<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- ----- EXCHANGE ACT
For the transition period from _____ to _____.
Commission file number 0-26764
TELECHIPS CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0266392
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6880 South McCarran Blvd., Reno, Nevada 89509
---------------------------------------------
(Address of principal executive offices)
(702) 824-5555
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
The number of shares of Common Stock outstanding as of November 13, 1996:
4,186,606.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
----- -----
<PAGE> 2
TELECHIPS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. Financial Information
1. Interim Financial Statements
Condensed Balance Sheets -
September 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . 1
Condensed Statements of Operations -
Three months and nine months ended September 30, 1996
and 1995 and period from January 7, 1991, to
September 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Statements of Cash Flows -
Three months and nine months ended September 30, 1996
and 1995 and period from January 7, 1991, to
September 30, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE> 3
TELECHIPS CORPORATION
(A Development Stage Company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,282,200 $2,702,701
Accounts receivable 1,673 7,339
Inventory 1,699,747 831,664
Prepaid expenses 52,901 101,814
---------- ----------
Total current assets 3,036,521 3,643,518
---------- ----------
Equipment and tooling, net 1,037,399 793,321
Prepaid expenses -- 44,680
Deposits and other assets 116,998 34,312
Prepaid royalties 281,914 285,194
---------- ----------
$4,472,832 $4,801,025
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 731,245 $ 437,393
Accrued expenses 47,730 18,303
Note payable 62,500 --
Line of credit payable 354,289 --
---------- ----------
Total current liabilities 1,195,764 455,696
---------- ----------
Other liabilities 29,061 --
---------- ----------
Total liabilities 1,224,825 455,696
---------- ----------
Shareholders' equity:
Series A 4% convertible preferred stock, par value $1.00,
3,000,000 shares authorized, 3,563 issued and outstanding at
September 30, 1996, $1,000 per share liquidation
preference (Note 9) (unaudited) 2,137,585 --
Common stock, par value $.01, 10,200,000 shares authorized,
3,863,106 issued and outstanding at September 30, 1996
(unaudited) 38,631 38,631
Paid-in capital 12,594,675 12,218,616
Retained earnings (deficit accumulated) during the development
stage (8,407,024) (4,862,117)
---------- ----------
6,363,867 7,395,130
Less: Notes receivable from shareholders (3,115,860) (3,049,801)
---------- ----------
Total shareholders' equity 3,248,007 4,345,329
---------- ----------
$4,472,832 $4,801,025
========== ==========
</TABLE>
The accompanying notes are in integral part of these condensed financial
statements.
- 1 -
<PAGE> 4
TELECHIPS CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
__________
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30 Period From
------------------------- -------------------------- January 7, 1991 to
1996 1995 1996 1995 September 30,
---- ---- ---- ---- ------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Sales revenue $ 19,320 $ -- $ 71,947 $ -- $ 92,647
Contract revenue -- -- -- -- 2,652,274
Cost of sales (23,204) -- (90,958) -- (124,741)
Contract research and development costs -- -- -- -- (2,080,188)
----------- ---------- ----------- ----------- -----------
(3,884) -- (19,011) -- 539,992
Operating expenses:
Marketing 354,740 137,190 808,908 329,147 1,883,927
General and administrative 411,493 212,139 1,012,795 451,983 2,301,544
Research and development 671,309 496,208 1,728,898 1,120,931 4,308,303
----------- ---------- ----------- ----------- -----------
Loss from operations (1,441,426) (845,537) (3,569,613) (1,902,061) (7,953,782)
Other income (expense):
Interest income 6,421 2,494 53,010 12,481 95,064
Interest (expense) (11,996) (41,112) (28,304) (73,851) (267,511)
Amortization of 1995 Bridge financing costs -- (23,400) -- (23,400) (280,795)
----------- ---------- ----------- ----------- ------------
Total other income (expense) (5,575) (62,018) 24,706 (84,770) (453,242)
----------- ---------- ----------- ----------- ------------
Net loss $(1,447,001) $( 907,555) $(3,544,907) $(1,986,831) $(8,407,024)
=========== ========== =========== =========== ============
Net loss per common and common equivalent shares $(.39) $(.47) $(.97) $(1.02) $(4.21)
===== ====== ===== ====== =======
Weighted average common shares 3,669,930 1,940,624 3,669,930 1,940,624 1,996,743
========= ========= ========= ========= ===========
</TABLE>
The accompanying notes are in integral part of these condensed financial
statements.
- 2 -
<PAGE> 5
TELECHIPS CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30 Period From
-------------------------- --------------------------- January 7, 1991 to
1996 1995 1996 1995 September 30,
---- ---- ---- ---- ------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,447,001) $ (907,555) $(3,544,907) $(1,986,831) $(8,407,024)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 14,452 5,125 32,249 12,809 62,097
Note receivable expensed as salary -- -- -- -- 48,750
Amortization of 1995 Bridge financing -- 34,165 -- 34,165 409,995
Net effect of changes in:
Accounts receivable 2,575 -- 5,666 -- (1,673)
Employee advances -- (21,300) -- (21,300) --
Inventory (280,282) (340,945) (868,083) (712,486) (1,699,747)
Prepaid expenses 26,347 -- 93,593 -- (52,901)
Deposits and other assets (28,007) 12,312 (82,686) 97,312 (116,998)
Accrued interest on note receivable -- (953) -- (2,659) --
Prepaid royalties 670 (4,510) 3,280 (4,510) (281,914)
Accounts payable (19,204) 268,829 356,352 572,239 793,745
Accrued expenses (1,498) 30,679 29,427 46,695 47,730
Accrued interest on notes payable -- 25,082 -- 52,582 --
Other liabilities (5,884) -- 29,061 -- 29,061
----------- ---------- ----------- ----------- -----------
Net cash used in activities (1,737,832) (899,071) (3,946,048) (1,911,984) (9,168,879)
----------- ---------- ----------- ----------- -----------
Cash flows from investing activities:
Issuance of note receivable -- -- -- -- (48,750)
Purchase of equipment and tooling (49,128) (139,623) (276,327) (764,549) (1,093,496)
----------- ---------- ----------- ----------- -----------
Net cash used in activities (49,128) (139,623) (276,327) (764,549) (1,142,246)
----------- ---------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from line of credit -- -- 354,289 -- 354,289
Loan proceeds -- 1,570,800 -- 1,570,800 2,340,005
Unamortized 1995 Bridge financing costs -- (280,795) -- (280,795) --
Deferred public offering costs -- (327,631) -- (352,631) --
Proceeds from issuance of common stock -- 106,104 -- 231,563 6,571,304
Proceeds from issuance of preferred stock 2,447,585 -- 2,447,585 1,339,135 4,689,446
Repayment of notes payable -- -- -- -- (2,250,000)
Payment of accrued Series A Preferred -- -- -- -- (111,719)
----------- ---------- ----------- ----------- -----------
Net cash provided by activities 2,447,585 1,068,478 2,801,874 2,508,072 11,593,325
----------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 660,625 29,784 (1,420,501) (168,461) 1,282,200
Cash and cash equivalents at beginning of period 621,575 114,766 2,702,701 313,011 --
----------- ---------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,282,200 $ 144,550 $ 1,282,200 $ 144,550 $ 1,282,200
=========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are in integral part of these condensed financial
statements.
- 3 -
<PAGE> 6
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
__________
1. Preparation of Interim Financial Statements:
The accompanying unaudited, condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB and,
therefore, do not include all information and footnotes necessary for
a fair presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles. In the opinion of the Company, such financial statements
reflect all adjustments necessary for a fair statement of the results
of operations and financial position for the interim periods
presented. Operating results for the nine-month period ended
September 30, 1996, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
The accounting policies followed by the Company are set forth in Note
1 of the Company's financial statements in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995, which is
incorporated herein by reference.
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. SFAS No. 123 establishes fair
value-based accounting and reporting standards for stock-based
employee compensation plans. The statement defines a fair value-based
method of accounting for an employee stock option or similar equity
instrument and allows parties to elect to continue to measure
compensation costs using the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees. SFAS No. 123 requires, for those electing to
remain with the APB Opinion No. 25 accounting, pro forma disclosure of
net income and earnings per share if the fair value-based method has
been applied.
The Company will adopt SFAS No. 123 for 1996 and is expected to elect
to continue to measure and record compensation costs as defined in APB
Opinion No. 25. The Company is currently determining the impact of
the adoption of SFAS No. 123 on its disclosures in its financial
statements.
2. Net Loss Per Common Share:
Net loss per common and common equivalent share is computed using the
weighted average number of common and common equivalent shares
outstanding during each period.
- 4 -
<PAGE> 7
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
__________
3. Inventory:
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
Raw Materials $1,186,633 $688,802
Work-in-Process 143,713 118,333
Finished Goods 369,401 24,529
---------- --------
$1,699,747 $831,664
========== ========
</TABLE>
4. Equipment and Tooling:
Equipment and tooling consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Tooling $ 763,861 $659,506
Computer and other equipment 233,986 81,105
Furniture and fixtures 59,323 44,086
Leasehold improvement 42,326 38,472
---------- --------
1,099,496 823,169
Less accumulated depreciation (62,097) (29,848)
---------- --------
Equipment, net $1,037,399 $793,321
========== ========
</TABLE>
5. Note Payable:
During April, 1996, the Company issued an uncollateralized note
payable (Note) to a vendor for $62,500, with an interest rate of 9%
payable monthly and principal due November, 1996. During October,
1996, the Company paid $31,250 of the Note and extended the existing
terms on the remaining $31,250 until March, 1997.
- 5 -
<PAGE> 8
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
__________
6. Line of Credit:
During November, 1995, the Company obtained a revolving line of credit
from a commercial bank for $1,200,000, collateralized by cash and cash
equivalents valued at 110% of outstanding draws. Interest is payable
monthly at a three-month U.S. Treasury Bill rate plus 3% (8.03% at
September 30, 1996). Principal is due at maturity. The line of
credit expires December 13, 1996. At December 31, 1995, there were no
outstanding draws. At September 30, 1996, the Company had an
outstanding balance of $354,289 on the line of credit. During
October, 1996, the Company paid the line of credit down to a balance
of $0. Interest paid on the line of credit through October, 1996, is
$17,483.
7. Stock Option Plans:
During January, 1996, the Company granted 14,750 options under the
1995 stock option plan (1995 plan) with an expiration date of January,
2006, and an exercise price of $5.125. During February, 1996, the
Company granted 82,900 additional options under the 1995 plan with an
expiration date of February, 2006, and an exercise price of $6.875.
During April, 1996, the Company granted 6,706 additional options under
the 1995 plan with an expiration date of April, 2006, and an exercise
price of $5.00. During June, 1996, the Company granted 83,450
additional options under the 1995 plan with an expiration date of
June, 2006, and an exercise price of $5.75. During the period from
April, 1996, to June, 1996, 58,338 options at prices ranging from
$3.11 to $6.875 and expiration dates from April, 2004, to February,
2006, were canceled and returned to the 1994 and 1995 stock option
plans. During October, 1996, the Company granted 36,000 additional
options under the 1995 plan with an expiration date of October, 2006,
and an exercise price of $2.1875. During the period from July, 1996,
to September, 1996, 18,396 options at prices ranging from $3.11 to
$5.25 and expiration dates from May, 2005, to April, 2006, were
canceled and returned to the 1994 and 1995 stock option plans.
8. Income Taxes:
The State of Nevada imposes no corporate income tax. The Company
accounts for income taxes in accordance with Statement of Financial
Accounting Standard No. 109 (SFAS No. 109) which requires the
liability method of accounting for income taxes.
At September 30, 1996, the deferred tax assets totaling approximately
$2,797,000 (federal) have been recorded, resulting primarily from net
operating loss carry forwards and capitalized research and development
costs. Because realization of these assets is not assured, a
valuation allowance of $2,797,000 has been recorded resulting in no
net deferred taxes or tax provision.
- 6 -
<PAGE> 9
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
__________
9. Subsequent Events:
Private Placement of Stock
On October 2, 1996, the Company completed a private placement of 4,188
shares of Series A 4% Convertible Preferred Stock (Preferred Stock)
with a face value of $1,000 per share. The Preferred Stock was sold
at a discount of 20% of face value and after paying underwriting
discounts, expenses and other related fees of approximately $470,000
the Company received aggregate net proceeds of approximately
$2,880,000 of which $2,448,000 had been received by September 30,
1996. In addition, the Company granted to the underwriter warrants to
purchase up to 400,000 shares of common stock at $2.25 per share,
exercisable at anytime until August, 2001. The warrants, valued at
$310,000, were recorded as a reduction in preferred stock and an
increase in paid-in capital. Upon occurrence of certain events, the
exercise price of the warrants may be adjusted downward. The
Preferred Stock is convertible anytime beginning November 11, 1996
until August 31, 1998 using a formula (Conversion Formula) multiplying
each Preferred share by 1,000 and dividing the result by the lower of
either the fair market value at the time of conversion or $3.00. The
Preferred Stock will automatically convert, if conversion has not
previously been effected, on August 31, 1998 or upon consummation of a
public offering of securities with gross proceeds of $10,000,000 or
more provided that such offering may not close prior to March 30,
1997. The 4% dividend is payable semiannually in cash or shares of
common stock converted using the Conversion Formula described above.
The Preferred Stock has a liquidation preference over all common
shares and shall be entitled to payment of $1,000 per share plus
dividends that have accrued.
Nonemployee Directors' Options
During October, 1996, nonemployee members of the Board of Directors
exercised options (Director's Options) to purchase 75,000 shares of
common stock at a price of $2.1875 per share for a total consideration
of $164,063. The shares were purchased with nonrecourse notes
collateralized by the stock. The notes bear interest at 8.25%, have a
maturity date of ten years from the date of exercise and can be
satisfied by cash, stock or similarly valued property. The shares
were placed in escrow, subject to a right of repurchase by the
Company. The Company's repurchase right lapses ratably over 36 months
beginning on the date of the option exercise. The repurchase rights
are triggered only if the Director voluntarily leaves the Board. The
repurchase price will be equal to the original exercise price.
Interest associated with unpaid notes on those shares repurchased will
be canceled. The shares are released from escrow upon lapse of the
repurchase rights and payment of the related portion of the notes.
- 7 -
<PAGE> 10
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued
__________
9. Subsequent Events: (Continued)
During October, 1996, the Board of Directors approved the Company's
1996 Director's Stock Option Plan (Director's Plan). The Director's
Plan authorizes the automatic granting of nonqualified stock options to
purchase an aggregate of up to 200,000 shares of common stock to
nonemployee directors of the Company. The exercise price of the
options will be fair market value on the date of grant. Each
nonemployee director will receive an option to purchase 30,000 shares
(Initial Grant Option) on the date such person first becomes a
director. These shares may be exercised either, (1), over a five-year
period by cash, stocks, or similarly value property, with the options
vesting ratably over a 36-month period from the date of grant; or, (2),
immediately by delivery of promissory notes to the same provisions
described above for Director's Options. In addition, each nonemployee
director will receive an automatic grant of an option to purchase 5,000
shares (Annual Grant Options) on each annual anniversary of the date
that such person first becomes a director. Annual Grant Options are
immediately exercisable on the date of grant under terms similar to
those of the Initial Grant Option. Both Annual and Initial Grant
Options expire five years from the date of grant.
Consulting Agreement
During October, 1996, the Company entered into an agreement with an
outside consultant to provide certain financial, business, investor
relations and public relations consulting services to the Company for
a period of one (1) year. In exchange for their services, the Company
has agreed to pay the consultant $7,500 per month and to issue the
consultant options to purchase up to 50,000 shares of common stock at
any time beginning January 1, 1997 through March 31, 1999, at an
exercise price of $2.25 per share. In addition, unless the consulting
agreement is earlier terminated, the Company has agreed to issue
additional options on each of January 2, 1997, April 2, 1997 and June
30, 1997 to purchase 50,000 shares of common stock at an exercise
price of $2.25 per share. In addition, if the consultant is solely
responsible for arranging certain financing transactions, they may
receive additional compensation.
- 8 -
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION. Telechips Corporation (the "Company") was organized in
January 1991 and since its inception has been engaged primarily in the
research, design and development of the Company's Telechips Access(TM) products
and related software and other technology. The Company began marketing
commercial units of the Access Model 3000 to its customers during the last
quarter of 1995. During the quarter ending September 30, 1996, the Company
sold units of the Access Model 3000 with total revenues of approximately
$19,000.
On October 2, 1996, the Company completed a private placement of 4,188
shares of 4% Convertible Preferred Stock, face value $1,000 per share (the
"Preferred Shares"). The Preferred Shares were issued without registration
under the Securities Act of 1933, as amended (the "Act"), pursuant to
Regulation S promulgated under the Act (the "Regulation S Offering").
The Preferred Shares are convertible using a formula multiplying each
Preferred Share by 1,000 and dividing the result by the lower of $3.00 or the
fair market value of the Company's Common Stock on the date of conversion. The
Preferred Shares are convertible at any time beginning November 11, 1996 until
August 31, 1998. The Company received approximately $2.9 million in net
proceeds. In connection with the financing, the Company also issued Common
Stock Purchase Warrants to purchase 400,000 shares of Common Stock at an
exercise price of $2.25 per share as adjusted.
The Company is currently using the proceeds of the Regulation S
Offering to increase marketing activities and develop new products such as
World Wide Web browser software, electronic mail software, a large-screen and
color versions of the product, a public payphone product and card reader
adjuncts. Further, the Company is using the proceeds of the Regulation S
Offering to fund general corporate activities.
The Company expects to incur significant expenses in connection with
its operations, including expenses associated with hiring additional marketing
and sales personnel and the research and development of new product lines. The
Company anticipates, based on its current proposed growth plans and assumptions
relating to its growth and operations, that the proceeds from the Regulation S
Offering and private placements, borrowings and planned revenues will not be
sufficient to satisfy the Company's contemplated cash requirements for the next
12 months and that the Company will be required to raise additional funds
within the next 12 months. In addition, in the event that the Company's plans
change or its assumptions prove to be inaccurate (due to unanticipated
expenses, delays, problems, or otherwise), the Company would be required to
seek additional funding sooner than anticipated. Any such additional funding
could be in the form of additional equity capital. Further, in the event that
the Company receives a larger than anticipated number of purchase orders for
Telechips Access products, it may require resources substantially greater than
those that are currently available to the Company. In such event the Company
may be required to raise additional capital or to engage third parties (as
- 9 -
<PAGE> 12
to which there can be no assurance) to assist the Company in meeting such
orders. The Company is currently pursuing several potential funding
opportunities; however, the Company has no current commitments for additional
funding. There can be no assurance that any of such opportunities will result
in actual funding or that additional financing will be available to the Company
when needed, on commercially reasonable terms, or at all. If the Company is
unable to obtain additional financing if needed, it will likely be required to
curtail its marketing and manufacturing plans and possibly cease its
operations. Any additional equity financing may involve substantial dilution to
the Company's then-existing shareholders. The Company's independent
accountants have included an explanatory paragraph in their report on the
Company's financial statements for the year ended December 31, 1995, stating
that the Company has not, to date, recognized significant revenues from
product sales nor produced units in quantities which will yield a gross margin
adequate to cover product and operations costs and that these factors raise
substantial doubt about the Company's ability to continue as a going concern.
See "Liquidity and Capital Resources."
On August 19, 1996, Mr. Richard E. Salwen resigned from the Company's
Board of Directors and also on August 19, 1996, Mr. Bruce Chatterley was
appointed to the Board. On October 11, 1996, the Company's Board was expanded
to six members and Mr. Frank Vigilante and Mr. Richard Wolf were appointed
directors.
Mr. Chatterley, 34, has been Vice President-Core Services Product
Management for Ameritech since January 1996. He was previously Vice President
of Marketing at Ameritech Payphone Service. From February 1989 to July 1994
Mr. Chatterley was with US West. From June 1986 to February 1989 Mr.
Chatterley was with General Electric and from September 1984 to August 1986 he
was with IBM.
Mr. Vigilante, 66, was a director with Network Equipment Technologies
from April 1992 to August 1996. He has been a director of the Visiting Nurse
Association of Central Jersey since October 1991. Mr. Vigilante has also been
a director of the Arthritis Foundation of New Jersey since February 1986 and is
currently its Chairman. He was a consultant with Pyramid Technologies
Corporation from April 1987 to February 1995. Mr. Vigilante held various
positions with AT&T and in 1985 he became a Senior Vice President. Mr.
Vigilante retired from AT&T in 1987 after 30 years of service.
Mr. Wolf, 58, has been Executive Vice President of Robert E. La Blanc
Associates, Inc., a telecommunications, information technologies consulting and
investment banking firm specializing in voice, data, and video
telecommunications since March 1982. From July 1972 to March 1982, Mr. Wolf
was a manager with AT&T. From January 1962 to July 1972, Mr. Wolf held various
management positions in the engineering and marketing departments with New York
Telephone.
- 10 -
<PAGE> 13
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 as Compared to Nine Months Ended
September 30, 1995. There were sales revenues of approximately $71,900 for the
nine months ended September 30, 1996 as compared to no revenues for the nine
months ended September 30, 1995. In May 1996, a major customer placed their
first significant order. Telechips Access units at a cost of approximately
$23,000 were also supplied to customers as demos and trial units during the
nine months ended September 30, 1996 and were charged to advertising expense.
Commercial production had not commenced during the nine months ended September
30, 1995.
For the nine months ended September 30, 1996, operating expenses,
which consist of marketing, research and development and general administrative
expenses, were approximately $3,551,000 as compared to $1,902,000 for the nine
months ended September 30, 1995. The increase was due to increased operating
activity related to marketing the Telechips Access line of products, increasing
research and development activity related to new software and hardware products
and final modifications for the initial Telechips Access models and increased
general corporate activity as the company begins to emerge from the development
state into a fully operational entity.
Research and development expenses increased to approximately
$1,729,000 for the nine months ended September 30, 1996 from $1,121,000 for the
nine months ended September 30, 1995. The increase was due to increased
research and development activities relating to new software products such as
the World Wide Web browser software, electronic mail software, a large-screen
and color versions of the product, a public payphone product and card reader
adjuncts.
Marketing expenses increased to approximately $809,000 for the nine
months ended September 30, 1996 from $329,000 for the nine months ended
September 30, 1995. This increase was due primarily to increased marketing
efforts including hiring sales and marketing support staff, increased use of
collateral materials, trade shows, public relations, sales negotiations and
efforts at forming strategic alliances.
General and administrative expenses increased to approximately
$1,013,000 for the nine months ended September 30, 1996 from $452,000 for the
nine months ended September 30, 1995. This increase was due in part to
increased administrative personnel as well as increased corporate, legal,
investor relations and other administrative costs correlating with the
anticipated growth in the Company's operations.
Three Months ended September 30, 1996 as Compared to Three Months
Ended September 30, 1995. There were sales revenues of approximately $19,000
for the three months ended September 30, 1996 as compared to no revenues for
the three months ended September 30, 1995. In May 1996, a major customer
placed their first significant order. Commercial production had not commenced
during the three months ended September 30, 1995.
- 11 -
<PAGE> 14
For the three months ended September 30, 1996, operating expenses,
which consist of marketing, research and development and general administrative
expenses, were approximately $1,437,000 as compared to $846,000 for the three
months ended September 30, 1995. The increase was due to increased operating
activity related to marketing the Telechips Access line of products, increasing
research and development activity related to new software and hardware products
and final modifications for the initial Telechips Access models and increased
general corporate activity as the company begins to emerge from the development
state into a fully operational entity.
Research and development expenses increased to approximately $671,000
for the three months ended September 30, 1996 from $496,000 for the three
months ended September 30, 1995. The increase was due to increased research
and development activities relating to new software products such as the World
Wide Web browser software, electronic mail software, a large-screen and color
versions of the product, a public payphone product and card reader adjuncts.
Marketing expenses increased to approximately $355,000 for the three
months ended September 30, 1996 from $137,000 for the three months ended
September 30, 1995. This increase was due primarily to increased marketing
efforts including hiring sales and marketing support staff, increased use of
collateral materials, trade shows, public relations, sales negotiations and
efforts at forming strategic alliances.
General and administrative expenses increased to approximately
$412,000 for the three months ended September 30, 1996 from $212,000 for the
three months ended September 30, 1995. This increase was due in part to
increased administrative personnel as well as increased corporate, legal,
investor relations and other administrative costs correlating with the
anticipated growth in the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception (January 1991), the Company has financed its
operations principally through contract revenue from research and development
consulting agreements with National Semiconductor Corporation ("NSC"), private
placements of its securities and notes and the initial public offering of its
Common Stock and Warrants.
On April 11, 1995, the Company conducted the final closing of the sale
to private investors of an aggregate of 30 units (the "1994 Units"), each 1994
Unit consisting of (i) 16,087 shares of Common Stock and (ii) 50,000 Shares of
Preferred
- 12 -
<PAGE> 15
Stock (the "Private Placement"). The purchase price per 1994 Unit was $100,000.
The Company received gross proceeds of $3,000,000 with respect to the sale of
the 1994 Units, yielding net proceeds after the payment of fees and expenses of
approximately $2,500,000. The Private Placement resulted in the Company's
issuance of 482,600 shares of Common Stock and 1,500,000 shares of Preferred
Stock (convertible into 482,600 shares of Common Stock). The Company paid to
D.H. Blair Investment Banking Corp. ("D.H. Blair") in connection with the
Private Placement and the 1994 Note Financing an aggregate of $330,000 and
issued to D.H. Blair and its designees warrants to purchase up to an aggregate
of 304,038 shares of Common Stock. Howard Phillips, a director of the Company,
was Director of Corporate Finance of D.H. Blair until August 1995.
On September 1, 1995, the Company completed the sale (the "Bridge
Financing") to private investors of 17 units (the "Units"), each Unit
consisting of (i) an unsecured non-negotiable promissory note of the Company in
the principal amount of $100,000, due on the earlier of the consummation of an
initial public offering ("IPO") or July 31, 1996 (a "Bridge Note") and (ii)
20,000 shares of Series A Common Stock (the "Bridge Shares"). The purchase
price per Unit was $100,000. The Company received gross proceeds of $1,700,000
from the sale of such Units. After the payment of $170,000 in placement fees
to the Whale Securities Co., L.P. (the "Underwriter"), which acted as placement
agent for the Company with respect to the sale of such Units, and other
offering expenses of approximately $134,000, the Company received net proceeds
of approximately $1,396,000 in connection with the Bridge Financing.
The Company's sale of 17 Units resulted in the Company's issuance (in
connection with the Bridge Financing) of a total of $1,700,000 principal amount
of Bridge Notes and 340,000 Bridge Shares. The 340,000 Bridge Shares issued in
the Bridge Financing were included in the Selling Shareholders' Shares and were
registered by the Company in conjunction with the Company's initial public
offering described below.
On October 20, 1995, the Company completed its initial public offering
of 1,500,000 shares of Common Stock, par value $.01 ("Common Stock") and
redeemable warrants ("Warrants") to purchase 1,500,000 shares of Common Stock
at an exercise price of $5.00 per share (the "IPO"). In addition, the
Underwriter exercised its overallotment option to purchase an additional
225,000 Warrants. The Common Stock and the Warrants are traded on the Nasdaq
SmallCap Market under the symbols "TCHP" and "TCHPW," respectively.
Upon consummation of the IPO, the Company received net proceeds of
approximately $6,255,000. The Company used approximately $2,451,000 of the
proceeds from the IPO to repay the outstanding Bridge Notes, the $300,000 in
notes issued in 1994, accrued dividends on Preferred Stock, $250,000 of NSC
notes and interest on all of such indebtedness. Pursuant to the terms of an
agreement with NSC, dated March 1994, as restated August 31, 1994 and amended
September 20, 1994, $500,000 of debt owed to NSC was canceled, the Company paid
NSC $250,000 plus accrued and unpaid interest of $38,904, from the proceeds of
the IPO, and issued to NSC 229,306 shares of Common Stock and a Warrant to
purchase 20,108 shares of Common Stock at $3.11 per share.
- 13 -
<PAGE> 16
In addition, the Company issued nonredeemable warrants (the
"Underwriter's Warrants") to purchase 150,000 shares of Common Stock at an
exercise price of $7.70 per share and 150,000 warrants (each exercisable to
purchase one share of Common Stock at a price of $7.70 per share) at an
exercise price of $.154 per Warrant to the Underwriter. Further, all
outstanding shares of Preferred Stock and Series B Common Stock, par value $.01
("Series B Common Stock"), were converted to Series A Common Stock and the
Series A Common Stock was redesignated as Common Stock. Upon conversion of the
Preferred Stock, the Company paid an aggregate of $111,719 in accrued and
unpaid dividends to the holders of Preferred Stock ("Preferred Stockholders").
During November, 1995, the Company obtained a $1,200,000 revolving
line of credit from a commercial bank ("Line of Credit"). The Line of Credit
expires on December 13, 1996. The Line of Credit is collateralized by cash and
cash equivalents valued at 110% of outstanding draws. Interest is payable
monthly at the three-month U.S. Treasury Bill rate plus 3% (8.03% as of
September 30, 1996). Principal is due at maturity. As of the date of this
report, the Company has a zero balance on the Line of Credit.
On October 2, 1996, the Company completed the Regulation S Offering of
4,188 Preferred Shares. The Preferred Shares were issued without registration
under the Act, pursuant to Regulation S promulgated under the Act.
The Preferred Shares are convertible using a formula multiplying each
Preferred Share by 1,000 and dividing the result by the lower of $3.00 or the
fair market value of the Company's Common Stock on the date of conversion. The
Preferred Shares are convertible at any time beginning November 11, 1996 until
August 31, 1998. The Company received approximately $2.9 million in net
proceeds. In connection with the financing, the Company also issued Common
Stock Purchase Warrants to purchase 400,000 shares of Common Stock at an
exercise price of $2.25 per share as adjusted.
In March 1994, and as amended on February 1, 1996, the Company entered
into a License Agreement with Microsoft (the "MS License Agreement") to license
certain software to be used in the Company's products. The MS License
Agreement establishes minimum royalty payments. Beginning September 1, 1996,
the Company is obligated to make monthly minimum royalty payments. As of the
date of this report, the Company has prepaid royalties to Microsoft of
approximately $262,000. The MS License Agreement may only be terminated prior
to its expiration date upon a default by the parties. This license expires on
September 30, 1997, and there are no automatic renewal terms.
Over the next 12 months, the Company intends to focus on increasing
its marketing efforts and research and development for new proposed products.
The Company anticipates, based on its current proposed growth plans and
assumptions relating to its growth and operations, that the proceeds from the
Regulation S Offering, borrowings and planned revenues will not be sufficient
to satisfy the Company's contemplated cash requirements for the next 12 months
and that the
- 14 -
<PAGE> 17
Company will be required to raise additional funds within the next 12 months.
In addition, in the event that the Company's plans change or its assumptions
prove to be inaccurate (due to unanticipated expenses, delays, problems, or
otherwise), the Company would be required to seek additional funding sooner
than anticipated. Any such additional funding could be in the form of
additional equity capital. Further, in the event that the Company receives a
larger than anticipated number of initial purchase orders for Telechips Access
products, it may require resources substantially greater than those that are
currently available to the Company. In such event the Company may be required
to raise additional capital or to engage third parties (as to which there can
be no assurance) to assist the Company in meeting such orders.
The Company is currently pursuing several potential funding
opportunities; however, the Company has no current commitments for additional
funding. There can be no assurance that any of such opportunities will result
in actual funding or that additional financing will be available to the Company
when needed, on commercially reasonable terms, or at all. If the Company is
unable to obtain additional financing if needed, it will likely be required to
curtail its marketing and manufacturing plans and possibly cease its
operations. Any additional equity financing may involve substantial dilution to
the Company's then-existing shareholders. The Company's independent
accountants have included an explanatory paragraph in their report on the
Company's financial statements for the year ended December 31, 1995, stating
that the Company has not, to date, recognized significant revenues from
product sales nor produced units in quantities which will yield a gross margin
adequate to cover product and operations costs and that these factors raise
substantial doubt about the Company's ability to continue as a going concern.
- 15 -
<PAGE> 18
FORWARD LOOKING STATEMENTS
The statements that are not historical facts in this report are
"forward looking statements" as defined in the Securities Litigation Reform Act
of 1995 and as such involve substantial risks and uncertainties including, but
not limited to, the risks and uncertainties set forth under the caption "Risk
Factors" in the Company's Registration Statement on Form S-3 declared effective
by the Securities and Exchange Commission on October 25, 1996. Such statements
include the following specific statements:
PAGE 9: Paragraph 3; Sentence 1
Paragraph 4; Sentence 1
Paragraph 4; Sentence 2
Paragraph 4; Sentence 5
PAGE 10: Paragraph 1; Sentence 1
Paragraph 1; Sentence 3
PAGE 14: Paragraph 5; Each Sentence
PAGE 15: Paragraph 1; Sentence 1
Paragraph 1; Sentence 3
- 16 -
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults on Senior Securities
None.
Item 4. Matters Submitted to a Vote of Security Holders
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on From 8-K
a). Exhibits
Exhibit 4.1 Amended Certificate of
Designation, Number, Powers,
Preferences and Relative
Participating Optional, and Other
Special Rights and the
Qualifications, Limitations,
Restrictions, and Other
Distinguishing Characteristics of
Series A Preferred Stock
Exhibit 4.2 Form of Series A Preferred
Stock Certificate
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
b). Reports on Form 8-K
A current report was filed on October 16, 1996 to announce the
completion of a Regulation S Offering relating to the offering
of $2.9 million private placement of 4,188 shares of 4%
Convertible Preferred Stock, face value $1,000 per share (the
"Preferred Shares"). The Preferred Shares were issued without
registration under the Securities Act of 1933, as amended (the
"Act"), pursuant to Regulation S promulgated under the Act.
- 17 -
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
Undersigned thereunto authorized.
TELECHIPS CORPORATION
/s/ C.A. Burns Date: November __, 1996
- ----------------------------
C.A. Burns
Chief Executive Officer
/s/ Nelson B. Caldwell Date: November __, 1996
- ----------------------------
Nelson B. Caldwell
Vice President-Finance
- 18 -
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- ----------
<S> <C> <C>
4.1 Certificate of Designation, Number, Powers,
Preferences and Relative Participating
Optional, and Other Special Rights and the
Qualifications, Limitations, Restrictions,
and Other Distinguishing Characteristics
of Series A Preferred Stock
4.2 Form of Series A Preferred Stock Certificate
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 4.1
AMENDED
CERTIFICATE OF DESIGNATION, NUMBER, POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL, AND OTHER SPECIAL RIGHTS AND THE
QUALIFICATIONS, LIMITATIONS, RESTRICTIONS,
AND OTHER DISTINGUISHING CHARACTERISTICS OF
SERIES A PREFERRED STOCK
OF
TELECHIPS CORPORATION
We the undersigned President and Secretary of TELECHIPS CORPORATION DO
HEREBY CERTIFY:
I. The name of the corporation (hereinafter called the
"Corporation" is TELECHIPS CORPORATION.
II. The certificate of incorporation of the Corporation authorizes
the issuance of 3,000,000 shares of Preferred Stock of par value of $1.00 per
share and expressly vests in the Board of Directors of the Corporation the
authority provided therein to issue any or all of said shares in one or more
series and by resolution or resolutions to establish the designation, number,
full or limited voting powers, or the denial of voting powers, preferences and
relative, participating, optional, and other special rights and the
qualifications, limitations, restrictions, and other distinguishing
characteristics of each series to be issued; and all previously designated and
issued shares of the Corporation's Preferred Stock has been converted to Common
Stock in the Corporation.
III. The Board of Directors of the Corporation at a special meeting
held on August 19, 1996, adopted resolutions creating a new series of Class A
Preferred Stock of the Corporation with the designation, number, powers,
preferences and relative, participating, optional and other special rights and
the qualifications, limitations, restrictions and other distinguishing
characteristics set forth in that certain Certificate of Designation, Number,
Powers, Preferences and Relative, Participating, Optional, and Other Special
Rights and the Qualifications, Limitations, Restrictions and Other
Distinguishing Characteristics of Series A Preferred Stock of Telechips
Corporation filed with the Secretary of the State of Nevada on August 23, 1996
("Original Certificate of Designation").
IV. By unanimous written consent dated September 4, 1996, the
Board of Directors of the Corporation approved the amendment of the resolutions
adopted on August 23, 1996 and the description of Series A Preferred Stock of
the Corporation set forth in the Original Certificate of Designation to read in
their entirety as follows:
-1-
<PAGE> 2
RESOLVED, that Seven Thousand Five Hundred (7,500) of the Three
Million (3,000,000) authorized shares of Preferred Stock of the Corporation
shall be designated Series A Preferred Stock (the "Series A Preferred Stock")
and shall possess the rights and privileges set forth below:
A. Stated Value.
1. Each share of Series A Preferred Stock shall
have a stated (face) value of $1,000.00.
B. Dividends.
1. The holder of each issued and outstanding
share of Series A Preferred Stock shall be entitled to receive, when and as
declared by the Board of Directors of the Corporation, out of the assets at the
time legally available for such purpose, dividends at a rate of four percent
(4%) per annum on the stated value, payable semi-annually at the Company's
option in cash or in shares of the Common Stock of the Corporation at a
dividend conversion price equal to the lesser of (x) three dollars ($3.00) of
(y) the average closing bid price for the five (5) trading days prior to
payment. Such dividends shall accumulate until paid to the holders. If any
dividends payable on the Series A Preferred Stock with respect to any dividend
payment period are not paid for any reason, the right of the holders of the
Series A Preferred Stock to receive payment of such dividend shall not lapse or
terminate, but said unpaid dividend or dividends shall be added to the stated
value of the Series A Preferred Stock effective at the beginning of the
semi-annual period next succeeding the semi-annual period as to which such
dividends were not paid, and shall thereafter accrue additional dividends at
the above-stated dividend rate. Any dividend payment made on the Series A
Preferred Stock shall be credited against the earliest accrued but unpaid
dividend which has been added to the stated value of the Series A Preferred
shares and shall reduce the stated value by the amount of the dividend paid.
No dividends shall be declared or paid with respect to the Corporation's Common
Stock (other than a dividend payable solely in Common Stock of the
Corporation), or upon any other class of Preferred Stock of the Corporation
with a dividend preference subordinate to the dividend preference of Series A
Preferred Stock, unless a dividend of equal or greater amount per share (on an
as-if-converted to Common Stock basis) is first declared and paid with respect
to the Series A Preferred Stock.
2. No dividends shall be paid on the Series A
Preferred Stock if such payment would violate Nevada law.
C. Liquidation Preference.
1. In the event of any liquidation, dissolution
or winding-up of the Corporation, either voluntary or involuntary ( a
"Liquidation"), the holders of shares of the Series A Preferred Stock then
issued and outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus
-2-
<PAGE> 3
or earnings, before any payment shall be made to the holders of shares of the
Common Stock or upon any other series of Preferred Stock of the Corporation
with a liquidation preference subordinate to the liquidation preference of the
Series A Preferred Stock, an amount equal to one thousand dollars ($1,000) per
share, plus an amount equal to any unpaid dividends accumulated and unpaid on
each such share to and including the date of distribution on such share. If,
upon any Liquidation of the Corporation, the assets of the Corporation
available for distribution to its shareholders shall be insufficient to pay the
holders of shares of the Series A Preferred Stock and the holders of any other
series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series A Preferred Stock the full amounts to
which they shall respectively be entitled, the holders of shares of the Series
A Preferred Stock and the holders of any other series of Preferred Stock with
liquidation preference equal to the liquidation preference of the Series A
Preferred Stock shall receive all of the assets of the Corporation available
for distribution and each such holder of shares of the Series A Preferred Stock
and the holders of any other series of Preferred Stock with a liquidation
preference equal to the liquidation preference of the Series A Preferred Stock
shall share ratably in any distribution in accordance with the amounts due such
shareholders. After payment shall have been made to the holders of shares of
the Series A Preferred Stock of the full amount of which they shall be
entitled, as aforesaid, the holders of shares of the Series A Preferred Stock
shall be entitled to no further distributions thereon and the holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights
and preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
2. A merger or consolidation of the Corporation
with or into any other corporation, or a sale, lease, exchange, or transfer of
all or any part of the assets of the Corporation which shall not in fact result
in the liquidation (in whole or in part) of the Corporation and the
distribution of its assets to its shareholders shall not be deemed to be a
voluntary or involuntary liquidation (in whole or in part), dissolution, or
winding-up of the Corporation.
D. Conversion of Series A Preferred Stock.
The holder of Series A Preferred Stock shall have the
following conversion rights:
1. Right to Convert. Each share of Series A
Preferred Stock shall be convertible, on the Conversion Dates and at the
Conversion Prices set forth below, into fully paid and nonassessable shares of
Common Stock.
2. Mechanics of Conversion. Each holder of
Series A Preferred Stock who desires to convert the same into shares of Common
Stock shall provide notice ("Conversion Notice") via telecopy to the
Corporation. The original Conversion Notice and the certificate or
certificates representing the Series A Preferred Stock for which conversion is
elected, shall be delivered to the Corporation by international courier, duly
endorsed. The date
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<PAGE> 4
upon which a Conversion Notice is properly received by the Corporation shall be
a "Notice Date".
The Corporation shall use all reasonable efforts to issue and
deliver within three (3) business days after the Notice Date, to such holders
of Series A Preferred Stock at the address of the holder on the stock books of
the Corporation, a certificate or certificates for the number of shares of
Common Stock to which the holder shall be entitled as aforesaid; provided that
the original shares of Series A Preferred Stock to be converted are received by
the transfer agent or the Corporation within three business days after the
Notice Date and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. If the
original shares of Series A Preferred Stock to be converted are not received by
the transfer agent or the Corporation within three business days after the
Notice Date, the Conversion Notice shall become null and void.
3. Conversion Dates. The Series A Preferred
Stock shall become convertible into shares of Common stock at any time
commencing forty five (45) after the last day on which there is an original
issuance of the Series A Preferred Stock (the "Conversion Date").
4. Conversion Price. In the event accrued
dividends have been paid, the shares of Series A Preferred Stock shall be
convertible into the number of share of Common Stock according to the following
formula:
N x 1,000
----------------
Conversion Price
N= the number of shares of the Series A
Preferred Stock for which conversion is
being elected.
Conversion
Price= the lesser of (x) three dollars ($3.00) or
(y) the five (5) day average closing bid
price prior to conversion; provided, however,
that in all cases the Corporation shall pay
all accumulated but unpaid dividends with
respect to the shares of Series A Preferred
Stock being converted.
5. Automatic Conversion. Each share of Series A
Preferred Stock outstanding on August 31, 1998 automatically shall be converted
into Common Stock on such date at the Conversion Price then in effect, and
August 31, 1998 shall be deemed to be the Notice Date with respect to such
conversion. Also, upon consummation of a registered public offering with gross
proceeds of $10,000,000 or more (before underwriting, discounts and expenses),
each share of Series A Preferred Stock outstanding on the date of such
completion shall automatically be converted into Common Stock on such date at
the Conversion Price then
-4-
<PAGE> 5
in effect, provided that the Holders must receive written notice 30 days prior
to the first filing date of such offering and that the offering may not close
prior to 180 days from the date of issuance of the Series A Preferred Stock.
6. Fractional Shares. No fractional share shall
be issued upon the conversion of any shares, share or fractional share of
Series A Preferred Stock. All shares of Common Stock (including fractions
thereof) issuable upon conversion of shares (or fractions thereof) of Series A
Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
Corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the closing bid
price of the Corporation's Common Stock on the Notice Date multiplied by such
fraction.
7. Reservation of Stock Issuable Upon
Conversion. The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose
of effecting the conversion of the shares of the Series A Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock; and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock, the Corporation will
take such corporate action as may be necessary to increase its authorized but
unissued shares of Common stock to such number of shares as shall be sufficient
for such purpose.
8. Adjustment to Conversion Price.
(a) If, prior to the conversion of all
shares of Series A Preferred Stock, the number of outstanding shares of Common
Stock is increased by a stock split, stock dividend, or other similar event,
the Conversion Price shall be proportionately reduced, or if the number of
outstanding shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Conversion Price shall
be proportionately increased.
(b) If, prior to the conversion of all
shares of Series A Preferred Stock, there shall be any merger, consolidation,
exchange of shares, recapitalization, reorganization, or other similar event,
as a result of which shares of Common Stock of the Corporation shall be changed
into the same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity, then the
holders of Series A Preferred Stock shall thereafter have the right to purchase
and receive upon conversion of shares of Series A Preferred Stock, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore issuable upon conversion, such
shares of stock and/or securities as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of shares of Series A Preferred
Stock
-5-
<PAGE> 6
held by such holders had such merger, consolidation, exchange of shares,
recapitalization or reorganization not taken place, and in any such case
appropriate provisions shall be made with respect to the rights and interests
of the holders of the Series A Preferred Stock to the end that the provisions
hereof (including, without limitation, provisions for adjustment of the
Conversion Price and of the number of shares issuable upon conversion of the
Series A Preferred Stock) shall thereafter be applicable, as nearly as may be
practicable in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof. The Corporation shall not effect any
transaction described in this subsection unless the resulting successor or
acquiring entity (if not he Corporation) assumes by written instrument the
obligation to deliver to the holders of the Series A Preferred Stock such
shares of stock and/or securities as, in accordance with the foregoing
provisions, the holders of the Series A Preferred Stock may be entitled to
purchase.
(c) If any adjustment under this
subsection would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion
shall be the next higher number of shares.
E. Voting. Except as otherwise provided below
or by the General Corporation Law of the State of Nevada, the holders of the
Series A Preferred Stock shall have no voting power whatsoever, and no holder
of Series A Preferred Stock shall vote or otherwise participate in any
proceeding in which actions shall be taken by the Corporation or the
shareholders thereof or be entitled to notification as to any meeting of the
Board of Directors or the Shareholders.
F. Protective Provisions. So long as shares of
Series A Preferred Stock are outstanding, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law)
of the holders of at least a majority of the then outstanding shares of Series
A Preferred Stock; provided, however, that with respect to paragraph (e),
holders of Series A Preferred Stock shall vote with the holders of Common Stock
on an as converted basis and shall not vote separately as a class:
(a) alter or change the rights,
preferences or privileges of the shares of Series A Preferred Stock so as to
affect adversely the Series A Preferred Stock;
(b) create any new class or series of
stock having a preference over the Series A Preferred Stock with respect to
dividends, payments upon Liquidation (as provided for in Section B of this
Designation) or redemption except for a class of stock approved by J.P. Carey
Enterprise, Inc.;
(c) do any act or thing not authorized
or contemplated by this Designation which would result in taxation of the
holders of shares of the Series A Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended);
-6-
<PAGE> 7
(d) issue any capital stock (other than
dividends) which ranks senior to or on a parity with the Series A Preferred
Stock with respect to rights to receive distributions upon liquidation,
dissolution, or winding up of the Corporation or with respect to dividends; or
(e) enter into a merger in which the
Corporation is not the surviving Corporation, and which requires approval of
the common Stockholders; provided, however, that the provisions of this
subparagraph (e) shall not be applicable to any such merger if the authorized
capital stock of the surviving corporation immediately after such merger shall
include only classes or series of stock for which no such consent or vote would
have been required pursuant to this section if such class or series had been
authorized by the Corporation immediately prior to such merger or which have
the same rights, preferences and limitations and authorized amount as a class
or series of stock of the corporation authorized (with such consent or vote of
the Series A Preferred Stock) prior to such merger and continuing as an
authorized class or series at the time thereof.
G. Status of Converted Stock. In the event any
shares of Series A Preferred Stock shall be converted as contemplated by this
Designation, the shares so converted shall be canceled, shall return to the
status of authorized but unissued Preferred Stock of no designated class or
series, and shall not be issuable by the Corporation as Series A Preferred
Stock.
H. Taxes. All shares of Common Stock issued
upon conversion of Series A Preferred Stock will be validly issued, fully paid
and nonassessable. The Corporation shall pay any and all documentary stamp or
similar issue or transfer taxes that may be payable in respect of any issue or
delivery of shares of Common Stock on conversion of Series A Preferred Stock
pursuant hereto. The Corporation shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the
Series A Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such transfer has
paid to the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid or that no such tax
is payable. The Corporation shall adjust the amount of dividends paid or
accrued so as to indemnify the holders of Preferred Stock against any
withholding or similar tax in respect of such dividends.
FURTHER RESOLVED, that the statements contained in the
foregoing resolutions creating and designating the said Series A Preferred
Stock and fixing the number, powers, preferences and relative, optional,
participating, and other special rights and the qualifications, limitations,
restrictions, and other distinguishing characteristics thereof shall, upon the
effective date of said series, be deemed to be included in and be a part of the
certificate of incorporation of the Corporation pursuant to the provisions of
the General Corporation Law of the State of Nevada.
-7-
<PAGE> 8
V. One Thousand Five Hundred (1,500) shares of the
previously authorized Six Thousand Eight Hundred Seventy-Five (6,875) shares of
Series A Preferred Stock of the Corporation have been issued and the holder of
all of such shares has consented to and approved the amendments reflected in
Section IV hereof.
VI. There are no classes or series of stock of the
Corporation which are senior to the Series A Preferred Stock of the Corporation
as to the payment of distributions upon dissolution of the Corporation,
regardless of any limitation or restriction on the voting power of such class
or series.
-8-
<PAGE> 9
Signed on September 9, 1996. Telechips Corporation
By: /s/ C.A. Burns
-------------------------------
Print Name: C.A. Burns
Title: President
By: /s/ Nelson B. Caldwell
-------------------------------
Print Name: Nelson B. Caldwell
Title: Secretary
STATE OF NEVADA
COUNTY OF WASHOE
This instrument was acknowledged before me on September 9, 1996, by
/s/ C.A. Burns and /s/ Nelson B. Caldwell, as President and Secretary,
respectively, of Telechips Corporation.
[NOTARY SEAL] /S/ Elizabeth Nicholson
-----------------------------------
Notary Public
My Commission Expires: August 11, 1999
-9-
<PAGE> 1
Exhibit 4.2
[FRONT]
[EDGAR DESCRIPTION: Stock Certificate with eagle on top left hand corner
facing west with gold seal on the bottom left hand corner surrounded by
geometrical boarder]
A STOCKHOLDER MAY OBTAIN A COPY OF A STATEMENT SETTING FORTH IN FULL OR
SUMMARIZING THE VOTING POWERS DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS, AND RELATIVE RIGHTS OF THE VARIOUS CLASSES OR SERIES OF THE
CORPORATIONS STOCK AT THE OFFICE OF THE COMPANY 680 S. MCCARREN BLVD., RENO,
NEVADA 89509
INCORPORATED UNDER THE LAWS OF
NO. THE STATE OF NEVADA SHARES
TELECHIPS CORPORATION
THIS CORPORATION IS AUTHORIZED TO ISSUE 3,000,000 SHARES OF
PREFERRED STOCK OF WHICH 7,500 SHARES ARE DESIGNATED AS SERIES
A PREFERRED STOCK WITH A STATED VALUE OF $1,000.00 PER SHARE.
THIS CERTIFIES THAT ______________________________________ IS THE OWNER OF
__________________ Shares of the SERIES A PREFERRED STOCK
transferable only on the books of the Corporation by
the holder hereof in person or by Attorney upon
surrender of this Certificate properly endorsed.
In Witness Whereof the said Corporation has caused
this Certificate to be signed by its duly authorized
officers and to be sealed with the Seal of of the
Corporation
this ____________ day of _____________, A.D. 19____
______________________ ____________________________
C.A. BURNS, PRESIDENT NELSON B. CALDWELL, SECRETARY
<PAGE> 2
[BACK]
THE SHARES OF PREFERRED STOCK OF TELECHIPS CORPORATION (THE "ISSUER")
REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT TO REGULATION S,
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND HAVE
NOT BEEN REGISTERED UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR
THE ACCOUNT OF A "U.S. PERSON" (AS THAT TERM IS DEFINED IN REGULATION S) DURING
THE PERIOD COMMENCING ON THE SALE OF THESE SECURITIES AND ENDING ON THE
FORTY-FIFTH (45TH) DAY FOLLOWING COMPLETION OF THE REGULATION S OFFERING OF THE
ISSUER PURSUANT TO WHICH THESE SHARES HAVE BEEN ISSUED, WHICH DAY IS
__________________, 1966 (THE "RESTRICTED PERIOD"). THE SHARES OF PREFERRED
STOCK REPRESENTED BY THIS CERTIFICATE MAY FIRST BE CONVERTED INTO COMMON STOCK
OF THE ISSUER ON THAT DATE WHICH IS FORTY-FIVE (45) DAYS FOLLOWING COMPLETION
OF THE REGULATION S OFFERING OF THE ISSUER PURSUANT TO WHICH THESE SHARES HAVE
BEEN ISSUED. THE ISSUER WILL NOTIFY THE TRANSFER AGENT OF THE DATE OF
COMPLETION OF SUCH OFFERING AND OF THE EXPIRATION OF SUCH RESTRICTED PERIOD.
FOLLOWING EXPIRATION OF THE RESTRICTED PERIOD, THESE SHARES MAY NOT BE OFFERED
OR SOLD UNLESS SUCH OFFER OR SALE IS REGISTERED OR EXEMPT FROM REGISTRATION
UNDER THE ACT.
<PAGE> 1
EXHIBIT 11
TELECHIPS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 1,97 242 1,971 242
Shares, warrants and options treated as common
share equivalent pursuant to SEC Staff Accounting
Bulletin Topic 4d 1,699 1,699 1,699 1,699
------ ------ ------ ------
Total common and common equivalent shares 3,670 1,941 3,670 1,941
------ ------ ------ ------
Net loss $1,447 $ 908 $3,545 $1,987
====== ====== ====== ======
Loss per common and common
equivalent shares $(0.39) $(0.47) $(0.97) $(1.02)
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR SEPTEMBER 30, 1996 AS FILED ON FORM 10-QSB
WITH THE SECURITIES EXCHANGE COMMISSION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,282,200
<SECURITIES> 0
<RECEIVABLES> 1,673
<ALLOWANCES> 0
<INVENTORY> 1,699,747
<CURRENT-ASSETS> 3,036,521
<PP&E> 1,099,946
<DEPRECIATION> 62,047
<TOTAL-ASSETS> 4,472,832
<CURRENT-LIABILITIES> 1,195,764
<BONDS> 0
0
2,137,585
<COMMON> 38,631
<OTHER-SE> 1,071,791
<TOTAL-LIABILITY-AND-EQUITY> 4,472,832
<SALES> 71,947
<TOTAL-REVENUES> 71,947
<CGS> (90,958)
<TOTAL-COSTS> (90,958)
<OTHER-EXPENSES> 1,728,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,544,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,544,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,544,907)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
</TABLE>
