AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August __, 2006
REGISTRATION NO. 333-135046
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
One IP Voice, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 3661 06-1205743
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
22 Prestige Park Circle
East Hartford, Connecticut 06108
(860) 610-6000
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(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Robert G. LaVigne
Executive Vice President, Chief Financial Officer and Secretary
One IP Voice, Inc.
(f/k/a Farmstead Telephone Group, Inc.)
22 Prestige Park Circle
East Hartford, Connecticut 06108
(860) 610-6000
--------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Henry E. Knoblock, III, Esq.
Dongsup S. Kim, Esq.
Gesmer Updegrove LLP
40 Broad Street - 3rd Floor
Boston, Massachusetts 02109
Telephone (617) 350-6800
Facsimile: (617) 350-6878
Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under Securities Act of 1933,
check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the same
offering. [ ]
CALCULATION OF REGISTRATION FEE
Proposed
Proposed Maximum
Amount of Maximum Aggregate
Title of Each Class Securities Offering Dollar Price Amount
of Securities to be Registered Price Per of Securities to of
to be Registered in the Offering Security be Registered Fee (8)
------------------- ---------------- --------- ---------------- -------
Common Stock 2,594,260 $1.89 $4,903,151.40 $524.64
Shares (1)
Common Stock 97,350 $1.89 $ 183,991.50 $ 19.69
Shares (2)
Common Stock 1,070,855 $1.89 $2,023,915.90 $216.56
Shares (3)
Common Stock 701,181 $1.89 $1,325,232.00 $141.80
Shares (4)
Common Stock 58,071 $1.89 $ 109,754.19 $ 11.74
Shares (5)
Common Stock 250,000 $1.89 $ 472,500.00 $ 50.56
Shares (6)
Common Stock 30,000 $1.89 $ 56,700.00 $ 6.07
Shares (7)
Total Securities
to be Registered 4,801,717 $1.89 $9,075,244.90 $971.06
Shares
These shares (being registered for resale) are issuable on conversion of
outstanding Series A Preferred Stock of the Company ("Preferred Stock" at
current conversion rate of 10 shares of Common Stock for each share of
Preferred Stock. The number of shares presently issuable on conversion is
2,594,260.
These shares (being registered for resale) are issuable on conversion of
shares of Preferred Stock issued upon exercise of warrants, at $17 per
Preferred Stock share. The number of Preferred Stock shares presently
issuable on exercise is 9,735.
These shares (being registered for resale) are issuable on exercise of
warrants, at $2.125 per Common Stock share. The number of shares
presently issuable on exercise is 1,070,855.
These shares (being registered for resale) are issuable on exercise of a
warrant, at $1.27 per Common Stock share. The number of shares presently
issuable on exercise is 701,181.
These shares (being registered for resale) are additional shares issuable
on conversion of outstanding note(s) (principal and interest) which were
at the original conversion price of $1.54, which has recently been
adjusted to the current conversion price of $1.27 per share. The number
of shares presently issuable on conversion is 333,071 of which 275,000
shares had been registered prior to the adjustment.
These shares (being registered for resale) are issuable on exercise of
warrants by certain executive officers of the Company, at an exercise
price equal to the fair market value of the Company's common stock as of
the date the warrant was issued to each executive officer. The number of
shares issuable on exercise is a total of 250,000 shares.
These shares (being registered for resale)are shares issued or issuable
pursuant to the terms of certain marketing agreements with a consultant
to the Company.
Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457 (c) of the Securities Act of 1933, as amended, the
registration fee for the shares has been calculated based upon the
average of the high and low prices, as reported by NASDAQ, for the
registrant's common stock as of April 28, 2006, which was $1.89 per
share.
Delaying amendment under rule 473(a): The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall become effective in
accordance with section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the Commission
acting pursuant to section 8(a), may determine.
The information in this prospectus is subject to completion or amendment. The
securities covered by this prospectus cannot be sold until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any state in
which an offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of that state.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED _______ __, 2006
PROSPECTUS
[LOGO] FARMSTEAD
Farmstead Telephone Group, Inc.
SHARES OF COMMON STOCK
The selling stockholders listed on page 10 of this prospectus are offering
for resale up to 5,086,797 shares of common stock beneficially owned by them. We
will not receive any of the proceeds from the sale of the shares by the selling
stockholders.
The common stock may be offered from time to time by the selling
stockholder through ordinary brokerage transactions in the over-the-counter
markets, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices and in other ways as described in the
"Plan of Distribution".
Our common stock is listed on the NASD Over-The-Counter Bulletin Board
(the "OTCBB")under the symbol "FTGP". On April 28, 2006, the last sale price of
our common stock as reported by the OTCBB was $1.92 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. FOR MORE
INFORMATION, SEE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _________ __, 2006
Table of Contents
Page
Forward-looking Statements 3
About Farmstead Telephone Group, Inc. 3
Risk Factors 4
Use of Proceeds 10
Selling Stockholders 10
Plan of Distribution 16
Information with Respect to the Registrant 17
Legal Matters 18
Experts 18
Where You Can Find More Information 18
Incorporation of Certain Documents By Reference 18
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ABOUT THIS PROSPECTUS
You should rely only on the information contained or incorporated by
reference in this prospectus. See "Documents Incorporated by Reference." We have
not authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We and the selling shareholders are not making an offer to sell
these shares of common stock in jurisdictions where offers and sales are not
permitted. You should assume that the information contained in this prospectus
is accurate only as of the date on the front cover of this prospectus,
regardless of the time of delivery of this prospectus or any sale of the common
stock. Our business, financial condition, results of operations and prospects
may have changed since the date of this prospectus.
In this prospectus, we refer to information and statistics regarding the
communications industry in the United States. We obtained this market data from
independent publications or other publicly available information. Although we
believe these sources are reliable, we have not independently verified and do
not guarantee the accuracy and completeness of this information.
Unless the context indicates otherwise, all references in this prospectus
to "Farmstead," "we," "us" and "our" refer to Farmstead Telephone Group, Inc.
and its subsidiaries.
PROSPECTUS SUMMARY
This summary highlights specific information contained elsewhere or
incorporated by reference in this prospectus. This summary is not complete and
does not contain all of the information that you should consider before
investing in our common stock and is qualified in its entirety by the more
detailed information included or incorporated by reference in this prospectus.
To understand this offering fully, you should carefully read this entire
prospectus, including the "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections and the
documents incorporated by reference.
FORWARD-LOOKING STATEMENTS
Certain statements in this Registration Statement or the documents
incorporated by reference in this Registration Statement constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Farmstead Telephone Group, Inc. to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, those set forth under the caption "Risk Factors." Forward-looking
statements may be indicated by the words "believe," "expect," "anticipate,"
"intend," and "plan" and similar expressions, by context or otherwise. Readers
are cautioned not to place undue reliance on any of these forward-looking
statements, which speak only as of the date of the statement was made. Farmstead
Telephone Group, Inc. undertakes no obligation to update any forward-looking
statement.
ABOUT FARMSTEAD TELEPHONE GROUP, INC.
Farmstead was incorporated in Delaware in 1986. We are principally engaged
as a provider of new and used Avaya, Inc. ("Avaya") business telecommunications
parts, complete systems, and services. From December 1998 to the program's
termination in July 2004, we provided refurbished "Classic Lucent(TM)" and
"Classic Avaya(TM)" telecommunications equipment pursuant to an "Authorized
Remarketing Supplier Program" with Lucent Technologies and Avaya. Since the
termination of this program, we have continued to supply refurbished equipment
to our customers. We also offer Avaya's full-line of new telecommunications
parts and complete systems as an Avaya-certified "Platinum Dealer". Our service
revenues are under the aegis of our "2 Star" Avaya Services Agreement. Our
product offerings are primarily customer premises-based private switching
systems and peripheral products, including voice messaging products. We also
provide telecommunications equipment installation, repair and refurbishing,
short-term rental, inventory management, and related value-added services. A
portion of our revenues is also derived from the sale of Avaya maintenance
contracts. We sell our products and services to large and mid-size,
multi-location businesses, as well as to small businesses, government agencies,
and other equipment resellers. This business segment has been referred to in
this document as the "Legacy Telecommunications Equipment Business" or the
"Telecommunications Equipment Business".
Effective February 1, 2001, we entered into a joint venture agreement with
TriNET Business Trust ("TriNET"), forming a limited liability corporation
operating under the name of InfiNet Systems, LLC ("InfiNet"). Under the
agreement, we had a 50.1% ownership interest, and TriNET had a 49.9% ownership
interest. Based in East Hartford, Connecticut, InfiNet was organized for the
purpose of selling new Avaya telecommunications systems primarily to customers
within the State of Connecticut and various counties in the State of New York.
Effective January 1, 2002, we
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acquired TriNET's 49.9% ownership interest in InfiNet. During 2002, however, we
changed our business strategy concerning the use of InfiNet, downsizing its
operating activities by eliminating its entire workforce and fulfilling systems
sales orders directly through Farmstead, which acquired its own systems dealer
license in 2002. As a result, InfiNet has since been inactive, and the company
was dissolved effective December 31, 2005.
Our operating results have declined significantly over the past several
years, with the Company incurring net losses of $3,314,000, $1,424,000 and
$709,000 for the years ended December 31, 2005, 2004 and 2003 on revenues of
$15.2 million, $12.3 million and $14.9 million, respectively. Although the
Company experienced a 23% improvement in revenues in 2005 as compared to 2004,
revenues and profit margins have been impacted by reduced business spending by
our larger customers on enterprise communications equipment coupled with intense
competition between the Company and other telecommunications equipment dealers
and aftermarket resellers.
Beginning in the fourth quarter of 2004, and continuing throughout 2005,
we have been implementing a strategic redirection, which is principally based
upon building a larger and more highly qualified sales force, and diversifying
the Company's product offerings and targeted customers. The business strategy is
to transition to a full communications solutions provider, becoming less
dependent on parts sales, and developing more sources of recurring revenues.
During 2005, we expanded our product offerings beyond traditional voice
communications products by offering Internet Protocol, or IP, telephony products
and unified communications products including voice messaging, and we expanded
our customer base and began generating incremental revenues by targeting the
small to medium-sized (under 200 employees) business market ("SMB").
Effective March 1, 2005 we launched a program to market SMB products and
services nationally. In connection therewith we significantly increased our
direct sales force and support staff, including the hiring of several former
Avaya sales and support professionals already engaged in this market sector.
In May, 2005, we formed a wholly-owned subsidiary named One IP Voice, Inc.
("OIPV"). OIPV was formed to provide carrier-based VoIP telephony solutions
along with network services. Its primary target market is the SMB market. OIPV's
product offerings include Hosted IP Centrex and IP Trunking services, bundled
with private OIPV "last mile" connectivity on a national basis, long distance
calling, On Net calling, local area calling, 911 capabilities and Wide Area
Network ("WAN") voice and data connectivity. Since its formation, OIPV has
achieved several business plan milestones, including the hiring of key
management personnel and the completion of the initial buildout of its first
feature server platform, located in Denver, Colorado. In January 2006, the
Company launched the national marketing of OIPV's products and services. The
OIPV business is critical to the Company's future business strategy and will
require significant capital in order to achieve success. This business segment
has been referred to in this document as the "IP Telephony Business".
RISK FACTORS
GENERAL RISK FACTORS
We operate in a changing environment that involves numerous known and
unknown risks and uncertainties that could materially adversely affect our
operations. The following highlights some of the factors that have affected,
and/or in the future could affect, our operations. Our prospects are subject to
many uncertainties and risks. Management recognizes the challenges that it
faces, particularly during this period of diminished sales levels, and has
adopted a number of strategies and action steps to deal with its current
operating environment. Disclosure of our strategies and action steps is
contained in the discussions set forth in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K filed with the SEC on April 12, 2006, and elsewhere herein. These
risks and uncertainties are also detailed from time to time in reports we file
with the SEC, including Forms 8-K, 10-Q, and 10-K, and include, among other
factors, the following principal risks:
WE HAVE INCURRED NET LOSSES OVER THE LAST SEVERAL YEARS AND WE ARE
UNCERTAIN AS TO OUR FUTURE PROFITABILITY.
We recorded net losses of $3,314,000, $1,424,000 and $709,000 during the
years ended December 31, 2005, 2004 and 2003, respectively. We expect that, due
to the buildout of our new carrier-based, hosted IP telephony business as
further described below, we will continue to incur operating losses for the
foreseeable future, and such losses may be substantial. We will need to generate
significant revenue growth to achieve an operating profit.
WE ARE PURSUING A SIGNIFICANT NEW BUSINESS DIRECTION - THE MARKETING OF
CARRIER-BASED, HOSTED VOIP PRODUCTS AND RELATED NETWORK SERVICES - WHICH
MAY NOT BE PROFITABLE.
4
Since the beginning of 2005, we have been devoting significant management
and capital resources to the development of this business, and we expect to
continue to do so; however we cannot provide assurance that this new business
venture will be profitable. Our business model is still being developed, and it
has not yet been proven out. There is also no guarantee that we will be
successful in generating significant revenues from future sales of our planned
IP products and services. If we are not able to generate significant revenues
selling into the VoIP telephony market, our business and operating results would
be seriously harmed.
WE CURRENTLY HAVE LIMITED CASH RESOURCES, AND WE MAY NOT HAVE ADEQUATE
CASH OR CREDIT LINES TO FINANCE OUR CURRENT WORKING CAPITAL REQUIREMENTS
OR THE BUILDOUT OF OUR NEW IP TELEPHONY BUSINESS.
We are currently dependent upon cash generated from operations, and
borrowings under a revolving credit facility, to satisfy our working capital
requirements, which have increased since we are incurring costs associated with
the development of One IP Voice ("OIPV") and its associated products and service
offerings. A material adverse change in our business going forward could prompt
our lender to terminate our credit facility. In addition, continued losses will
consume our current cash reserves, and negatively affect our ability to obtain
additional or replacement financing until we could demonstrate improved
operating results or a return to profitability.
Our working capital requirements are expected to significantly increase as
we continue the build out of the infrastructure of capital equipment, systems,
licenses and personnel required to deploy our hosted VoIP service offerings
through OIPV. Our current telephone equipment business does not generate
sufficient cash to meet the additional cash requirements of OIPV. In the event
that we are unable to obtain sufficient external financing for this project, we
may be unable to complete the buildout of the OIPV business as currently
planned. No assurances can be given that we will have sufficient cash resources
to finance future growth, and it has become necessary to raise additional funds
through public and/or private debt and equity financings, which may also not be
available to us until operating performance improves, and which may
significantly dilute stockholder ownership in us. If, however, we perform
according to our expectations, we believe that additional sources of financing
would become available to us.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND SALES EMPLOYEES,
WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR BUSINESS MAY NOT BE
SUCCESSFUL.
Our success is highly dependent upon our ability to hire and retain key
technical, sales and executive management personnel who have critical industry
experience and relationships that we rely on to execute our business plans.
Competition for such personnel is currently intense in our industries. If we
fail to hire and retain a sufficient number of high-quality personnel, we may
not be able to maintain or expand our business.
RISKS ATTRIBUTABLE TO THE NEW IP TELEPHONY BUSINESS
THE SUCCESS OF OUR NEW OIPV BUSINESS VENTURE IS DEPENDENT ON THE GROWTH
AND PUBLIC ACCEPTANCE OF VOIP TELEPHONY PRODUCTS AND SERVICES.
As we enter this emerging marketplace, we will be dependent upon future
demand for VoIP telephony systems and services. In order for the IP telephony
market to continue to grow, several things need to occur. Telephony service
providers must continue to invest in the deployment of high speed broadband
networks to residential and business customers. VoIP networks must improve
quality of service for real-time communications, managing effects such as packet
jitter, packet loss, and unreliable bandwidth, so that toll-quality service can
be provided. VoIP telephony equipment and services must achieve a similar level
of reliability that users of the public switched telephone network have come to
expect from their telephone service. VoIP telephony service providers such as
ourselves must offer cost and feature benefits that are sufficient to cause
customers to switch away from traditional telephony service providers.
Furthermore, end users in markets serviced by recently deregulated
telecommunications providers are not familiar with obtaining services from
competitors of these providers and may be reluctant to use new providers, such
as ourselves. We will need to devote substantial resources to educate customers
and end users about the benefits of VoIP telephony solutions in general and our
services in particular. If any or all of these factors fail to occur, our
business may not be successful.
THE VOIP TELEPHONY MARKET IS SUBJECT TO INTENSE COMPETITION AND RAPID
TECHNOLOGICAL CHANGE, AND WE WILL DEPEND ON NEW PRODUCT AND SERVICE
INTRODUCTIONS IN ORDER TO ESTABLISH, MAINTAIN AND GROW OUR BUSINESS.
5
VoIP telephony is an emerging market that is characterized by rapid
changes in customer requirements, frequent introductions of new and enhanced
products, and continuing and rapid technological advancement. To compete
successfully in this emerging market, we will have to offer VoIP telephony
products and services that will incorporate the latest technological
advancements in features, performance and cost-effectiveness, and respond to
changing customer requirements. To that end, we will be reliant upon independent
third party providers and manufacturers of the equipment, networks and software
that are integrated into our product offerings. In particular, we rely heavily
on Straitshot Communications, Inc., a Washington corporation, ("Straitshot") for
certain communications services and equipment in connection with our OIPV
offering. Our Chairman and CEO, Mr. Stiegemeier, is currently a member of the
Board of Directors of Straitshot. In the event that Straitshot was unable or
unwilling to provide services or equipment under its agreement with OIPV,
service to the Company's customers could be materially impacted.
The Company competes against many companies in the VoIP industry including
providers of hosted offerings such as AT&T, Callvantage, MCI Advantage,
Voiceone, Net2Phone, Cbeyond, Covad and Vonage; cable television companies, such
as Cablevision, Cox and Time Warner, incumbent telephone carriers, such as SBC
and Verizon and other providers of traditional and legacy telephone service.
While competition will be intense in this burgeoning industry, we believe that
our products will effectively compete because we are delivering a complete
product and service offering to the SMB business segment.
DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR PLANNED
COMPETITIVE PRICING STRUCTURE.
Decreasing telecommunications rates may diminish or eliminate the
competitive pricing structure of our services. Telecommunications rates have
decreased significantly over the last few years in most of the markets in which
we intend to operate, and we anticipate that rates will continue to be reduced.
Users who select our services to take advantage of the current pricing
differential between traditional telecommunications rates and our rates may
switch to traditional telecommunications carriers as such pricing differentials
diminish or disappear, and we will be unable to use such pricing differentials
to attract new customers in the future. Continued rate decreases could require
us to lower our rates to remain competitive and adversely impact our profit
margins.
OUR SUCCESS WILL DEPEND ON THIRD PARTIES IN OUR PLANNED DISTRIBUTION
CHANNELS.
We plan to sell our products primarily through resellers, and we are
focusing our business development efforts on establishing distribution channels.
Our planned revenues and future growth will depend in large part on sales of our
products through reseller and other distribution relationships. We may not be
successful in developing these distribution relationships. Agreements with
distribution partners may not require minimum purchases or restrict development
or distribution of competitive products. In addition, our planned distribution
channels may not dedicate sufficient resources or give sufficient priority to
selling our products. Our failure to develop distribution channels, the loss of
a key distribution relationship or a decline in the efforts of a material
reseller or distributor could have a material adverse effect on our business,
financial condition or results of operations.
RISKS ATTRIBUTABLE TO OUR LEGACY TELECOMMUNICATIONS EQUIPMENT BUSINESS
OUR BUSINESS IS MATERIALLY IMPACTED BY CAPITAL SPENDING LEVELS FOR
TELECOMMUNICATIONS PRODUCTS AND SERVICES IN THE UNITED STATES.
Although the Company experienced a 23% improvement in revenues in 2005 as
compared to 2004, revenues have been impacted by reduced business spending by
our larger customers on enterprise communications equipment over the last
several years. In addition, this environment has resulted in increased pricing
and competitive pressures, which have affected revenues and profit margins. If
business capital spending for telecommunications products does not improve, or
if economic conditions in the U.S. deteriorate, our telecommunications equipment
revenues may decline and our operating results will be adversely affected. We
remain cautious about the telecommunications product marketplace going forward,
and cannot predict whether the level of capital spending for the Company's
products will improve in the near term. As a result, we believe that there will
be continued pressure on our ability to generate revenue in excess of current
levels.
OUR BUSINESS IS HEAVILY DEPENDENT UPON AVAYA, AS OUR PRIMARY SUPPLIER OF
EQUIPMENT FOR RESALE.
6
We primarily sell Avaya telecommunications products and services through
various Dealer agreements with Avaya. The Company is dependent upon the quality
and price-competitiveness of current Avaya products as well as Avaya's continued
development of new products in order to compete. The Company's current sales
levels for new parts and systems would be adversely impacted should market
demand for these Avaya products significantly decline. Should Avaya's operations
deteriorate to the point that it either cannot continue to introduce
technologically new products or effectively compete with other equipment
manufacturers, our long-term business strategy to continue as an Avaya dealer
would be adversely affected. Our new parts and systems sales levels would also
be adversely impacted if the Avaya dealer agreements were terminated, or if
Avaya eliminated its "Business Partner" programs.
OUR GROSS PROFIT MARGINS VARY FROM PERIOD TO 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. Our larger "Enterprise" companies often receive significant
purchase discounts from Avaya, which could lower our gross margins as we compete
against Avaya directly for this business; (3) the level and amount of vendor
discounts and purchase rebates available to us from Avaya and its master
distributors; (4) excess capacity -as sales volume falls, overhead costs become
a higher percentage of sales dollars; (5) competitive pressures -as a result of
the slowdown in capital equipment spending in our industry, and the several
hundred Avaya dealers nationwide , we have been faced with increased price
competition; and (6) obsolescence charges. The combined effect of all of these
factors will result in varying gross profit margins from period to period.
OUR GROSS PROFIT MARGINS AND OPERATING EXPENSES COULD BE ADVERSELY
AFFECTED BY A REDUCTION IN PURCHASE DISCOUNT AND OTHER REBATE OR INCENTIVE
PROGRAMS CURRENTLY OFFERED BY AVAYA.
As an Avaya Dealer, we receive substantial rebates and other cash
incentives from Avaya, based upon volume levels of certain product purchases,
which are material to our operating results and which help reduce product
purchase costs, market development and marketing expenses. These incentive
programs are subject to change by Avaya, and no assurances can be given that
they would not be altered so as to adversely impact our profit margins or
operating expenses.
RISKS RELATED TO OUR CURRENT FINANCING ARRANGEMENTS AND FINANCING PLANS:
IF WE ARE REQUIRED TO REPAY OUR OUTSTANDING BORROWINGS UNDER OUR SECURED
REVOLVING NOTE OR SECURED CONVERTIBLE MINIMUM BORROWING NOTES TO LAURUS AT
AN UNEXPECTED TIME, WE COULD DEPLETE OUR WORKING CAPITAL. AN INABILITY TO
REPAY THE OUTSTANDING BORROWINGS WHEN REQUIRED COULD REQUIRE THE SALE OF
SUBSTANTIAL ASSETS.
Our Secured Revolving Note and Secured Convertible Minimum Borrowing Notes
(collectively, the "Notes") with Laurus for a maximum of $3 million, of which
$1,832,000 was outstanding at December 31, 2005, are repayable March 31, 2008,
unless sooner converted into shares of our common stock. An Event of Default, as
defined under these agreements and including, for example, a change in the
Company's financial condition which is deemed to have a "material adverse
effect", which is not cured within specified grace periods, can result in the
acceleration of the Note repayments. The Notes are secured by the Company's
assets. An inability to repay the Notes when required could result in the sale
of substantial of the Company's assets.
FUTURE EQUITY TRANSACTIONS, INCLUDING EXERCISE OF OPTIONS OR WARRANTS AND
SHARES ISSUED UNDER CONVERTIBLE NOTES AND EQUITY SECURITIES, COULD DEPRESS
THE MARKET PRICE OF OUR COMMON STOCK AND COULD RESULT IN SIGNIFICANT
DILUTION TO OUR EXISTING STOCKHOLDERS.
From time to time, the Company may sell preferred stock and warrants, and
convertible debt, to investors in private placements conducted by
broker-dealers, or in negotiated transactions. These transactions cause dilution
to existing shareholders. Also, from time to time, options are issued to
employees and third parties, with exercise prices equal to market. Exercise of
in-the-money options and warrants will result in dilution to existing
shareholders; the amount of dilution may depend on the spread between market and
exercise price, and the number of shares involved. The Company will continue to
grant options to employees and consultants with exercise prices equal to market
price at the grant date, and in the future may sell restricted stock and
warrants, all of which may result in dilution to existing shareholders. As of
April 28, 2006, we had 3,975,282 shares of common stock issued and outstanding
and we had (i) convertible notes and warrants issued to the Laurus Master Fund,
Ltd which could require the issuance of 1,353,822 additional shares of common
stock; (ii) shares of Series A convertible preferred stock
7
outstanding which are convertible into 2,594,260 shares of common stock; (iii)
warrants issued to investors and the placement agent in connection with the
Company's 2006 private placement and convertible bridge loan transactions which
could require the issuance of 1,853,796 additional shares of common stock; (iv)
warrants issued to the placement agent in connection with the Company's 2006
private placement transactions which could require the issuance of Series A
convertible preferred stock which would be convertible into 300,670 shares of
common stock; and (v) and outstanding stock options and warrants issued to
employees and affiliates which could require the issuance of 3,728,619
additional shares of common stock.
TERMS OF SUBSEQUENT FINANCING MAY ADVERSELY IMPACT YOUR INVESTMENT.
We may have to raise equity by issuing debt or preferred stock financing
in the future. Your rights and the value of your investment in our common stock
could be reduced. For example, if we continue to issue secured debt, the
creditors would have a claim to our assets that would be prior to the rights of
stockholders until the debt is paid. Debt service would increase costs and
negatively impact operating results. Preferred stock could also be issued in
series from time to time with such designations, rights, preferences, and
limitations as needed to raise capital. The terms of preferred stock offerings
could be more advantageous to those investors than to the holders of common
stock.
WE ARE CURRENTLY LISTED ON THE OVER-THE-COUNTER BULLETIN BOARD.
On November of 2005, the Company received notice from the American Stock
Exchange (the "AMEX") that the Company no longer complied with the AMEX's
continued listing standards as set forth in Section 1003 (a) (ii) of the AMEX
Company Guide (the "Company Guide"), and that its securities were, therefore,
subject to being delisted from the AMEX. The Company was previously granted an
eighteen month period to regain compliance with this standard, and such
compliance period ended as of November 7, 2005.
The Company subsequently appealed this determination and on December 14,
2005 participated in a formal hearing before an appointed Listing Qualifications
Panel (the "Panel"). On December 19, 2005, the Company received written notice
from the AMEX that the Panel had affirmed the earlier determination to delist
the common stock of the Company. The notice cited that the Company was as of
November 7, 2005, and continued to be, not in compliance with (1) Section
1003(a)(i) of the Company Guide as its stockholders' equity was less than $2
million and it had sustained losses from continuing operations and/or net losses
in two of its three most recent fiscal years; and (2) Section 1003(a)(ii) of the
Company Guide as its stockholders' equity was less than $4 million and it had
sustained losses from continuing operations and/or net losses in three of its
four most recent fiscal years.
The Company obtained quotation of its securities on the Over-the-Counter
Bulletin Board (the "OTCBB") effective December 30, 2005, and its Common Stock
is currently listed under the symbol "FTGP". The OTC Bulletin Board(R) is a
regulated quotation service that displays real-time quotes, last-sale prices,
and volume information in over-the-counter (OTC) equity securities. An OTC
equity security generally is any equity that is not listed or traded on
Nasdaq(R) or a national securities exchange. OTCBB securities include national,
regional, and foreign equity issues, warrants, units, American Depositary
Receipts (ADRs), and Direct Participation Programs (DPPs).
The recent delisting described above and being listed on the OTCBB could
reduce the ability of our shareholders to purchase or sell shares as quickly and
as inexpensively as they have done historically. For instance, failure to obtain
listing on another market or exchange may make it more difficult for traders to
sell our securities. Broker-dealers may be less willing or able to sell or make
a market in our common stock which could
* result in a decrease in the trading price of our common stock;
* lessen interest by institutions and individuals in investing in our
common stock;
* make it more difficult to obtain analyst coverage; and
* make it more difficult for us to raise capital in the future.
IF WE ARE UNABLE TO OBTAIN, AND/OR MAINTAIN THE EFFECTIVENESS OF THE
REGISTRATION STATEMENT FOR THE SHARES UNDERLYING THE LAURUS MINIMUM
BORROWING NOTES AND WARRANTS, WE MAY INCUR SUBSTANTIAL FINANCIAL
PENALTIES
Pursuant to the terms of a Registration Rights Agreement with Laurus in
connection with the current credit facility, the Company is obligated to file
and obtain effectiveness for a registration statement registering the resale of
shares of the Company's Common Stock issuable upon conversion of the Laurus
Notes and the exercise of the Warrant. If the registration statement is not
filed or declared effective in a timely manner, the Company will be subject to
8
certain penalties including a daily penalty at a rate of 2% per month of the
outstanding principal amount of any Minimum Borrowing Notes.
IF WE SELL ANY SECURITIES AT AN EFFECTIVE PRICE BELOW $1.54 PER SHARE, THE
CONVERSION PRICE OF THE LAURUS CONVERTIBLE NOTES WILL BE LOWERED,
RESULTING IN ADDITIONAL DILUTION TO STOCKHOLDERS
Pursuant to our convertible note agreements with Laurus, if we issue
securities at a price that is lower than the then current conversion price,
which was $1.54 as of December 31, 2005, the conversion price applicable to
Laurus would be lowered to this amount. If this occurs, stockholders may incur
substantial additional dilution as a result of the potential issuance of
additional securities upon conversion. In January 2006 Laurus's conversion price
was in fact lowered to $1.27 from $1.54 as a result of the issuance of warrants
to investors at a $1.27 exercise price.
OTHER RISKS:
In addition to the specific risks and uncertainties discussed above, our
future operating performance can also be affected by: performance and
reliability of products; the maintenance of our level of customer service and
customer relationships; adverse publicity; business disruptions; acts of
terrorism within the U.S., and the impact of those acts on the U.S. economy; and
other events that can impact revenues and business costs. The risks included
here are not exhaustive. Other sections of this report may include additional
factors, which could adversely affect our business and financial performance.
Moreover, we operate 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.
Stockholders should also be aware that while we do, from time to time,
communicate with securities analysts, it is against our 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,
stockholders should not assume that we agree with any statement or report issued
by any analyst irrespective of the content of the statement or report.
Furthermore, we have 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 our responsibility.
WE MAY BE SUBJECT OF SECURITIES CLASS ACTION LITIGATION DUE TO FUTURE
STOCK PRICE VOLATILITY.
In the past, when the market price of a stock has been volatile, holders
of that stock have often instituted securities class action litigation against
the company that issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
PROVISIONS OF DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL.
As a Delaware corporation, we are subject to the General Corporation Law
of the State of Delaware, including Section 203, an anti-takeover law enacted in
1988. In general, Section 203 restricts the ability of a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder. Subject to exceptions, an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years did own, 15% or more of a corporation's voting
stock. As a result of the application of Section 203, potential acquirers may be
discouraged from attempting to acquire us, thereby possibly depriving our
stockholders of acquisition opportunities to sell or otherwise dispose of our
stock at above-market prices typical of acquisitions.
THE PRICE OF OUR COMMON STOCK COULD BE VOLATILE.
Prior to December 30, 2005, our stock traded on the AMEX. Since that time,
our common stock has traded on the OTCBB. It has experienced, and is likely to
experience in the future, significant price and volume fluctuations which could
adversely affect the market price of our common stock without regard to our
operating performance. In addition, the trading price of our
9
common stock could be subject to significant fluctuations in response to actual
or anticipated variations in our quarterly operating results, announcements by
us or our competitors, factors affecting the telecommunications industry
generally, changes in national or regional economic conditions, changes in
securities analysts' estimates for our competitors' or industry's future
performance or general market conditions. The market price of our common stock
could also be affected by general market price declines or market volatility in
the future or future declines or volatility in the prices of stocks for
companies in our industry.
FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD AFFECT THE MARKET PRICE
OF OUR COMMON STOCK AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
Under the Laurus transaction, as further described herein, we are
obligated to register within thirty (30) days common stock issuable upon
conversion of any notes then outstanding. Depending upon the amount outstanding
under the revolving facility and the current market price of the Company's
shares, Laurus could, subject to certain restrictions, elect to convert its debt
into additional common shares significantly in excess of the number of shares
being registered under this Memorandum. The Company however does have the option
to redeem the notes being converted for a cash premium. We have also registered
a substantial number of shares of common stock that are issuable upon the
exercise of options. If holders of options choose to exercise their purchase
rights and sell shares of common stock in the public market, or if holders of
currently restricted common stock or common stock issuable upon conversion of
our convertible debt choose to sell such shares of common stock in the public
market under Rule 144 or otherwise, or if the selling stockholder whose shares
are being offered pursuant to this Memorandum sells or attempts to publicly sell
such Offered Securities or the Underlying Shares all at once or in a short time
period, the prevailing market price for our common stock may decline. Future
public sales of shares of common stock may adversely affect the market price of
our common stock or our future ability to raise capital by offering equity
securities.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid a dividend on our common stock. We intend
to retain earnings, if any, for use in the operation and expansion of our
business and therefore do not anticipate declaring or paying any dividends in
the foreseeable future.
OUR DIRECTORS AND MANAGEMENT WILL EXERCISE SIGNIFICANT CONTROL OVER OUR
COMPANY.
Our directors and executive officers and their affiliates collectively
control or beneficially own approximately 47% of our outstanding common stock.
As a result, these stockholders, if they act together, will be able to influence
our management and affairs and all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. The concentration of ownership may have the effect of delaying or
preventing a change in control of our company and might affect the market price
of our common stock.
NEED FOR ADDITIONAL CAPITAL
Various elements of the Company's business and growth strategies,
including its plans to broaden existing product lines, introduce new products
and invest in infrastructure will require additional capital. There can be no
assurance that funds will be available to the Company on terms satisfactory to
the Company when needed. To the extent that the Company raises additional equity
capital, it would have a dilutive effect on existing shareholders.
USE OF PROCEEDS
We will not receive any proceeds from the sale of our securities by the
selling stockholders named in this prospectus. Any proceeds we receive from any
exercise for cash by the selling stockholders of warrants held by them will be
used for working capital.
We have agreed to pay certain expenses in connection with the registration
of the shares being offered by the selling stockholders.
SELLING STOCKHOLDERS
Series A Preferred Stock Investors
From February 17, 2006 through April 17, 2006 the Company sold an
aggregate of 200,456 Unit shares of Series A Preferred Stock to the following
investors (the "Investors") at a price of $17.00 per Unit: Meadowbrook
Opportunity Fund LLC, Sotomar - Empreendimentos Industriais e
10
Imobiliarios, SA, William A. Boyd, Suzy Ulrich, Richard J. Cranmer, Watamar &
Partners SA, Thomas Barrett, Case Holdings Co., Inc., Allan Sorensen, Chuck &
Joy Hartz, Hartz Family Foundation, Barton Ferris, Jr., William Harner Michael
Bloch, Robert A. Smith, Robert Gillman, Julian Eaton, Julian F. & Mary J. Eaton,
Robert H. Chanson, Joan Robertson, Robert B. Rowley, William M. Goatley
Revocable Trust DTD 05/09/89, MidSouth Investor Fund LP, Ronald C. Smiley, Lewis
Opportunity Fund, LP, Sat P. Dewan, Dewan Retirement Plan Trust, Richard Dwayne
Roberson, OT Finance, SA, Robert W. Russell, Joseph & Kimberly Greenspan, Thomas
Link, Nite Capital, Richard & Christine VonderSitt, Deborah A. Picon, Danid P.
Hanlon, S. Wistar Lewis, Alan S. Wirshborn, Gail B. Shanklin, Benjamin S.
Eichholtz, as Custodian for David Eichholtz and Daniel Eichholtz, and Michaels
Associates. Each Unit consists of (i) one share of the Company's Series A
Preferred Stock, $.001 par value per share, and (ii) a Warrant to purchase five
shares of the Company's Common Stock, par value $.001 per share, at an exercise
price of $2.125 per share. The aggregate proceeds received by the Company, net
of fees and expenses incurred by the Company's placement agent, were
approximately $3.1 Million.
The following describes certain of the material terms of this transaction.
The description below is not a complete description of the terms of the
financing transaction and is qualified in its entirety by reference to the
agreements entered into in connection therewith which are included as exhibits
to the Current Reports on Form 8-K previously filed on February 24, 2006, March
21, 2006 and April 21, 2006.
Series A Preferred Stock. Each Investor received certain rights in
connection with its purchase of the Series A Preferred Stock:
* The Investor shall be entitled to receive in preference to any
dividend on the Common Stock a cumulative non-compounding dividend
at the rate of 8% per annum of the original Preferred A Per Share
Price.
* In the event of any liquidation or winding up of the Company, the
Investor shall be entitled to receive in preference to the holders
of the Common Stock an amount equal to two times the original
Preferred A Per Share Price plus any declared but unpaid dividends.
* The conversion price of the Series A Preferred Stock will be subject
to a weighted average adjustment (based on all deemed outstanding
shares of Common Stock and shares of Preferred Stock) and to reduce
dilution in the event that the Company issues additional equity
securities (other than the shares reserved for issuance under or to
Laurus Master Fund Ltd., the Company's Stock Option Plan, the
Company's Employee Stock Purchase Plan, employees, officers,
consultants and directors of the Company, and under other currently
existing options, warrants and obligations to issue shares) at a
purchase price less than the Series A Preferred Stock conversion
price. The Series A Preferred Stock conversion price will also be
subject to proportional adjustment for stock splits, stock
dividends, recapitalizations and the like.
* The Series A Preferred Stock will vote together with the Common
Stock and not as a separate class except as required by law,
however, the Series A Preferred Stock, exclusively and as a separate
class, will be entitled to elect one (1) director of the
Corporation. Each share of Series A Preferred Stock shall have a
number of votes equal to the number of shares of Common Stock then
issuable upon conversion of such share of Series A Preferred Stock.
The foregoing provisions were incorporated in the Certificate of
Designation filed with the Secretary of State of the State of Delaware on
February 17, 2006.
Warrant to Purchase Shares of Stock. The Investors received warrants to
purchase up to an aggregate 1,002,280 shares of the Company's common stock at an
exercise price of $2.125 per share. The warrant expires five years from
issuance. In lieu of exercising the warrant with cash, the Holder may elect to
receive that number of shares of common stock equal to the value of the warrant
(or that portion being exercised) at the time of exercise.
Registration Rights. The Company agreed to use its best efforts to
register the common stock underlying the Securities for resale via a Form S-3 or
other appropriate registration
11
statement ("Registration Statement") within 90 days after the completion of the
Series A Offering. The Company agreed to respond to Securities and Exchange
Commission Registration Statement comments within 10 days and request
effectiveness of the Registration Statement within 3 days of "no review" or "no
further comments".
Sotomar - Empreendimentos Industriais e Imobiliarios, SA
On February 8, 2006, the Company issued a $1,000,000 Principal Amount
Convertible Promissory Note (the "Sotomar Note") to Sotomar - Empreendimentos
Industriais e Imobiliarios, SA (the "Holder") pursuant to a Convertible Note and
Warrant Purchase Agreement (the "Sotomar Purchase Agreement") of even date. The
proceeds received by the Company, net of issuance expenses and placement agent
fees, amounted to approximately $900,000.
The following describes certain of the material terms of this transaction.
The description below is not a complete description of the terms of the
financing transaction and is qualified in its entirety by reference to the
agreements entered into in connection therewith which are included as exhibits
to the Current Report on Form 8-K previously filed on February 14, 2006.
Warrant to Purchase Shares of Stock. In connection with the issuance of
the Sotomar Note, the Holder received a warrant to purchase up to an aggregate
529,134 shares of the Company's common stock at an exercise price of $1.27 per
share. The warrant expires ten years from issuance. In lieu of exercising the
warrant with cash, the Holder may elect to receive that number of shares of
common stock equal to the value of the warrant (or that portion being exercised)
at the time of exercise. The warrant also contains normal anti-dilution clauses
in the event of stock splits or stock dividends and the Sotomar Purchase
Agreement provides for registration rights with respect to the underlying equity
securities, and unlimited "come-along" rights in the event of a change of
control of Company.
Pursuant to the terms of the Sotomar Note, and as a result of the
aforementioned sale of Series A Preferred Stock, on February 17, 2006 the
Sotomar Note, together with interest accrued thereon, converted into 58,970
shares of Series A Preferred Stock.
Christopher P. Baker
On January 30, 2006, the Company obtained a bridge loan of $400,000 from
Christopher P. Baker ("CPB"), a principal of C.P. Baker Securities, Inc., the
Company's placement agent, for a convertible note (the "CPB Note") and a 10 year
warrant to purchase an aggregate of up to 22,047 shares of Company's Common
Stock (the "CPB Warrant"), pursuant to a Convertible Promissory Note and Warrant
Purchase Agreement (the "CPB Purchase Agreement"). All amounts outstanding under
the CPB Note have been paid out by the Company and the CPB Note has been
canceled as of February 8, 2006. The CPB Warrant has an exercise price per share
of $1.27. The CPB Warrant also contains normal anti-dilution clauses in the
event of stock splits or stock dividends and the CPB Purchase Agreement provides
for registration rights with respect to the underlying equity securities, and
unlimited "come-along" rights in the event of a change of control of Company.
C.P. Baker Securities, Inc.
In connection with the Series A Preferred Stock transactions and the
bridge loan with Sotomar described above, the Company issued to its placement
agent, C.P. Baker Securities, Inc., warrants (i) to purchase up to an aggregate
150,335 shares of the Company's common stock at an exercise price of $2.125 per
share; (ii) to purchase up to an aggregate 30,067 shares of the Company's Series
A Preferred Stock at an exercise price of $17.00 per share; and (iii) to
purchase up to 150,000 shares of the Company's common stock at an exercise price
of $1.27. The warrants described in (i) and (ii) expire ten years from issuance,
and the warrant described in (iii) expires in five years. In lieu of exercising
the warrants with cash, the placement agent may elect to receive that number of
shares of common stock or Series A Preferred Stock, as applicable, equal to the
value of the applicable warrant (or that portion being exercised) at the time of
exercise. Of the warrants described, the placement agent has specifically
requested that the Company not register any of the underlying shares of common
stock under its warrant to purchase 33,085 shares of the Company's common stock,
its warrant to purchase 48,675 shares of the Company's common stock, its warrant
to purchase up to 6,617 shares of the Company's preferred stock and its warrant
to purchase up to 13,715 shares of the Company's preferred stock.
Laurus Master Fund Ltd.
On March 31, 2005, the Company entered into a financing transaction with
Laurus Master Fund, Ltd, ("Laurus"), providing for a three-year, $3 million
("Capital Availability Amount") revolving loan credit facility which includes a
Secured Revolving Note (the "Revolving Note") and Secured Convertible Minimum
Borrowing Notes (together with the Revolving Note, the "Laurus Notes"). The
initial Secured Convertible Minimum Borrowing Note was set at $500,000, the
proceeds of which were advanced to the Company on April 4, 2005 (the "First
Note"). The second Secured
12
Convertible Minimum Borrowing Note was also set at $500,000 dated as of
September 2, 2005 (the "Second Note"). Amounts outstanding under the Laurus
Notes will either be paid in cash at their March 31, 2008 maturity date or, at
Laurus' option, by converting such amounts into shares of the Company's common
stock from time to time. The Company also issued Laurus a five-year warrant (the
"Warrant") to purchase an aggregate of 500,000 shares of common stock of the
Company at an exercise price of $1.82 per share. The warrant exercise price was
set at 130% of the average closing price of the Company's common stock over the
ten trading days preceding the execution of the agreement, and is subject to
anti-dilution protection adjustments. The shares of common stock underlying the
First Note and the Warrant have been registered through previous S-3 filings.
This transaction was completed in a private offering pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933, as amended.
This credit facility replaced the $1.7 million revolving credit facility the
Company had with Business Alliance Capital corporation.
The following describes certain of the material terms of the financing
transaction with Laurus. The description below is not a complete description of
the material terms of the financing transaction and is qualified in its entirety
by reference to the agreements entered into in connection with the financing
which were included as exhibits to the Current Report on Form 8-K filed April 5,
2005:
Principal Borrowing Terms and Prepayment: Borrowings are advanced pursuant
to a formula consisting of (i) 90% of eligible accounts receivable, as defined
(primarily receivables that are less than 90 days old), and (ii) 30% of eligible
inventory, as defined (primarily inventory classified as "finished goods"), up
to a maximum inventory advance of $600,000, less any reserves required by
Laurus. Interest on the outstanding borrowings is charged at the per annum rate
of two percentage points (2%) above the prime rate, but not less than 6%. The
interest rate charged, however, will be decreased by 2% (or 200 basis points)
for every 25% increase in the market price of the Company's common stock above
the fixed conversion price, down to a minimum interest charge of 0.0%. The
Company will additionally be charged a fee equal to 0.25% of the unused portion
of the facility. Should the Company terminate the financing agreement with
Laurus prior to the maturity date, the Company will incur an early payment fee
equal to 4%, 3% and 2% of the Capital Availability Amount if terminated in the
first, second or third year, respectively, of the term.
Security and Events of Default. The Laurus Notes are secured by a lien on
substantially all of the Company's assets. The Security Agreement contains no
specific financial covenants; however, it defines certain circumstances under
which the agreement can be declared in default and subject to termination,
including among others if (i) there is a material adverse change in the
Company's business or financial condition; (ii) an insolvency proceeding is
commenced; (iii) the Company defaults on any of its material agreements with
third parties or there are material liens or attachments levied against the
Company's assets; (iv) the Company's common stock ceases to be publicly traded;
and (v) the Company fails to comply with the terms, representations and
conditions of the agreement. Upon the occurrence of an Event of Default, the
interest rate charged will be increased by 1-1/2 % per month until the default
is cured; should the default continue beyond any applicable grace period, then
Laurus could require the Company to repay 120% of any principal and interest
outstanding under the agreement.
Conversion Rights. All or a portion of the outstanding principal and
interest due under the Laurus Notes may be converted, at the option of the
Holder, into shares of the Company's common stock, subject to certain
limitations as defined in the Laurus Notes, if the market price of the common
stock is 15% above the current Fixed Conversion Price of $1.27 per share for
five consecutive trading days in any month. The fixed conversion price was
originally set at 110% of the average closing price of the Company's common
stock over the ten trading days preceding the execution of the agreement, and is
subject to anti-dilution protection adjustments. The fixed conversion price will
be reset once $1.5 million of debt has been converted. Upon receipt of a
conversion notice from the Holder, the Company can elect to pay cash to the
Holder in lieu of issuing shares of common stock, at a price per share equal to
the intraday high price of the stock.
Registration Rights. Pursuant to the terms of a Registration Rights
Agreement, the Company is obligated to file and obtain effectiveness for a
registration statement registering the resale of shares of the Company's common
stock issuable upon conversion of the Laurus Notes and the exercise of the
Warrant. If the registration statement is not timely filed, or declared
effective the Company will be subject to certain penalties.
Alfred Stein
Mr. Stein has an employment agreement dated March 1, 2005 and expiring
December 31, 2008 which includes the following key provisions: (i) current
annual base salary of $250,000; (ii) an annual bonus of up to 100% of base
salary based upon attaining earnings targets approved by the Board of Directors;
(iii) the grant of a five-year warrant to purchase up to 250,000 shares of
common stock at an exercise price of $.67 per share, which was equal to the
closing price of the
13
common stock on his date of hire; and (iv) the grant of an option to purchase up
to 100,000 shares of common stock at an exercise price of $1.80 per share, which
was equal to the closing price of the common stock on the date of grant; subject
to vesting over four quarters commencing with the quarter ended March 31, 2006.
The Company has previously registered 150,000 of the 250,000 underlying shares
and has agreed to register the remainder of the underlying shares for the
Executive with this prospectus.
Nevelle Johnson
Mr. Johnson has an employment agreement expiring December 31, 2008 which
includes the following key provisions: (i) current annual base salary of
$250,000; (ii) an annual bonus of up to 50% of base salary based upon attaining
earnings targets approved by the Board of Directors; (iii) the grant of a
five-year warrant to purchase up to 250,000 shares of common stock at an
exercise price of $1.10 per share, which was equal to the closing price of the
common stock on his date of hire; and (iv) payment by the Company of life
insurance premiums not exceeding $5,000 per month. The Company has previously
registered 100,000 of the 250,000 underlying shares and has agreed to register
the remainder of the underlying shares for the Executive with this prospectus.
Aurelius Consulting Group
The Company has issued 20,000 shares of restricted Common Stock to
Aurelius Consulting Group, pursuant to a six-month Marketing Agreement on July
20, 2005 which contract has since expired. Effective January 31, 2006, the
Company entered into a new three-month Marketing Agreement with Aurelius
pursuant to which Aurelius has been issued 10,000 shares of restricted Common
Stock and which contract has since expired.
Based on information provided by the selling stockholders, the following
table sets forth certain information regarding the selling stockholders.
The table below assumes for calculating each selling stockholder's
beneficial and percentage ownership that options, warrants or convertible
securities that are held by such stockholder (but not held by any other person)
and are exercisable within 60 days from the date of this prospectus have been
exercised and converted. The table also assumes the sale of all of the shares
being offered.
Common Stock Beneficially
Owned After the Offering (1)
Number of Shares of -------------------------------
Common Stock
Beneficially Owned Shares Number Percent of
Selling Security Holder Prior to the Offering Being Offered of Shares Outstanding Shares
----------------------- --------------------- ------------- --------- ------------------
Meadowbrook Opportunity Fund LLC 661,755(2) 661,755(2) --
Sotomar - Empreendimentos
Industriais e Imobiliarios, SA 2,001,149(2) 2,001,149(2) --
William A. Boyd 88,230(2) 88,230(2) --
Suzy Ulrich 26,460(2) 26,460(2) --
Richard J. Cranmer 44,115(2) 44,115(2) --
Wanita S.A. 89,970(2) 89,970(2) --
Thomas Barrett 11,025(2) 11,025(2) --
Case Holdings Co., Inc. 44,115(2) 44,115(2) --
Allan Sorensen 22,050(2) 22,050(2) --
Chuck & Joy Hartz 88,230(2) 88,230(2) --
Hartz Family Foundation 44,115(2) 44,115(2) --
Barton Ferris, Jr. 22,050(2) 22,050(2) --
William Harner 8,820(2) 8,820(2) --
Michael Bloch 69,000(2) 69,000(2) --
14
Robert A. Smith 17,640(2) 17,640(2) --
Robert Gillman 8,820(2) 8,820(2) --
Julian Eaton 44,115(2) 44,115(2) --
Julian F. Eaton & Mary J. Eaton,
Joint Tenants 44,115(2) 44,115(2) --
Robert H. Chanson 22,050(2) 22,050(2) --
Joan Robertson 22,050(2) 22,050(2) --
Robert B. Rowley 37,500(2) 37,500(2) --
William M. Goatley Revocable Trust
DTD 05/09/89 9,000(2) 9,000(2) --
MidSouth Investor Fund LP 176,460(2) 176,460(2) --
Ronald C. Smiley 8,820(2) 8,820(2) --
Lewis Opportunity Fund, LP 150,000(2) 150,000(2) --
Sat P. Dewan 9,000(2) 9,000(2) --
Dewan Retirement Plan Trust 15,000(2) 15,000(2) --
Richard Dwayne Roberson 18,000(2) 18,000(2) --
OT Finance, SA 15,000(2) 15,000(2) --
Robert W. Russell 15,000(2) 15,000(2) --
Joseph Greenspan & Kimberly
Greenspan, Joint Tenants 9,000(2) 9,000(2) --
Thomas Link 26,460(2) 26,460(2) --
Nite Capital 88,230(2) 88,230(2) --
Richard VonderSitt & Christine
VonderSitt, Joint Tenants 9,000(2) 9,000(2) --
Deborah A. Picon 18,000(2) 18,000(2) --
Danid P. Hanlon 44,115(2) 44,115(2) --
S. Wistar Lewis 15,000(2) 15,000(2) --
Alan S. Wirshborn 9,000(2) 9,000(2) --
Gail B. Shanklin 22,050(2) 22,050(2) --
Benjamin S. Eichholtz, as Custodian
for David Eichholtz and Daniel
Eichholtz 21,165(2) 21,165(2) --
Michaels Associates 30,000(2) 30,000(2) --
C.P. Baker Securities, Inc 315,925(2) 601,005(2) --
Christopher P. Baker 22,047(2) 22,047(2) --
Laurus Master Fund, Ltd. (1) 194,788(3) 58,071 --
Alfred Stein 300,000(4) 100,000 --
Nevelle Johnson 260,000(5) 150,000 --
Aurelius Consulting Group 30,000 30,000 -- (6)
We do not know when or in what amounts the selling stockholder may offer
for sale the shares of common stock pursuant to this offering. The selling
stockholder may choose not to sell any of the shares offered by this
prospectus. Because the selling stockholder may, subject
15
to certain restrictions, offer all or some of the shares of common stock
pursuant to this offering we cannot estimate the number of shares of
common stock that the selling stockholder will hold after completion of
the offering. For purposes of this table, we have assumed that the selling
stockholder will have sold all of the shares covered by this prospectus
upon the completion of the offering and that the selling stockholder will
not have entered into any other transactions with respect to our
securities.
These numbers include any and all shares of common stock issuable on
conversion or exercise of each Preferred Stock and warrants to purchase
either Common Stock or Preferred Stock held by such selling stockholder;
however, with respect to C.P. Baker Securities, Inc., at C.P. Baker
Securities, Inc.'s specific request, only 315,925 shares of the total
601,005 shares of common stock underlying their warrants to purchase
either common stock or preferred stock are being registered.
Laurus (i) has made an investment in the Second Note and, subject to
certain conditions noted below, may, taking into account the recent
adjustment to the current conversion price to the Second Note from $1.57
to $1.27 per share, convert this investment into up to 333,071 shares of
our common stock at the new conversion price of $1.27 per share, 275,000
of which underlying shares are currently registered and 58,071 additional
shares are now being registered through this S-1 filing and (ii) holds
warrants to purchase up to 500,000 shares of common stock, which shares
have been registered through previous S-3 filings, and, subject to certain
conditions noted below, these warrants are exercisable within 60 days at
an exercise price of $1.82 per share. These notes and warrants are not
exercisable to the extent that the number of shares of our common stock
beneficially held by Laurus after giving effect to such conversion or
exercise would result in beneficial ownership by Laurus of more than 4.99%
of our outstanding shares of common stock. Laurus may only waive these
restrictions (x) upon 90 days' prior notice to us, or (y) upon the
occurrence of an event of default under the Notes. Laurus beneficially
owns 194,788 shares of our common stock underlying warrants and the Notes
that are exercisable or convertible, as the case may be, within 60 days.
Laurus' address is 825 Third Avenue, New York, NY 10022.
Consists of 250,000 shares issuable upon exercise of warrants and 50,000
shares issuable upon exercise of currently exercisable stock options.
Includes 250,000 shares issuable upon the exercise of warrants.
Less than 1 percent.
PLAN OF DISTRIBUTION
All costs, expenses and fees in connection with the registration of the
shares offered by this prospectus shall be borne by us. Brokerage costs, if any,
attributable to the sale of shares will be borne by the selling stockholder.
Subject to certain contractual restrictions noted above, the shares may be
sold by the selling stockholder by one or more of the following methods:
* under a 10b5-1 trading plan;
* block trades in which the broker or dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion of
the shares as principal to facilitate the transaction;
* purchases by a broker or dealer as principal and resale by such
broker dealer for its account pursuant to this prospectus;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
* through put and call options relating to the shares;
* negotiated transactions;
* a combination of any such methods of sale at market prices
prevailing at the time of the sale or at negotiated prices; and
16
* any other method permitted pursuant to applicable law.
The transactions described above may or may not involve brokers or
dealers.
The selling stockholders will not be restricted as to the price or prices
at which the selling stockholders may sell their shares. Sales of shares by the
selling stockholders may depress the market price of our common stock since the
number of shares which may be sold by the selling stockholders is relatively
large compared to the historical average weekly trading of our common stock.
Accordingly, if the selling stockholders were to sell, or attempt to sell, all
of such shares at once or during a short time period, we believe such a
transaction could adversely affect the market price of our common stock.
From time to time a selling stockholder may pledge its shares under margin
provisions of customer agreements with its brokers or under loans with third
parties. Upon a default by the selling stockholder, the broker or such third
party may offer and sell any pledged shares from time to time.
In effecting sales, brokers and dealers engaged by a selling stockholder
may arrange for other brokers or dealers to participate in the sales as agents
or principals. Brokers or dealers may receive commissions or discounts from the
selling stockholder or, if the broker-dealer acts as agent for the purchaser of
such shares, from the purchaser in amounts to be negotiated, which compensation
as to a particular broker dealer might be in excess of customary commissions
which are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the selling stockholder to sell a
specified number of such shares at a stipulated price per share, and to the
extent the broker-dealer is unable to do so acting as agent for a selling
stockholder, to purchase as principal any unsold shares at the price required to
fulfill the broker-dealer commitment to the selling stockholder. Broker-dealers
who acquire shares as principal may then resell those shares from time to time
in transactions
* in the over-the counter market or otherwise;
* at prices and on terms prevailing at the time of sale;
* at prices related to the then-current market price; or
* in negotiated transactions.
These resales may involve block transactions or sales to and through other
broker-dealers, including any of the transactions described above. In connection
with these sales, these broker-dealers may pay to or receive from the purchasers
of those shares commissions as described above. The selling stockholders may
also sell the shares in open market transactions under Rule 144 under the
Securities Act, rather than under this prospectus.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. In this event, any commissions received by these broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
The selling stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
The selling stockholders are subject to applicable provisions of the
Securities Exchange Act of 1934 and the SEC's rules and regulations, including
Regulation M, which provisions may limit the timing of purchases and sales of
the shares by the selling stockholders.
* In order to comply with certain states' securities laws, if
applicable, the shares may be sold in those jurisdictions only
through registered or licensed brokers or dealers. In certain states
the shares may not be sold unless the shares have been registered or
qualified for sale in such state, or unless an exemption from
registration or qualification is available and is obtained.
The maximum commission or discount to be received by any NASD member or
independent broker/dealer will not be greater than eight (8) percent for the
sale of any securities being registered pursuant to SEC Rule 415.
INFORMATION WITH RESPECT TO THE REGISTRANT
17
Our Annual Report on Form 10-K for the fiscal year ended December 31,
2005, and our Quarterly Report on Form 10-Q for the fiscal quarter ended March
30, 2006, and subsequent Current Reports on Form 8-K,and other reports filed
with the SEC and incorporated by reference into this Registration Statement (see
detailed list below under "Incorporation of Certain Documents by Reference"),
contain information about us, including audited financial statements for our
fiscal year ended December 31, 2005, unaudited financial statements for our
fiscal quarter ended March 30, 2006 and selected financial data. Please refer to
these reports for additional information.
LEGAL MATTERS
Gesmer Updegrove LLP of Boston, Massachusetts will pass upon the validity
of the shares of common stock being offered by this prospectus.
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this prospectus by reference from Farmstead Telephone Group,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005 have been
audited by Carlin, Charron & Rosen, LLP, independent registered public
accounting firm, as stated in their report, which is incorporated herein by
reference, and has been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and we file reports and other information with the SEC.
You may read and copy any of the reports, statements, or other information
we file with the SEC at the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains a Web site at http://www.sec.gov that contains
reports, proxy statements and other information regarding issuers that file
electronically with the SEC. The NASD maintains a Web site at
http://www.nasdaq.com that contains reports, proxy statements and other
information filed by us.
You may also obtain information about us, including copies of our SEC
reports, through our website at http://www.farmstead.com. This website address
is not an active link to the registration statement of which this prospectus is
a part, and any documents, references, links or other materials of any kind
contained or referred to on such website are not part of the registration
statement of which this prospectus is a part.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have filed with the SEC, Washington, D.C., a registration statement on
Form S-1 under the Securities Act of 1933, covering the securities offered by
this prospectus. This prospectus does not contain all of the information that
you can find in our registration statement and the exhibits to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance such statement is qualified by reference to each such contract or
document filed or incorporated by reference as an exhibit to the registration
statement.
The SEC allows us to "incorporate by reference" the information we file
with them. This means that we can disclose important information to you by
referring you to other documents that are legally considered to be part of this
prospectus, and later information that we file with the SEC will automatically
update and supersede the information in this prospectus and the documents listed
below. We incorporate by reference the documents listed below, and any future
filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until the selling stockholder sells all the
shares.
1. Our Annual Report on Form 10-K for the fiscal year ended December 31,
2005;
2. Our Quarterly Report Restatement on Form 10-Q/A filed on May 15, 2006;
3. Our Quarterly Report on Form 10-Q filed on May 18, 2006;
4. Our Current Report on Form 8-K filed on February 14, 2006;
5. Our Current Report on Form 8-K filed on February 24, 2006;
18
6. Our Current Report on Form 8-K filed on March 21, 2006;
7. Our Current Report on Form 8-K filed on April 12, 2006;
8. Our Current Report on Form 8-K filed on April 21, 2006;
9. The description of the Registrant's common stock, contained in the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-5103) dated June 3, 1996 (as amended by Forms SB-2/A dated July 22,
1996, and August 12, 1996), and Form 8-A dated September 10, 1996,
including any amendments or reports filed for the purpose of updating that
description;
10. All documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the date of this
prospectus and prior to the termination of this offering, except the
Compensation Committee Report on Executive Compensation and the
performance graph included in any Proxy Statement filed by us pursuant to
Section 14 of the Exchange Act; and
11. All documents filed by us pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the date of the
initial filing of this registration statement and prior to the
effectiveness of this registration statement, except the Compensation
Committee Report on Executive Compensation and the performance graph
included in any Proxy Statement filed by us pursuant to Section 14 of the
Exchange Act.
The SEC file number for all of these filings is 001-12155.
You may request and we will provide a copy of these filings to you at no
cost, other than the exhibits, by writing or telephoning us at Farmstead
Telephone Group, Inc., 22 Prestige Park Circle, East Hartford, Connecticut
06108, telephone number (860)610-6000.
We have not authorized anyone else to provide you with information
different from that contained or incorporated by reference in this prospectus.
This prospectus is not an offer to sell nor is it a solicitation of an offer to
buy any security in any jurisdiction where the offer or sale is not permitted.
Neither the delivery of this prospectus nor any sale made under this prospectus
shall, under any circumstances, imply that there has been no change in our
affairs since the date of this prospectus or that the information contained in
this prospectus or incorporated by reference herein is correct as of any time
subsequent to its date.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses payable by the Registrant in connection with the issuance
and distribution of the securities being registered (estimated except for the
SEC Registration fee) are as follows:
SEC Registration Fee $ 1,028.70
Accounting Fees and Expenses $ 3,000*
Printing Expenses $ 5,000*
Legal Fees and Expenses $ 8,000*
Miscellaneous Expenses $ 2,000*
Total $19,028.70*
* Estimated pursuant to Item 511 of Regulation S-K
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
("GCL") provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to
19
indemnify their officers and directors under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their being or having been an officer or director.
Section 102(b) of the GCL permits a corporation, by so providing in its
certificate of incorporation, to eliminate or limit director's liability to the
corporation and its shareholders for monetary damages arising out of certain
alleged breaches of their fiduciary duty. Section 102(b)(7) of the GCL provides
that no such limitation of liability may affect a director's liability with
respect to any of the following: (i) breaches of the director's duty of loyalty
to the corporation or its shareholders; (ii) acts or omissions not made in good
faith or which involve intentional misconduct of knowing violations of law;
(iii) liability for dividends paid or stock repurchased or redeemed in violation
of the GCL; or (iv) any transaction from which the director derived an improper
personal benefit. Section 102(b)(7) does not authorize any limitation on the
ability of the corporation or its shareholders to obtain injunctive relief,
specific performance or other equitable relief against directors.
The registrant's Certificate of Incorporation and the registrant's By-laws
provide for indemnification to the fullest extent permitted or authorized by the
GCL or judicial or administrative decisions of each person who was or is a party
or threatened to be made a party, or was, or is a witness, to any threatened
pending or completed action, suit, or proceeding against any liability or cost
or expense asserted against him or incurred by him by reason of the fact that he
is or was a director, officer or employee of the registrant or is or was an
agent of the registrant to whom the registrant has agreed to grant such
indemnity or is serving or was serving, at the registrant's request, as an
officer , director or employee of another entity or is serving as an agent of
another entity to whom the Corporation has agreed to grant indemnity. The
foregoing right of indemnification shall not be deemed to be exclusive of any
other rights to which those seeking indemnification may be entitled under any
by-law, agreement, vote of shareholders or disinterested directors, or
otherwise.
The registrant's Certificate of Incorporation provides that no director of
the registrant shall be personally liable to the registrant or its stockholders
for any monetary damages for breaches of fiduciary duty as a director, except
for liability (i) for any breach of the director's duty of loyalty to the
registrant or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the GCL; or (iv) for any transaction from which the director
derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Please see more detailed information and description on each of the
following list of recent sales of unregistered securities which are contained in
the "Selling Security Holders" discussions above.
Series A Preferred Stock Investors
From February 17, 2006 through April 17, 2006 the Company sold an
aggregate of 200,456 Unit shares of Series A Preferred Stock to investors at a
price of $17.00 per Unit. Each Unit consists of (i) one share of the Company's
Series A Preferred Stock, $.001 par value per share, and (ii) a Warrant to
purchase five shares of the Company's Common Stock, par value $.001 per share,
at an exercise price of $2.125 per share. The aggregate proceeds received by the
Company, net of fees and expenses incurred by the Company's placement agent,
were approximately $3.1 Million.
Sotomar - Empreendimentos Industriais e Imobiliarios, SA
On February 8, 2006, the Company issued a $1,000,000 Principal Amount
Convertible Promissory Note (the "Sotomar Note") to Sotomar - Empreendimentos
Industriais e Imobiliarios, SA (the "Holder") pursuant to a Convertible Note and
Warrant Purchase Agreement (the "Sotomar Purchase Agreement") of even date. The
proceeds received by the Company, net of issuance expenses and placement agent
fees, amounted to approximately $900,000.
Christopher P. Baker
On January 30, 2006, the Company obtained a bridge loan of $400,000 from
Christopher P. Baker ("CPB"), a principal of C.P. Baker Securities, Inc., the
Company's placement agent, for a convertible note (the "CPB Note") and a 10 year
warrant to purchase an aggregate of up to 22,047
20
shares of Company's Common Stock (the "CPB Warrant"), pursuant to a Convertible
Promissory Note and Warrant Purchase Agreement (the "CPB Purchase Agreement").
Laurus Master Fund Ltd.
On March 31, 2005, the Company entered into a financing transaction with
Laurus Master Fund, Ltd, ("Laurus"), providing for a three-year, $3 million
("Capital Availability Amount") revolving loan credit facility which includes a
Secured Revolving Note (the "Revolving Note") and Secured Convertible Minimum
Borrowing Notes (together with the Revolving Note, the "Laurus Notes"). The
initial Secured Convertible Minimum Borrowing Note was set at $500,000, the
proceeds of which were advanced to the Company on April 4, 2005 (the "First
Note"). The second Secured Convertible Minimum Borrowing Note was also set at
$500,000 dated as of September 2, 2005 (the "Second Note"). Amounts outstanding
under the Laurus Notes will either be paid in cash at their March 31, 2008
maturity date or, at Laurus' option, by converting such amounts into shares of
the Company's common stock from time to time. The Company also issued Laurus a
five-year warrant (the "Warrant") to purchase an aggregate of 500,000 shares of
common stock of the Company at an exercise price of $1.82 per share. The warrant
exercise price was set at 130% of the average closing price of the Company's
common stock over the ten trading days preceding the execution of the agreement,
and is subject to anti-dilution protection adjustments. The shares of common
stock underlying the First Note and the Warrant have been registered through
previous S-3 filings. This transaction was completed in a private offering
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended. This credit facility replaced the $1.7 million
revolving credit facility the Company had with Business Alliance Capital
corporation.
ITEM 16. EXHIBITS.
The following documents are filed as Exhibits to this prospectus or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical referencing the SEC filing which included such
document.
3.1 Certificate of Incorporation [Exhibit 3(a) to the S-18
Registration Statement of the Company's securities declared
effective on April 13, 1987 (File No. 3-9556B)]
3.2 Certificate of Amendment of Certificate of Incorporation [Exhibit
3(a) to Amendment No. 2 to SB-2 Registration Statement dated July
22, 1996 (Registration No. 333-5103)]
3.3 Certificate of Amendment of Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated July 10, 1991 [Exhibit
10.12 to the Annual Report on Form 10-K for the year ended
December 31, 1991]
3.4 Amended and Restated By-Laws [Exhibit 3(d) to the Annual Report
on Form 10-K for the year ended December 31, 2000]
3.5 Certificate of Designation to the Certificate of Incorporation of
Farmstead Telephone Group, Inc., dated February 17, 2006 [Exhibit
99.1 to the Form 8-K Current Report filed February 24, 2006]
4.1 Amended 1992 Stock Option Plan [Exhibit to the Proxy Statement on
Schedule 14A filed April 14, 1998 (File No. 001-12155)]
4.2 Farmstead Telephone Group, Inc. 2002 Stock Option Plan [Appendix
A to the Proxy Statement on Schedule 14A filed April 19, 2002 for
the 2002 Annual Meeting of Stockholders]
4.3 Warrant to Purchase common stock of Farmstead Telephone Group,
Inc. issued to Jean-Marc Stiegemeier October 1, 2004 [Exhibit
4(a) to the Form 8-K Current Report filed October 6, 2004]
4.4 Warrant to Purchase common stock of Farmstead Telephone Group,
Inc. issued to Alfred G. Stein January 15, 2005 [Exhibit 4.4 to
the Annual Report on Form 10-K for the year ended December 31,
2005]
4.5 Warrant to Purchase common stock of Farmstead Telephone Group,
Inc. issued to Nevelle R. Johnson March 1, 2005 [Exhibit 4(a) to
the Form 8-K Current Report filed March 4, 2005]
4.6 Security Agreement dated March 31, 2005 by and among Laurus
Master Fund, Ltd. and Farmstead Telephone Group, Inc. [Exhibit
99.1 to the Form 8-K Current Report filed April 5, 2005]
4.7 Secured Revolving Note dated as of March 31, 2005. [Exhibit 99.2
to the Form 8-K Current Report filed April 5, 2005]
21
4.8 Secured Convertible Minimum Borrowing Note dated as of March 31,
2005 [Exhibit 99.1 to the Form 8-K Current Report filed April 5,
2005]
4.9 Common Stock Purchase Warrant dated as of March 31, 2005 [Exhibit
99.1 to the Form 8-K Current Report filed April 5, 2005]
4.10 Minimum Borrowing Note Registration Rights Agreement dated as of
March 31, 2005 [Exhibit 99.1 to the Form 8-K Current Report filed
April 5, 2005]
4.11 Convertible Promissory Note and Warrant Purchase Agreement, dated
February 8, 2006, entered into with Sotomar - Empreendimentos
Industriais e Imobiliarios, SA 2005 [Exhibit 99.1 to the Form 8-K
Current Report filed February 14, 2006]
4.12 Convertible Promissory Note, dated February 8, 2006, issued to
Sotomar - Empreendimentos Industriais e Imobiliarios, SA [Exhibit
99.2 to the Form 8-K Current Report filed February 14, 2006]
4.13 Warrant to Purchase Shares of Common Stock, dated February 8,
2006, issued to Sotomar - Empreendimentos Industriais e
Imobiliarios, SA SA [Exhibit 99.3 to the Form 8-K Current Report
filed February 14, 2006]
4.14 Warrant to Purchase Shares of Common Stock, dated February 8,
2006, issued to C.P. Baker Securities, Inc. SA [Exhibit 99.4 to
the Form 8-K Current Report filed February 14, 2006]
4.15 Series A Preferred Stock and Warrant Purchase Agreement dated
February 17, 2006, entered into with Meadowbrook Opportunity Fund
LLC SA [Exhibit 99.1 to the Form 8-K Current Report filed
February 24, 2006]
4.16 Series A Preferred Stock and Warrant Purchase Agreement dated
February 17, 2006, entered into as of March 17, 2006 with Sotomar
- Empreendimentos Industriais e Imobiliarios, SA, William A.
Boyd, Suzy Ulrich, Richard J Cranmer, Watamar & Partners SA,
Thomas Barrett, Case Holdings Co., Inc., Allan Sorensen, Chuck &
Joy Hartz, Hartz Family Foundation, Barton Ferris, Jr. and
William Harner [Exhibit 99.1 to the Form 8-K Current Report filed
March 21, 2006]
4.17 Series A Preferred Stock and Warrant Purchase Agreement dated
February 17, 2006, entered into as of April 17, 2006 with Michael
Bloch, Robert A. Smith, Robert Gillman, Julian Eaton, Julian F. &
Mary J. Eaton, Robert H. Chanson, Joan Robertson, Robert B.
Rowley, William M. Goatley Revocable Trust DTD 05/09/89, MidSouth
Investor Fund LP, Ronald C. Smiley, Lewis Opportunity Fund, LP,
Sat P. Dewan, Dewan Retirement Plan Trust, Richard Dwayne
Roberson, OT Finance, SA, Robert W. Russell, Joseph & Kimberly
Greenspan, Thomas Link, Nite Capital, Richard & Christine
VonderSitt, Deborah A. Picon, Danid P. Hanlon, S. Wistar Lewis,
Alan S. Wirshborn, Gail B. Shanklin, Benjamin S. Eichholtz, as
Custodian for David Eichholtz and Daniel Eichholtz, and Michaels
Associates [Exhibit 99.1 to the Form 8-K Current Report filed
April 21, 2006]
5 Opinion of Gesmer Updegrove LLP
10.1 Agreement of Lease By and between Tolland Enterprises and
Farmstead Telephone Group, Inc., dated November 5, 1996 [Exhibit
10.1 to the Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996]
10.2 Employment Agreement dated as of January 1, 1998 between
Farmstead Telephone Group, Inc. and George J. Taylor, Jr.
[Exhibit 10.5 to the Annual Report on Form 10-KSB for the year
ended December 31, 1997]
10.3 Supplemental Executive Retirement Plan, effective as of January
1, 1998 [Exhibit 10.6 to the Annual Report on Form 10-KSB for the
year ended December 31, 1997]
10.4 Rider #1 to Lease Dated November 5, 1996 By and Between Tolland
Enterprises ("Landlord") and Farmstead Telephone Group, Inc.
("Tenant"), attached as of May 27, 1999 [Exhibit 10(cc) to the
Annual Report on Form 10-K for the year ended December 31, 1999]
10.5 First Amendment of Lease, dated June 30, 1999, By and Between
Tolland Enterprises ("Landlord") and Farmstead Telephone Group,
Inc. ("Tenant") [Exhibit 10(dd) to the Annual Report on Form 10-K
for the year ended December 31, 1999]
22
10.6 Employment Agreement dated as of January 1, 2000 between
Farmstead Telephone Group, Inc. and Robert G. LaVigne [Exhibit
10(ee) to the Annual Report on Form 10-K for the year ended
December 31, 2000]
10.7 Farmstead Telephone Group, Inc. Employee Stock Purchase Plan
[Appendix B to the to the Proxy Statement on Schedule 14A filed
April 13, 2001 for the 2001 Annual Meeting of Stockholders]
10.8 Limited Liability Company Agreement of InfiNet Systems LLC,
effective February 1, 2001 [Exhibit 10(dd) to the Annual Report
on Form 10-K for the year ended December 31, 2001]
10.9 Restated First Addendum To That Certain Employment Agreement
Between Farmstead Telephone Group, Inc. and George J. Taylor,
Jr., effective August 1, 2001 [Exhibit 10(ff) to the Annual
Report on Form 10-K for the year ended December 31, 2001]
10.10 Avaya Inc. Reseller Master Terms and Conditions; Agreement No.
AVNERA1-060601, dated May 31, 2002. [Exhibit 10(a) to the
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002]
10.11 Loan and Security Agreement dated February 19, 2003 by and
between Business Alliance Capital Corp. and Farmstead Telephone
Group, Inc. 2001 [Exhibit 10(v) to the Annual Report on Form 10-K
for the year ended December 31, 2002]
10.12 Revolving Credit Master Promissory Note dated February 19, 2003
between Business Alliance Capital Corporation and Farmstead
Telephone Group, Inc. [Exhibit 10(w) to the Annual Report on Form
10-K for the year ended December 31, 2002]
10.13 Second Addendum to That Certain Employment Agreement Between
Farmstead Telephone Group, Inc. and George J. Taylor, Jr., Dated
as of January 1, 1998, as Amended by That Certain Restated First
Addendum Dated as of August 1, 2001[Exhibit 10(x) to the Annual
Report on Form 10-K for the year ended December 31, 2002]
10.14 Revolving Credit Master Promissory Note dated February 19, 2004
between Business Alliance Capital Corporation and Farmstead
Telephone Group, Inc. [Exhibit 10(aa) to the Annual Report on
Form 10-K for the year ended December 31, 2003]
10.15 Modification Agreement dated February 19, 2004 between Business
Alliance Capital Corporation and Farmstead Telephone Group, Inc.
[Exhibit 10(z) to the Annual Report on Form 10-K for the year
ended December 31, 2003]
10.16 Third Addendum to That Certain Employment Agreement Between
Farmstead Telephone Group, Inc. and George J. Taylor, Jr., Dated
as of January 1, 1998, as Amended by That Certain Restated First
Addendum Dated as of August 1, 2001and as Further Amended by That
Certain Second Addendum Dated as of January 1, 2003 [Exhibit
10(bb) to the Annual Report on Form 10-K for the year ended
December 31, 2003]
10.17 Second Addendum to That Certain Employment Agreement between
Farmstead Telephone Group, Inc. and Robert G. LaVigne dated as of
January 1, 2000 as Amended by That First Addendum Dated as of
January 1, 2003 [Exhibit 10(cc) to the Annual Report on Form 10-K
for the year ended December 31, 2003]
10.18 Amendment to Reseller Master Terms and Conditions: Authorized
Remanufactured Supplier (ARS) Program Between Avaya Inc. and
Farmstead Telephone Group, Inc., dated October 28, 2003 [Exhibit
10(dd) to the Annual Report on Form 10-K for the year ended
December 31, 2003]
10.19 Employment Agreement dated October 1, 2004 between Farmstead
Telephone Group, Inc. and Jean-Marc Stiegemeier. [Exhibit 10(a)
to the Form 8-K Current Report filed October 6, 2004]
10.20 Fourth Addendum to that Certain Employment Agreement Between
Farmstead Telephone Group, Inc. and George J. Taylor, Jr.
23
Dated as of January 1, 1998 as Amended by that Certain Restated
First Addendum Dated as of August 1, 2001; as Further Amended by
that Certain Second Addendum Dated as of January 1, 2003; and as
Further Amended by that Certain Third Addendum Dated as of
January 1, 2004. [Exhibit 10(b) to the Form 8-K Current Report
filed October 6, 2004]
10.21 Agreement between Farmstead Telephone Group, Inc. and Jean- Marc
Stiegemeier dated August 16, 2004 [Exhibit 10(c) to Form 10-Q for
the quarter ended September 30, 2004].
10.22 Employment Agreement dated January 15, 2005 between Farmstead
Telephone Group, Inc. and Alfred G. Stein [Exhibit 10.22 to the
Annual Report on Form 10-K for the year ended December 31, 2005]
10.23 Employment Agreement dated March 1, 2005 between Farmstead
Telephone Group, Inc. and Nevelle R. Johnson [Exhibit 10(a) to
the Form 8-K Current Report filed March 4, 2005]
10.24 First Addendum to that Certain Employment Agreement Between
Farmstead Telephone Group, Inc. and Jean-Marc Stiegemeier, Dated
as of October 1, 2004 [Exhibit 99(a) to the Form 8-K Current
Report filed October 14, 2005]
21 Subsidiaries
23.1 Consent of Carlin, Charron & Rosen, LLP
23.3 Consent of Gesmer Updegrove LLP (included in Exhibit 5)
24 Power of Attorney (included on the signature page of the
Registration Statement)
ITEM 17. UNDERTAKINGS
Undertaking Required by Regulation S-K, Item 512(a).
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
ii. To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof)which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that clauses (i) and (ii) do not apply if the Registration
Statement is on Form S-3, Form S-8 or Form F-3, and the information required to
be included in a post-effective amendment by such clauses is contained in
periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Undertaking Required by Regulation S-K, Item 512(b).
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
24
securities offered therein, and the offering of such securities at that time
shall be deemed to be initial bona fide offering thereof.
Undertaking required by Regulation S-K, Item 512(h).
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons pursuant to
the foregoing provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of East Hartford, State of
Connecticut on the 16th day of August, 2006.
Farmstead Telephone Group, Inc.
By: /s/ Jean-Marc Stiegemeier
-------------------------------------
Jean-Marc Stiegemeier
Chief Executive Officer and President
25