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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, 2004
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
(Registrant's telephone number, including area code)
_______________________________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 proceeding 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2004, the registrant had 3,315,638 shares of its $0.001 par
value Common Stock outstanding.
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TABLE OF CONTENTS TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003 3
Consolidated Statements of Operations - Three Months
Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
ITEM 4. CONTROLS AND PROCEDURES 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 12
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 12
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In thousands) 2004 2003
---------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 349 $ 827
Accounts receivable, net 1,884 1,408
Inventories, net 2,340 1,969
Other current assets 428 447
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Total Current Assets 5,001 4,651
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Property and equipment, net 289 313
Other assets 382 327
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Total Assets $ 5,672 $ 5,291
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,513 $ 1,248
Debt maturing within one year 305 -
Accrued expenses and other current
liabilities 393 274
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Total Current Liabilities 2,211 1,522
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Other liabilities 507 478
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Total Liabilities 2,718 2,000
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Commitments and contingencies (Note 9)
Stockholders' Equity:
Preferred stock, $0.001 par value;
2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000
shares authorized; 3,315,638 and 3,311,601
shares issued and outstanding at
March 31, 2004 and December 31, 2003,
respectively 3 3
Additional paid-in capital 12,318 12,316
Accumulated deficit (9,337) (8,996)
Accumulated other comprehensive loss (30) (32)
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Total Stockholders' Equity 2,954 3,291
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Total Liabilities and Stockholders' Equity $ 5,672 $ 5,291
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See accompanying notes to consolidated financial statements.
3
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
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(In thousands, except per share amounts) 2004 2003
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Revenues:
Equipment $ 2,922 $ 4,027
Services and other revenue 484 477
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Net revenues 3,406 4,504
Cost of revenues:
Equipment 2,046 2,777
Services and other revenue 272 333
Other cost of revenues 211 258
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Total cost of revenues 2,529 3,368
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Gross profit 877 1,136
Selling, general and administrative expenses 1,210 1,275
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Operating loss (333) (139)
Interest expense (6) (2)
Other income 1 2
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Loss before income taxes (338) (139)
Provision for income taxes 3 6
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Net loss $ (341) $ (145)
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Basic and diluted net loss per common share $ (.10) $ (.04)
Weighted average common shares outstanding:
Basic and diluted 3,313 3,299
==========================================================================
See accompanying notes to consolidated financial statements.
4
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------
(In thousands) 2004 2003
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Cash flows from operating activities:
Net loss $(341) $ (145)
Adjustments to reconcile net loss to net cash
flows used in operating activities:
Provision for doubtful accounts receivable 9 9
Provision for losses on inventories 9 -
Depreciation and amortization 36 45
Decrease in accumulated other comprehensive loss 2 -
Changes in operating assets and liabilities:
Increase in accounts receivable (485) (1,063)
(Increase) decrease in inventories (380) 92
Increase in other assets (36) (335)
Increase in accounts payable 265 869
Increase (decrease) in accrued expenses and
other current liabilities 119 (125)
Increase in other liabilities 29 24
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Net cash used in operating activities (773) (629)
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Cash flows from investing activities:
Purchases of property and equipment (12) (20)
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Net cash used in investing activities (12) (20)
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Cash flows from financing activities:
Borrowings under revolving credit line 305 373
Issuance of common stock 2 -
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Net cash provided by financing activities 307 373
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Net decrease in cash and cash equivalents (478) (276)
Cash and cash equivalents at beginning of period 827 994
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Cash and cash equivalents at end of period $ 349 $ 718
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 6 $ 1
Income taxes 4 4
See accompanying notes to consolidated financial statements.
5
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
(inactive). The accompanying consolidated financial statements as of and
for the three months ended March 31, 2004 and 2003 have been prepared in
accordance with accounting principles generally accepted in the United
States of America and the rules and regulations of the Securities and
Exchange Commission for interim financial statements. In the Company's
opinion, the unaudited interim consolidated financial statements and
accompanying notes reflect all adjustments, consisting of normal and
recurring adjustments, that 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 to be
experienced 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, 2003.
2. OPERATIONS
As presented in the consolidated financial statements contained in
this report, the Company incurred a net loss of $341,000 for the quarter
ended March 31, 2004, and has incurred substantial losses in each of the
past three fiscal years. These losses have been primarily the result of
significant declines in revenues over these periods. There is currently no
clear indication that sales levels will significantly increase in the near
term and, in fact, they could continue to decline. The Company is
currently in the process of developing and implementing a plan to further
restructure its operations in order to align its operating expenses with
its revenue levels. The plan may include curtailing certain planned
business generation strategies and pursuing other strategic alternatives.
3. RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the
three months ended March 31, 2003 were reclassified to conform to the
current period presentation.
4. ACCOUNTS RECEIVABLE, NET
March 31, December 31,
(Dollars in thousands) 2004 2003
------------------------------------------------------------------
Trade accounts receivable $1,832 $1,410
Less: allowance for doubtful accounts (58) (80)
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Trade accounts receivable, net 1,774 1,330
Other receivables 110 78
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Accounts receivable, net $1,884 $1,408
===============================================================
Other receivables consist of commissions, rebates and other dealer
incentives due from Avaya, Inc., and are recorded in the consolidated
financial statements when earned.
5. INVENTORIES, NET
March 31, December 31,
(Dollars in thousands) 2004 2003
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Finished goods and spare parts $2,071 $1,817
Work in process (a) 511 450
Rental equipment 73 61
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2,655 2,328
Less: reserves for excess and obsolete
inventories (315) (359)
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Inventories, net $2,340 $1,969
========================================================================
(a) Work in process inventories consist of used equipment requiring
repair or refurbishing.
6
6. DEBT MATURING WITHIN ONE YEAR
On February 19, 2004, the Company's revolving credit facility with
Business Alliance Capital Corporation ("BACC") was extended for an
additional one-year term with the following modifications: (i) the credit
facility advance limit was increased from $1.5 million to $1.7 million; and
(ii) the amount that could be advanced against eligible inventory was
increased from $200,000 to $400,000. For additional information on the
terms and conditions of the BACC credit facility, refer to our Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 2003.
As of March 31, 2004, outstanding borrowings with BACC amounted to
$304,679. The unused portion of the credit facility as of March 31, 2004
was $1,395,321, of which $877,828 was available to borrow. The average
and highest amounts borrowed during the three months ended March 31, 2004
were approximately $152,000 and $361,000, respectively. The Company was in
compliance with the provisions of its loan agreement as of March 31, 2004.
7. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions
and Other Postretirement Benefits, an Amendment of FASB Statements No. 87,
88 and 106" ("SFAS No. 132"). SFAS No. 132 requires, for defined benefit
pension plans and other defined postretirement benefit plans, additional
disclosures regarding plan assets, investment strategy, measurement date,
plan obligations, cash flows and components of net periodic benefit cost,
effective upon issuance. The Company adopted the annual disclosure
requirements for the year ended December 31, 2003. The Company adopted the
interim disclosure requirements effective with this filing as provided in
Note 10.
8. STOCK OPTIONS
The Company applies the disclosure only provisions of Financial
Accounting Standards Board Statement ("SFAS") No. 123, "Accounting for
Stock-based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") for
employee stock option awards. Had compensation cost for the Company's stock
option plan been determined in accordance with the fair value-based method
prescribed under SFAS 123, the Company's net loss and basic and diluted net
loss per share would have approximated the pro forma amounts indicated
below (dollars in thousands except per share amounts):
Three Months Ended
March 31,
------------------
2002 2003
-----------------------------------------------------------------------
Net loss, as reported $(341) $(145)
Add: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (21) (23)
----------------------------------------------------------------------
Pro forma net loss $(362) $(168)
Pro forma net loss per share:
Basic and diluted $(.11) $(.05)
======================================================================
The weighted-average fair value of options granted during the three
months ended March 31, 2004 and 2003 was $.56 and $.22, respectively. The
fair value of stock options used to compute pro forma net loss and net loss
per share disclosures was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for 2004 and 2003; expected volatility of
109% for 2004 and 113% for 2003; average risk-free interest rate of 3.02 %
for 2004 and 2.78% for 2003; and an expected option holding period of 4.7
years for 2004 and 5.6 years for 2003.
9. COMMITMENTS AND CONTINGENCIES
Lease Agreements. On March 23, 2004, the Company entered into a new
lease agreement on its corporate offices and distribution center located at
22 Prestige Park Circle, East Hartford, CT. This agreement replaced the
Company's existing lease due to expire in December 2004. Under the new
lease agreement, which becomes effective May 1, 2004, the Company will be
leasing 25,051 square feet for a 10-year, 8-month period expiring December
31, 2014. The lease contains one five-year renewal option. The lease also
allows the Company the one-time option to terminate the lease without
penalty on
7
December 31, 2009. Minimum monthly rent will amount to $11,377 for 2004,
$13,047 for years 2005 - 2009, and $13,569 for years 2010 - 2014. The
Company is additionally obligated to pay the lessor its proportionate share
of the property operating costs at an amount equal to $1.20 per square
foot, subject to a 2% annual increase.
On March 31, 2004, the Company terminated, without penalty, its lease
agreement on 15,137 square feet of warehouse space that was scheduled to
expire December 31, 2004. The lease termination is effective April 1,
2004.
Letter of Credit. In connection with the Company's revolving credit
agreement with BACC, the Company issued a $300,000 irrevocable standby
letter of credit ("LC") in favor of BACC. The LC can be drawn upon by BACC
to satisfy any outstanding obligations under the Company's loan agreement
ninety days after an event of default. The LC is secured by cash, and
since this cash is restricted from use by the Company during the term of
the LC, it has been classified under other current assets in the
consolidated balance sheet at March 31, 2004 and December 31, 2003.
10. EMPLOYEE BENEFIT PLANS
The components of the net periodic benefit cost included in the
results of operations for the three months ended March 31, 2004 and 2003
are as follows:
(Dollars in thousands) 2004 2003
------------------------------------------------
Service cost $20 $18
Interest cost 9 8
Recognized actuarial losses 2 -
------------------------------------------------
Net expense $31 $26
================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions set forth below and elsewhere in this Quarterly Report
on Form 10-Q contain certain statements, based on current expectations,
estimates, forecasts and projections about the industry in which we operate
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. Our 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. Many of these risks and uncertainties are described under the
heading "Risks, Uncertainties and Other Factors That May Affect Future
Results" below. All forward-looking statements included in this document
are based upon information available to us on the date hereof. We
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
addition, other written or oral statements made or incorporated by
reference from time to time by us or our representatives in this report,
other reports, filings with the Securities and Exchange Commission ("SEC"),
press releases, conferences, or otherwise may be forward-looking statements
within the meaning of the Act.
RESULTS OF OPERATIONS
OVERVIEW. For the three months ended March 31, 2004, we recorded a
net loss of $341,000 or $.10 per share on revenues of $3,406,000. This
compares with a net loss of $145,000 or $.04 per share on revenues of
$4,504,000 recorded for the three months ended March 31, 2003. The
operating results for 2004, as compared to the comparable prior year
period, are the product of several dynamics affecting the industry in
general and Farmstead in particular. First, there is a continuing softness
in corporate buying in the telecommunications equipment sector. We believe
that corporations are still cautious about capital equipment spending. As
a result, we have experienced a decrease in both the number of orders
received and their average order size. Although there have been some signs
of improvement in our industry as evidenced by improved operating results
from some of the key manufacturers, and increased sales quotation
activities, customer spending for new telecommunication systems has been
below our expectations. Second, there is increased competition in our
marketplace, and coupled with the soft economic conditions, has led to
continued sales price erosion. Third, our sales force has undergone
significant turnover in the last two years, and the productivity ramp-up of
new salespersons has taken longer than expected.
8
Our overall strategy during these tough economic times has been to
properly size our business in relation to current revenue run-rates, while
preserving our key technical personnel that are critical to maintaining and
growing a systems and services business. Our primary focus during the first
quarter of 2004 had been on strategies to increase revenues while
continuing close controls over operating expenses. However, there is
currently no clear indication that sales levels will significantly increase
in the near term and, in fact, they could continue to decline. Accordingly,
we are currently in the process of developing and implementing a plan to
further restructure operations in order to align our operating expenses
with our revenue levels. The plan may include curtailing certain planned
business generation strategies and pursuing other strategic alternatives.
Additional information on major components of our operating performance for
the three months ended March 31, 2004 follows below.
REVENUES
Three Months Ended March 31,
----------------------------------
(Dollars in thousands) 2004 % 2003 %
------------------------------------------------------------------
End-user equipment sales $2,763 81 $3,622 80
Equipment sales to resellers 159 5 405 9
Services and other revenues 484 14 477 11
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Consolidated revenues $3,406 100 $4,504 100
==================================================================
Equipment Sales
---------------
During the three months ended March 31, 2004, end-user equipment
sales revenues, consisting of sales of both new and refurbished parts and
systems sales, decreased by $859,000 or 24% from the comparable 2003
period. The decrease consisted of a 24% decline in parts sales and a 23%
decline in systems sales. We attribute these sales declines primarily to
(i) continuing softness in corporate spending for telecommunications
products, including both parts and systems and (ii) sales price erosion due
to increased competition in the marketplace. In addition, last year's
first quarter revenues included two large system sales that comprised 23%
of that period's equipment sales. We believe that our parts sales business
has been affected by the downsizing of many of our customers over the last
few years, which resulted in excess equipment available for re-deployment
in their operations. As a marketing tool to help generate future equipment
revenues, we have developed an electronic commerce framework called
"ECONNECT". Although revenues to date have not been significant, we have
recently signed agreements with two large aftermarket customers whom we
will service through ECONNECT. We will be monitoring the effectiveness and
leverage of this type of program as the year progresses.
Equipment sales to resellers ("wholesale sales") decreased by
$246,000 or 61% from the comparable 2003 period. Wholesale sales have been
impacted by the same factors noted above that have impacted end-user sales.
In addition, our principal supplier of used equipment for resell into the
wholesale market has significantly curtailed operations, thereby limiting
our ability to acquire equipment for profitable resale into the wholesale
market. We expect this trend to continue over at least the short-term.
Services and Other Revenues
---------------------------
Three Months Ended March 31,
(Dollars in thousands) 2004 2003
--------------------------------------------------------
Services:
Installations $331 $283
Rentals and repair 36 107
Other revenues 117 87
-------------------------------------------------
Services and other revenues $484 $477
=================================================
During the three months ended March 31, 2004, services and other
revenues increased overall by $7,000 or 2% from the comparable 2003 period.
The increase was attributable to (i) 35% growth in other revenues due to an
increase in commissions earned from Avaya for selling Avaya maintenance
contracts, partly offset by a decrease in freight billed to customers as a
result of lower sales volume, and (ii) 17% growth in installation revenues.
These results were partly offset by a 66% decrease in equipment rentals and
customer repair revenues. Revenues from these sources are erratic and
difficult to predict, since they tend to be project-oriented. An increase
or decrease in installation revenues does not always coincide with the
reported increase or decrease in system sales since installations may occur
in different periods than the related system sale, and the Company may sell
new systems or system upgrades without being contracted to perform the
installation.
9
COST OF REVENUES AND GROSS PROFIT. Total cost of revenues for the
three months ended March 31, 2004 was $2,529,000, a decrease of $839,000 or
25% from the comparable 2003 period. The gross profit for the three months
ended March 31, 2004 was $877,000, a decrease of $259,000 or 23% from the
comparable 2003 period. As a percentage of revenue, the gross profit
margin was 26.1% for 2004, compared to 25.6% for the comparable 2003
period.
Our gross profit margins are dependent upon a variety of factors
including (1) product mix - gross margins can vary significantly among
parts sales, system sales and our various service offerings. The parts
business, for example, involves hundreds of parts that generate
significantly varying gross profit margins depending upon their
availability, competition, and demand conditions in the marketplace; (2)
customer mix - we sell parts to both end-users and to other equipment
resellers. In our partnering relationship with Avaya, certain customers
receive pre-negotiated discounts from Avaya which could lower our gross
margins as we do business with these customers; (3) the level and amount of
discounts and purchase rebates available to us from Avaya and its master
distributors and (4) the level of overhead costs in relation to sales
volume. Overhead costs consist primarily of materials handling,
purchasing, and facility costs. The combined effect of all of these
factors will result in varying gross profit margins from period to period.
Gross profit on Equipment Sales. For the three months ended March
31, 2004, the gross profit margin on equipment sales revenues decreased
slightly to 30%, from 31% recorded during the comparable prior year period.
The decrease was attributable to sales of parts to both end-users and to
wholesalers, partly offset by increased profit margins on systems sales.
Although we have experienced downward pressure on our sales pricing, as
noted above, we have been focusing on lowering our product acquisition
costs in order to maintain our gross margin levels. We expect continued
pressure on our profit margins going forward.
Gross profit on Services and Other Revenues. For the three months
ended March 31, 2004, the gross profit margin on services and other
revenues increased to 44%, from 30%. The increase was primarily
attributable to higher profit margins on installations, and higher
commissions earned on sales of Avaya maintenance contracts.
Other Cost of Revenues: Other cost of revenues consists of product
handling, purchasing and facility costs and expenses. For the three months
ended March 31, 2004, these expenses were $47,000 or 18% lower than the
comparable prior year period, however represented 7% of equipment sales
revenues during the current period, compared to 6% of equipment sales
revenues in 2003. The dollar reduction primarily resulted from personnel
reductions implemented in January 2004.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
for the three months ended March 31, 2004 were $1,210,000, a decrease of
$65,000 or 5% from the comparable 2003 period. SG&A expenses, however,
were 36% of revenues in 2004 as compared to 28% of revenues in 2003, which
is attributable to the "fixed" nature of a significant portion of our SG&A.
The decrease was attributable to lower depreciation and bad debt expenses,
and lower office and other administrative expenses. In response to lower
sales levels, we have been more tightly controlling expenses, and deferring
expenditures where possible. The reduction in SG&A expenses was partly
offset by a 9% increase in sales and marketing compensation, as we
increased the size of our sales force in an effort to increase sales.
Given the unpredictability of the direction of future revenues, we will
continue to monitor SG&A expenses and where possible, make certain expenses
more variable in relation to sales volume.
INTEREST EXPENSE AND OTHER INCOME. Interest expense for the three
months ended March 31, 2004 was $6,000, compared with $2,000 for the
comparable 2003 period. The increase was attributable to higher average
borrowings. Other income for the three months ended March 31, 2004 was
$1,000, compared with $2,000 for 2003, and consisted of interest earned on
invested cash .
PROVISION FOR INCOME TAXES. The provision for income taxes for the
three months ended March 31, 2004 was $3,000, compared with $6,000 for the
comparable 2003 period. The provision for income taxes represented
estimated minimum state taxes in each period. We maintain a full valuation
allowance against our net deferred tax assets, which 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.
Realization of these net deferred tax assets is dependent upon our ability
to generate future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, defined as current assets less current liabilities,
was $2,790,000 at March 31, 2004, a decrease of $339,000 or 11% from
$3,129,000 at December 31, 2003. The working capital ratio was 2.3 to 1 at
March 31, 2004, compared with 3.1 to 1 at December 31, 2003.
10
Operating activities used $773,000 during the three months ended
March 31, 2004. Net cash used by operating activities consisted of a net
loss of $341,000 adjusted for non-cash items of $56,000, and net cash used
by changes in operating assets and liabilities of $488,000. Net cash used
by changes in operating assets and liabilities was primarily attributable
to an increase in accounts receivable and inventories, partly offset by an
increase in accounts payable and accrued expenses.
Investing activities used $12,000 during the three months ended March
31, 2004 to fund capital expenditures.
Financing activities provided $307,000 during the three months ended
March 31, 2004, attributable to working capital borrowings under our
revolving credit facility with BACC. On February 19, 2004, the BACC credit
facility was extended for an additional one-year term with the following
modifications: (i) the credit facility advance limit was increased from
$1.5 million to $1.7 million; and (ii) the amount that could be advanced
against eligible inventory was increased from $200,000 to $400,000. For
additional information on the terms and conditions of the BACC credit
facility, refer to our Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2003.
As of March 31, 2004, our outstanding borrowings with BACC amounted
to $304,679. The unused portion of the credit facility as of March 31, 2004
was $1,395,321, of which $877,828 was available to borrow. The average
and highest amounts borrowed during the three months ended March 31, 2004
were approximately $152,000 and $361,000, respectively. We were in
compliance with the provisions of our loan agreement as of March 31, 2004.
As a result of our reduced revenues and employment levels, we early-
terminated one building lease agreement covering 15,137 square feet of
warehouse space (otherwise scheduled to expire December 31, 2004), and
renegotiated the building lease on our main offices and distribution
center, reducing our square footage under rent from approximately 35,000
square feet to approximately 25,000 square feet. These actions are
estimated to reduce our 2004 building rental and operating costs by
approximately $16,000 per month. Refer to Note 9, for further information
on the new lease agreement.
We are dependent upon generating positive cash flow from operations
and upon our revolving credit facility to provide cash to satisfy working
capital requirements. If the trend in operating losses continues, we would
most likely not have the financial resources to sustain or fund our current
level of operations. Further, no assurances can be given that we will have
sufficient cash resources to finance future growth . Historically, our
working capital borrowings have increased during periods of revenue growth.
This is because our cash receipts cycle is longer than our cash
disbursements cycle. Under the current lending agreement, we are prohibited
from borrowing against receivables generated by systems sales until the
systems are installed. Under these circumstances, we could run out of
availability and/or require a higher credit line. In order to obtain
additional financing, we may first need to demonstrate improved operating
performance. No assurances can be given that we will have sufficient cash
resources to finance possible future growth, and it may become necessary to
seek additional financing sources for such purpose.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion included in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2003 under the subheading "Critical
Accounting Policies and Estimates" is still considered current and is
hereby incorporated into this Quarterly Report on Form 10-Q.
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
The discussion included in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2003 under the subheading "Risks,
Uncertainties and Other Factors That May Affect Future Results" is still
considered current and applicable, and is hereby incorporated into this
Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The discussion included in Item 7A of our Annual Report on Form 10-K for
the year ended December 31, 2003, "Quantitative and Qualitative Disclosures
About Market Risk", is still considered current and applicable, and is
hereby incorporated into this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-
14(c) and 15d-
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14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the filing date of this
Quarterly Report on Form 10-Q. Based on such evaluation, such officers have
concluded that our disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to our
Company required to be included in our reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect such
controls subsequent to the date of their most recent evaluation.
PART II. OTHER INFORMATION.
ITEMS 1-5 have been omitted because there is nothing to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
The following documents are filed as Exhibits to this Quarterly
Report on Form 10-Q:
10 (a) Agreement of Lease By and Between Fremont Prestige
Park, LLC (Landlord) and Farmstead Telephone Group,
Inc. (Tenant), dated March 23, 2004
31.1 Certification of the Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during
the quarter for which this report is filed.
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 12, 2004 /s/ George J. Taylor, Jr.
------------------------------------
George J. Taylor, Jr.
Chief Executive Officer, President
Dated: May 12, 2004 /s/ Robert G. LaVigne
------------------------------------
Robert G. LaVigne
Executive Vice President,
Chief Financial Officer
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