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 September 30, 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.
-------------------------------
(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
(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 October 30, 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
September 30, December 31,
(In thousands) 2001 2000
-------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,345 $ 374
Accounts receivable, less allowance for doubtful accounts 4,568 6,527
Inventories 6,058 7,181
Deferred taxes and other current assets 187 197
-----------------------------------------------------------------------------------------
Total Current Assets 13,158 14,279
-----------------------------------------------------------------------------------------
Property and equipment, net 530 632
Deferred taxes and other non-current assets 578 583
-----------------------------------------------------------------------------------------
Total Assets $ 14,266 $ 15,494
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,102 $ 3,789
Debt maturing within one year (Note 2) 2,688 102
Accrued expenses and other current liabilities (Note 3) 582 1,493
-----------------------------------------------------------------------------------------
Total Current Liabilities 6,372 5,384
-----------------------------------------------------------------------------------------
Long-term debt (Note 2) - 1,726
Other liabilities 241 182
-----------------------------------------------------------------------------------------
Total Liabilities 6,613 7,292
-----------------------------------------------------------------------------------------
Minority Interest in Subsidiary (Note 4) 394 -
Stockholders' Equity (Note 5):
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 September 30, 2001 and December 31, 2000 3 3
Additional paid-in capital 12,274 12,248
Accumulated deficit (5,018) (4,049)
-----------------------------------------------------------------------------------------
Total Stockholders' Equity 7,259 8,202
-----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 14,266 $ 15,494
=========================================================================================
See accompanying notes to consolidated financial statements.
2
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------- --------------------
(In thousands, except income (loss) per share amounts) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------
Revenues $8,762 $11,068 $26,072 $31,642
Cost of revenues 6,773 8,147 20,327 24,628
---------------------------------------------------------------------------------------------------------
Gross profit 1,989 2,921 5,745 7,014
Selling, general and administrative expenses 1,770 2,257 6,221 5,963
---------------------------------------------------------------------------------------------------------
Operating income (loss) 219 664 (476) 1,051
Interest expense (41) (58) (124) (257)
Other income 9 11 31 32
---------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest
in income of subsidiary 187 617 (569) 826
Provision for income taxes 9 10 31 17
---------------------------------------------------------------------------------------------------------
Income (loss) before minority interest in income of
subsidiary 178 607 (600) 809
Minority interest in income of subsidiary 168 - 369 -
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 10 $ 607 $ (969) $ 809
=========================================================================================================
Basic and diluted net income (loss) per common share: $ - $ .19 $ (.30) $ .25
Weighted average common shares outstanding:
Basic 3,273 3,273 3,273 3,273
Diluted 3,273 3,274 3,285 3,275
=========================================================================================================
See accompanying notes to consolidated financial statements.
3
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, 2001 and 2000
(In thousands) 2001 2000
-----------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (969) $ 809
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 194 235
Minority interest in income of subsidiary 369 -
Value of compensatory stock options issued 26 28
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,959 (133)
Decrease in inventories 1,123 796
Decrease (increase) in other assets 15 (86)
(Decrease) increase in accounts payable (687) 2,089
(Decrease) increase in accrued expenses
and other current liabilities (911) 651
Increase in other liabilities 59 47
-----------------------------------------------------------------------------------
Net cash provided by operating activities 1,178 4,436
-----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (92) (141)
-----------------------------------------------------------------------------------
Net cash used in investing activities (92) (141)
-----------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of inventory finance borrowings - (1,175)
Borrowings (repayments) under revolving credit line 937 (2,612)
Repayments of capital lease obligation (77) (77)
Capital contribution from minority interest partner 25 -
-----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 885 (3,864)
-----------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,971 431
Cash and cash equivalents at beginning of period 374 446
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,345 $ 877
===================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 125 $ 256
Income taxes 94 5
See accompanying notes to consolidated financial statements.
4
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.
("Farmstead"), FTG Venture Corporation (inactive), a wholly owned
subsidiary, and InfiNet Systems, LLC ("InfiNet"), a 50.1% owned subsidiary
(collectively 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
Long-term debt obligations consisted of the following:
September 30, December 31,
(In thousands) 2001 2000
--------------------------------------------------------------------
Revolving credit agreement $ 2,626 $ 1,689
Obligation under capital lease 62 139
-----------------------------------------------------------------
2,688 1,828
Less current portion (2,688) (102)
-----------------------------------------------------------------
Long-term debt $ - $ 1,726
=================================================================
Outstanding borrowings under the Company's revolving credit facility
have been reclassified as a current liability as of September 30, 2001
because the Company's loan agreement expires in September 2002. As of
September 30, 2001, the unused portion of the revolving credit facility was
approximately $5,374,000, of which approximately $1,668,000 was available
under various borrowing formulas. The average and highest amounts
borrowed during the three months ended September 30, 2001 were
approximately $2,389,000 and $2,847,000, respectively. The average and
highest amounts borrowed during the nine months ended September 30, 2001
were approximately $2,173,000 and $2,876,000, respectively. The Company
was in compliance with its loan covenants as of September 30, 2001.
Note 3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following:
September 30, December 31,
(In thousands) 2001 2000
---------------------------------------------------------------------------
Salaries, commissions and benefits $370 $1,137
License fees payable to Avaya 122 210
Other 90 146
-----------------------------------------------------------------------
Accrued expenses and other current liabilities $582 $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.
Under the agreement, the Company has a 50.1% ownership interest, and TriNet
has a 49.9% ownership interest. With operations currently based in East
Hartford, CT, InfiNet was established 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 $3,904,000 and net income of $740,000 from its
inception to September 30, 2001. InfiNet's total assets at September 30,
2001 were $1,870,000.
5
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.
Note 5. Stockholders' Equity
On July 18, 2001, the Company extended the expiration date of its
Class A and Class B Redeemable Common Stock Purchase Warrants (the
"Warrants") from August 12, 2001 to June 30, 2002. There are currently
1,137,923 of each class of Warrants outstanding, currently entitling the
holders to acquire one share of Common Stock at an exercise price of $2.00
per share. The Company also extended the expiration date of its 89,948
outstanding Representative Warrants from September 16, 2001 to June 30,
2002. The Representative Warrants entitle the holder 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.
On June 14, 2001, stockholders approved the 2001 Employee Stock
Purchase Plan ("ESPP"), which made initially available for issuance to
qualified employees 250,000 shares of Common Stock. The ESPP provides for
semi-annual "offering periods", during which periods employees can
participate through payroll deductions. At the end of the offering period,
initially March 1, 2002, the participating employees will be able to
purchase stock at a 15% discount to the market price of Farmstead stock at
the beginning or end of the offering period, whichever is lower. Shares
purchased by an employee through the ESPP cannot exceed $25,000 in fair
market value per calendar year. As of October 30, 2001, employees had
contributed approximately $9,000 into the plan. The shares issuable
pursuant to the ESPP were registered on Form S-8 (No. 333-69290) dated
September 11, 2001.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net Income (Loss)
Net income for the three months ended September 30, 2001 was $10,000,
compared to net income of $607,000 in the comparable 2000 period. Net
income included $168,000 attributable to the Company's 50.1 % ownership
interest in the net income of InfiNet. The net loss for the nine months
ended September 30, 2001 was $969,000, compared with net income of $809,000
in the comparable 2000 period. The net loss for the nine months ended
September 30, 2001 included a $325,000 charge to increase inventory
valuation reserves, $104,000 in employee termination costs, and $369,000
net income attributable to the Company's 50.1 % ownership interest in the
net income of InfiNet.
For the three months ended September 30, 2001, InfiNet recorded net
income of $337,000 on revenues of $1,630,000. From its February 2001
inception to September 30, 2001, InfiNet recorded net income of $740,000 on
revenues of $3,907,000. See the notes to consolidated financial
statements contained elsewhere herein, for further information on InfiNet.
Revenues
Three months Nine Months
Ended Ended
September 30, September 30,
------------------ -------------------
(In thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------
End-user equipment sales $6,987 $ 9,523 $20,669 $26,446
Equipment sales to resellers 879 900 3,275 2,972
Services 896 645 2,128 2,224
---------------------------------------------------------------------------
Consolidated revenues $8,762 $11,068 $26,072 $31,642
===========================================================================
Revenues for the three months ended September 30, 2001 were
$8,762,000, a decrease of $2,306,000, or 21% from the comparable 2000
period. End-user equipment sales revenues in the current three-month period
amounted to $6,987,000, a decrease of $2,536,000 or 27% from the comparable
2000 period. Equipment sales to resellers in the current three-month
period amounted to $879,000, a decrease of $21,000 or 2% from the
comparable 2000 period. Service revenues amounted to $896,000, an increase
of $251,000 or 39% from the comparable 2000 period, principally due to
increased equipment
6
installation revenues resulting from increased systems sales, partly offset
by lower rental and equipment repair and refurbishing revenues.
Revenues for the nine months ended September 30, 2001 were
$26,072,000, a decrease of $5,570,000, or 18% from the comparable 2000
period. End-user equipment sales revenues in the current nine-month period
amounted to $20,669,000, a decrease of $5,777,000 or 22% from the
comparable 2000 period. Equipment sales to resellers in the current nine-
month period amounted to $3,275,000, an increase of $303,000 or 10% from
the comparable 2000 period. Service revenues amounted to $2,128,000, a
decrease of $96,000 or 4% from the comparable 2000 period, due principally
to lower equipment repair and refurbishing revenues stemming from the
termination of a contract with Lucent Technologies in the prior year, and
lower rental revenues, partly offset by increased equipment installation
revenues.
The Company believes that the reduction in revenues in the year 2001
is primarily attributable to current economic conditions and the 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. Incremental
sales of systems generated by InfiNet has helped offset the slowdown in
parts sales. The Company expects that its future sales revenues will
improve as capital spending for technology products improve, although no
assurances can be given.
Cost of Revenues and Gross Profit
Total cost of revenues for the three months ended September 30, 2001
were $6,773,000, a decrease of $1,374,000 or 17% from the comparable 2000
period. The gross profit for the three months ended September 30, 2001 was
$1,989,000, a decrease of $932,000 or 32% from the comparable 2000 period.
As a percentage of revenue, the gross profit margin decreased for the three
months ended September 30, 2001 to 22.7% from 26.4% recorded in the
comparable 2000 period. The decrease in the gross profit margin was
attributable to (i) product sales mix, primarily a higher ratio of new
equipment sales to end-users than used equipment sales; (ii) incremental
system sales generated by InfiNet in the current year period at a margin
lower than that obtained in the comparable prior year period, (iii) lower
margins on sales to other resellers; and (iii) lower margins from service
revenues, principally from subcontract installations
Total cost of revenues for the nine months ended September 30, 2001
were $20,327,000, a decrease of $4,301,000 or 18% from the nine months
ended September 30, 2000. The gross profit for the nine months ended
September 30, 2001 was $5,745,000, a decrease of $1,269,000 or 18% from the
comparable 2000 period. As a percentage of revenue, the gross profit
margin was 22% in both nine-month periods of 2001 and 2000. Excluding
InfiNet, the gross profit margin was 21.1%, down slightly from 22.2%
realized in the prior year period due primarily to (i) a $325,000 second
quarter charge increasing inventory obsolescence reserves due to reduced
product demand, (ii) a sales promotional program to sell-off certain
overstocked inventory at reduced sales prices, and (iii) lower margins from
subcontract installation services, partly offset by lower labor and
overhead costs as a percentage of revenues.
The Company believes that the current economic conditions and related
reduced product demand have contributed to increased competition for sales,
resulting in reduced profit margins on certain of the Company's products
during the current year.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the three months ended September 30, 2001 were
$1,770,000, a decrease of $487,000 or 22% from the comparable 2000 period.
Excluding $97,000 incurred by InfiNet in its current-year start-up, SG&A
expenses were otherwise $584,000 or 26% lower than the comparable prior
year period. SG&A expenses were 20% of revenues in both the three months
ended September 30, 2001 and 2000. The decrease in SG&A expenses during the
current three-month period was primarily attributable to a $526,000 or 34%
decrease in employee compensation expenses (40% decrease excluding InfiNet)
resulting from reduced employment levels, which included a workforce
reduction of approximately 15% in the month of July. The Company also
incurred lower business travel expenses and lower business consulting fees.
These decreased expenses were partly offset by increased bad debt and
insurance expenses.
SG&A expenses for the nine months ended September 30, 2001 were
$6,221,000, an increase of $258,000 or 4% over the nine months ended
September 31, 2000. Of this increase, $247,000 was incurred by InfiNet,
consisting principally of employee compensation expenses, in its current-
year start-up. Excluding InfiNet, SG&A expenses were $11,000 higher than the
comparable 2000 period. SG&A expenses were 24% and 19% of revenues for the
nine months ended September 30, 2001 and 2000, respectively. SG&A
expenses increased primarily due to: (i) the start-up of InfiNet in the
current year, as noted above, (ii) increased bad debt reserves and write-
offs; (iii) higher legal fees from the use of outside counsel in day-to-day
business and contract negotiation matters, as well as legal fees incurred
during the first six months of the current year in connection with amending
the Company's By-laws and Certificate of Incorporation, establishing an
employee stock purchase
7
plan which was approved by stockholders at the September 14, 2001 annual
meeting, and in various other corporate governance matters; (iv) higher net
product marketing expenses; and (v) increased insurance costs. The Company
also incurred $104,000 of employee termination expenses during the second
quarter of the current year. These increased expenses were partly offset
by a $421,000 or 10% decrease in compensation expenses (15% reduction
excluding InfiNet) attributable to workforce reductions during the current
year. The Company also incurred lower business consulting fees and lower
depreciation expense.
The Company is continuing to review its SG&A expenses in an effort
to further reduce them, as it deems appropriate, in response to the current
year's reduced sales levels.
Interest Expense, Other Income and Minority Interest
Interest expense for the three months ended September 30, 2001 was
$41,000, as compared to $58,000 for the comparable 2000 period. Interest
expense for the nine months ended September 30, 2001 was $124,000 as
compared to $257,000 for the nine months ended September 30, 2000. The
decrease in interest expense in the current three-month period was
attributable to lower borrowing costs. The decrease in interest expense
for the current nine-month period was attributable to both lower average
bank borrowings, and lower borrowing costs. During the three months ended
September 30, 2001, average bank borrowings approximated $2.4 million at an
average borrowing rate of approximately 6.1%, compared with average bank
borrowings of $1.8 million at an average borrowing rate of approximately
11.2% for the same three-month period of 2000. During the nine months
ended September 30, 2001, average bank borrowings approximated $2.2 million
at an average borrowing rate of approximately 7%, compared with average
bank borrowings of $3.1 million at an average borrowing rate of
approximately 10.1% for the same nine-month period of 2000.
Other income for the three months and nine months ended September 30,
2001 and 2000 consisted primarily of interest earned on invested cash.
Minority interest of $168,000 and $369,000 for the three and nine
months ended September 30, 2001 represents the 49.9% share of the net
income of InfiNet accruing to its minority partner.
Liquidity and Capital Resources
Working capital was $6,786,000 at September 30, 2001, a decrease of
$2,109,000 or 24% from $8,895,000 at December 31, 2000. The working
capital ratio was 2.1 to 1 at September 30, 2001, compared with 2.7 to 1 at
December 31, 2000. Working capital and the related ratio were both
impacted by the reclassification of the Company's outstanding bank
borrowings ($2,626,000 at September 30, 2001) from long-term to current,
since the current loan agreement expires in September 2002.
Operating activities provided $1,178,000 during the nine months ended
September 30, 2001, primarily due to reductions in both accounts receivable
and inventories, partially offset by a decrease in accounts payable,
accrued expenses and other current liabilities. These decreases are
primarily due to lower sales levels, improved accounts receivable
collections, and inventory reduction strategies. Investing activities used
$92,000 in the purchase of property and equipment.
Financing activities provided $885,000, primarily from bank
borrowings under the revolving credit facility, less repayments of the
capital lease obligation. As of September 30, 2001, the unused portion of
the revolving credit facility was approximately $5,374,000, of which
approximately $1,668,000 was available under various borrowing formulas.
The average and highest amounts borrowed during the three months ended
September 30, 2001 were approximately $2,389,000 and $2,847,000,
respectively. The average and highest amounts borrowed during the nine
months ended September 30, 2001 were approximately $2,173,000 million and
$2,876,000, respectively. The Company was in compliance with its loan
covenants as of September 30, 2001.
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.
8
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 that 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 that 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 $2.4
million (which amount represented the average amount borrowed under the
revolving credit facility during the three months ended September 30,
2001), each 1 percentage point increase in the bank's lending rate would
result in $24,000 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.
9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 14, 2001, the Stockholders of the Company approved amendments
to the Company's Certificate of Incorporation in order to, among other
things, (i) require a super majority vote of Stockholders to further amend
the Certificate of Incorporation, in certain instances; (ii) create a
classified (a.k.a. "staggered") Board of Directors; (iii) amend the section
pertaining to indemnification of officers, directors, and employees; and
(iv) eliminate the right of Stockholders to act by written consent or to
call special meetings.
On July 18, 2001, the Company extended the expiration date of its
Class A and Class B Redeemable Common Stock Purchase Warrants (the
"Warrants") from August 12, 2001 to June 30, 2002. There are currently
1,137,923 of each class of Warrants outstanding, currently entitling the
holders to acquire one share of Common Stock at an exercise price of $2.00
per share. The Company also extended the expiration date of its 89,948
outstanding Representative Warrants from September 16, 2001 to June 30,
2002. The Representative Warrants entitle the holder 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.
On September 11, 2001, the Company filed a Form S-8 Registration
Statement under the Securities Act of 1933 with the SEC in order to
register 250,000 shares of Common Stock reserved for issuance under the
Company's ESPP. The ESPP was approved by stockholders at the June 14, 2001
Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
The following documents are filed as Exhibits to this report on
Form 10-Q or incorporated by reference herein. Any document
incorporated by reference is identified by a parenthetical
referencing the SEC filing which included such document.
3(e) Certificate of Amendment of Certificate of Incorporation
of Farmstead Telephone Group, Inc., dated July 9, 2001.
[Exhibit 3(e) to Form 10-Q for the quarter ended June
30, 2001]
4(j) Resolutions adopted by the Company's Board of Directors
July 19, 2001, amending terms of Warrants and
Underwriter's Options. [Exhibit 4(j) to Form 10-Q for
the quarter ended June 30, 2001]
10(hh) Farmstead Telephone Group, Inc. 2001 Employee Stock
Purchase Plan [Appendix B to the Proxy Statement on
Schedule 14A filed April 13, 2001 for the 2001 Annual
Meeting of Stockholders]
16 Letter re change in certifying accountants [Exhibit 16
to Form 8-K dated October 23, 2001]
21 Subsidiaries
(b) Reports on Form 8-K: On July 18, 2001, the Company filed Form
8-K indicating that the Board of Directors approved extending
the expiration of the Redeemable Class A (FTG. WS.A) and Class
B (FTG.WS.B) Common Stock Purchase Warrants from August 12,
2001 to June 30, 2002. On October 24, 2001, the Company filed
Form 8-K, dated October 23, 2001, indicating a change in its
certifying accountants from Deloitte & Touche LLP to DiSanto
Bertoline & Company, P.C.
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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: November 7, 2001 /s/ George J. Taylor, Jr.
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George J. Taylor, Jr.
Chief Executive Officer, President
Dated: November 7, 2001 /s/ Robert G. LaVigne
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Robert G. LaVigne
Executive Vice President,
Chief Financial Officer
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