<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 2
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from __________ to __________
Commission file number 0-26764
TELECHIPS CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Nevada 88-0266392
- ---------------------------- -------------------
(State of other juris- (I.R.S. Employer
disction of incorporation Identification No.)
or organization)
<TABLE>
<S> <C> <C>
6880 S. McCarran Blvd., Reno, Nevada 89509 Issuer's telephone number: (702) 824-5555
- --------------------------------------------------- --------------
(Address of principal (Zip Code)
executive offices)
</TABLE>
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01
------------------------------
(Title of Class)
Common Stock purchase warrants
------------------------------
(Title of Class)
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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year: $20,700
Aggregate market value of the voting stock held by non-affiliates as
of March 28, 1996: $18,147,036
Number of shares of Common Stock outstanding as of March 28,
1996: 4,104,406
Documents Incorporated by Reference: None.
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders
Telechips Corporation
We have audited the accompanying balance sheets of Telechips Corporation (a
development stage company) as of December 31, 1995 and 1994, and related
statements of operations, shareholders' equity (deficit), and cash flows for
the years then ended and for the period from inception (January 7, 1991) to
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Telechips Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended and for the period from January 7, 1991 to
December 31, 1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has not, to date, earned any significant
revenues from product sales nor produced units in quantities and at a cost
which will yield a gross margin adequate to cover its ongoing costs of
operations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of the uncertainty.
Sacramento, California
March 19, 1996
F-1
<PAGE> 3
TELECHIPS CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
ASSETS 1995 1994
---- ----
<S> <C> <C>
Current assets:
Cash $2,702,701 $ 313,011
Accounts Receivable 7,339 --
Inventory 831,664 --
Prepaid expenses 101,814 --
---------- -----------
Total current assets 3,643,518 313,011
---------- -----------
Equipment and tooling, net 793,321 79,882
Note receivable from shareholder -- 51,107
Prepaid expenses 44,680 --
Deposits and other assets 34,312 97,312
Prepaid royalties 285,194 262,500
---------- -----------
$4,801,025 $ 803,812
---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 437,393 $ 181,370
Accrued expenses 18,303 26,386
---------- -----------
Total current liabilities 455,696 207,756
---------- -----------
Notes payable -- 550,000
Accrued interest on notes payable -- 26,258
------------ -----------
Total liabilities 455,696 784,014
---------- -----------
Convertible debt -- 500,000
------------ -----------
Series A 10% cumulative convertible redeemable preferred stock, par value
$1.00 per share, 1,950,000 shares authorized, 625,000 issued and
outstanding at December 31, 1994, converted to common stock in 1995 -- 912,370
(Note 10) ------------ -----------
Shareholders' equity (deficit):
Common stock, par value $.01, 10,200,000 shares authorized,
3,863,106 issued and outstanding at December 31, 1995 (Note 10) 38,631 --
Series A common stock, par value $.01, 9,000,000 shares
authorized, 201,083 issued and outstanding at December 31, 1994,
converted to common stock in 1995 (Note 10) -- 2,011
Series B common stock, par value $.01, 1,200,000 shares
authorized, 241,300 issued and outstanding, converted to common
stock in 1995 (Note 10) -- 2,413
Paid-in capital 12,218,616 77,068
Retained earnings (deficit accumulated) during the development stage (4,862,117) (1,474,064)
----------- ------------
7,395,130 (1,392,572)
Less: Notes receivable from shareholders (Note 10) (3,049,801) --
----------- ----------
Total shareholders' equity (deficit) 4,345,329 (1,392,572)
---------- -----------
$4,801,025 $ 803,812
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 4
TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31, Period From
------------ January 7, 1991 to
1995 1994 December 31, 1995
---- ---- ------------------
<S> <C> <C> <C>
Sales revenue $ 20,700 $ -- $ 20,700
Contract revenue -- 245,365 2,652,274
Cost of sales (33,783) -- (33,783)
Contract research and development costs -- (207,015) (2,080,188)
------------ ------------ ------------
(13,083) 38,350 559,003
Operating expenses:
Marketing 572,053 259,589 1,075,019
General and administrative 730,577 295,959 1,288,748
Research and development 1,619,788 959,617 2,579,405
------------ ------------ ------------
Income (loss) from operations (2,935,501) (1,476,815) (4,384,169)
------------ ------------ ------------
Other income (expense):
Interest income 38,000 2,875 42,054
Interest (expense) (209,757) (29,450) (239,207)
Amortization of 1995 Bridge financing costs (280,795) -- (280,795)
------------ ------------ ------------
Total other income (expense) (452,552) (26,575) (477,948)
------------ ------------ ------------
Net loss $(3,388,053) $(1,503,390) $(4,862,117)
============ ============ ============
Net loss per common and common equivalent shares $ (1.47) $ (0.70) $ (2.29)
============ ============ ============
Weighted average common shares 2,300,896 2,141,707 2,119,655
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 5
TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
for the Period from January 7, 1991 (inception) to December 31, 1995
<TABLE>
<CAPTION>
Common Stock Common Stock
-------------------- --------------------
Series A Series B
-------- --------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 7, 1991 (inception) -- $ -- -- $ -- -- $ --
Issuance of common stock; May 1991 at
$0.025 per share 241,300 2,413 -- -- -- --
Net income from inception to December 31,
1991 -- -- -- -- -- --
--------- --------- --------- -------- ---------- --------
Balance at December 31, 1991 241,300 2,413 -- -- -- --
Net income for the year ended December 31,
1992 -- -- -- -- -- --
--------- --------- --------- -------- ---------- --------
Balance at December 31, 1992 241,300 2,413 -- -- -- --
Issuance of common stock:
July 1993 at $0.025 per share 60,325 603 -- -- -- --
Net loss for the year ended December 31,
1993 -- -- -- -- -- --
--------- --------- --------- -------- ---------- --------
Balance at December 31, 1993 301,625 3,016 -- -- -- --
Split and conversion of common stock into Series B
common stock and placement of half of the
resulting Series B shares (241,300) into escrow
(See Note 10) (301,625) (3,016) -- -- 241,300 2,413
Issuance of Series A common stock:
October 1994, $0.497 per share -- -- 148,801 1,488 -- --
November 1994, $0.497 per share -- -- 52,282 523 -- --
Accrual of Series A Preferred dividends -- -- -- -- -- --
Net loss for the year ended December 31, 1994 -- -- -- -- -- --
--------- --------- --------- -------- ---------- --------
Balance at December 31, 1994 -- -- 201,083 2,011 241,300 2,413
Issuance of Series A common stock:
January 1995, $0.497 per share -- -- 32,173 322 -- --
February 1995, $0.497 per share -- -- 60,325 603 -- --
April 1995, $0.497 per share -- -- 189,019 1,890 -- --
September 1995, $0.38 per share -- -- 340,000 3,400 -- --
Issuance of common stock:
October 1995 (IPO), $5.00 per share 1,500,000 15,000 -- -- -- --
October 1995 (exercise of Founders' options
for notes receivable), $5.10 per share
(See Note 10) 587,300 5,873 -- -- -- --
Accrual of Series A Preferred dividends -- -- -- -- -- --
Conversion of convertible debt upon close of IPO
(See Note 9) 229,306 2,293 -- -- -- --
Conversion of Series A Preferred stock into common
stock upon close of IPO (See Note 10) 482,600 4,826 -- -- -- --
Conversion of Series A and B common stock into
common stock upon close of IPO (See Note 10) 1,063,900 10,639 (822,600) (8,226) (241,300) (2,413)
Accrual of interest on notes receivable,
collateralized by common stock -- -- -- -- -- --
Net loss for the year end December 31, 1995 -- -- -- -- -- --
--------- --------- --------- -------- ---------- --------
Balance at December 31,1995 3,863,106 $38,631 -- $ -- -- $ --
========= ======= ========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Notes
Retained Receivable Total
Earnings Collateralized Shareholders'
Paid-In (Accumulated by Common Equity
Capital Deficit) Stock (Deficit)
------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at January 7, 1991 (inception) $ -- $ - $ -- $ --
Issuance of common stock; May 1991 at $0.025 per share 3,587 -- -- 6,000
Net income from inception to December 31, 1991 -- -- -- --
--------- --------- --------- ----------
Balance at December 31, 1991 3,587 -- -- 6,000
Net income for the year ended December 31, 1992 -- 33,269 -- 33,269
--------- --------- --------- ---------
Balance at December 31, 1992 3,587 33,269 -- 39,269
Issuance of common stock:
July 1993 at $0.025 per share 897 -- -- 1,500
Net loss for the year ended December 31, 1993 -- (3,943) -- (3,943)
--------- ---------- ---------- -----------
Balance at December 31, 1993 4,484 29,326 -- 36,826
Split and conversion of common stock into Series B common
stock and placement of half of the resulting Series B
shares (241,300) into escrow (See Note 10) 603 -- -- --
Issuance of Series A common stock:
October 1994, $0.497 per share 60,403 -- -- 61,891
November 1994, $0.497 per share 21,222 -- -- 21,745
Accrual of Series A Preferred dividends (9,644) -- -- (9,644)
Net loss for the year ended December 31, 1994 -- (1,503,390) -- (1,503,390)
---------- ----------- ---------- -----------
Balance at December 31, 1994 77,068 (1,474,064) -- (1,392,572)
Issuance of Series A common stock:
January 1995, $0.497 per share 14,016 -- -- 14,338
February 1995, $0.497 per share 26,281 -- -- 26,884
April 1995, $0.497 per share 82,347 -- -- 84,237
September 1995, $0.38 per share 102,704 -- -- 106,104
Issuance of common stock:
October 1995 (IPO), $5.00 per share 6,239,605 -- -- 6,254,605
October 1995 (exercise of Founders' options
for notes receivable), $5.10 per share (See Note 10) 2,989,357 -- (2,995,230) --
Accrual of Series A Preferred dividends (102,075) -- -- (102,075)
Conversion of convertible debt upon close of IPO
(See Note 9) 497,707 -- -- 500,000
Conversion of Series A Preferred stock into common
stock upon close of IPO (See Note 10) 2,237,035 -- -- 2,241,861
Conversion of Series A and B common stock into common
stock upon close of IPO (See Note 10) -- -- -- --
Accrual of interest on notes receivable, collateralized by
common stock 54,571 -- (54,571) --
Net loss for the year end December 31, 1995 -- (3,388,053) -- (3,388,053)
----------- ------------ ----------- -----------
Balance at December 31,1995 $12,218,616 $(4,862,117) $(3,049,801) $4,345,329
=========== ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 6
TELECHIPS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31, Period From
------------ January 7, 1991 to
1995 1994 December 31, 1995
---- ---- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(3,388,053) $(1,503,390) $(4,862,117)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 18,812 5,635 29,848
Note receivable expensed as salary 48,750 -- 48,750
Amortization of 1995 Bridge financing costs 409,995 -- 409,995
Net effect of changes in:
Accounts receivable (7,339) 130,496 (7,339)
Inventory (831,664) -- (831,664)
Prepaid expenses (146,494) -- (146,494)
Deposits 63,000 (97,312) (34,312)
Accrued interest on note receivable 2,357 (2,357) --
Prepaid royalties (22,693) (262,500) (285,193)
Accounts payable 256,023 138,999 437,393
Accrued expenses (8,083) 26,386 18,303
Accrued interest on notes payable (26,258) 26,258 --
Deferred revenue -- (82,500) --
------------ ------------ ------------
Net cash used in operating activities (3,631,647) (1,620,285) (5,222,830)
------------ ------------ ------------
Cash flows from investing activities:
Issuance of note receivable -- (48,750) (48,750)
Purchase of equipment and tooling (732,252) (57,731) (817,170)
------------ ------------ ------------
Net cash used in investing activities (732,252) (106,481) (865,920)
------------ ------------ ------------
Cash flows from financing activities:
Loan proceeds 1,290,005 1,050,000 2,340,005
Proceeds from issuance of common stock 6,486,168 83,636 6,571,304
Proceeds from issuance of preferred stock 1,339,135 902,726 2,241,861
Repayment of notes payable (2,250,000) -- (2,250,000)
Payment of accrued Series A Preferred dividends (111,719) -- (111,719)
------------ ------------ ------------
Net cash provided by financing activities 6,753,589 2,036,362 8,791,451
------------ ------------ ------------
Net increase in cash 2,389,690 309,596 2,702,701
-----------
Cash at beginning of period 313,011 3,415 --
------------ ------------ ------------
Cash at end of period $ 2,702,701 $ 313,011 $ 2,702,701
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 7
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
Nature of Business, Customer and Product Concentration
Telechips Corporation, a development stage company (Company), was
incorporated in Nevada on January 7, 1991, and began operations May
22, 1991. The Company designs and manufactures graphic display
telephone equipment, peripheral devices and enhancements and related
software applications. Currently, the Company has a small number of
customers and is marketing only one product line.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results
could differ from those estimates.
Cash
For purposes of reporting cash flows, the Company considers all
temporary cash investments with an original maturity of three months
or less to be cash equivalents. As of December 31, 1995, the Company
had on deposit with two financial institutions $903,739, which
exceeded Federal Deposit Insurance Corporation insurable limit of
$100,000. To date, the Company has not incurred any losses on these
deposits.
Inventory
Inventory consists primarily of parts and components (raw materials)
and is stated at the lower of cost (average cost) or market.
Equipment and Tooling
Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
which range from 5 to 7 years. The cost and related accumulated
depreciation of property sold or retired are removed from the accounts
and the resulting gain or loss is included in current income.
Maintenance and repairs are charged to expense when incurred.
Expenditures for additions and improvements, where significant in
amount, are capitalized.
Tooling is amortized over the shorter of the useful life of the
tooling using the straight- line method or over the related product
life-cycle using a units of production method.
F-6
<PAGE> 8
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
1. Summary of Significant Accounting Policies, continued:
Contract Revenues
Contract revenues are recognized on the percentage-of-completion
method. Research and development costs are charged to contract
research and development costs when incurred. Payments received in
advance are deferred and not recognized as revenue until the services
are performed.
Research and Development Costs
Research and development costs not related to contracts are charged to
operations as incurred.
Prepaid Royalties
Prepaid royalties are expensed at a rate of $35.00 per unit as sales
of telephone equipment are recognized.
Income Tax
The state of Nevada imposes no corporate income tax. Prior to
November 1994, the Company maintained Subchapter S status for Federal
tax purposes. The income or loss of the Company was included in the
tax returns of the individual shareholders. Subsequent to the Company
obtaining equity financing in 1994, the Company converted to a C
corporation. 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.
Net Loss Per Common Share
Net loss per common share and common equivalent share is computed
using the weighted average number of common and common equivalent
shares outstanding during each period.
SFAS No. 123
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 had
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.
F-7
<PAGE> 9
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
2. Going Concern:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has not, to
date, recognized any significant revenues from product sales nor
produced units in quantities which will yield a gross margin adequate
to cover product and operations costs. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of the uncertainty.
The Company recently consummated a contract to supply its ThinPhone
product to a major insurance company and expects to receive
significant purchase orders under this contract . However, as of the
date of the report, such purchase orders have not been released. The
Company is also in the process of consummating various other
agreements related to product sales and joint product development
work. Based on quotes from manufacturers under contract agreements
with the Company, the Company anticipates it will be able to produce
commercial units at a cost that will yield a gross margin, which
combined with anticipated product sales, will adequately cover cost of
product and operations and produce positive cash flow. However, there
can be no assurance that such efforts will be successful.
3. Inventory:
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Raw Materials $688,802 $ --
Work-in-Process 118,333 --
Finished Goods 24,529 --
-------- --------
$831,664 $ --
======== ========
</TABLE>
4. Equipment and Tooling:
Equipment and tooling consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Tooling $659,506 $ 50,000
Computer and other equipment 81,105 36,964
Furniture and fixtures 44,086 3,954
Leasehold improvements 38,472 --
-------- --------
823,169 90,918
Less accumulated depreciation and amortization 29,848 11,036
-------- --------
Equipment, net $793,321 $ 79,882
======== ========
</TABLE>
F-8
<PAGE> 10
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
5. Notes Receivable:
During 1994, the Company loaned a shareholder an aggregate amount of
$48,750. The note bears interest at an annual rate of 7% and was due
November, 1996. The note including accrued interest of $5,770 was
canceled and charged to salary expense in December, 1995.
6. Notes Payable:
Notes payable consist of the following at:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Note payable to Customer (see Note 11), interest at 10%
accrued from April, 1994 until repayment. The note
including accrued interest of $38,904 was paid
October, 1995. $ -- $250,000
Notes payable interest at 10%, principal and accrued
interest due upon the closing date of a public offering
of stock by the Company. The notes including accrued
interest of $31,740 were paid October, 1995. -- 300,000
------------- --------
Total $ -- $550,000
============= ========
</TABLE>
7. 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 the three-month U.S. Treasury Bill rate plus 3% (8.2% at
December 31, 1995). Principal is due at maturity. The line of credit
expires December 13, 1996. At December 31, 1995, there were no
outstanding draws. Subsequent to December 31, 1995, the Company
borrowed $354,289 on the line of credit.
8. 1995 Bridge Financing:
On September 1, 1995, the Company completed the sale to private
investors of 17 units (the Units), each unit consisting of (1) an
unsecured, nonnegotiable promissory note of the Company in the
principal amount of $100,000, bearing interest initially at the rate
of 8% per annum, increasing to 12% per annum, payable semiannually, in
arrears, with the principal and any accrued interest and unpaid
interest due on the earlier of the consummation of an IPO or July 31,
1996; and (2) 20,000 shares of Series A common stock (the 1995 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 placement agent
and other offering expenses of approximately $134,000, the Company
received net proceeds of approximately $1,396,000 of the total
proceeds of $1,700,000. The fair market value of the 1995 Bridge
Shares ($129,200) was allocated to Series A Common Stock and Paid-
F-9
<PAGE> 11
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
8. 1995 Bridge Financing, continued
In Capital in the amounts of $3,400 and $125,800, respectively, and
$1,570,800 of the total proceeds was allocated to debt. Aggregate
financing costs of $303,891 was allocated between unamortized 1995
Bridge financing costs and paid-in capital in the amounts of $280,795
and $23,096, respectively. The notes including accrued interest of
$18,630 were repaid upon completion of the IPO. Unamortized 1995
Bridge financing costs were expensed and additional Bridge interest of
$129,200 was accreted and expensed.
9. Convertible Debt:
The convertible debt consisted of a $500,000 note payable, noninterest
bearing, converted at the time the Company issued shares to the
Customer (see Note 11) equivalent to 7% of the outstanding stock of
the Company. Common shares amounting to 229,306 were issued to the
Customer in October, 1995.
10. Preferred Stock and Shareholder's Equity:
1994 Private Placement Offering
On October 31, 1994, the Company initiated a private offering of stock
to accredited investors (Offering). The Offering consisted of 20
units, later expanded to 30 units by vote of the shareholders, each
unit consisting of 16,087 shares of Series A Common Stock and 50,000
shares of Series A 10% Convertible Cumulative Redeemable Preferred
Stock (Series A Preferred Stock). The Offering was completed in six
separate closings, two of which occurred during 1994. The Placement
Agent for the Offering received, in addition to certain fees, an
option to purchase additional shares equivalent to 30% of the units
sold at approximately $3.11 per share for Series A Common Stock and
$1.00 per share for Series A Preferred Stock. The options expire five
years from the date of issue.
Effective concurrent with the Offering, 241,300 shares of Series B
Common Stock issued in the name of the original common shareholders,
were placed in Escrow to be released upon either: (1) the Company
achieving certain financial goals as determined in the Escrow
Agreement; or (2) if a sale of the Company nets certain proceeds as
determined in the Escrow Agreement. The Company expects that the
release of the Escrow Shares will be deemed compensatory and,
accordingly, will result in substantial charges to earnings equal to
the fair market value of the Escrow Shares as of the date on which
they are released.
The holders of the Series A 10% Preferred Stock were entitled to
cumulative, annual dividends of 10% which were due and payable upon
redemption or conversion.
In anticipation of the 1994 Private Placement Offering, the Company
issued promissory notes (Notes) in the amount of $300,000 with annual
interest at 10% (see Note 6). The holders of the Notes received
48,260 warrants to purchase Series A Common Stock at an exercise price
of $2.49 per share. The warrants expire five years from the date of
issue.
F-10
<PAGE> 12
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
10. Preferred Stock and Shareholder's Equity, continued:
In connection with the Notes, the Placement Agent for the Offering
received 14,478 warrants to purchase shares of Series A Common Stock
at an exercise price of $2.49 per share. The warrants expire five
years from the date of issue.
Other Warrants
As part of an agreement between the Company and a Customer, the
Customer received 20,108 warrants to purchase common stock at $3.11
per share (see Note 11).
1994 and 1995 Stock Option Plans
In July, 1994, the Company adopted a Stock Option Plan (Plan) that
provides for a maximum of 48,260 shares of the Company's authorized
but unissued common stock, par value $.01 per share, to be available
for grant as Non-Statutory and/or Incentive Stock Options. In August,
1995, the Company adopted the 1995 Stock Option Plan that provides for
a maximum of 345,000 shares of the Company's authorized but unissued
common stock par value of $.01 per share to be available for grant as
non-statutory and an incentive stock option with substantially
identical terms to the 1994 Stock Option Plan.
NON-STATUTORY OPTIONS: Non-Statutory Options may be granted to
persons who are employees, officers or directors of, or consultants or
advisors to the Company, at an exercise price determined by the Board
of Directors at the date of grant. The exercise and expiration period
shall be set forth in the applicable option agreement. No shares have
been granted under this portion of the Plan.
INCENTIVE STOCK OPTIONS: Incentive Stock Options may be granted only
to employees of the Company at an exercise price of at least fair
market value, or not less than 110% of fair market value for any
owners of stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (10% owners), as
determined by the Board of Directors at the date of grant. The
exercise period for options granted to any 10% owners shall not exceed
five years from the date of grant. The remaining options expire 10
years from the date of grant. The options generally vest at 25% one
year from the initial date of employment or date of grant and the
remainder ratably over 36 months.
At December 31, 1995, there were 121,726 options outstanding and
35,110 exercisable as follows:
<TABLE>
<CAPTION>
Exercise
Date of Grant Granted Exercisable Price Expiration Date
------------- ------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
May, 1995 40,418 16,181 $3.11 May, 2005
July, 1995 7,842 -- $3.51 July, 2005
October, 1995 64,667 18,929 $4.75 October, 2005
November, 1995 23,200 -- $5.25 November, 2005
------- --------
138,127
Canceled (14,401)
--------
Total 121,726 35,110
======= ======
</TABLE>
F-11
<PAGE> 13
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
10. Preferred Stock and Shareholder's Equity, continued:
During January, 1996, the Company granted 14,750 additional options
with an expiration date of January, 2006 and exercise price of $5.125.
During February, 1996, the Company granted 82,900 additional options
with an expiration date of February, 2006, and an exercise price of
$6.875. None of these options are currently exercisable.
Initial Public Offering of Stock
On October 20, 1995, the Company completed the public sale (IPO) of
1,500,000 shares of common stock at a price of $5.00 per share and
1,725,000 (1,500,000 offered plus 225,000 overallotment) redeemable
warrants to purchase common stock at a price of $.10 per warrant,
which warrant entitles the owner to purchase one share of common stock
at an exercise price of $5.00 (Redeemable Warrants). The warrants
expire October, 2000 and are redeemable by the Company, with the
consent of the underwriter, upon 30 days' notice at any time
commencing October 16, 1996, at a price of $.10 per warrant, provided
that the closing bid quotation of the common stock of the Company has
been $7.50 for 30 days prior to giving notice.
The IPO yielded total proceeds of $7,672,500 and net proceeds of
approximately $6,255,000 after deducting the underwriter's discount of
$767,250, and underwriter's fees, legal and other financing costs
aggregating approximately $650,250. In addition, the Company sold to
the Underwriter for an aggregate of $150, warrants (Underwriter's
Warrants) to purchase up to 150,000 shares of common stock at an
exercise price of $7.70 per share and/or up to 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. The
Underwriter's Warrants are exercisable over a four-year period
beginning October 16, 1996.
The Company also granted to the Underwriter an overallotment option,
expiring November 30, 1995, to purchase up to 225,000 additional
shares of common stock and/or 225,000 additional warrants at $5.00 and
$.10, respectively, less underwriting discounts and commissions. The
warrant overallotment was exercised at the close of the IPO.
Exercise of Founder's Options
Also upon closing of the IPO, members of the Company's senior
management team exercised options to purchase 587,300 additional
shares of common stock (Founders' Options) at a price of $5.10 per
share for a total consideration of $2,995,230. The shares were
purchased with nonrecourse notes collateralized by the stock. The
notes bear interest at 8.75%, have no maturity date 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 employee voluntarily leaves the Company.
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.
F-12
<PAGE> 14
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
10. Preferred Stock and Shareholder's Equity, continued:
Changes to Certain Existing Agreements, Reverse Stock Split,
and Pro Forma Presentation
During August, 1995, the Company initiated changes, requiring
shareholder vote, to certain existing agreements as follows: (1)
amendment to the Articles of Incorporation (Articles) to allow for
voluntary conversion of Series A Preferred Stock into shares of Series
A Common Stock at a conversion ratio of 1.25 per Series A Common
share; (2) election to convert the Series A Preferred Stock into
shares of Series A Common stock, as described in item (1), upon the
completion of an IPO (Conversion); (3) amendment to the terms of the
Series B Common stock escrow agreement, in addition to existing
release provisions, to allow for release upon attainment of certain
stock market price goals following an IPO; (4) consent to a reverse
split of the Company's Series A and Series B Common Stock at a ratio
of 1 to 2.486536 (effective August 21, 1995); and (5) amendment to the
Articles of Incorporation to allow for Series A Common Stock (into
which all other outstanding [and Series B escrow] shares would be
converted) to be redesignated as common stock upon completion of an
IPO. As of the date of the IPO, all items received the required
favorable votes.
Upon the closing of the IPO, all of the outstanding Series A and B
Common Stock and the Series A Preferred stock were converted into
1,546,500 shares of common stock. The Series B escrow shares were
also converted into common stock upon the closing. In addition,
$500,000 in convertible debt was converted into 229,306 shares of
common stock. Such conversions have been presented in the balance
sheet, and earning per share computation. The financial statements
and accompanying footnotes reflect the effects of the reverse split
for all periods presented.
11. Contract Revenues:
All contract revenues were derived from a contract with one customer
to design and develop certain technology to be contained in graphic
display telephone equipment. From May 22, 1991 to July 31, 1992, a
major shareholder of the Company performed all contract requirements
as an outside consultant. The contract was terminated in February,
1994.
In March, 1994, and as amended in August and September, 1994, the
Customer agreed to receive, upon the consummation of the Initial
Public Offering (see Note 10), 20,108 warrants to purchase common
stock at $3.11 per share and conversion rights to shares in the amount
equivalent to 7% of the outstanding stock of the Company in accordance
with the terms described in Note 9 in exchange for granting the
Company a worldwide, perpetual, nonexclusive license to certain
intellectual property embodied in the graphic display telephone
equipment described above and loaning the Company $500,000 (see Note
9) to be used in consummating the Company's contract with a vendor.
The warrants expire five years from the date of issue. The agreement
prohibits the Customer from manufacturing or selling the equipment
until after March 31, 1997.
F-13
<PAGE> 15
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
12. Software License Agreement:
In March, 1994, the Company entered into an agreement with Microsoft
Corporation to license Microsoft's software to be used in the graphic
display telephone equipment. Microsoft is the sole source supplier of
this software. The agreement provides for royalty payments based on
$35 per unit, to be paid upon sale of the equipment. During March and
September, 1994, the Company prepaid $250,000 and $12,500 in
royalties, respectively. Beginning September 1, 1996, the Company is
committed to make minimum royalty payments based on an average of 600
units per month. If the average is below the 600 units, the per-unit
royalty shall increase 20% to $42.00 per unit until such time that the
volume exceeds the minimum for three consecutive months. In the event
the Company fails to accrue any royalties prior to the expiration of
the agreement, the Company may be charged a $10,000 administrative
fee. The agreement as amended February 1, 1996, expires March 31,
1997.
13. Operating Lease:
The Company leases its office under an operating lease. In June,
1995, the Company moved to a new and larger office. The five-year
lease expires June, 2000. Rental expenses for the years ended
December 31, 1995 and 1994, were $97,787 and $34,232, respectively.
Minimum annual rental payments consist of the following:
<TABLE>
<CAPTION>
Year Ending December 31:
-----------------------
<S> <C>
1996 $150,942
1997 156,976
1998 163,250
1999 169,771
Thereafter 79,205
--------
Total $720,144
========
</TABLE>
F-14
<PAGE> 16
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Continued
14. Income Taxes:
The income tax effect of temporary timing differences between
financial and income tax reporting that give rise to deferred income
tax assets and liabilities at December 31, 1995 and 1994, under the
provisions of SFAS No. 109, are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 850,776 $ 80,815
Capitalized research and experimentation costs 644,642 93,604
Research and experimentation credits 127,036 28,548
Other (13,038) 7,743
------------ -----------
1,609,416 210,710
Less valuation allowance (1,609,416) (210,710)
------------ -----------
Net deferred $ -- $ --
============ ===========
</TABLE>
As a result of providing a valuation allowance equal to the deferred
tax asset, there is no tax provision.
At December 31, 1995, the Company had approximately $2,500,000 in net
operating loss carryforwards and $127,000 in research and
experimentation credit carryforwards for federal tax purposes, which
expire from 2009 to 2011, respectively.
F-15
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act and Rule
12b-15 thereunder, the registrant has caused this amendment to its Annual
Report on Form 10-KSB for the fiscal year December 31, 1995, to be signed on
its behalf by the undersigned, thereunder duly authorized on the 2nd day of
July, 1996.
TELECHIPS CORPORATION
BY:
/s/ Nelson B. Caldwell
--------------------------------------
Nelson B. Caldwell
Vice President-Finance and
Secretary
