copy of the Amended and Restated By-laws of
the Company was filed as Exhibit 3(d) to the Annual Report on Form 10-K for
the period ending December 31, 2000.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements 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.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: May 11, 2001 /s/ George J. Taylor, Jr.
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George J. Taylor, Jr.
Chief Executive Officer, President
Dated: May 11, 2001 /s/ Robert G. LaVigne
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Robert G. LaVigne
Executive Vice President,
Chief Financial Officer