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, 2002
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
incorporation or organization) (IRS Employer
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 April 15, 2002, the registrant had 3,288,610 shares of its $0.001
par value Common Stock outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands) 2002 2001
---------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,184 $ 1,479
Accounts receivable, less allowance for doubtful accounts 3,334 3,133
Inventories 4,122 4,427
Deferred income taxes 91 91
Other current assets 149 98
---------------------------------------------------------------------------------------------------
Total Current Assets 8,880 9,228
---------------------------------------------------------------------------------------------------
Property and equipment, net 468 505
Non-current deferred income taxes 364 364
Goodwill (Note 5) 128 -
Other assets 319 245
---------------------------------------------------------------------------------------------------
Total Assets $ 10,159 $ 10,342
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,883 $ 2,794
Debt maturing within one year (Note 2) 1,277 37
Accrued expenses and other current liabilities (Note 3) 467 567
---------------------------------------------------------------------------------------------------
Total Current Liabilities 3,627 3,398
Other liabilities 281 260
---------------------------------------------------------------------------------------------------
Total Liabilities 3,908 3,658
---------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary (Note 5) - 153
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;
3,288,610 and 3,272,579 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 3 3
Additional paid-in capital 12,306 12,285
Accumulated deficit (6,058) (5,757)
---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 6,251 6,531
---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 10,159 $ 10,342
===================================================================================================
See accompanying notes to consolidated financial statements.
2
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, 2002 and 2001
(In thousands, except per share amounts) 2002 2001
-----------------------------------------------------------------------------------------
Revenues $ 6,027 $ 9,294
Cost of revenues 4,721 6,869
-----------------------------------------------------------------------------------------
Gross profit 1,306 2,425
Selling, general and administrative expenses 1,660 2,131
-----------------------------------------------------------------------------------------
Operating income (loss) (354) 294
Interest expense (12) (41)
Other income 71 11
-----------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest in
income of subsidiary (295) 264
Provision for income taxes 6 18
-----------------------------------------------------------------------------------------
Income (loss) before minority interest in income of subsidiary (301) 246
Minority interest in income of subsidiary - 92
-----------------------------------------------------------------------------------------
Net income (loss) $ (301) $ 154
-----------------------------------------------------------------------------------------
Basic and diluted net income (loss) per common share $ (.09) $ .05
Weighted average common shares outstanding:
Basic 3,281 3,273
Diluted 3,289 3,357
-----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31, 2002 and 2001
(In thousands) 2002 2001
-----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (301) $ 154
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 62 62
Minority interest in income of subsidiary - 92
Value of compensatory stock options issued 11 10
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (201) 1,590
Decrease (increase) in inventories 305 (1,369)
Increase in other assets (125) (128)
Decrease in accounts payable (911) (176)
Decrease in accrued expenses and other
current liabilities (100) (849)
Increase in other liabilities 21 19
-----------------------------------------------------------------------------------------
Net cash used in operating activities (1,239) (595)
-----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (25) (14)
Acquisition of InfiNet (153) -
-----------------------------------------------------------------------------------------
Net cash used in investing activities (178) (14)
-----------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under revolving credit line 1,268 930
Repayments of capital lease obligation (28) (26)
Issuance of common stock 10 -
Capital contribution from (distribution to) minority
interest partner (128) 25
-----------------------------------------------------------------------------------------
Net cash provided by financing activities 1,122 929
-----------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (295) 320
Cash and cash equivalents at beginning of period 1,479 374
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,184 $ 694
-----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 9 $ 41
Income taxes 9 77
See accompanying notes to consolidated financial statements.
4
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The consolidated financial statements presented herein consist of the
accounts of Farmstead Telephone Group, Inc. and its wholly-owned
subsidiaries, FTG Venture Corporation (inactive) and InfiNet Systems, LLC
(which became wholly-owned effective January 1, 2002; prior thereto the
Company owned a 50.1% interest. See Note 5 for further information on
InfiNet). The interim consolidated financial statements and notes 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. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year. 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, 2001.
Note 2. Debt Maturing Within One Year
Outstanding borrowings under the Company's revolving credit facility
with First Union National Bank were $1,268,000 and $0 at March 31, 2002 and
December 31, 2001, respectively. As of March 31, 2002, the unused portion
of the revolving credit facility was approximately $6.7 million, of which
approximately $1,364,000 was available under various borrowing formulas.
The average and highest amounts borrowed during the three months ended
March 31, 2002 were approximately $918,000 and $1,514,000, respectively.
As a result of the net loss for the three months ended March 31, 2002,
the Company was not in compliance with its funds flow coverage ratio. In
addition, due to continued losses, the Company was not in compliance with
its tangible net worth covenant at April 30, 2002, which required a minimum
$6 million tangible net worth, as defined, at all times. On May 10, 2002
the Company was granted a waiver of these covenant violations as
consideration for the following modifications to be made to its loan
agreement: (i) the overall credit line was reduced from $8 million to $4
million; (ii) the advance rate formula on inventory was modified from 50%
of eligible inventory with a cap of $2 million, to 50% of eligible
inventory with a revised cap equal to 50% of eligible accounts receivable;
(iii) the minimum amount of tangible net worth required was reduced from $6
million to $5.5 million; (iv) the funds flow ratio covenant was eliminated
for the remainder of the term of the agreement (the loan agreement expires
September 27, 2002) and (v) the borrowing rate was increased from the
average 30-day London Interbank Offered Rate ("LIBOR") plus 250 basis
points to LIBOR plus 300 basis points. In consideration of the covenant
waiver, the Company was charged $5,000. The pro forma impact of these loan
modifications is a reduction in the March 31, 2002 unused portion of the
credit facility from $6.7 million to $2.7 million, and a reduction in the
March 31, 2002 borrowing availability from approximately $1,364,000 to
approximately $817,000.
Should the Company continue to default on its financial covenants, the
bank could elect to terminate the credit facility, which is otherwise
scheduled to expire in September 2002, or decide not to extend the facility
for another term. Should that happen, other sources of working capital
could be more expensive and possibly not obtainable until the Company could
demonstrate improved operating results. 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.
Debt maturing within one year also included $8,789 and $37,556 at March
31, 2002 and December 31, 2001, respectively, representing the remaining
payments under a capital lease obligation.
Note 3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following (in thousands):
March 31, December 31,
2002 2001
---------------------------------------------------------------------------
Salaries, commissions and benefits $ 286 $ 420
License fees payable to Avaya 67 42
Other 114 105
---------------------------------------------------------------------------
Accrued expenses and other current liabilities $ 467 $ 567
===========================================================================
5
Note 4. Recently Issued Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.'s 141 and 142, "Business Combinations"
and "Goodwill and Other Intangible Assets", respectively. SFAS 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under the provisions of SFAS 142,
goodwill recorded as a part of a business combination is no longer
amortized, but instead will be subject to at least an annual assessment for
impairment by applying a fair-value-based test. Also, SFAS 142 requires
that in future business combinations, all acquired intangible assets should
be separately stated on the balance sheet if the benefit of the intangible
asset can be sold, transferred, licensed, rented, or exchanged, regardless
of the acquirer's intent to do so. These intangible assets would then be
amortized over their useful lives, resulting in amortization expense. The
Company has applied the provisions of these new accounting pronouncements
in its accounting for the acquisition of its minority partner's ownership
interest in InfiNet, as discussed in Note 5.
Note 5. Acquisition of InfiNet
In February, 2002, the Company acquired, effective January 1, 2002,
TriNET Business Trust's ("TriNET") 49.9% ownership interest in InfiNet for
an aggregate cash purchase price of $153,334. Prior to the acquisition,
the Company had a 50.1% ownership interest in InfiNet. In December 2001,
TriNET notified the Company that it wanted to terminate its participation
in InfiNet. Although contractually not obligated to do so, the Company
offered to buy TriNET's share interest, and negotiated a purchase price
equal to one times the minority interest partner's share of InfiNet's
earnings for the ten months ended December 31, 2001 plus $25,000. The
Company acquired TriNET's interest for several reasons including its
trained workforce in systems design and sales, and the opportunity to
further leverage InfiNet's customer contacts with Farmstead's existing and
future product offerings. The acquisition has been accounted for as a
purchase, under SFAS 141 as described in Note 4. The $128,335 excess of
the purchase price over the fair value of the net assets acquired has been
allocated to goodwill, in accordance with SFAS 142 as described in Note 4,
and will be subject to an annual assessment for impairment.
The following pro forma information presents the Company's consolidated
results of operations for the three months ended March 31, 2001 as if the
acquisition had been completed as of the beginning of that period. The
results of operations for the three months ended March 31, 2002 include the
effects of the acquisition from January 1, 2002.
(In thousands, except per share data) As Reported Pro forma
-----------------------------------------------------------------------------------
Revenue $9,294 $9,294
Income before minority interest in income of subsidiary 246 246
Minority interest in income of subsidiary (92) -
Net income 154 246
Earnings per share: basic $.05 $.08
diluted .05 .07
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
For the three months ended March 31, 2002, the Company reported a net
loss of $301,000 or $(.09) per share, on revenues of $6,027,000, as
compared to net income of $154,000 or $.05 per share on revenues of
$9,294,000 for the comparable 2001 period. Management believes that these
declines reflect the significant reduction in demand for telecommunications
products in the U.S. which commenced during the first half of 2001 and
which is continuing into 2002. Starting in the second quarter of 2001, the
Company has attempted to offset the financial impact of a reduced revenue
stream by reducing operating costs and expenses, which included workforce
reductions and pay reductions during 2001. The Company's efforts to control
and reduce costs where possible have continued into 2002. However, should
there be a further deterioration in the market conditions in the
telecommunications equipment industry, the Company may experience continued
decreases in revenues and operating results. Additional information on
components of the Company's operating performance for the three months
ended March 31, 2002 as compared to the prior year period follows below.
6
Revenues
Three Months
Ended March 31,
(In thousands) 2002 2001
-------------------------------------------------------
End-user equipment sales $ 4,791 $ 7,544
Equipment sales to resellers 883 1,090
Services 353 660
-------------------------------------------------------
Consolidated revenues $ 6,027 $ 9,294
=======================================================
Revenues for the three months ended March 31, 2002 were $6,027,000, a
decrease of $3,267,000 or 35% from the comparable 2001 period. End-user
equipment sales revenues in 2002 decreased by $2,753,000 or 36% from the
comparable 2001 period, as both parts and systems sales revenues decreased.
Equipment sales to resellers decreased by $207,000 or 19% from the
comparable 2001 period. Service revenues decreased by $307,000 or 47% from
the comparable 2001 period, attributable to lower installation revenues
following the decline in new systems sales, and to lower equipment rentals.
End-user equipment sales revenues accounted for 79% of revenues in 2002
(81% in 2001), equipment sales to resellers accounted for 15% of revenues
in 2002 (12% in 2001) and service revenues accounted for 6% of revenues in
2002 (7% in 2001).
As discussed above, the decrease in revenues across all sales channels
was primarily attributable to continued reduced demand in the U.S. for
telecommunication products which the Company started experiencing by the
end of the first quarter of 2001, and to increased competition in the
marketplace, particularly in the aftermarket parts business. Since the
formation of InfiNet in 2001, the Company has been focusing on developing
its systems and applications product offerings to become a more significant
part of its overall revenues. This focus has included the hiring of sales,
service and technical design talent experienced in systems and applications
sales. Management believes that its efforts are beginning to show positive
results. The Company still expects that its future sales revenues will
improve in all of its current sales channels when capital spending for
telecommunication products improves, although no assurances can be given as
to the timing of when this will occur.
Cost of Revenues and Gross Profit
Total cost of revenues for the three months ended March 31, 2002 was
$4,721,000, a decrease of $2,148,000 or 31% from the comparable 2001
period. The gross profit for the three months ended March 31, 2002 was
$1,306,000, a decrease of $1,119,000 or 46% from the comparable 2001
period. As a percentage of revenue, the gross profit margin was 22% for
2002, as compared to 26% for the comparable 2001 period.
The decrease in the gross profit margin is primarily the result of the
capital spending slowdown which commenced in 2001, and which has continued
throughout the first quarter of 2002. Lower product demand has resulted in
increased sales competition, and has put downward pressure on sales pricing
in order to generate sales, particularly in the aftermarket parts business.
In addition, the gross profit margin was negatively impacted by higher
labor and overhead costs as a percentage of revenues.
Although first quarter 2002 profit margins from all sales channels
improved from the fourth quarter 2001 levels, the Company believes that
there will continue to be pressure on gross profit margins until market
conditions and product demand in the telecommunications industry improves.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses for the three months ended March 31, 2002 were
$1,660,000, a decrease of $471,000 or 22% from the comparable 2001 period.
SG&A expenses were 28% of revenues in 2002 as compared to 23% of revenues
in 2001. The decrease in SG&A expenses was primarily attributable to (i) a
$301,000 decrease in payroll expenses as a result of a 17% reduction in
SG&A personnel, pay reductions implemented during 2001, and lower
commissions due to lower sales levels; and (ii) Company efforts to reduce
operating expenses in response to lower revenues, which in addition to
lower compensation expenses has resulted in lower marketing, travel,
insurance, legal, consulting and other office expenses.
The Company is continuing its efforts to further reduce SG&A expenses,
as necessitated by its lower current revenue levels, as one measure in
order to return to profitability.
Interest Expense, Other Income and Minority Interest
Interest expense for the three months ended March 31, 2002 was $12,000,
as compared to $41,000 for the comparable 2001 period. The decrease in
interest expense was attributable to both lower average borrowings and
lower borrowing costs. During the three months ended March 31, 2002, average
bank borrowings approximated $918,000 at an average borrowing rate of
approximately 4.5%, compared with average bank borrowings of approximately
$1.9 million at an average borrowing
7
rate of approximately 8% for the comparable 2001 period.
Other income for the three months ended March 31, 2002 included (i)
$65,000 representing the fair market value of common stock of Anthem, Inc.
received by the Company, at no cost, as part of the conversion of Anthem
Insurance Companies, Inc. from a mutual insurance company to a stock
insurance company, and (ii) interest earned on invested cash. Other income
for the three months ended March 31, 2001 consisted primarily of interest
earned on invested cash.
Minority interest in income of subsidiary of $92,000 for the three
months ended March 31, 2001 represented a provision for the 49.9% share of
the net income of InfiNet earned by its minority partner, TriNET Business
Trust ("TriNET"). In February, 2002, the Company acquired, effective
January 1, 2002, all of TriNET's ownership interest in InfiNet for an
aggregate cash purchase price of $153,334.
(Benefit) Provision for Income Taxes
The Company recorded a tax provision of $6,000 for the three months
ended March 31, 2002, as compared to $18,000 in the comparable period of
2001. Due to the Company's net loss for the three months ended March 31,
2002, the tax provision consisted of minimum required state income taxes.
The Company's deferred tax assets consist primarily of net operating loss
and capital loss carryforwards, and timing differences between the book and
tax treatment of inventory and other asset valuations. The increase in the
deferred tax assets from December 31, 2001 have been fully reserved for due
to the Company's current year operating loss and its history of earnings
volatility.
Liquidity and Capital Resources
Working capital was $5,253,000 at March 31, 2002, a decrease of
$577,000 or 10% from $5,830,000 at December 31, 2001. The working capital
ratio was 2.4 to 1 at March 31, 2002, as compared to 2.7 to 1 at December
31, 2001.
Operating activities used $1,239,000 during the three months ended
March 31, 2002, primarily due to reductions in accounts payable, accrued
expenses and other current liabilities. Decreases in these accounts were
primarily as a result of lower revenues and compensation expenses.
Investing activities used $178,000 during the three months ended March
31, 2002, attributable to (i) the $153,334 purchase price for the
acquisition of the minority partner's 49.9% ownership interest in InfiNet,
and (ii) $25,000 of purchased equipment.
Financing activities provided $1,122,000 during the three months ended
March 31, 2002, from working capital borrowings of $1,268,000 under the
revolving credit facility and $10,000 from 16,031 common shares issued to
employees under the Company's employee stock purchase plan, less $28,000 in
capital lease payments and a $128,000 capital distribution to TriNET.
Outstanding borrowings under the Company's revolving credit facility
with First Union National Bank were $1,268,000 at March 31, 2002, compared
with $0 at December 31, 2001. As of March 31, 2002, the unused portion of
the credit facility was approximately $6.7 million, of which approximately
$1,364,000 was available under various borrowing formulas. The average and
highest amounts borrowed during the three months ended March 31, 2002 were
approximately $918,000 and $1,514,000, respectively, as compared to
approximately $1.9 million and $2.6 million, respectively, for the three
months ended March 31, 2001.
As a result of the net loss for the three months ended March 31, 2002,
the Company was not in compliance with its funds flow coverage ratio. In
addition, due to continued losses, the Company was not in compliance with
its tangible net worth covenant at April 30, 2002, which required a minimum
$6 million tangible net worth, as defined, at all times. On May 10, 2002
the Company was granted a waiver of these covenant violations as
consideration for the following modifications to be made to its loan
agreement: (i) the overall credit line was reduced from $8 million to $4
million; (ii) the advance rate formula on inventory was modified from 50%
of eligible inventory with a cap of $2 million, to 50% of eligible
inventory with a revised cap equal to 50% of eligible accounts receivable;
(iii) the minimum amount of tangible net worth required was reduced from $6
million to $5.5 million; (iv) the funds flow ratio covenant was eliminated
for the remainder of the term of the agreement (the loan agreement expires
September 27, 2002) and (v) the borrowing rate was increased from the
average 30-day London Interbank Offered Rate ("LIBOR") plus 250 basis
points to LIBOR plus 300 basis points. In consideration of the covenant
waiver, the Company was charged $5,000. The pro forma impact of these loan
modifications is a reduction in the March 31, 2002 unused portion of the
credit facility from $6.7 million to $2.7 million, and a reduction in the
March 31, 2002 borrowing availability from approximately $1,364,000 to
approximately $817,000.
8
The Company is currently dependent upon its existing credit agreement
and accounts receivable collection experience to provide cash to satisfy
its working capital requirements. Should the Company continue to default on
its financial covenants, the bank could elect to terminate the credit
facility, which is otherwise scheduled to expire in September 2002, or
decide not to extend the facility for another term. Should that happen,
other sources of working capital could be more expensive and possibly not
obtainable until the Company could demonstrate improved operating results.
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.
The Company is currently engaged in a project to develop an ebusiness
platform, designed to enable its customers to transact business with the
Company electronically, at an estimated cost of $250,000. There are
currently no other 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, the ability of the Company to
obtain necessary financing, 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, non-exclusionary 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
9
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 $918,000 (which
amount represented the average amount borrowed under the revolving credit
facility during the three months ended March 31, 2002), each 1 percentage
point increase in the bank's lending rate would result in $9,180 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
Items 1 through 5 have been omitted because there is nothing to report or
they are inapplicable.
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(f) Certificate of Correction Filed to Correct a Certain Error
in the Certificate of Amendment of Farmstead Telephone Group,
Inc., filed July 9, 2001
4(k) Farmstead Telephone Group, Inc. 2002 Stock Option Plan
[Appendix A to the Proxy Statement on Schedule 14A filed
April 19, 2002 (File number 001-12155)]
10(a) Letter Agreement dated February 15, 2002 between TriNET
Business Trust and Farmstead Telephone Group, Inc.
21 Subsidiaries
(b) Reports on Form 8-K: On April 4, 2002, the Company filed Form 8-K
to report the following: "On August 13, 2001, Farmstead Telephone Group,
Inc. ("Company") erroneously reported in Part II, Item 2 and Part II, Item
4 of its quarterly report on Form 10-Q that Proposal No. 2 presented to
stockholders at the Company's Annual Meeting held June 14, 2001 had been
approved. Proposal No. 2 sought certain amendments to the Company's
Certificate of Incorporation. The Company was just recently advised by its
outside securities counsel that, upon their re-examination of Delaware Law,
although the proposal received votes of a majority of stockholders present
in person or represented by proxy at the Annual Meeting, it did not receive
votes of a majority of the shares of common stock outstanding as required
by Delaware Law. As a result thereof, Proposal No. 2 was not approved by
the stockholders and any attempted amendment is null and void.
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.
/s/ George J. Taylor, Jr.
Dated: May 13, 2002 -------------------------------
George J. Taylor, Jr.
Chief Executive Officer, President
/s/ Robert G. LaVigne
Dated: May 13, 2002 -------------------------------
Robert G. LaVigne
Executive Vice President,
Chief Financial Officer
10