SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21934
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TELEPAD CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1680936
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
380 Herndon Parkway, Suite 1900, Herndon, Virginia 22070
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (703) 834-9000
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Not Applicable
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Former name, former address and former fiscal year,
if changed since last report.
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 ninety (90) days.
Yes X No__________
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date:
Shares Outstanding
Class of Common Stock at July 23, 1996
- --------------------- ----------------
Class A Common Stock 11,351,738 shares, $0.01 par value
Class B Common Stock 250,000 shares, $0.01 par value
<PAGE>
TELEPAD CORPORATION
INDEX TO FORM 10-QSB
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1996 (unaudited) and
December 31, 1995 3
Statements of Operations for the three and six month
periods ended June 30, 1996 (unaudited) and 1995
(unaudited) 4
Statements of Cash Flows for the six month periods ended
June 30, 1996 (unaudited) and 1995 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
TELEPAD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,358,814 $ 1,257,948
Accounts receivable, less allowance of $100,000
at June 30, 1996 and December 31, 1995, respectively 339,037 472,724
Inventory, less allowance of $80,000 at June 30, 1996 and
December 31, 1995, respectively 520,554 403,733
Other current assets 654,373 96,246
------------ ------------
Total current assets 14,872,778 2,230,651
------------ ------------
Furniture and equipment:
Office furniture and equipment 155,565 117,520
Computer equipment 621,747 527,908
------------ ------------
777,312 645,428
Less accumulated depreciation (397,048) (287,838)
------------ ------------
Net furniture and equipment 380,264 357,590
Deposits and other assets 27,689 21,061
------------ ------------
Total assets $ 15,280,731 $ 2,609,302
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,271,752 $ 2,821,741
Notes payable (Note 2) -- 3,881,698
Deferred revenue 26,269 17,718
------------ ------------
Total current liabilities 2,298,021 6,721,157
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued
Common stock, $.01 par value; 95,000,000 shares authorized:
Class A common stock, 94,406,937 shares designated,
11,341,738 and 4,436,175 shares issued and outstanding
at June 30,1996 and December 31, 1995, respectively 113,417 44,361
Class B common stock, 593,063 shares designated,
250,000 and 555,563 shares issued and outstanding
at June 30,1996 and December 31, 1995, respectively 2,500 5,556
Additional paid-in capital 39,121,405 18,657,124
Accumulated deficit (26,254,612) (22,818,896)
------------ ------------
Total stockholders' equity (deficit) 12,982,710 (4,111,855)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 15,280,731 $ 2,609,302
============ ============
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
TelePad products $ 428,305 $ 230,934 $ 619,198 $ 585,793
Service contracts 58,752 61,412 159,774 344,216
----------- ----------- ----------- -----------
Total revenues 487,057 292,346 778,972 930,009
Costs and expenses:
Cost of goods sold - Telepad products 407,814 200,767 662,896 358,174
Cost of goods sold - service contracts 34,639 31,691 75,289 208,957
Costs related to manufacturing startup 317,607 -- 317,607 --
Research and development 552,461 493,496 792,665 864,443
Selling, general and administrative 1,217,763 863,184 2,097,249 1,750,952
----------- ----------- ----------- -----------
Total costs and expenses 2,530,284 1,589,138 3,945,706 3,182,526
----------- ----------- ----------- -----------
Loss from operations (2,043,227) (1,296,792) (3,166,734) (2,252,517)
Interest income 185,933 -- 188,172 3,885
Interest expense (3,288) -- (253,197) --
Amortization of debt issue costs -- -- (118,302) --
Other expenses (15,212) -- (85,655) --
----------- ----------- ----------- -----------
Net loss $(1,875,794) $(1,296,792) $(3,435,716) $(2,248,632)
=========== =========== =========== ===========
Net loss per share $ (0.19) $ (0.26) $ (0.47) $ (0.48)
=========== =========== =========== ===========
Weighted average shares outstanding 9,740,786 4,950,286 7,377,596 4,662,184
=========== =========== =========== ===========
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,435,716) $ (2,248,632)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 109,210 75,596
Amortization of debt discount 118,302 --
Common stock issued in lieu of cash for consulting
and employment services -- 313,750
Changes in assets and liabilities:
Accounts receivable 133,687 3,510,547
Inventory (116,821) 1,340,833
Other current assets (558,127) 64,087
Deposits and other assets (6,628) --
Accounts payable and accrued expenses (549,989) (5,521,340)
Deferred revenue 8,551 26,355
------------ ------------
Net cash used in operating activities (4,297,531) (2,438,804)
INVESTING ACTIVITIES
Purchase of furniture and equipment (131,884) (25,649)
------------ ------------
Net cash used in investing activities (131,884) (25,649)
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 20,530,281 2,147,196
Proceeds from notes payable 750,000 --
Repayment of notes payable (4,750,000) --
------------ ------------
Net cash provided by financing activities 16,530,281 2,147,196
------------ ------------
Net increase (decrease) in cash 12,100,866 (317,257)
Cash and cash equivalents, beginning of period 1,257,948 378,660
------------ ------------
Cash and cash equivalents, end of period $ 13,358,814 $ 61,403
============ ============
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED.)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three- and six-month periods ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information, refer to the
financial statements for the year ended December 31, 1995 and footnotes thereto
included in the Company's Form 10-KSB.
Net Loss Per Share
Net loss per share is calculated using the weighted average number of
common shares outstanding during the period, with shares of Class A common stock
and Class B common stock treated as a single class for purposes of the
calculation. Shares issuable upon the exercise of stock options and warrants
have been excluded from the computation because the effect of their inclusion
would be antidilutive.
2. NOTES PAYABLE
On February 15, 1996, the Company and an individual investor, who had
previously provided his personal guaranty of the Company's obligations to
International Business Machines Corporation ("IBM") for the production of 400
TelePad 3 computers, entered into an agreement whereby the individual investor
loaned the Company $750,000 evidenced by a promissory note which had a term of
one year, but included the right to require early retirement of the obligation
at the final closing of the secondary public offering. The promissory note
carried interest at the rate of 20% and contained a loan origination fee of
approximately $68,000. The promissory note was secured by all of the Company's
assets. The conditions of the agreement required that a portion of the proceeds
from the note be used to satisfy existing obligations to IBM and that IBM
release the guaranty. The Company received net proceeds, after disbursements to
IBM and prepayment of one-half of the annual interest due under the promissory
note, of approximately $193,000. On May 1, 1996, the Company paid $825,000 to
the individual investor to retire the promissory note. The $825,000 payment
included the principal amount of $750,000 and $75,000 in interest. The
respective security interest has been released.
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<PAGE>
3. CONTINGENT MATTERS
In order to secure credit for production of the TelePad 3 computer, the
Company has provided a letter of credit to Sanmina Corporation ("Sanmina") in
the amount of $2,000,000. This letter of credit is secured by $2,000,000, which
is invested in an interest-bearing account and is pledged as security.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
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THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1995
For the three months ended June 30, 1996, the Company recognized
revenues of $487,000 compared to revenues of $292,000 in the same period in
1995. This increase of $195,000 is the result of a $197,000 increase in product
sales and a $2,000 decrease in service sales. Prior to July 1995, when
production of the TelePad 3 commenced, the Company's primary product was the
TelePad SL. Although production of the TelePad 3 started in July 1995, due to
financial and technical issues, production of the TelePad 3 was limited to 400
units until production started again in June 1996. The Company completed a
secondary offering in April 1996 and entered into an agreement with a new
manufacturer, Sanmina. Lack of adequate financing and the shift in manufacturers
resulted in no new TelePad 3s being produced in 1996 until June 1996, when
production commenced at Sanmina.
Cost of products and services sold during the three months ended June
30, 1996 totaled $760,000 (156% of revenue) compared to $232,000 (79% of
revenue) in the three months ended June 30, 1995. Costs in the current period
include a charge of $318,000 directly related to the shift in manufacturers and
restarting production in the new facility. Product gross margins in the current
quarter have been constrained by the relatively high cost of parts purchased
primarily in 1995 by the prior manufacturer, but not used and replaced earlier
due to financial and technical delays. Cost of products sold also includes a
$22,000 warranty reserve comprised of $10,000 for TelePad 3 units built in the
current period and $12,000 to incorporate recent engineering changes into units
built in prior periods.
Research and development ("R&D") expenses for the three months ended
June 30, 1996 were $552,000 compared to $493,000 for the three months ended June
30, 1995. This 12% increase in R&D spending was due primarily to non-recurring
expenses associated with the start up of a new manufacturing facility in the
current period as compared with expenditures for the initial design of the
TelePad 3 for the same three-month period in 1995.
Selling, general and administrative expenses for the three months ended
June 30, 1996 were $1,218,000 compared to $863,000 for the three months ended
June 30, 1995. The increase of $355,000 (41%) was primarily the result of
increases in selling expenses in response to the new supply of TelePad 3 units
and the addition of new space and personnel to expand the Company's
capabilities.
Interest income contributed $186,000 in the current period as a result
of the investment of the net proceeds of the secondary public offering completed
in April 1996.
- 7 -
<PAGE>
As a result of the foregoing, the Company recorded a net loss of
$1,876,000 or ($0.19) per share for the three-month period ended June 30, 1996
compared to a net loss of $1,297,000 or ($0.26) per share for the same period in
1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996, the Company recognized revenues
of $779,000 compared to revenues of $930,000 in the same period in 1995. This
decrease of $151,000 is the net result of a $33,000 increase in product sales
and a $184,000 decrease in service sales. The decrease in service revenues
resulted from work on multiple small professional service contracts in the
six-month period ended June 30, 1996 versus work on one large contract designing
a custom software solution in the same period in 1995.
Cost of products and services sold during the six months ended June 30,
1996 totaled $1,056,000 (136% of revenue) compared to $567,000 (61% of revenue)
in the six months ended June 30, 1995. Costs in the current period include a
charge of $318,000 directly related to the shift in manufacturers and restarting
production in new facility. Product gross margins in the current period have
been constrained by the relatively high cost of parts purchased primarily in
1995 by the prior manufacturer, but not used and replaced earlier due to
financial and technical delays. Cost of products sold includes a charge of
approximately $33,000 for warranty costs and a charge of approximately $47,000
to expense accessories for the TelePad 3 which were made obsolete by design
modifications. Approximately $23,000 of the warranty costs are to incorporate
recent engineering changes into TelePad 3 units built in prior periods.
R&D expenses for the six months ended June 30, 1996 were $793,000
compared to $864,000 for the six months ended June 30, 1995. This 8% decrease in
R&D spending was due primarily to design and development to enhance the TelePad
3 and non-recurring expenses associated with the start up of a new manufacturing
facility in the current period as compared with expenditures for the initial
design of the TelePad 3 for the same period in 1995.
Selling, general and administrative expenses for the six months ended
June 30, 1996 were $2,097,000 compared to $1,751,000 for the six months ended
June 30, 1995. The increase of $346,000 (20%) was primarily the result of
increases in selling expenses in response to the new supply of TelePad 3 units
and the addition of new space and personnel to expand the Company's
capabilities.
Interest expense of $253,000 and amortization of debt issue costs of
$118,000 in the six-month period ended June 30, 1996 relate to the $4,000,000 in
bridge notes outstanding. These notes were retired with the proceeds from the
secondary offering.
As a result of the foregoing, the Company recorded a net loss of
$3,436,000 or ($0.47) per share for the six months ended June 30, 1996 compared
to a net loss of $2,249,000 or ($0.48) per share for the same period in 1995.
The weighted average number of shares increased as a result of 6,555,000 shares
sold in the secondary offering.
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<PAGE>
Liquidity And Capital Resources
- -------------------------------
Net cash used in operating activities was $4,298,000 in the six-month
period ended June 30, 1996 as compared to $2,439,000 in the comparable period in
1995. The cash consumed by the $3,436,000 net loss was increased by payments to
vendors, primarily IBM, and a $600,000 advance made to Sanmina to start
production of the TelePad 3. Inventory increased by a net amount of $117,000,
primarily as a result of the purchase of $300,000 in TelePad SL parts from IBM
and a reduction of TelePad 3 inventory.
On April 3, 1996, the Company completed a public offering of 20,000
units (the "Units"). Each Unit consisted of 285 shares of Class A common stock
and 1,000 Class D warrants and was sold for $1,000 per Unit, pursuant to which
the Company raised $20,000,000. The net proceeds to the Company from the Unit
offering amounted to $17,779,000. On April 25, 1996, the underwriter exercised
the over-allotment option to purchase an additional 3,000 Units pursuant to
which the Company raised an additional $3,000,000. The Company received net
proceeds of $2,736,000 from the exercise of the over-allotment option.
In July, August and September, 1995, the Company undertook a private
placement of 80 units, each consisting of $50,000 in 10% promissory notes due
upon the earlier to occur of (a) the closing of a public offering of the
Company's Class A common stock and warrants or (b) July 26, 1997, and 25,000
Class D warrants, each of which entitled the holder thereof to purchase one
share of the Company's Class A common stock at an exercise price of $2.50 per
share under certain circumstances. On July 26, 1995, the Company completed the
sale of 46.5 units and received net proceeds therefrom in the amount of
$1,966,663. On August 7, 1995, the Company completed the sale of an additional
29 units and received net proceeds therefrom in the amount of $1,261,500. On
September 8, 1995, the Company completed the sale of an additional 4.5 units and
received net proceeds therefrom in the amount of $195,750. On April 25, 1996 the
Company paid $4,268,685 to repay the $4,000,000 principal amount of the
promissory notes and accrued interest in the amount of $268,685.
On May 1, 1996, the Company paid $825,000 to the individual investor
holding the $750,000 promissory note to repay the $750,000 principal amount and
$75,000 in interest. The Company expects that available cash will enable the
Company to meet its normal operating requirements over the near term.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TELEPAD CORPORATION
Date: August 14, 1996 /s/ Donald W. Barrett
---------------------------------
Donald W. Barrett
Chairman of the Board and Chief Executive
Officer
Date: August 14, 1996 /s/ Robert D. Russell
---------------------------------
Robert D. Russell
Vice President and Treasurer
Principal Financial and Accounting
Officer
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000892038
<NAME> TELEPAD CORPORATION
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,358,814
<SECURITIES> 0
<RECEIVABLES> 339,037
<ALLOWANCES> 100,000
<INVENTORY> 520,554
<CURRENT-ASSETS> 14,872,778
<PP&E> 777,312
<DEPRECIATION> (397,048)
<TOTAL-ASSETS> 15,280,731
<CURRENT-LIABILITIES> 2,298,021
<BONDS> 0
0
0
<COMMON> 12,982,710
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,280,731
<SALES> 0
<TOTAL-REVENUES> 778,972
<CGS> 1,055,792
<TOTAL-COSTS> 3,945,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (457,154)
<INCOME-PRETAX> (3,435,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,435,716)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> 0
</TABLE>
