SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1997.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21934
TELEPAD CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1680936
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
380 HERNDON PARKWAY, SUITE 1900, HERNDON, VIRGINIA 20170
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (703) 834-9000
--------------
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 90 ninety 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 August 1, 1997
--------------------- -----------------
Class A Common Stock 11,755,624 shares, $0.01 par value
Class B Common Stock none
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
<PAGE>
TELEPAD CORPORATION
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1997 (unaudited)
and December 31, 1996 3
Statements of Operations for the three and six month
periods ended June 30, 1997 (unaudited)
and 1996 (unaudited) 4
Statements of Cash Flows for the six-month periods
ended June 30, 1997 (unaudited) and 1996 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
TELEPAD
CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,263,116 $ 1,418,770
Short-term investments 1,170,685 4,078,679
Restricted cash 2,000,000 2,000,000
Accounts receivable, less allowance of $113,000
at June 30, 1997 and $107,000 at December 31, 1996 944,975 668,922
Inventory, less allowance of $14,000 at June 30, 1997
and December 31, 1996, respectively 3,349,846 3,474,782
Other current assets 149,242 243,988
------------ ------------
Total current assets 8,877,864 11,885,141
------------ ------------
Furniture and equipment:
Office furniture and equipment 203,140 197,932
Computer equipment 932,597 880,656
------------ ------------
1,135,737 1,078,588
Less accumulated depreciation (633,622) (505,639)
------------ ------------
Net furniture and equipment 502,115 572,949
Deposits and other assets 23,589 27,689
------------ ------------
Total assets $ 9,403,568 $ 12,485,779
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,515,164 $ 1,991,805
Deferred revenue 21,402 34,643
------------ ------------
Total current liabilities 1,536,566 2,026,448
Stockholders' equity
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,
11,755,624 and 11,558,905 shares issued and outstanding
at June 30,1997 and December 31, 1996, respectively 117,556 115,589
Class B common stock, 593,063 shares designated, none issued or
outstanding at June 30, 1997 and 150,000 shares issued and
outstanding at December 31, 1996 -- 1,500
Additional paid-in capital 39,283,613 39,250,820
Accumulated deficit (31,534,167) (28,908,578)
------------ ------------
Total stockholders' equity 7,867,002 10,459,331
------------ ------------
Total liabilities and stockholders' equity $ 9,403,568 $ 12,485,779
============ ============
</TABLE>
See accompanying notes
3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
TelePad products $ 956,219 $ 428,305 $ 1,445,580 $ 619,198
Service contracts -- 58,752 32,331 159,774
------------ ------------ ------------ ------------
Total revenues 956,219 487,057 1,477,911 778,972
Costs and expenses:
Cost of goods sold - Telepad products 913,940 407,814 1,348,987 662,896
Cost of goods sold - service contracts -- 34,639 13,417 75,289
Costs related to manufacturing startup -- 317,607 -- 317,607
Research and development 317,408 552,461 623,699 792,665
Selling, general and administrative 1,132,086 1,217,763 2,274,360 2,097,249
------------ ------------ ------------ ------------
Total costs and expenses 2,363,434 2,530,284 4,260,463 3,945,706
------------ ------------ ------------ ------------
Loss from operations (1,407,215) (2,043,227) (2,782,552) (3,166,734)
Interest income 66,160 185,933 163,342 188,172
Interest expense -- (3,288) -- (253,197)
Amortization of debt issue costs -- -- -- (118,302)
Other expenses (6,378) (15,212) (6,378) (85,655)
------------ ------------ ------------ ------------
Net loss $ (1,347,433) $ (1,875,794) $ (2,625,588) $ (3,435,716)
============ ============ ============ ============
Net loss per share $ (0.11) $ (0.19) $ (0.22) $ (0.47)
============ ============ ============ ============
Weighted average shares outstanding 11,753,976 9,740,786 11,735,479 7,377,596
============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1997 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,625,588) $ (3,435,716)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 127,983 109,210
Amortization of debt discount -- 118,302
Provision for loss on accounts receivable 5,989 --
Changes in assets and liabilities:
Accounts receivable (282,042) 133,687
Inventory 124,936 (116,821)
Other current assets 94,746 (558,127)
Deposits and other assets 4,100 (6,628)
Accounts payable and accrued expenses (476,642) (549,989)
Deferred revenue (13,241) 8,551
------------ ------------
Net cash used in operating activities (3,039,759) (4,297,531)
INVESTING ACTIVITIES
Purchase of furniture and equipment (57,149) (131,884)
Sales of short-term investments 2,907,994 --
------------ ------------
Net cash provided (used) by investing activities 2,850,845 (131,884)
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 33,260 20,530,281
Proceeds from notes payable -- 750,000
Repayment of notes payable -- (4,750,000)
------------ ------------
Net cash provided by financing activities 33,260 16,530,281
------------ ------------
Net (decrease) increase in cash (155,654) 12,100,866
Cash and cash equivalents, beginning of period 1,418,770 1,257,948
------------ ------------
Cash and cash equivalents, end of period $ 1,263,116 $ 13,358,814
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Actual cash payments for interest $ -- $ 75,000
============ ============
</TABLE>
See accompanying notes
5
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
JUNE 30, 1997 AND 1996 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-month and six-month periods ended
June 30, 1997 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1997. For further information, refer to the
financial statements for the year ended December 31, 1996 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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
128 on the calculation of basic earnings per share and fully diluted earnings
per share for the periods presented is not expected to be material.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
For the quarter ended June 30, 1997, revenues increased 96% to $956,000
from $487,000 recorded in the same period in 1996. For the first six months of
1997, revenues increased $699,000, or 90% from $779,000 in the same period in
1996. The increases in both periods are primarily the result of increased unit
shipments of TelePad 3 computers. Sales of the TelePad 3 in the first half of
1996 were hampered by the lack of a supply of TelePad 3s due to being out of
production during a switch in contract manufacturers.
Cost of products and services sold during the three months ended June
30, 1997 totaled $914,000 (96% of revenue) compared to $442,000 (91% of revenue)
in the same period in 1996. For the first six months of 1997, the cost of
products and services sold was $1,362,000 (91% of revenue) compared with
$738,000 (95% of revenue) in the comparison period. The second quarter of 1996
included product related charges of $318,000 recognized in connection with the
shift in manufacturers and restarting production in a new facility. Gross margin
percentages in the second quarter of 1997 are reduced from the same period in
1996 by a combination of not having service revenue in the current period, which
has higher margins than hardware, and pricing pressure on TelePad 3 computers
which contain a 486 microprocessor. The Company has announced that it is putting
586 microprocessor technology into production resulting in downward pricing
pressure and reduced gross margins on TelePad 3 computers with 486
microprocessor technology.
Research and development ("R&D") expenses for second quarter of 1997
were $317,000 compared to $552,000 for the same period in 1996. This 43%
decrease in R&D spending was due primarily to nonrecurring charges in the second
quarter of 1996 for engineering work required to startup production at Sanmina,
the new contract manufacturer. This reduction was partially offset by the
increased cost of a slightly larger engineering staff, which was increased after
the first quarter of 1996, to facilitate a shift in emphasis to product
enhancements and to the development of new modules to broaden the TelePad 3
product line.
Selling, general and administrative expenses for the quarter ended June
30, 1997 decreased 7%, or $86,000, from the same period in 1996. For the six
month period, selling, general and administrative expenses increased $177,000,
or 8% from the same period in 1996. The increase in the six month period was
primarily the result of increases in selling expenses in response to the new
supply of TelePad 3 units and the addition of personnel and space to expand the
Company's capabilities.
Interest income in the second quarter of 1997 was $66,000 compared to
$186,000 in the comparison period. This reflects the investment of the net
proceeds of the secondary public offering completed in April 1996 and the
subsequent use of cash in operations. Interest expense and amortization of debt
issue costs in 1996 were related to outstanding indebtedness that was retired
with the proceeds from the second public offering.
7
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $3,040,000 in the six-month
period ended June 30, 1997 as compared to $4,298,000 in the comparable period in
1996. Net cash used in operating activities in both periods was primarily due to
the net losses incurred in each respective period. Accounts receivable increased
by $282,000 in the current period based on increased sales whereas in the prior
period collections exceeded increases in accounts receivable and this increased
cash by $134,000. Other current assets in the prior period increased by
$558,000, primarily as a result of an advance payment of $608,000 made to the
Company's new contract manufacturer in April 1996 to start the transfer of
production from the former contract manufacturer. Accounts payable and accrued
expenses were reduced in both periods and the reductions in both periods
primarily reflect payments to the Company's contract manufacturer in the
respective period.
In the six-month period ended June 30, 1997, cash used in operating
activities was primarily funded by a reduction in short-term investments whereas
in the prior period cash used in operating activities was primarily funded by
the completion by the Company of a public offering of its securities.
On April 3, 1996, the Company completed a public offering of 20,000
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. Cash was also
increased by the proceeds of a note payable from an individual investor in the
amount of $750,000.
On April 25, 1996 the Company paid $4,268,685 to repay $4,000,000
principal amount of outstanding 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.
"Safe Harbor" Statement under the private Securities Litigation Reform
Act of 1995: The statements above which are not historical facts are
forward-looking statements that involve risks and uncertainties, including, but
not limited to, demand for the Company's products and market acceptance risks,
the effect of economic conditions, the impact of competitive products and
pricing, product development, commercialization and technological difficulties,
capacity, and supply constraints or difficulties, the results of financing
efforts, and other risks detailed in the Company's Securities and Exchange
Commission filings.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The annual meeting of shareholders of the Registrant was held on May
12, 1997 for the purpose of (i) electing two directors of the Company to serve
as Class I directors of the Company's Board of Directors for terms expiring at
the third succeeding annual meeting after their election, and until their
successors shall be duly elected and qualified, and (ii) ratifying the
appointment of the Registrant 's independent public accountants for the year
ending December 31, 1997. Proxies for the meeting were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934 and there was no
solicitation in opposition.
The following directors were elected by the following vote:
Votes
-----
Class For Against
----- --- -------
Sydney H. Dankman I 10,760,120 91,455
John M. Toups I 10,760,120 91,455
The proposal to ratify the appointment of the independent public
accountants for the year ending December 31, 1997 was approved by the following
vote:
For Against Non Votes/Abstentions
--- ------- ---------------------
10,767,025 63,200 21,350
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
9
<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, 1997 /S/ DONALD W. BARRETT
--------------- -----------------------
Donald W. Barrett
Chairman of the Board and Chief Executive Officer
Date: AUGUST 14, 1997 /S/ ROBERT D. RUSSELL
--------------- -----------------------
Robert D. Russell
Vice President, Secretary 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,263,116
<SECURITIES> 1,170,685
<RECEIVABLES> 944,975
<ALLOWANCES> 113,000
<INVENTORY> 3,349,846
<CURRENT-ASSETS> 8,877,864
<PP&E> 1,135,737
<DEPRECIATION> (633,622)
<TOTAL-ASSETS> 9,403,568
<CURRENT-LIABILITIES> 1,536,566
<BONDS> 0
0
0
<COMMON> 117,556
<OTHER-SE> 7,867,002
<TOTAL-LIABILITY-AND-EQUITY> 9,403,568
<SALES> 1,445,580
<TOTAL-REVENUES> 1,477,911
<CGS> 1,348,987
<TOTAL-COSTS> 1,362,404
<OTHER-EXPENSES> 2,898,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,625,588)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,625,588)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> 0
</TABLE>
