<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 March 31, 1997.
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 March 31, 1997:
1,176,763.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
----- -----
<PAGE> 2
<TABLE>
<S> <C> <C>
PART I. Financial Information
1. Interim Financial Statements
Condensed Balance Sheets -
March 31, 1997 (unaudited) and December 31, 1996................1
Condensed Statements of Operations -
Three months ended March 31, 1997 (unaudited) and 1996 .........2
Condensed Statements of Cash Flows -
Three months ended March 31, 1997 (unaudited) and 1996..........3
Notes to Condensed Financial Statements ..........................4
2. Management's Discussion and Analysis ..............................12
PART II. Other Information
SIGNATURES .................................................................18
</TABLE>
<PAGE> 3
TELECHIPS CORPORATION
(A Development Stage Company)
CONDENSED BALANCE SHEETS
----------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,030 $ 289,993
Accounts receivable 48,151 68,673
Inventory, net 128,164 675,660
Prepaid expenses 17,563 74,299
------------ ------------
Total current assets 229,908 1,108,625
------------ ------------
Equipment and tooling, net 101,154 759,491
Prepaid expenses -- --
Deposits and other assets 43,325 33,577
Unamortized discount on notes payable 18,485 --
Deferred private placement costs 22,992 --
Prepaid royalties -- 281,846
------------ ------------
$ 415,864 $ 2,183,539
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 858,360 $ 928,377
Accrued expenses 76,947 33,262
Accrued interest on notes payable 49,724 --
Notes payable 379,401 31,250
Other liabilities 17,368 22,407
------------ ------------
Total current liabilities 1,381,800 1,015,296
------------ ------------
Convertible debt (Note 7) 700,000 --
Shareholders' equity:
Series A 4% cumulative convertible preferred stock, par value $1.00,
3,000,000 shares authorized, 1,185 and 3,340 issued and outstanding at
March 31, 1997 and December 31, 1996, respectively, aggregate
liquidation preference of $1,206,500 (Note 8) 726,418 2,047,150
Common stock, par value $.01, 20,200,000 shares authorized, 1,160,676
and 377,990 issued and outstanding at March 31, 1997 and December 31,
1996, respectively (Note 8) 11,607 3,780
Paid-in capital 13,931,084 13,515,796
Deficit accumulated during the development stage (13,819,865) (10,973,186)
------------ ------------
849,244 4,593,540
Less: Notes receivable from shareholders (Note 8) (2,515,180) (3,425,297)
------------ ------------
Total shareholders' equity (1,665,936) 1,168,243
------------ ------------
$ 415,864 $ 2,183,539
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
1
<PAGE> 4
TELECHIPS CORPORATION
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
----------
<TABLE>
<CAPTION>
Three Months Ended
March 31, Period From
--------- January 7, 1991 to
1997 1996 March 31, 1997
---- ---- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Sales revenue $ 59,750 $ -- $ 188,247
Contract revenue -- -- 2,652,274
Cost of sales (67,714) -- (233,084)
Contract research and development costs -- -- (2,080,188)
Inventory allowance (488,137) -- (1,251,477)
----------- ----------- ------------
(496,101) -- (724,228)
Operating expenses:
Marketing 218,271 229,005 2,590,570
General and administrative 507,131 311,305 3,323,864
Research and development 337,156 474,014 5,123,412
Write-down for impairment of assets 993,156 -- 1,293,976
----------- ----------- ------------
Loss from operations (2,551,815) (1,014,324) 13,056,050
----------- ----------- ------------
Other income (expense):
Interest income 1,000 33,308 103,388
Interest expense (64,349) (6,630) (354,893)
Amortization of financing costs (231,515) -- (512,310)
----------- ----------- ------------
Total other income (expense) (294,864) 26,678 (763,815)
----------- ----------- ------------
Net loss $(2,846,679) $ (987,646) $ 13,819,865
=========== =========== ============
Net loss per common and common equivalent
shares $ (2.90) $ (4.05) $ (75.85)
=========== =========== ============
Weighted average common shares 980,857 244,233 193,254
=========== =========== ============
</TABLE>
The accompanying notes are an 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 Ended
March 31, Period From
--------- January 7, 1991 to
1997 1996 March 31, 1997
----------- ----------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,846,679) $ (987,646) $(13,819,865)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 17,728 7,009 103,882
Note receivable expensed as salary -- -- 48,750
Amortization and accretion of loan financing costs 231,515 -- 641,510
Valuation allowance for inventory 488,137 -- 1,251,477
Write-down for impairment of assets 993,156 -- 1,293,976
Issue of common stock and options and warrants to
purchase common stock in exchange for services 12,500 -- 69,500
Net effect of changes in:
Accounts receivable 2,000 1,398 (66,673)
Inventory 59,359 (285,180) (1,379,641)
Prepaid expenses 4,443 40,899 (69,856)
Deposits and other assets (9,748) (1,500) (43,325)
Prepaid royalties 114 486 (281,731)
Accounts payable (21,866) 11,427 969,011
Accrued expenses 43,685 2,009 76,947
Accrued interest on notes payable 49,724 -- 49,724
Other liabilities (5,039) 34,217 17,368
----------- ----------- ------------
Net cash used in operating activities (980,971) (1,176,881) (11,138,946)
----------- ----------- ------------
Cash flows from investing activities:
Issuance of note receivable -- -- (48,750)
Purchase of equipment and tooling -- (169,896) (1,140,466)
----------- ----------- ------------
Net cash used in investing activities -- (169,896) (1,189,216)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from line of credit -- 354,289 354,289
Loan proceeds 750,000 -- 3,090,005
Deferred private placement costs (22,992) -- (22,992)
Proceeds from issuance of common stock -- -- 6,571,304
Proceeds from issuance of preferred stock (net) -- -- 5,118,844
Repayment of line of credit -- -- (354,289)
Repayment of notes payable -- -- (2,281,250)
Payment of accrued Series A Preferred dividends -- -- (111,719)
----------- ----------- ------------
Net cash provided by financing activities 727,008 354,289 12,364,192
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents (253,963) (992,488) 36,030
Cash and cash equivalents at beginning of period 289,993 2,702,701 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 36,030 $ 1,710,213 $ 36,030
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid during the period $ 3,966 $ 6,630 $ 294,510
=========== =========== ============
</TABLE>
The accompanying notes are an 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 three-month
period ended March 31, 1997, are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997 (Note 2).
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, 1996, which is incorporated herein
by reference.
2. Bankruptcy, Inventory Allowance, Impairment of Assets:
On April 21, 1997, due to cash shortages, the Company laid off twelve
employees, leaving only six administrative and sales personnel including
management. On April 30, 1997, the Company laid off the remaining employees
and management staff and ceased general operations. On May 6, 1997, the
Nasdaq Listing Qualifications Panel, based on its May 1, 1997, hearing,
determined to delist the Company's securities from its Nasdaq SmallCap
Market. The Company's securities are currently traded through the NASD
Bulletin Board. On May 13, 1997, after exhausting all possibilities for
obtaining financing crucial to operations and completion of production,
marketing and sales plans, the nominal cash reserves of the Company would
no longer support retention of key employees and payment of vendors
critical to the production process. As a result, the Board of Directors
retained a law firm to file a petition for relief under Chapter 7 of the
Bankruptcy Code. The petition is expected to be filed sometime before May
30, 1997. The officers of the Company are currently making the necessary
preparations to turn over the assets and liabilities of the Company to a,
as yet to be determined, court-appointed trustee. As a result of the
Company's ceasing operations, the net realizable value of the Company's
assets has been severely impaired. The Condensed Financial Statements for
the three-month period ended March 31, 1997, reflect the following
estimated amounts recognized as an allowance against inventory and
impairment of assets considering their net realizable value in liquidation
under bankruptcy:
<TABLE>
<CAPTION>
Inventory
Allowance
---------
(unaudited)
<S> <C>
Raw materials $361,987
Work-in-progress 48,993
Finished goods 77,157
--------
$488,137
========
</TABLE>
4
<PAGE> 7
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
Write-down for
Impairment of Assets
(unaudited)
<S> <C>
Accounts receivable $ 18,522
Tooling 467,063
Computer and other equipment 115,189
Furniture and fixtures 27,629
Leasehold improvement 30,728
Prepaid expenses 52,293
Prepaid royalties 281,732
--------
$993,156
========
</TABLE>
3. Net Loss Per Common Share:
Net loss per common share and common equivalent share is computed by
dividing net loss, after increasing the net loss by the discount on
issuance of Series A 4% cumulative convertible preferred stock, by the
weighted average number of common and common equivalent shares outstanding
during each period. The discount on the Series A Preferred Stock amounted
to $837,500 for the year ended December 31, 1996 and $0 for the three-month
period ended March 31, 1997. Primary and fully diluted earnings per share
are the same for the year ended December 31, 1996 and the three-month
period ended March 31, 1997.
5
<PAGE> 8
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
4. Inventory:
Inventory consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ----------
(unaudited)
<S> <C> <C>
Raw materials $1,022,343 $1,028,564
Work-in-process 97,986 97,986
Finished goods 259,312 312,450
---------- ----------
1,379,641 1,439,000
Less valuation allowance 1,251,477 763,340
---------- ----------
Inventory, net $ 128,164 $ 675,660
========== ==========
</TABLE>
5. Equipment and Tooling:
Equipment and tooling consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Tooling $ 6,644 $473,707
Computer and other equipment 148,056 264,042
Furniture and fixtures 33,723 61,352
Leasehold improvements 11,598 42,326
-------- --------
200,021 841,427
Less accumulated depreciation and amortization 98,867 81,936
-------- --------
Equipment and tooling, net $101,154 $759,491
======== ========
</TABLE>
6
<PAGE> 9
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
6. Notes 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 May, 1997. As of the date of this report, the
Note has not been paid.
On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted yielding net proceeds to the Company of
$250,000. The note bears a stated annual interest rate of 1% (effective
annualized rate of 252.91% after taking into account the discount
including issuance of common stock) and is payable upon the earlier of
180 days from date of issuance or upon the closing of a significant
equity, quasi-equity or debt financing by the Company. In addition, the
Company agreed to issue to the lender 75,000 shares of common stock
upon maturity valued at $51,600. The note was paid and shares issued
April 2, 1997.
On February 24, 1997, the Company issued an uncollateralized note
payable (Note) to a vendor for $48,151, with an interest rate of 9% due
and payable at maturity, April 1, 1997. Payment of the Note was
conditioned on receipt in settlement of a certain amount of raw
materials inventory. As of the date of this report, such inventory,
valued at a cost of approximately $67,000, had not been received. As a
result, as of the date of this report, the Company has not paid the
Note or accrued interest of approximately $1,083.
7. Convertible Debt:
On March 10, 1997, the Company issued a note payable for $700,000. The
note was discounted yielding net proceeds to the Company of $500,000.
The note bears an annual interest rate of 1% (effective annualized rate
of 634.78% after taking into account the discount) and is payable upon
the closing of a financing transaction. Upon closing of the
transaction, the note will be canceled and the proceeds along with
accrued interest will be deposited into escrow to be used to purchase
securities in the financing transaction. On April 2, 1997, the note was
canceled and was converted to Series B 4% cumulative convertible
preferred stock (Note 8).
7
<PAGE> 10
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
8. Preferred Stock and Shareholder's Equity:
Exercise of Founder's Options
Also upon closing of the Company's Initial Public Offering, members of
the Company's senior management team exercised options to purchase
39,153 additional shares of common stock (Founders' Options) at a price
of $76.50 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
Compa- ny'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. During 1996, 722 Founder's
Options shares valued at $55,248 and related accrued note interest of
$4,103 were canceled and removed from paid-in capital and notes
receivable from shareholders, respectively. During the three-month
period ended March 31, 1997, 10,457 Founder's Options shares valued at
$799,920 and related accrued note interest of $90,457 were canceled and
removed from paid-in capital and notes receivable from shareholders,
respectively.
Private Placement of Series A 4% Cumulative Convertible Preferred Stock
On October 2, 1996, the Company completed a private placement of 4,188
shares of Series A 4% cumulative 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. In addition, the Company granted to the underwriter
warrants to purchase up to 26,667 shares of common stock at $33.75 per
share, exercisable at any time until August, 2001. The warrants, valued
at $310,000, were recorded as a reduction in Preferred Stock (offering
costs) and an increase in paid-in capital. Upon occurrence of certain
events, the exercise price of the warrants may be adjusted downward.
Upon completion of the private placement of Series B 4% cumulative
convertible preferred stock on April 2, 1997, these warrants were
canceled.
The Preferred Stock is convertible any time 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 $45.00. 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
8
<PAGE> 11
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
8. Preferred Stock and Shareholder's Equity, continued:
4% dividend is payable semiannually in cash or shares of common stock
converted using the Conversion Formula described above. Preferred
dividends in arrears at March 31, 1997 approximate $21,500. The
Preferred Stock is nonvoting and has a liquidation preference over all
common shares and shall be entitled to payment of $1,000 per share plus
dividends that have accrued.
As of March 31, 1997, 3,003 shares of Preferred Stock were converted
into 818,680 shares of common stock. In addition, 9,302 shares of
common stock were issued in payment of dividends on the converted
Preferred Stock. Subsequent to March 31, 1997, an additional 85 shares
of Preferred Stock were converted into 158,922 shares of common stock.
In addition, 3,387 shares of common stock were issued in payment of
dividends on the converted Preferred Stock.
Nonemployee Director's Options
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 non-qualified stock options
to purchase an aggregate of up to 20,333 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 2,000 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 valued 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 below for
Director's Options. In addition, each nonemployee director will receive
an automatic grant of an option to purchase 333 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. During October, 1996, 7,000 options to purchase
shares of common stock were granted to nonemployee directors.
During October, 1996, nonemployee members of the Board of Directors
exercised options (Director's Options) to purchase 5,000 shares of
common stock at a price of $32.8125 per share for a total consideration
of $164,063. The shares were purchased with nonrecourse notes collater-
alized 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
9
<PAGE> 12
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
8. Preferred Stock and Shareholder's Equity, continued:
rights and payment of the related portion of the notes. During the
three-month period ended March 31, 1997, 4,750 Director's Options
valued at $155,859 and related accrued interest of $15,853 were
canceled and removed from paid-in capital and notes receivable from
shareholders, respectively.
Consulting Agreement
During January, 1997, the Company entered into an agreement with an
outside consultant to provide certain international financial public
relations to the Company for a period of six (6) months. In exchange
for services, the Company has agreed to pay the consultant an initial
sum of $12,500 representing the first month's fee and a nonrefundable
deposit toward expenses. Thereafter the Company will pay a minimum of
$6,250 per month based on a certain number of minimum hours of work
with additional hours beyond the minimum to be charged incrementally.
As of the date of this report, the Company has paid the consultant
3,101 shares of common stock valued at $12,500 and $8,720 in cash.
1994 and 1995 Stock Option Plans
During January, 1997, 900 shares previously granted under the Company's
1994 and 1995 Stock Option Plans (Plans) were canceled. During April,
1997, an additional 5,884 shares were canceled. The remaining 5,938
exercisable shares, if unexercised by May 30, 1997 will be canceled
effective that date under liquidation provisions of the Plans.
1997 Reverse Stock Split
On March 7, 1997, the shareholders approved a 1-for-15 reverse split,
retaining the post-split authorized common shares at 20,200,000. Prior
to the reverse split on March 7, 1997, there were 16,172,625 shares
outstanding and post split, the number of shares outstanding was
1,078,175. The financial statements and accompanying footnotes reflect
the effects of the reverse split for all periods presented.
Private Placement of Series B 4% Cumulative Convertible Preferred Stock
On April 2, 1997, the Company completed a private placement of 1,906
shares of Series B 4% cumulative convertible preferred stock (Series B
Preferred Stock) with a face value of $1,000 per share. Of the Series B
Preferred Stock, 1,031 shares were sold at a discount of 20% of the
face value after paying underwriting discounts, expenses and other
related fees of approximately $172,250, the Company received aggregate
net proceeds of $652,750. Also, as described in Note 7, the Company
converted a $700,000 note payable into 875 shares of Series B Preferred
Stock. In addition, the Company granted the underwriter 7,500 shares of
common stock valued
10
<PAGE> 13
TELECHIPS CORPORATION
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
----------
8. Preferred Stock and Shareholder's Equity, continued:
at approximately $51,000 and warrants to purchase 150,000 shares of
common stock at approximately $.70 per share valued at approximately
$105,000. The common stock and warrants, an aggregate value of
$156,000, were recorded as a reduction of Series B Preferred Stock
(offering costs) and an increase in paid-in capital. Upon occurrence of
certain events, the exercise price of the warrants may be adjusted
downward. The Series B Preferred Stock is convertible anytime beginning
May 17, 1997, until March 31, 1999, using a formula (Series B
Conversion Formula) multiplying each Series B Preferred share by 1,000
and dividing the result by the lower of either 110% of the fair market
value at April 2, 1997, or the fair market value at the time of
conversion. The Series B Preferred Stock will automatically convert, if
conversion has not previously been effected, on March 31, 1999, 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
September 29, 1997. The 4% dividend is payable semiannually in cash or
shares of common stock converted using the Series B Conversion Formula
described above. The Preferred Stock is nonvoting, has a liquidation
preference over all common shares, is subordinate to the liquidation
preference of the Series A Preferred Stock. The holders thereof shall
be entitled to payment of $1,000 per share plus dividends that have
accrued. A portion of the net proceeds was used to pay off the $300,000
on February 7, 1997, as described in Note 6.
Subsequent to March 31, 1997, 37.5 shares of the Series B Preferred
Stock were converted into 842,106 shares of common stock. In addition,
4,153 shares of common stock were issued in payment of dividends on the
converted Series B Preferred Stock.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 "Factors
Affecting Operating Results" in the Company's Annual Report on Form 10-KSB for
the Fiscal Year Ended December 31, 1996.
INTRODUCTION. Telechips Corporation (the Company or Telechips), a
development-stage company, incorporated under the laws of Nevada on January 7,
1991, was engaged primarily in the design, development and marketing of network
client and interactive computer/telephony devices, related peripheral devices
and software applications. The Company was seeking to develop a family of
products potentially including component level variants which, if developed,
would have enabled customers to access and to take advantage of the many
innovations in network computing, including the integration of computing and
telephony capabilities at client devices. During the three-month period ending
March 31, 1996, the Company sold its Access Series 3000 products with total
revenues of approximately $60,000. However, the Company was unable to complete
financing crucial to its continuing operations.
On April 21, 1997, due to cash shortages, the Company laid off twelve
employees, leaving only six administrative and sales personnel including
management. On April 30, 1997, the Company laid off the remaining employees and
management staff and ceased general operations. On May 6, 1997, the Nasdaq
Listing Qualifications Panel, based on its May 1, 1997, hearing, determined to
delist the Company's securities from its Nasdaq SmallCap Market. The Company's
securities are currently traded through the NASD Bulletin Board. On May 13,
1997, after exhausting all possibilities for obtaining financing crucial to
operations and completion of production, marketing and sales plans, the nominal
cash reserves of the Company would no longer support retention of key employees
and payment of vendors critical to the production process. As a result, the
Board of Directors retained the law firm of Hale, Lane, Peek, Dennison, Howard,
Anderson and Pearl of Reno and Las Vegas, Nevada to file a petition for relief
under Chapter 7 of the Bankruptcy Code. The petition is expected to be filed
sometime before May 30, 1997. The officers of the Company are currently making
the necessary preparations to turn over the assets and liabilities of the
Company to a, as yet to be determined, court-appointed trustee. As a result of
the Company's ceasing operations, the net realizable value of the Company's
assets has been severely impaired. The Condensed Financial Statements as of
March 31, 1997, reflect the estimated results of that impairment.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 as Compared to Three Months Ended
March 31, 1996. There were sales revenues of approximately $60,000 for the three
months ended March 31, 1997 as compared to no revenues for the three months
ended March 31, 1996. During the three months ended March 31, 1996, there were
considerable delays in manufacturing due to Lucent Technologies, Inc.'s
inability to ship product which met the Company's quality standards. An
inventory allowance for $488,137 was expensed in the three-month period ended
March 31, 1997 due to
12
<PAGE> 15
severe asset impairment as a result of the Company ceasing operations and filing
a petition for relief under Chapter 7 of the Bankruptcy Code (see "Liquidity and
Capital Resources"). There was no similar expense in the three month period
ended March 31, 1996.
For the three months ended March 31, 1997, operating expenses, which
consist primarily of marketing, research and development and general
administrative expenses, were approximately $2,056,000 as compared to $1,014,000
for the three months ended March 31, 1996. Also included in the $2,056,000 of
the three-month period ended March 31, 1997, is a write-down for impairment of
assets of approximately $993,000, also due to severe asset impairment as a
result of the Company ceasing operations and filing a petition for relief under
the Bankruptcy Code. The remaining increase was due primarily to increased
general corporate activity in an attempt to turnround Company performance and
obtain financing critical to continued operations.
Research and development expenses decreased to approximately $337,000
for the three months ended March 31, 1997 from $474,000 for the three months
ended March 31, 1996. The decrease was due to employee layoffs and focus of
efforts on a smaller product set.
Marketing expenses decreased to approximately $218,000 for the three
months ended March 31, 1997 from $229,000 for the three months ended March 31,
1996. This decrease was due primarily to employee layoffs.
General and administrative expenses increased to approximately $507,000
for the three months ended March 31, 1997 from $311,000 for the three months
ended March 31, 1996. This increase was due primarily to increased general
corporate activity in an attempt to turnaround Company performance and obtain
financing critical to continued operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements were significant. The Company had
been dependent primarily on the Company's initial public offering (the IPO) of
its Common Stock and certain warrants (the Public Warrants), private placements
of equity securities and indebtedness. As noted below, on May 13, 1997, the
Board of Directors retained a law firm to file a petition for relief under
Chapter 7 of the Bankruptcy Code.
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) 1,072 shares of Common Stock; and (ii) 50,000 Shares of
Preferred 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 32,173 shares of Common Stock and 1,500,000 shares of
Preferred Stock (convertible into 32,173 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 20,269 shares of Common Stock. Howard Phillips, a director of the Company,
was Director of Corporate Finance of D. H. Blair until August, 1995.
13
<PAGE> 16
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, nonnegotiable 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) 1,333 shares of 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 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 22,667 Bridge Shares. The 22,667 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 100,000 shares of Common Stock, par value $.01 (Common Stock) and redeemable
warrants (Warrants) to purchase 100,000 shares of Common Stock at an exercise
price of $75.00 per share (the IPO). In addition, the Underwriter exercised its
overallotment option to purchase an additional 15,000 Warrants.
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 to 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 NCS was canceled, the Company paid
NSC $250,000 plus accrued and unpaid interest at $38,904, from the proceeds of
the IPO, and issued to NSC 15,288 shares of Common Stock and a Warrant to
purchase 1,341 shares of Common Stock at $46.65 per share.
In addition, the Company issued nonredeemable warrants (the
Underwriter's Warrants) to purchase 10,000 shares of Common Stock at an exercise
price of $115.50 per share and 10,000 warrants (each exercisable to purchase one
share of Common Stock at a price of $115.50 per share) at an exercise price of
$2.31 per Warrant to the Underwriter. Further, all outstanding shares of
Preferred Stock and Series B Common Stock, par value $.01, 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 revolving line of credit
collateralized by cash and cash equivalents valued at 105% of outstanding draws.
Interest is payable monthly at the three-month U.S. Treasury Bill rate plus 3%
(8.32% at March 31, 1997). Principal is due at maturity. The line of credit
expires December 31, 1997. At March 31, 1997, there were no outstanding draws.
14
<PAGE> 17
On October 2, 1996, the Company completed a private placement of 4,188
shares of 4% cumulative 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 conversion price of the Preferred Shares is
determined by multiplying each Preferred Share by 1,000 and dividing the result
by the lower of $45.00 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 to Third World Investments, Ltd., Common Stock Purchase
Warrants to purchase 26,667 shares of Common Stock at an exercise price of
$33.75 per share as adjusted. These warrants were canceled as a result of the
April 2, 1997, financing described below.
On February 7, 1997, the Company issued a note payable for $300,000.
The note was discounted, yielding net proceeds to the Company of $250,000. The
note bears a stated annual interest rate of 1% (effective annualized rate of
252.91%, after taking into account the discount including issuance of Common
Stock) and is payable upon the earlier of 180 days from date of issuance or upon
the closing of a significant equity, quasi-equity or debt financing by the
Company. In addition, the Company agreed to issue to the lender 75,000 shares of
Common Stock upon maturity valued at $51,600. The note was paid and shares
issued April 2, 1997.
On March 10, 1997, the Company issued a note payable for $700,000. The
note was discounted, yielding net proceeds to the Company of $500,000. The note
bears an annual interest rate of 1% (effective annualized rate of 634.78%,
taking into account the discount) and is payable upon the closing of a financing
transaction. Upon closing of the transaction, the note will be canceled and the
proceeds along with accrued interest will be deposited into escrow to be used to
purchase securities in the financing transaction. On April 2, 1997, the note was
canceled and was converted to Series B 4% cumulative convertible preferred
stock.
On April 2, 1997, the Company completed a private placement of 1,906
shares of Series B 4% cumulative convertible preferred stock (Series B Preferred
Stock) with a face value of $1,000 per share. Of the Series B Preferred Stock,
1,031 shares were sold at a discount of 20% of the face value after paying
underwriting discounts, expenses and other related fees of approximately
$172,250. The Company received aggregate net proceeds of $652,750. The Company
also converted a $700,000 note payable into 875 shares of Series B Preferred
Stock. In addition, the Company granted the underwriter 7,500 shares of Common
Stock value at approximately $51,000 and warrants to purchase 150,000 shares of
Common Stock at approximately $.70 per share valued at $105,000. The Common
Stock and warrants, an aggregate value of $110,000, were recorded as a reduction
of Series B Preferred Stock ("offering costs") and an increase in paid-in
capital. Upon occurrence of certain events, the exercise price of the warrants
may be adjusted downward. The Series B Preferred Stock is convertible any time
beginning May 17, 1997, until March 31, 1999, using a formula (Series B
Conversion Formula) multiplying each Series B Preferred share by 1,000 and
dividing the result by the lower of either 110% of the fair market value on
April 2, 1997, or the fair market value at the time of conversion. The Series B
Preferred Stock will automatically convert, if conversion has not previously
been effected, on March 31, 1999, 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 September 29, 1997. The 4% dividend is payable
semiannually in
15
<PAGE> 18
cash or shares of Common Stock converted using the Series B Conversion Formula
described above. The Preferred Stock is nonvoting, has a liquidation preference
over all common shares, is subordinate to the liquidation preference of the
Series A Preferred Stock and shall be entitled to payment of $1,000 per share
plus dividends that have accrued. A portion of the net proceeds was used to pay
off the $300,000 February 7, 1997 note payable.
The Company has used the remaining proceeds of the Regulation S
Offering to fund general corporate activities and complete development of and
market the Telechips Access NETWORK CLIENT PRODUCT. THE COMPANY ANTICIPATED,
BASED ON ITS PROPOSED GROWTH PLANS AND ASSUMPTIONS RELATING TO ITS GROWTH AND
OPERATIONS, THAT THE PROCEEDS FROM THE REGULATION S OFFERINGS AND PRIVATE
PLACEMENTS, BORROWINGS AND PLANNED REVENUES WOULD NOT HAVE BEEN SUFFICIENT TO
SATISFY THE COMPANY'S CONTEMPLATED CASH REQUIREMENTS FOR THE NEXT 12 MONTHS AND
THAT THE COMPANY WOULD HAVE BEEN REQUIRED TO RAISE ADDITIONAL FUNDS IN THE
IMMEDIATE FUTURE. THE COMPANY WAS UNABLE TO COMPLETE ADDITIONAL FINANCING.
ON APRIL 21, 1997, DUE TO CASH SHORTAGES, THE COMPANY LAID OFF TWELVE
EMPLOYEES, LEAVING ONLY SIX ADMINISTRATIVE AND SALES PERSONNEL INCLUDING
MANAGEMENT. ON APRIL 30, 1997, THE COMPANY LAID OFF THE REMAINING EMPLOYEES AND
MANAGEMENT STAFF AND CEASED GENERAL OPERATIONS. ON MAY 6, 1997, THE NASDAQ
LISTING QUALIFICATIONS PANEL, BASED ON ITS MAY 1, 1997, HEARING, DETERMINED TO
DELIST THE COMPANY'S SECURITIES FROM ITS NASDAQ SMALLCAP MARKET. THE COMPANY'S
SECURITIES ARE CURRENTLY TRADED THROUGH THE NASD BULLETIN BOARD. ON MAY 13,
1997, AFTER EXHAUSTING ALL POSSIBILITIES FOR OBTAINING FINANCING CRUCIAL TO
OPERATIONS AND COMPLETION OF PRODUCTION, MARKETING AND SALES PLANS, THE NOMINAL
CASH RESERVES OF THE COMPANY WOULD NO LONGER SUPPORT RETENTION OF KEY EMPLOYEES
AND PAYMENT OF VENDORS CRITICAL TO THE PRODUCTION PROCESS. AS A RESULT, THE
BOARD OF DIRECTORS RETAINED THE LAW FIRM OF HALE, LANE, PEEK, DENNISON, HOWARD,
ANDERSON AND PEARL OF RENO AND LAS VEGAS, NEVADA TO FILE A PETITION FOR RELIEF
UNDER CHAPTER 7 OF THE BANKRUPTCY CODE. THE PETITION IS EXPECTED TO BE FILED
SOMETIME BEFORE MAY 30, 1997. THE OFFICERS OF THE COMPANY ARE CURRENTLY MAKING
THE NECESSARY PREPARATIONS TO TURN OVER THE ASSETS AND LIABILITIES OF THE
COMPANY TO A, AS YET TO BE DETERMINED, COURT-APPOINTED TRUSTEE. AS A RESULT OF
THE COMPANY'S CEASING OPERATIONS, THE NET REALIZABLE VALUE OF THE COMPANY'S
ASSETS HAS BEEN SEVERELY IMPAIRED. THE CONDENSED FINANCIAL STATEMENTS AS OF
MARCH 31, 1997, REFLECT THE ESTIMATED RESULTS OF THAT IMPAIRMENT.
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
A special meeting of the stockholders was held on March 5, 1997, at the
principal office of the Company at 8:30 A.M., Pacific time and adjourned
to March 7, 1997, at 2:00 P.M. Pacific time, for the purpose of approving
an amendment to the Company's Articles of Incorporation to effect a
1-for-15 reverse stock split of the issued and outstanding Common Stock
(the "Reverse Split"); 7,777,017 shares voted in favor of the Reverse
Split, 572,524 shares voted against the Reverse Split, 33,674 shares
abstained from voting.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on From 8-K
a) Exhibits
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
A current report was filed on February 18, 1997 to announce
the issuance of a press release relating to the resignation of
its chairman, president, chief executive officer and director,
C.A. Burns, and the resignation of two directors, Bruce
Chatterley and Howard Phillips.
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/ Nelson B. Caldwell Date: May 21, 1997
- ---------------------------
Nelson B. Caldwell
Chief Executive Officer and
Principal Financial Officer
18
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ----------- --------
<S> <C> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
TELECHIPS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts)
Three months ended
March 31,
----------------------
1997 1996
---- ----
Weighted average common shares outstanding 868 131
Shares, warrants and options treated as
common shares equivalent pursuant to SEC
Staff Accounting Bulletin Topic 4d 113 113
------ ------
Total common and common equivalent shares 981 244
====== ======
Net loss $2,846 $ 988
====== ======
Loss per common and common
equivalent shares $(2.90) $(4.05)
====== ======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 36,030
<SECURITIES> 0
<RECEIVABLES> 48,151
<ALLOWANCES> 0
<INVENTORY> 128,164
<CURRENT-ASSETS> 101,154
<PP&E> 200,021
<DEPRECIATION> 98,867
<TOTAL-ASSETS> 415,864
<CURRENT-LIABILITIES> 1,381,800
<BONDS> 0
0
726,418
<COMMON> 11,607
<OTHER-SE> (2,403,961)
<TOTAL-LIABILITY-AND-EQUITY> 415,864
<SALES> 59,750
<TOTAL-REVENUES> 59,750
<CGS> 67,714
<TOTAL-COSTS> 67,714
<OTHER-EXPENSES> 1,330,312
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295,864
<INCOME-PRETAX> (2,846,679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,846,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,846,679)
<EPS-PRIMARY> $(2.90)
<EPS-DILUTED> $(2.90)
</TABLE>
