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 SEPTEMBER 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
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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
incorporation or organization) Identification No.)
380 HERNDON PARKWAY, SUITE 1900, HERNDON, VIRGINIA 20170
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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 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 November 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
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - September 30, 1997 (unaudited)
and December 31, 1996 3
Statements of Operations for the three and
nine-month periods ended September 30,
1997 (unaudited) and 1996 (unaudited) 4
Statements of Cash Flows for the nine-month
periods ended September 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 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
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<PAGE>
TELEPAD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,151,919 $ 1,418,770
Short-term investments -- 4,078,679
Restricted cash 347,216 2,000,000
Accounts receivable, less allowance of $126,000
at September 30, 1997 and $107,000 at December 31, 1996 2,093,686 668,922
Inventory, less allowance of $14,000 at September 30, 1997
and December 31, 1996 2,252,001 3,474,782
Other current assets 1,862,857 243,988
------------ ------------
Total current assets 7,707,679 11,885,141
Furniture and equipment:
Office furniture and equipment 203,140 197,932
Computer equipment 953,964 880,656
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1,157,104 1,078,588
Less accumulated depreciation (702,314) (505,639)
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Net furniture and equipment 454,790 572,949
Deposits and other assets 223,589 27,689
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Total assets $ 8,386,058 $ 12,485,779
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,654,633 $ 1,991,805
Deferred revenue 14,201 34,643
------------ ------------
Total current liabilities 1,668,834 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 September 30, 1997 and December 31, 1996, respectively 117,556 115,589
Class B common stock, 593,063 shares designated,
none issued or outstanding at September 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 (32,683,945) (28,908,578)
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Total stockholders' equity 6,717,224 10,459,331
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Total liabilities and stockholders' equity $ 8,386,058 $ 12,485,779
============ ============
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
TelePad products $ 1,217,234 $ 821,723 $ 2,662,813 $ 1,440,922
Service contracts 90,899 34,281 123,230 194,055
------------ ------------ ------------ ------------
Total revenues 1,308,133 856,004 2,786,043 1,634,977
Costs and expenses:
Cost of goods sold - TelePad products 1,226,816 748,064 2,575,803 1,410,959
Cost of goods sold - service contracts 62,214 12,578 75,631 87,867
Costs related to manufacturing startup
-- -- -- 317,607
Research and development 154,924 405,090 778,622 1,197,755
Selling, general and administrative 1,132,883 1,135,210 3,407,242 3,232,459
------------ ------------ ------------ ------------
Total costs and expenses 2,576,837 2,300,942 6,837,298 6,246,647
------------ ------------ ------------ ------------
Loss from operations (1,268,704) (1,444,938) (4,051,255) (4,611,670)
Interest income 127,042 207,466 290,384 395,637
Interest expense
(214) -- (214) (253,197)
Amortization of debt issue costs
-- -- -- (118,302)
Other income (expense) (7,904) -- (14,282) (85,655)
------------ ------------ ------------ ------------
Net loss $ (1,149,780) $ (1,237,472) $ (3,775,367) $ (4,673,187)
============ ============ ============ ============
Net loss per share $ (0.10) $ (0.11) $ (0.32) $ (0.53)
============ ============ ============ ============
Weighted average shares outstanding 11,755,624 11,604,573 11,742,194 8,786,588
============ ============ ============ ============
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,775,367) $ (4,673,187)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 196,675 157,680
Amortization of debt discount -- 118,302
Provision for loss on accounts receivable 18,924 1,061
Changes in assets and liabilities:
Restricted cash 1,652,784 --
Accounts receivable (1,443,688) 152,097
Inventory 1,222,781 (2,056,494)
Other current assets (1,418,869) (299,280)
Deposits and other assets (195,900) (6,628)
Accounts payable and accrued expenses (337,172) 171,849
Deferred revenue (20,442) (2,953)
------------ ------------
Net cash used in operating activities (4,100,274) (6,437,553)
INVESTING ACTIVITIES
Purchase of furniture and equipment (78,516) (297,113)
Investment in Intellibit Corporation (200,000) --
Sales of short-term investments 4,078,679 --
------------ ------------
Net cash provided by (used in) investing activities 3,800,163 (297,113)
FINANCING ACTIVITIES
Net cash proceeds from issuance of common stock 33,260 20,599,774
Proceeds from notes payable -- 750,000
Repayment of notes payable -- (4,750,000)
------------ ------------
Net cash provided by financing activities 33,260 16,599,774
------------ ------------
Net (decrease) increase in cash and cash equivalents (266,851) 9,865,108
Cash and cash equivalents, beginning of period 1,418,770 1,257,948
Cash and cash equivalents, end of period $ 1,151,919 $ 11,123,056
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Actual cash payments for interest $ 214 $ 418,685
============ ============
</TABLE>
See accompanying notes
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<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
SEPTEMBER 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 nine-month periods
ended September 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.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
- ---------------------
For the quarter ended September 30, 1997, TelePad product revenues
increased 48% to $1,217,000 from $822,000 recorded in the same period in 1996.
For the first nine months of 1997, TelePad product revenues increased
$1,222,000, or 85%, from $1,441,000 in the same period in 1996. The increases in
both periods are primarily the result of increased unit shipments of TelePad 3
computers. Service contract revenue increased $57,000, or 168%, in the current
quarter, but decreased $71,000, or 71%, from the nine-month period in 1996.
Although services represent a small portion of the Company's revenue currently,
more emphasis is being placed on opportunities for the sale of services in an
attempt to more fully capitalize on the Company's knowledge of mobile computing.
Cost of products sold during the three months ended September 30, 1997
totaled $1,227,000 (101% of related revenue) compared to $748,000 (91% of
related revenue) in the same period in 1996. For the first nine months of 1977,
the cost of products sold was $2,576,000 (97% of related revenue) compared with
$1,411,000 (98% of related revenue) in the comparison period. The Company began
shipping TelePad 3 computers with 586 microprocessors in the third quarter of
1997 and this has put downward pricing pressure on TelePad 3 computers with 486
microprocessor technology. The comparison of revenue to cost in the current
quarter was also affected by selected price reductions to encourage the sale of
TelePad 3 computers with the 486 microprocessor and to encourage field
evaluation trials where there appears to be significant sales potential. The
pricing pressure caused by the shift in microprocessors is expected to be
focused on the third and forth quarters of fiscal 1997 when the supply of 486
machines is expected to be exhausted, whereas competitive pricing pressure is
expected to be an ongoing factor in the business. The nine month period ending
September 30, 1996 included product related charges of $318,000 recognized in
connection with the shift in manufacturers and restarting production in a new
facility.
Research and development ("R&D") expenses for third quarter and
nine-month period of 1997 were down 62% and 35%, respectively, from the same
periods in 1996. These reductions in R&D spending are due primarily to
completion of the primary engineering development of the TelePad 3 computer and
a shift to a lower level of work on modules which add functionality to the
TelePad 3. The reductions in engineering development of the TelePad 3 expenses
were partially offset by increased costs 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
September 30, 1997 increased $14,000, from the same period in 1996. For the nine
month period, selling, general and administrative expenses increased $191,000,
or 6% from the same period in 1996. The increase in the nine 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 third quarter of 1997 was $127,000 compared to
$207,000 in the same period in 1996. 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
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<PAGE>
of debt issue costs in 1996 were related to outstanding indebtedness that was
retired with the proceeds from the Company's secondary public offering which was
completed in April 1996.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $4,100,000 in the nine-month
period ended September 30, 1997 as compared to $6,438,000 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 $1,444,000 in the current period based on the
combination of increased sales and extended payment terms on one significant
sale. In the prior period, collections exceeded increases in accounts receivable
and this increased cash by $152,000. Inventory reductions due to sales in the
period contributed $1,223,000 to cash, whereas in the prior period inventory
accumulations resulted in a $2,056,000 use of cash. Other current assets in the
current period increased $1,419,000, primarily as a result of advance payments
in the amount of $1,653,000 made to the Company's contract manufacturer against
open purchase orders for inventory. The original product delivery schedule was
significantly delayed by the 586 microprocessor development schedule. The letter
of credit issued to the contract manufacturer to facilitate production, which
was reflected in restricted cash, was reduced by an equivalent amount.
In the nine-month period ended September 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. In September 1997, the Company purchased 20% of the common stock of
Intellibit Corporation, a Virginia corporation, for $200,000 in cash, with an
option to increase the investment to 80% subject to certain conditions.
Intellibit Corporation is a privately held developer of digital signal
processing products.
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 received by the Company on February 15, 1996, upon the
issuance of a note payable to 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.
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<PAGE>
"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, possible delisting of securities by Nasdaq, the risk of low-priced
stock, and other risks detailed in the Company's Securities and Exchange
Commission filings.
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: NOVEMBER 13, 1997 /S/ DONALD W. BARRETT
----------------- -----------------------
Donald W. Barrett
Chairman of the Board and Chief
Executive Officer
Date: NOVEMBER 13, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,499,135
<SECURITIES> 0
<RECEIVABLES> 2,093,686
<ALLOWANCES> 126,000
<INVENTORY> 2,252,001
<CURRENT-ASSETS> 7,707,679
<PP&E> 1,157,104
<DEPRECIATION> (702,314)
<TOTAL-ASSETS> 8,386,058
<CURRENT-LIABILITIES> 1,668,834
<BONDS> 0
0
0
<COMMON> 117,556
<OTHER-SE> 6,717,224
<TOTAL-LIABILITY-AND-EQUITY> 8,386,058
<SALES> 2,662,813
<TOTAL-REVENUES> 2,786,043
<CGS> 2,575,803
<TOTAL-COSTS> 2,651,433
<OTHER-EXPENSES> 4,201,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> (3,775,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,775,367)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> 0
</TABLE>
