UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-15938
Farmstead Telephone Group, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1205743
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle
East Hartford, CT 06108
(Address of principal executive offices) (Zip Code)
(860) 610-6000
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 31, 2005, the registrant had 3,352,730 shares of its
$0.001 par value Common Stock outstanding.
TABLE OF CONTENTS TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
Consolidated Balance Sheets - June 30, 2005 and
December 31, 2004 3
Consolidated Statements of Operations - Three and Six
Months Ended June 30, 2005 and 2004 4
Consolidated Statement of Changes in Stockholders'
Equity - Six Months Ended June 30, 2005 4
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS 16
SIGNATURES 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(In thousands) 2005 2004
--------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 390 $ 217
Accounts receivable, net 3,467 1,453
Inventories, net 1,429 1,627
Other current assets 101 378
--------------------------------------------------------------------------------------------------
Total Current Assets 5,387 3,675
--------------------------------------------------------------------------------------------------
Property and equipment, net 289 268
Deferred financing costs (Note 7) 407 -
Other assets 107 107
--------------------------------------------------------------------------------------------------
Total Assets $ 6,190 $ 4,050
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,674 $ 1,110
Debt maturing within one year (Note 7) 981 187
Accrued expenses and other current liabilities 342 242
--------------------------------------------------------------------------------------------------
Total Current Liabilities 3,997 1,539
--------------------------------------------------------------------------------------------------
Postretirement benefit obligation 656 593
Long-term debt (Note 7) 562 39
--------------------------------------------------------------------------------------------------
Total Liabilities 5,215 2,171
--------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
Stockholders' Equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $0.001 par value; 30,000,000 shares authorized;
3,352,730 and 3,322,182 shares issued and outstanding at
June 30, 2005 and December 31, 2004, respectively 3 3
Additional paid-in capital 12,523 12,320
Accumulated deficit (11,532) (10,420)
Accumulated other comprehensive loss (19) (24)
--------------------------------------------------------------------------------------------------
Total Stockholders' Equity 975 1,879
--------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,190 $ 4,050
==================================================================================================
See accompanying notes to consolidated financial statements.
3
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
----------------- ------------------
(In thousands, except loss per share amounts) 2005 2004 2005 2004
------------------------------------------------------------------------------------------
Revenues:
Equipment $3,723 $2,584 $ 5,688 $5,506
Services and other revenue 760 305 1,204 789
------------------------------------------------------------------------------------------
Total revenues 4,483 2,889 6,892 6,295
Cost of Revenues:
Equipment 2,695 1,970 4,014 4,016
Services and other revenue 321 189 555 461
Other cost of revenues 131 126 233 337
------------------------------------------------------------------------------------------
Total cost of revenues 3,147 2,285 4,802 4,814
------------------------------------------------------------------------------------------
Gross profit 1,336 604 2,090 1,481
Selling, general and administrative expenses 1,765 1,010 3,148 2,220
------------------------------------------------------------------------------------------
Operating loss (429) (406) (1,058) (739)
Interest expense (43) (6) (51) (12)
Other income 1 1 4 2
------------------------------------------------------------------------------------------
Loss before income taxes (471) (411) (1,105) (749)
Provision for income taxes 3 3 7 6
------------------------------------------------------------------------------------------
Net loss $ (474) $ (414) $(1,112) $ (755)
==========================================================================================
Basic and diluted net loss per common share: $ (.14) $ (.12) $ (.33) $ (.23)
Weighted average common shares outstanding:
Basic and diluted 3,353 3,316 3,340 3,314
==========================================================================================
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months ended June 30, 2005
Accumulated
Common Stock Additional Accum- Other
----------------- Paid-in ulated Comprehensive
(In thousands) Shares Amount Capital Deficit Loss Total
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 3,322 $3 $12,320 $(10,420) $(24) $ 1,879
Net loss - - - (1,112) - (1,112)
Amortization of pension liability
adjustment - - - - 5 5
-------
Comprehensive loss (1,107)
Issuance of warrants - - 186 - - 186
Issuance of common stock 31 - 17 - - 17
------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2005 3,353 $3 $12,523 $(11,532) $(19) $ 975
==================================================================================================================
See accompanying notes to consolidated financial statements.
4
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, 2005 and 2004
(In thousands) 2005 2004
-----------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,112) $(755)
Adjustments to reconcile net loss to net cash flows
used in operating activities:
Provision for doubtful accounts receivable 18 18
Provision for losses on inventories 18 68
Depreciation and amortization of property and equipment 53 73
Amortization of deferred financing costs 36 -
Decrease in accumulated other comprehensive loss 5 4
Increase in accrued postretirement benefit obligation 63 57
Changes in operating assets and liabilities:
Increase in accounts receivable (2,032) (119)
Decrease (increase) in inventories 180 (245)
Decrease in other assets 277 7
Increase in accounts payable 1,564 5
Increase in accrued expenses and other current liabilities 100 174
-----------------------------------------------------------------------------------
Net cash used in operating activities (830) (713)
-----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (18) (23)
-----------------------------------------------------------------------------------
Net cash used in investing activities (18) (23)
-----------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings under revolving credit line and minimum
borrowing note 1,271 218
Increase in deferred financing costs (257) -
Proceeds from issuance of common stock 17 2
Repayments of long-term debt (10) -
-----------------------------------------------------------------------------------
Net cash provided by financing activities 1,021 220
-----------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 173 (516)
Cash and cash equivalents at beginning of period 217 827
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 390 $ 311
===================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 20 $ 14
Income taxes 2 4
Non-cash financing and investing activities:
Purchase of equipment under capital lease 56 -
Value of warrant issued in connection with revolving
credit facility 186 -
See accompanying notes to consolidated financial statements.
5
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements presented herein consist of the
accounts of Farmstead Telephone Group, Inc. and its wholly-owned
subsidiaries. The accompanying consolidated financial statements as of
June 30, 2005 and for the three and six months ended June 30, 2005 and 2004
have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules and regulations of
the Securities and Exchange Commission for interim financial statements. In
the Company's opinion, the unaudited interim consolidated financial
statements and accompanying notes reflect all adjustments, consisting of
normal and recurring adjustments that are necessary for a fair statement of
results for the interim periods presented. The results of operations for
the interim periods are not necessarily indicative of the results to be
experienced for the entire fiscal year. This Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
2. OPERATIONS
As presented in the consolidated financial statements contained in
this report, the Company incurred net losses of $474,000 and $1,112,000 for
the three and six months ended June 30, 2005, respectively. In addition,
the Company has incurred substantial losses in each of the past four fiscal
years. As further described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company has taken several measures to
turnaround its operating performance. The turnaround strategy 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, such as through installation and
maintenance services. As a part of the turnaround plan, the Company hired a
new President and CEO in October 2004, and two Executive Vice Presidents -
one responsible for operations (hired in January 2005) and one responsible
for sales (hired in March 2005). In March, the Company significantly
expanded its sales infrastructure and opportunities, first by the hiring of
twenty three sales and sales support professionals formerly employed by
Avaya Inc., and second by entering into a trial agreement with Avaya to
provide products and services to the SMB ("small-to-medium sized business")
market which commenced in March with the launch of a nationwide SMB sales
program. By the end of June 2005, the Company's direct sales and sales
support group was 85% larger than June 2004. As a result of these efforts,
the Company has been successful in uplifting revenues, as revenues for the
three and six months ended June 30, 2005 were 55% and 9% higher than the
comparable prior year periods. In fact, the $4,483,000 in revenues for the
quarter ended June 30, 2005 was the highest revenue quarter since the
second quarter of 2002, and the Company recorded a profit for the month of
June, which was the Company's first profitable month since May 2003.
In May 2005, the Company took steps to further diversify its product
offerings, forming a wholly-owned subsidiary named "One IP Voice" which,
when operational, will offer carrier-based hosted IP telephony services
along with network services. Its primary target will be the SMB market.
In order to finance its business expansion plans, effective March 31,
2005 the Company entered into a $3 million credit arrangement with a new
lender, replacing a $1.7 million credit facility with Business Alliance
Capital Corporation. For additional information, refer to Note 7, Debt
Obligations contained herein.
3. RECLASSIFICATIONS
Certain amounts in the prior year's financial statements have been
reclassified to conform to the 2005 presentation.
4. ACCOUNTS RECEIVABLE, NET
June 30, December 31,
(Dollars in thousands) 2005 2004
-------------------------------------------------------------------
Trade accounts receivable $3,051 $1,379
Less: allowance for doubtful accounts (78) (60)
-------------------------------------------------------------------
Trade accounts receivable, net 2,973 1,319
Other receivables 494 134
-------------------------------------------------------------------
Accounts receivable, net $3,467 $1,453
===================================================================
6
Other receivables primarily consist of commissions, rebates and other
dealer incentives due from Avaya and are recorded in the consolidated
financial statements when earned.
5. INVENTORIES, NET
June 30, December 31,
(Dollars in thousands) 2005 2004
--------------------------------------------------------------------------------
Finished goods and spare parts $1,260 $1,341
Work in process (a) 208 352
Rental equipment 13 52
--------------------------------------------------------------------------------
1,481 1,745
Less: reserves for excess and obsolete inventories (52) (118)
--------------------------------------------------------------------------------
Inventories, net $1,429 $1,627
================================================================================
(a) Work in process inventories consist of used equipment requiring
repair or refurbishing.
6. PROPERTY AND EQUIPMENT, NET
Estimated
Useful Lives June 30, December 31,
(Dollars in Thousands) (Yrs.) 2005 2004
----------------------------------------------------------------------------------------------
Leased equipment under capital lease consists of computer equipment.
7. DEBT OBLIGATIONS
June 30, December 31,
(Dollars In thousands) 2005 2004
-------------------------------------------------------------------
Laurus revolving credit facility note $ 950 $ -
Laurus Minimum Borrowing Note 500 -
BACC revolving credit facility note - 179
Installment purchase note 44 47
Leased equipment under capital lease 49 -
-------------------------------------------------------------------
1,543 226
Less: debt maturing within one year (981) (187)
-------------------------------------------------------------------
Long-term debt obligations $ 562 $ 39
===================================================================
Credit Arrangements:
On March 31, 2005, the Company terminated its $1.7 million revolving
credit facility with Business Alliance Capital Corporation ("BACC"),
repaying the outstanding balance and an early-termination fee of $68,000 on
April 1, 2005. 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 a Secured Convertible Minimum Borrowing Note (together with the
Revolving Note, the "Laurus Notes"). The initial Minimum Borrowing Note was
set at $500,000, the proceeds of which were advanced to the Company on
April 4, 2005. 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
7
common stock 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. 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.
The fair value of the Warrant was estimated using the Black-Scholes
pricing model with the following assumptions: fair market value of the
underlying common stock of $1.08 per share (which amount represents the
closing price of the common stock on the date that the principal terms and
conditions of the financing were approved by both parties); zero dividends;
expected volatility of 55%; a risk-free interest rate of 3.9% and an
expected holding period of 4.5 years. The resulting value of $186,299,
along with a $117,000 prepaid facility fee, have been recorded in deferred
financing costs, and are being amortized to interest expense over the term
of the facility. Other direct costs incurred by the Company in the
execution of the agreements with Laurus, approximating $140,000, have also
been recorded on the balance sheet under deferred financing costs, and are
being amortized to SG&A expense over the term of the facility.
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
Company's Annual Report on Form 10-K for the year ended December 31, 2004:
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 is additionally 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. Borrowings under 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, Laurus
could require the Company to repay 120% of any principal and interest
outstanding under the agreement.
Conversion Rights and Limitation. 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, at the
Fixed Conversion Price ("FCP") of $1.54. The FCP 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 FCP will be reset once $1.5
million of debt has been converted. The Laurus Notes contain a mandatory
conversion feature such that, if the average closing price of the common
stock as reported by Bloomberg, L.P. on the Principal Market for five (5)
consecutive trading days in any calendar month shall be greater than 115%
of the FCP, the Holder shall convert into shares of common stock such
portion of the principal amount outstanding under any Minimum Borrowing
Note (together with accrued interest and fees in respect thereof) on such
date equal to ten percent (10%) of the aggregate dollar trading volume of
the common stock for the period of twenty-two (22) trading days preceding
the date of the mandatory conversion. The Holder shall not be required
under any circumstances to make more than one (1) mandatory conversion in
any calendar month. By agreement between the parties, Laurus will not own
greater than 4.99% of the outstanding shares of the Company's common stock
except that (i) upon the occurrence and during the continuance of an Event
of Default, or (ii) upon 75 days prior notice to the Company, their
ownership could increase to 19.99%. 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
8
upon conversion of the Laurus Notes and the exercise of the Warrant. On
June 24, 2005, the Company completed the registration of the common stock
issuable upon conversion of the initial Minimum Borrowing Note and the
Warrant.
As of June 30, 2005, outstanding borrowings with Laurus were
$1,450,383, consisting of $950,383 under the revolving credit portion of
the facility and a $500,000 Minimum Borrowing Note. The unused portion of
the credit facility as of June 30, 2005 was $1,549,617, all of which was
available to borrow. The average and highest amounts borrowed under the
Laurus credit facility during the three months ended June 30, 2005 were
approximately $815,000 and $1,640,000, respectively. The average and
highest amounts borrowed under all credit facilities during the six months
ended June 30, 2005 were approximately $521,000 and $1,640,000,
respectively. The Company was in compliance with the provisions of its loan
agreement as of June 30, 2005.
Obligations under Capital Lease:
During 2005, the Company entered into non-cancelable lease agreements
to finance $56,000 of computer equipment with payment terms ranging from 24
to 36 months. Monthly lease payments aggregate $1,984 and the agreements
contain a $1.00 purchase option at the end of the lease term. The effective
interest rate on the lease obligations is 10.38 to 10.5%. The principal
balance of these obligations at June 30, 2005 was $48,809, of which $22,531
was classified under debt maturing within one year.
Note Payable:
The Company is financing an automobile through a $50,056, 3.75% note
payable to a finance company. The note is payable in 38 monthly
installments of $799, with a final payment of $24,236 on January 7, 2008.
The note balance at June 30, 2005 was $43,941, of which $8,154 was
classified under debt maturing within one year.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
June 30, December 31,
(Dollars in thousands) 2005 2004
----------------------------------------------------------------------------
Salaries, commissions and benefits $229 $167
Other 113 75
----------------------------------------------------------------------------
Accrued expenses and other current liabilities $342 $242
============================================================================
9. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment," ("SFAS No. 123 (revised 2004)"), revising FASB
Statement 123, "Accounting for Stock-Based Compensation" and superseding
APB Opinion No. 25, "Accounting for Stock Issued to Employees,". This
Statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
focusing primarily on transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123 (revised 2004)
requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions). That cost will be recognized
over the period during which an employee is required to provide service in
exchange for the award. Accounting for share-based compensation
transactions using the intrinsic method supplemented by pro forma
disclosures will no longer be permissible. This statement is effective as
of the beginning of the first interim or annual reporting period that
begins after December 15, 2005 and the Company will adopt the standard in
the first quarter of fiscal 2006. The adoption of this standard will have
an impact on the Company's results of operations as it will be required to
expense the fair value of all share based payment; however the Company has
not yet determined whether or not this impact will be significant.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). This statement clarifies
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). It also requires that these items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal". This statement also clarifies the circumstances
under which fixed overhead costs associated with operating facilities
involved in inventory processing should be capitalized. The provisions of
SFAS No. 151 are effective for fiscal years beginning after June 15, 2005
and the Company will adopt this standard in its third quarter of fiscal
2005. The Company has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
9
10. STOCK OPTIONS
The Company applies the disclosure only provisions of Financial
Accounting Standards Board Statement ("SFAS") No. 123, "Accounting for
Stock-based Compensation" ("SFAS 123") and SFAS No. 148, "Accounting for
Stock-based Compensation - Transition and Disclosure" ("SFAS 148") for
employee stock option and warrant awards. Had compensation cost for the
Company's stock option plan and issued warrants been determined in
accordance with the fair value-based method prescribed under SFAS 123, the
Company's net loss and basic and diluted net loss per share would have
approximated the pro forma amounts indicated below (dollars in thousands
except per share amounts):
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
Net loss, as reported $(474) $(414) $(1,112) $(755)
Add: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects (37) (17) (239) (38)
---------------------------------------------------------------------------------------------------
Pro forma net loss (511) (431) (1,351) (793)
Pro forma net loss per share:
Basic and diluted $(.15) $(.13) $ (.40) $(.24)
===================================================================================================
The weighted-average fair value of options granted during the three
and six months ended June 30, 2005 was $.49 and $.40, respectively,
compared to $.37 for the three and six months ended June 30, 2004. The fair
value of stock options used to compute pro forma net loss and net loss per
share disclosures was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 0% for 2005 and 2004; expected volatility of
55% for 2005 and 108% for 2004; average risk-free interest rate of 3.8% for
2005 and 3.30 % for 2004; and an expected option holding period of 3.5
years for 2005 and 4.3 years for 2004.
11. COMMITMENTS AND CONTINGENCIES
Employment agreements:
On January 15, 2005 the Company hired Mr. Alfred G. Stein to the
position of Executive Vice President. From September 13, 2004 to his date
of hire, Mr. Stein was a consultant to the Company, assisting management in
the development of a strategic re-direction of the Company's sales
organization and product offerings, for which he earned $40,000 in
consulting fees. Mr. Stein has an employment agreement expiring December
31, 2007 which includes the following key provisions: (i) an annual base
salary of $175,000, (ii) an annual bonus of up to 100% of base salary based
upon the attainment of a Board-approved annual business plan which includes
revenue and operating profit targets and (iii) the grant of a five-year
warrant to purchase up to 250,000 shares of common stock at an exercise
price of $0.67 per share, which was equal to the closing price of the
common stock on his date of hire. The Company registered 150,000 shares
underlying the warrant, and has agreed to register the remaining 100,000
shares by January 15, 2007.
On March 1, 2005, the Company hired Mr. Nevelle R. Johnson to the
position of Executive Vice President. Mr. Johnson's responsibilities
include management of the Company's national sales organization, as well as
the development of new product and service offerings. Mr. Johnson has an
employment agreement expiring December 31, 2008 which includes the
following key provisions: (i) an initial annual base salary of $200,000;
(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, provided that the
Company attains at least 75% of targeted earnings. The Company registered
100,000 of the shares underlying the warrant, and has agreed to register an
additional 100,000 shares by March 1, 2007 and the remaining 50,000 shares
by March 1, 2008;
Both Mr. Stein's and Mr. Johnson's employment agreements provide
severance pay should they terminate their agreements for "good cause", as
defined, or should the Company terminate their agreements without cause, or
in the event of a change in control of the Company, as defined. Severance
pay would amount to three times the amount of the then-current base salary
and the average bonus paid during the three most recent calendar years.
These individuals would not be entitled to any severance or other
compensation if they voluntarily terminate their employment or if they are
terminated by the Company "for cause", as defined. Their agreements also
contain non-compete stipulations.
10
12. EMPLOYEE BENEFIT PLANS
The components of the net periodic benefit cost included in the
results of operations for the three and six months ended June 30, 2005 and
2004 are as follows:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(Dollars in thousands) 2005 2004 2005 2004
-------------------------------------------------------------------
Service cost $21 $20 $43 $40
Interest cost 10 9 20 18
Recognized actuarial losses 3 2 5 4
-------------------------------------------------------------------
Net expense $34 $31 $68 $62
===================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions set forth below and elsewhere in this Quarterly
Report on Form 10-Q contain certain statements, based on current
expectations, estimates, forecasts and projections about the industry in
which we operate and management's beliefs and assumptions, which are not
historical facts and are considered forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 ("the
Act"). Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results,
performance, or achievements, and may contain the words "believe," "will
be," "will continue," "will likely result," "anticipates," "seeks to,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and
similar words, expressions or phrases of similar meaning. Our actual
results could differ materially from those projected in the forward-looking
statements as a result of certain risks, uncertainties and assumptions,
which are difficult to predict. Many of these risks and uncertainties are
described under the heading "Risks, Uncertainties and Other Factors That
May Affect Future Results" below. All forward-looking statements included
in this document are based upon information available to us on the date
hereof. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise. In addition, other written or oral statements made or
incorporated by reference from time to time by us or our representatives in
this report, other reports, filings with the Securities and Exchange
Commission ("SEC"), press releases, conferences, or otherwise may be
forward-looking statements within the meaning of the Act.
RESULTS OF OPERATIONS
Overview
For the three months ended June 30, 2005, we reported a net loss of
$474,000 or $.14 per share on revenues of $4,483,000. This compares with a
net loss of $414,000 or $.12 per share on revenues of $2,889,000 recorded
for the three months ended June 30, 2004. For the six months ended June
30, 2005, we reported a net loss of $1,112,000 or $.33 per share on
revenues of $6,892,000. This compares with a net loss of $755,000 or $.23
per share on revenues of $6,295,000 recorded for the six months ended June
30, 2004. The net loss for the six month period of 2005 includes one-time
expenses aggregating $84,000 incurred in connection with the termination of
our credit facility with Business Alliance Capital Corporation. There
continues to be intense competition in the market areas that we serve,
particularly with our larger, "Enterprise" customers. This has particularly
been the case in the aftermarket parts business in which, over the last
several years, the Company has experienced significant sales price erosion,
as aftermarket parts have become more of a commodity and subject to "price
shopping" by customers. The Company has worked to lessen the effects of
this trend by increasing its sales force and focusing on developing its
systems sales business and, during the second quarter of 2005 has increased
its market share of both parts and systems sales.
As further described in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company has taken several measures to
turnaround its operating performance. The turnaround strategy 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, such as through installation and
maintenance services. As a first step in the turnaround plan, the Company
hired a new President and CEO in October 2004, and two Executive Vice
Presidents - one responsible for operations (hired in January 2005) and one
responsible for sales (hired in March 2005). In
11
March, the Company significantly expanded its sales infrastructure and
opportunities, first by the hiring of twenty three sales and sales support
professionals formerly employed by Avaya Inc., and second by entering into
a trial agreement with Avaya to provide products and services to the SMB
("small-to-medium sized business") market which commenced in March with the
launch of a nationwide SMB sales program. By the end of June 2005, the
Company's direct sales and sales support group was force was 85% larger
than June 2004. As a result of these efforts, The Company has been
successful in uplifting revenues, as revenues for the three and six months
ended June 30, 2005 were 55% and 9% higher than the comparable prior year
periods. In fact, the $4,483,000 in revenues for the quarter ended June 30,
2005 was the highest revenue quarter since the second quarter of 2002, and
the Company recorded a profit for the month of June, which was the
Company's first profitable month since May 2003.
In May 2005, the Company took steps to further diversify its product
offerings, forming a wholly-owned subsidiary named "One IP Voice" which,
when operational by the end of 2005, will offer carrier-based hosted IP
telephony services along with network services. Its primary target will be
the SMB market. In order to finance its business expansion plans, effective
March 31, 2005 the Company entered into a $3 million credit arrangement
with a new lender, replacing a $1.7 million credit facility with Business
Alliance Capital Corporation. For additional information on our financial
resources, refer to Note 7, "Debt Obligations", and the "Liquidity and
Capital Resources" section which follows.
Additional information on our results of operations and financial
condition for the three and six months ended June 30, 2005 follows below.
Revenues
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
(in thousands) 2005 2004 2005 2004
-----------------------------------------------------------------------------
Equipment:
End-user equipment sales $3,660 $2,272 $5,534 $5,035
Equipment sales to resellers 63 312 154 471
-----------------------------------------------------------------------------
Total equipment sales 3,723 2,584 5,688 5,506
-----------------------------------------------------------------------------
Services:
Installations 401 189 659 520
Rentals, repair and other 18 35 48 71
Other revenue 341 81 497 198
-----------------------------------------------------------------------------
Total services and other revenue 760 305 1,204 789
-----------------------------------------------------------------------------
Consolidated revenues $4,483 $2,889 $6,892 $6,295
=============================================================================
Equipment Sales. Total equipment sales for the three months ended
June 30, 2005, were $3,723,000, an increase of $1,139,000 or 44% from the
comparable 2004 period. The increase consisted of a $1,388,000 increase in
end-user sales, less a $249,000 decrease in equipment sales to resellers
("wholesale sales"). The increase in end-user sales was attributable to a
$1,068,000 or 201% increase in system sales and a $320,000 or 18% increase
in parts sales. Total equipment sales for the six months ended June 30,
2005, were $5,688,000, an increase of 182,000 or 3% from the comparable
2004 period. The increase consisted of a $499,000 increase in end-user
sales, less a $317,000 decrease in wholesale sales. The increase in end-
user sales was attributable to an $845,000 or 52% increase in system sales,
partly offset by a $346,000 or 10% decline in parts sales. During 2005, we
continued a strategy of diversifying our product offerings by marketing the
sale of complete telecommunications systems to our customer base. In March
2005, we significantly expanded our sales force and began targeting the SMB
marketplace, which is primarily oriented towards systems sales. Other
factors affecting end-user equipment sales for 2005 have previously been
described in the "Overview" section above. Wholesale sales have been
impacted by some of the same factors which affected end user sales and our
shift in emphasis to new system sales.
Service revenues for the three months ended June 30, 2005 were
$419,000, an increase of $195,000 or 87% from the comparable 2004 period.
Service revenues for the six months ended June 30, 2005 were $707,000, an
increase of $116,000 or 20% from the comparable 2004 period. The increases
in each period were attributable to installation services which have
increased due to the significant increase in second quarter system sales.
An increase or decrease in installation revenues, however, does not always
coincide with the reported increase or decrease in system sales since
installations may occur in different periods than the related system sale.
Other revenue for the three months ended June 30, 2005 was $341,000,
an increase of $260,000 or 321% from the comparable 2004 period. Other
revenue for the six months ended June 30, 2005 was $497,000, an increase of
$299,000 or
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151% from the comparable 2004 period. The increase in each period was
attributable to higher commissions earned on Avaya maintenance contract
sales. In the sale of Avaya maintenance contracts, the Company receives a
one-time commission, and all of the equipment service obligations are borne
entirely by Avaya.
Cost of Revenues and Gross Profit. Total cost of revenues for the
three months ended June 30, 2005 was $3,147,000, an increase of $862,000
or 38% from the comparable 2004 period. The gross profit for the three
months ended June 30, 2005 was $1,336,000, an increase of $732,000 or 121%
from the comparable 2004 period. As a percentage of revenue, the overall
gross profit margin was 30% for the three months ended June 30, 2005,
compared to 21% for the comparable 2004 period.
Total cost of revenues for the six months ended June 30, 2005 was
$4,802,000, a decrease of $12,000, or less than one-half percent, from the
comparable 2004 period. The gross profit for the six months ended June 30,
2005 was $2,090,000, an increase of $609,000 or 41% from the comparable
2004 period. As a percentage of revenue, the overall gross profit margin
was 30% for the six months ended June 30, 2005, compared to 24% for the
comparable 2004 period.
In general, 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 cause us to accept lower 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) capacity - as sales volume
rises or falls, overhead costs, consisting primarily of product handling,
purchasing, and facility costs, can become a lower or higher percentage of
sales dollars; (5) competitive pressures - as a result of the slowdown in
capital equipment spending in our industry, and the large number of Avaya
dealers nationwide, we have been faced with increased price competition;
and (6) obsolescence charges. The combined effect of all of these factors
could result in varying gross profit margins from period to period.
Gross Profit Margins on Equipment Sales. For the three months ended
June 30, 2005, the gross profit margin on equipment sales increased to 28%
from 24% in 2004. The gross profit margin for the 2004 period was
negatively impacted by an increase in obsolescence reserves and by the
payment of license fees to Avaya from a program that terminated in June
2004. Excluding the effects of these items, the gross profit margin on 2004
equipment sales would have also been 27%. For the six months ended June 30,
2005, the gross profit margin on equipment sales increased to 29% from 27%
in 2004. The gross profit margin for the 2004 period was also negatively
impacted by an increase in obsolescence reserves and by the payment of
license fees to Avaya. Excluding the effects of these items, the gross
profit margin on 2004 equipment sales would have been 30%. As compared to
the prior year periods, the Company experienced a decline in the gross
profit margins generated by the sale of aftermarket parts. This is
attributable to the fact that the parts business has become more of a
"commodity" business and less of a "value-added" business. It has therefore
become more prone to price-shopping by customers, who are tending more
towards awarding contracts to the lowest bidder. The impact of a reduced
parts business however, has been offset by significantly higher sales of
systems at improved profit margins from 2004. These results can be
primarily attributed to increased sales of systems to the SMB marketplace
as well as to our larger "Enterprise" customers. We expect continued
pressure on our equipment profit margins going forward, particularly in the
sale of parts and systems to our larger customers, due to continuing price
competition.
Gross Profit Margins on Services and Other Revenue. For the three
months ended June 30, 2005, the Company realized an overall 58% profit
margin on its combined service and other revenues, compared to 38% recorded
in 2004. The profit margin increase was attributable to significantly
higher commission revenues earned from the sale of Avaya maintenance
contracts, which generate a 100% profit margin, and to improved margins on
installations. For the six months ended June 30, 2005, the Company realized
an overall 54% profit margin on its combined service and other revenues,
compared to 42% recorded in 2004. The profit margin increase for the six
month period was attributable to significantly higher commission revenues
earned from the sale of Avaya maintenance contracts.
Other Cost of Revenues. Other cost of revenues consists of product
handling, purchasing and facility costs and expenses. For the three months
ended June 30, 2005, these expenses were 4% higher than 2004, and
represented approximately 4% of 2005 equipment sales revenues, compared to
5% of 2004 equipment sales revenues. For the six months ended June 30, 2005,
these expenses were 31% lower than 2004, and represented approximately 4%
of 2005 equipment sales revenues, compared to 6% of 2004 equipment sales
revenues. The reduction in other cost of revenues primarily resulted from
lower personnel levels and other overhead costs.
13
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
for the three months ended June 30, 2005 were $1,765,000, an increase of
$755,000 or 75% from the comparable 2004 period. SG&A expenses for the
three months ended June 30, 2005 were 39% of revenues, compared to 35% of
revenues in 2004. Approximately 90% of the increase in SG&A was
attributable to increased personnel levels, including compensation and
benefits, recruiting fees, and incremental office and travel expenses.
SG&A expenses for the six months ended June 30, 2005 were $3,148,000, an
increase of $928,000 or 42% from the comparable 2004 period. SG&A expenses
for the six months ended June 30, 2005 were 46% of revenues, compared to
35% of revenues in 2004. Approximately 85% of the increase in SG&A was
attributable to increased personnel levels, including compensation and
benefits, recruiting fees, and incremental office and travel expenses.
As a part of the Company's turnaround plan, it hired a new President
and CEO in October 2004, and two Executive Vice Presidents - one
responsible for operations (hired in January 2005) and one responsible for
sales (hired in March 2005). In addition, by June 30, 2005, the Company's
sales and support group was 85% larger than June 2004. The increase in the
sales and support group was attributable to the launch of a Company
initiative to market its products and services to small to medium-sized
business ("SMB") marketplace.
In connection with the replacement of the BACC credit facility with
the Laurus credit facility, the Company incurred in March 2005 one-time
expenses totaling $84,000, consisting of a $68,000 early termination fee,
and a $16,000 charge to write-off of the remaining balance of its annual
loan commitment fee with BACC. In addition, as of June 30, 2005 the Company
had incurred $140,000 of direct expenses associated with the acquisition of
the Laurus credit facility. These costs are included in deferred financing
costs on the balance sheet and are being amortized to SG&A expense over the
term of the facility. As of June 30, 2005 approximately $11,000 has been
expensed.
We expect our SG&A expenses to increase as we continue the execution
of our turnaround strategy, which has begun to focus on the development and
deployment of the hosted VOIP services and products to be marketed through
our newly-formed subsidiary, One IP Voice, Inc.
Interest Expense and Other Income. Interest expense for the three
months ended June 30, 2005 was $43,000, compared with $6,000 for 2004.
Interest expense for the six months ended June 30, 2005 was $51,000,
compared with $12,000 for 2004. Included in interest expense for the three
and six months of 2005 is $25,000 representing the amortization of a
portion of deferred financing costs incurred in connection with the
acquisition of the Laurus credit facility, as further described in Note 7.
These costs, consisting of a $117,000 facility fee and a $186,299 value
ascribed to the warrants issued to Laurus, are being amortized to interest
expense over the term of the facility. The increase in interest expense was
also attributable to higher average borrowing levels and higher borrowing
rates. Other income for all periods presented consisted of interest earned
on invested cash.
Provision for Income Taxes. The provision for income taxes represents
estimated minimum state taxes in all reported periods. We maintain a full
valuation allowance against our net deferred tax assets, which consist
primarily of net operating loss and capital loss carryforwards, and timing
differences between the book and tax treatment of inventory and other asset
valuations. Realization of these net deferred tax assets is dependent upon
our ability to generate future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, defined as current assets less current liabilities,
was $1,390,000 at June 30, 2005, a decrease of $746,000 or 35% from
$2,136,000 at December 31, 2004. The working capital ratio was 1.3 to 1 at
June 30, 2005, compared to 2.4 to 1 at December 31, 2004. Operating
activities used $830,000 during the six months ended June 30, 2005,
compared to the use of $713,000 in the comparable 2004 period. Net cash
used by operating activities in 2005 consisted of a net loss of $1,112,000
less non-cash items of $193,000, and net cash generated by changes in
operating assets and liabilities of $89,000. Net cash generated by changes
in operating assets and liabilities was primarily attributable to an
increase in accounts payable and accrued expenses, a decrease in
inventories and other assets, partly offset by an increase in accounts
receivable resulting from higher sales levels.
Investing activities used $18,000 during the six months ended June
30, 2005, compared to $23,000 in 2004. Net cash used by investing
activities in 2005 and 2004 consisted of capital expenditures. Capital
expenditures during 2005 were principally for computer and office equipment
to support our expanded personnel levels, most of which were financed
through lease agreements. Pursuant to our loan agreement with Laurus, we
may obtain external financing on capital expenditures up to $500,000 in any
fiscal year period before requiring Laurus's prior approval.
Financing activities provided $1,021,000 during the six months ended
June 30, 2005 principally from borrowings under our revolving credit lines,
net of related costs incurred. On March 31, 2005, we terminated our $1.7
million revolving credit
14
facility with BACC, repaying the outstanding balance on April 1, 2005, and
entered into a financing transaction with Laurus Master Fund, Ltd.,
("Laurus"), providing for a three-year, $3 million revolving loan credit
facility. Our borrowing formulas with Laurus are less restrictive than the
formulas provided under the BACC agreement, thereby increasing our
borrowing capacity. Refer to Note 7, "Debt Obligations", of the Notes to
Consolidated Financial Statements included herein for further information
on the principal terms and conditions of this financing transaction.
Our ability to provide cash to satisfy working capital requirements
continues to be dependent upon generating positive cash flow from
operations and upon formula borrowings under our revolving credit facility.
Historically, our working capital borrowings have increased during periods
of revenue growth. This is because our cash receipts cycle is longer than
our cash disbursements cycle. As our revenues from systems sales increases,
as management expects, the cash receipts cycle may lengthen, unless we can
consistently negotiate up-front deposits and progress payments under our
systems sales contracts. In addition, our working capital requirements are
expected to significantly increase by year end as we continue to buildout
the infrastructure of capital equipment, systems and personnel required to
deploy our hosted VOIP service offerings through our newly-formed
subsidiary One IP Voice, Inc. No assurances can be given that we will have
sufficient cash resources to finance all of our future growth plans, and it
may become necessary to seek additional financing sources for such
purposes. In order to obtain additional financing, we may first need to
demonstrate improved operating performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion included in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2004 under the subheading "Critical
Accounting Policies and Estimates" is still considered current and
applicable, and is hereby incorporated into this Quarterly Report on Form
10-Q.
RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS
The discussion included in Item 7 of our Annual Report on Form 10-K
for the year ended December 31, 2004 under the subheading "Risks,
Uncertainties and Other Factors That May Affect Future Results" is still
considered current and applicable, and is hereby incorporated into this
Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The discussion included in Item 7A of our Annual Report on Form 10-K for
the year ended December 31, 2004, "Quantitative and Qualitative Disclosures
About Market Risk", is still considered current and applicable, and is
hereby incorporated into this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. We maintain
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) that are designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act, is recorded,
processed, summarized and reported within the time periods specified in the
Security and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including
our Chief (principal) Executive Officer and Chief (principal) Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible controls and procedures.
An evaluation was conducted by our Chief Executive Officer and Chief
Financial Officer of the effectiveness of the Company's disclosure controls
and procedures as of the end of the period covered by this report. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our reports filed under
the Exchange Act, is recorded, processed, summarized and reported within
the time periods specified in the Security and Exchange Commission's rules
and forms.
(b) Changes in Internal Controls. There have been no changes in our
internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the most recently completed
fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
15
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Refer to the Company's Current Report on Form 8-K filed April 5,
2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The proposals voted upon at the Company's Annual Meeting of
Stockholders, held July 14, 2005, along with the voting results, were
as follows:
(1) Election of Directors: All nominees were elected: The results
of the balloting were as follows:
Votes Votes
Nominees For Withheld
--------------------- --------- --------
Jean-Marc Stiegemeier 3,208,981 41,071
George J. Taylor, Jr. 3,188,401 61,651
Harold L. Hanson 3,207,714 42,338
Hugh M Taylor 3,205,551 44,501
Joseph J. Kelley 3,208,534 41,518
Ronald P. Pettirossi 3,212,658 37,394
(2) Ratification of the appointment of Carlin, Charron & Rosen LLP
as independent auditors of the Company for the year ending
December 31, 2005: The proposal was approved with 3,197,907
votes for, 40,840 votes against and 11,305 abstentions.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS:
The following documents are filed as Exhibits to this Quarterly
Report on Form 10-Q:
31.1 Certification of the Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: August 10, 2005 /s/ Jean-Marc Stiegemeier
------------------------------------
Jean-Marc Stiegemeier
Chief Executive Officer, President
Dated: August 10, 2005 /s/ Robert G. LaVigne
------------------------------------
Robert G. LaVigne
Executive Vice President, Chief
Financial Officer
17