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, 1998.
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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
- ------------------------------ ---------------------------------
(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
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Not Applicable
- --------------------------------------------------------------------------------
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 13, 1998
--------------------- ------------------
Class A Common Stock 13,021,874 shares, $0.01 par value
Class B Common Stock none
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
TELEPAD CORPORATION
INDEX TO FORM 10-QSB
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - June 30, 1998 (unaudited)
and December 31, 1997 3
Statements of Operations for the three and six month periods
ended June 30, 1998 (unaudited) and 1997 (unaudited) 4
Statements of Cash Flows for the six-month periods
ended June 30, 1998 (unaudited) and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-13
Part II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Securities Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
TELEPAD CORPORATION
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30, December 31,
1998 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 163,302 $ 1,588,790
Short-term investments 173,475 -
Accounts receivable, less allowance of $108,000 at June 30, 1998 and
$88,000 at December 31, 1997 1,688,140 1,419,231
Inventory 2,478,476 1,174,507
Advance to Sanmina - 1,286,284
Other current assets 401,973 184,133
------------------ ------------------
Total current assets 4,905,366 5,652,945
------------------ ------------------
Furniture and equipment:
Office furniture and equipment 237,754 203,140
Computer equipment 684,590 668,378
------------------ ------------------
922,344 871,518
Less accumulated depreciation (581,026) (489,895)
------------------ ------------------
Net furniture and equipment 341,318 381,623
Investment in affiliates 533,000 200,000
Deposits and other assets 25,231 23,591
Goodwill, net 3,062,236 -
================== ==================
Total assets $ 8,867,151 $ 6,258,159
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 3,071,743 $ 2,309,680
Notes payable 2,146,308 -
Deferred revenue 13,601 13,601
------------------ ------------------
Total current liabilities 5,231,652 2,323,281
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series C 7% cumulative redeemable convertible preferred stock,
950,000 shares designated, 950,000 and no shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively;
liquidation preference of $950,000 at June 30, 1998 1,009,850 -
Stockholders' equity
Common stock, $.01 par value; 95,000,000 shares authorized:
Class A common stock, 94,406,937 shares designated,
12,065,624 and 11,755,624 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 130,219 117,556
Class B common stock, 593,063 shares designated,
no shares issued or outstanding at June 30, 1998
and December 31,1997, respectively - -
Additional paid-in capital 40,401,213 39,283,613
Accumulated deficit (37,905,783) (35,466,291)
------------------ ------------------
Total stockholders' equity 2,625,649 3,934,878
================== ==================
Total liabilities and stockholders' equity $ 8,867,151 $ 6,258,159
================== ==================
</TABLE>
See accompanying notes
3
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------------ ----------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Product related $ 1,532,618 $ 956,219 $ 1,990,008 $ 1,445,580
Service contracts 65,799 - 281,570 32,331
------------------ ----------------- ----------------- -----------------
Total revenues 1,598,417 956,219 2,271,578 1,477,911
Costs and expenses:
Cost of goods sold - products 1,354,973 913,940 1,759,522 1,348,987
Cost of goods sold - service contracts 116,493 - 226,631 13,417
Research and development 116,464 317,408 259,712 623,699
Selling, general and administrative 1,438,144 1,132,086 2,464,663 2,274,360
------------------ ----------------- ----------------- -----------------
Total costs and expenses 3,026,074 2,363,434 4,710,528 4,260,463
------------------ -----------------
Loss from operations (1,427,657) (1,407,215) (2,438,950) (2,782,552)
Interest income 4,400 66,160 18,482 163,342
Interest expense (17,291) - (17,291) -
Other expenses (145) (6,378) (1,733) (6,378)
------------------ ----------------- ----------------- -----------------
Net loss available for common
stockholders $ (1,440,693) $ (1,347,433) $(2,439,492) $ (2,625,588)
================== ================= ================= =================
Net loss per share $ (0.12) $ (0.11) $ (0.20) $ (0.22)
================== ================= ================= =================
Diluted net loss per share $ (0.12) $ (0.11) $ (0.20) $ (0.22)
================== ================= ================= =================
Weighted average shares outstanding 12,440,212 11,753,976 $ 12,242,362 11,735,479
================== ================= ================= =================
</TABLE>
See accompanying notes
4
<PAGE>
TELEPAD CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss $ (2,439,492) $ (2,625,588)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 120,218 127,983
Accrued interest on notes payable 13,308 -
Provision for loss on accounts receivable 9,468 5,989
Provision for gain/loss on foreign exchange (6,179) -
Provision for loss in inventory value 41,085 -
Changes in assets and liabilities net of effects from purchase of L&E:
Accounts receivable 809,257 (282,042)
Inventory (633,960) 124,936
Advance to Sanmina 1,286,284 -
Other current assets (209,059) 94,746
Deposits and other assets 8,643 4,100
Accounts payable and accrued expenses (740,872) (476,642)
Deferred revenue - (13,241)
------------------- -------------------
Net cash used in operating activities (1,741,299) (3,039,759)
Investing activities
Purchase of furniture and equipment (53,996) (57,149)
Proceeds from the sale of fixed assets 9,714 -
Purchases of short-term investments (173,475) -
Sales of short-term investments - 2,907,994
Payment for purchase of L&E, net of cash acquired (3,206,545) -
Investment in subsidiary (333,000) -
------------------- -------------------
Net cash used in investing activities (3,757,302) 2,850,845
Financing activities
Proceeds from issuance of common stock 1,130,263 33,260
Proceeds from issuance of preferred stock 1,009,850 -
Proceeds from notes payable 1,933,000 -
------------------- -------------------
Net cash provided by financing activities 4,073,113 33,260
------------------- -------------------
Net decrease in cash (1,425,488) (155,654)
Cash and cash equivalents, beginning of period 1,588,790 1,418,770
=================== ===================
Cash and cash equivalents, end of period $ 163,302 $ 1,263,116
=================== ===================
Supplemental disclosures of cash flow information
Actual cash payments for interest $ 3,983 $ -
=================== ===================
</TABLE>
See accompanying notes
5
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information pertaining to the periods ended
June 30, 1998 and 1997 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 period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Company's Form 10-KSB.
Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement 128 in its 1997 financial statements
and has restated net loss per share information for all prior periods. Basic net
loss per share was determined by dividing net loss by the weighted average
number of common shares outstanding during each period. Diluted net loss per
share excludes common equivalent shares, unexercised stock options and warrants
as the computation would not be dilutive. A reconciliation of the net loss
available for common shareholders and number of shares used in computing basic
and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss $ (1,440,693) $ (1,347,433) $ (2,439,492) $ (2,625,588)
================ ================ ================ ================
Weighted average shares:
Basic net loss per share -
weighted average shares 12,440,212 11,753,976 12,242,362 11,735,479
Effect of dilutive securities:
Stock options - - - -
Diluted net loss per share -
---------------- ---------------- ---------------- ----------------
adjusted weighted average shares 12,440,212 11,753,976 12,242,362 11,735,479
================ ================ ================ ================
Basic net loss per share $ (0.12) $ (0.11) $ (0.20) $ (0.22)
================ ================ ================ ================
Diluted net loss per share $ (0.12) $ (0.11) $ (0.20) $ (0.22)
================ ================ ================ ================
</TABLE>
6
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stockholders' Equity
During the first quarter of 1998, 310,000 shares of Class A common
stock were issued to seven officers and directors of the Company who elected to
receive shares of common stock in lieu of a portion of their salaries or board
fees.
On May 27, 1998, the Company, as part of the purchase of L&E, issued
950,000 shares of a new series of preferred stock designated Series C 7%
Cumulative Redeemable Convertible Preferred Stock, having a liquidation
preference of $1.00 per share, ("Preferred Shares") and 900,000 shares of Class
A common stock. The Preferred Shares are redeemable, at the Company's option, at
a redemption price payable in cash equal to the liquidation preference and all
accrued but unpaid dividends thereon. Pursuant to the Certificate of
Designations by which the Preferred Shares were created, each Preferred Share is
convertible into one share of Common Stock, upon approval of such conversion
(the "Conversion Proposal") by the holders of a majority of the outstanding
Common Stock voted thereon in person or by proxy at an annual or special meeting
(the "First Meeting"), or a subsequent annual or special meeting (the "Second
Meeting"). TelePad intends to convene the First Meeting, and if necessary the
Second Meeting, to seek shareholders approval of the Conversion Proposal, no
later than the 210th day following the closing of the L&E purchase transaction
on May 27, 1998. If the Conversion Proposal is approved, the 950,000 Preferred
Shares will be converted into 950,000 shares of Common Stock (subject to certain
anti-dilution adjustments).
The Company obtained $1,000,000 of the cash consideration paid to the
L&E shareholders through a portion of the proceeds realized on May 27, 1998 from
the Company's private sale of convertible notes in the aggregate principal
amount of $1,500,000 (the "Investor Notes"), to private investors (collectively,
the "Investors"). The Company also issued to certain placement agents warrants
to purchase 200,000 shares of Common Stock, at an exercise price of $0.98 per
share, subject to certain anti-dilution and other adjustment provisions
contained therein (the "Warrants"). Each Investor Note bears interest at a rate
of 8% per annum, matures on May 27., 1999, and is convertible, in $25,000
increments, at the discretion of the holder into Common Stock from time to time
until the principal balance and all unpaid interest on such Investor Note is
paid in full (the "Conversion Date") at a specified per share conversion price
subject to certain anti-dilution and other adjustments. The Company has issued
into escrow 1,500,000 shares of Common Stock reserved for delivery to the
Investors in the event of the conversion of the Investor Notes. The issuance of
any additional shares (in excess of such 1,500,000 shares) by the Company to the
Investors with respect to the conversion of the Investor Notes and the issuance
of the Put Notes (if any), or to certain placement agents upon exercise of the
Warrants, is subject to prior approval of the Company's shareholders. The
conversion price will be $0.98 per share if the conversion occurs within the
first 120 days following the Closing, and thereafter if the average closing bid
price for the Common Stock on the NASDAQ SmallCap Market, or any other
securities exchange or securities market on which the Common Stock is then
traded for any five consecutive days is less than $1.31, then the conversion
price per share will be the lesser of (i) 75% of the average closing bid price
of the Common Stock on the NASDAQ SmallCap Market, or any other securities
exchange or securities market on which the Common Stock is then traded, for the
five consecutive trading days immediately preceding the Conversion Date, or (ii)
$0.98. The Company has granted the Investors, a security interest in all of the
Company's assets, other than the L&E Stock, to secure the Investor Notes. The
Investors have agreed to subordinate their security interest in the
7
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's assets in favor of liens in connection with non-convertible debt
financing on reasonable commercial terms by the Company but up to a maximum
prior lien of $1,000,000 and provided the Investors have been given seven
business days prior notice of such financing.
2. Acquisition
On May 27, 1998, the Company, pursuant to a Share Purchase Agreement
dated as of May 27, 1998 (the "Purchase Agreement"), acquired from Christine
LeMaire and Dean N. Eisenberger (collectively the "L&E Shareholders"), all of
the outstanding capital stock of L&E Mobile Computer Mounts, Inc. ("L&E"). The
company is accounting for the acquisition as a purchase and is amortizing the
excess fair value over a 10 year period. The initial purchase price, subject to
additional payments as set forth below, was $3,266,550.
L&E is a distributor, installer and integrator of vehicle mounted
mobile computers, and a distributor and manufacturer of mobile mounting
products. At closing, among other things, the Company paid a total of $1,300,000
in cash to the L&E Shareholders ("Cash Consideration") and issued to them a
total of (a) 900,000 shares of its Class A Common Stock, par value $.01 per
share (the "Common Stock Consideration"), and (b) 950,000 shares, having a
liquidation preference of $1.00 per share, of a new series of preferred stock
designated Series C 7% Cumulative Redeemable Convertible Preferred Stock
("Preferred Shares"). The Company is obligated to pay an additional sum (the
"Additional Consideration") to the L&E Shareholders, within a specified number
of days after the earlier of: (i) the third anniversary of the closing under the
Purchase Agreement (the "Closing"); (ii) the date on which any event included in
the definition of "Acceleration Event" occurs (including specified changes in
control of the Company and certain other extraordinary events regarding the
Company or L&E); and (iii) at the Company's option, on an earlier date (the
"Additional Consideration Payment Date"). The amount of the Additional
Consideration will be based on either (a) a formula using a multiple of L&E's
average annual "stand-alone" earnings before income taxes, depreciation and
amortization (as defined in the Purchase Agreement) from the Closing to the
Additional Consideration Payment Date, or (b) at the Company's option, the
present value on the Additional Consideration Payment Date, of $20,000,000
discounted from the third anniversary of the Closing, assuming a discount rate
of 8.5% per annum. As a condition to the Closing, as a capital contribution, the
Company concurrently issued a non-recourse $333,000 note payable to L&E, which
bears interest at a rate of 6% per annum, and which matures 60 days following
the Closing (the "Note"). The Company is obligated to make additional capital
contributions to L&E of $333,000 on May 27, 1999 and $334,000 on May 27, 2000.
The Company, L&E and the L&E shareholders have entered into a series of
negotiations concerning the possible termination of the Note and amendment of
the provisions of the Purchase Agreement relating to additional capital
investments in L&E to be made by the Company.
8
<PAGE>
TELEPAD CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Pro Forma Information
The unaudited pro forma combined condensed statements of operations
gives effect to the acquisition of L&E Mobile Computer Mounts, Inc. ("L&E"),
completed by TelePad Corporation (the "Company") on May 27, 1998, as if it had
occurred at January 1, 1998 and January 1, 1997, respectively.
Six Months Ended June 30,
1998 1997
---------------- -----------------
Pro forma Pro forma
Revenue $ 5,115,377 $ 2,295,410
Net loss available to
common shareholders $ (2,592,799) $ (2,692,968)
================ =================
Basic and diluted loss per share $ (20.00) $ (0.21)
================ =================
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
For the quarter ended June 30, 1998, revenues increased 67% to
$1,598,000 from $956,000 recorded in the same period in 1997. The increase is
primarily the result of revenue from the addition of L&E Mobile Computer Mounts,
Inc. ("L&E"), which was acquired in a purchase transaction on May 27, 1998. For
the first six months of 1998, revenues increased $794,000, or 54% from
$1,478,000 in the same period in 1997. The addition of L&E was partially offset
by a decline in shipments of TelePad 3 computers in the first half of 1998
compared to the first half of 1997. The Company has experienced delays in
securing orders for TelePad 3 computers. Service revenue increase $250,000 in
the first half compared to the first half of 1997 as more service contract work
has been performed. However, service revenue in the quarter ended June 30, 1998
was reduced by the reversal of revenue recognized in the first quarter of 1998
based on misrepresentations by an employee of the Company regarding contract
work performed.
Cost of products and services sold during the three months ended June
30, 1998 totaled $1,471,000 (92% of revenue) compared to $914,000 (95% of
revenue) in the same period in 1997. For the first six months of 1977, the cost
of products and services sold was $1,986,000 (87% of revenue) compared with
$1,362,000 (92% of revenue) in the comparison period. The second quarter of 1998
includes a $41,000 charge to cost of goods sold to recognize the loss in value
of inventory held for future production. Gross margin percentages in the second
quarter of 1998 improved from the same period in 1997 primarily as a result of
the addition of L&E, but offset partially by a $51,000 negative gross margin on
service contracts resulting from the reversal of service contract revenue.
Improving competitive computer technology continues to put downward margin
pressure on the TelePad 3 computer sales.
Research and development ("R&D") expenses for the second quarter of
1998 were $116,000 compared to $317,000 for the same period in 1997. This 63%
decrease in R&D spending in the quarter ended June 30, 1998 and the 58%
reduction in the first half compared to the prior period reflects a shift from
work on developing the 586 microprocessor version of the TelePad 3 and modules
for the TelePad 3 in the prior period to a reduced level of work on designing
the next version of the TelePad 3 in the current period.
Selling, general and administrative expenses for the quarter ended June
30, 1998 increased 27%, or $306,000, from the same period in 1997. For the six
month period, selling, general and administrative expenses increased $191,000,
or 8% from the same period in 1997. The increases in the current quarter and
first half compared to the prior periods was primarily the result of the
addition of L&E selling, general and administrative expenses and legal and
accounting costs associated with the purchase of L&E.
Interest income in the second quarter of 1998 was $4,000 compared to
$66,000 in the comparison period. This reflects a reduced cash balance caused by
the use of cash in operations. Interest expense increased $17,000 in the current
quarter primarily as a result of the notes payable related to the acquisition of
L&E.
10
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $1,741,000 in the six-month
period ended June 30, 1998 as compared to $3,040,000 in the comparable period in
1997. Net cash used in operating activities in both periods was primarily due to
the net losses incurred in each respective period. Accounts receivable decreased
by a net amount of $809,000 in the current period based on reduced TelePad 3
computer sales offset partially by an increase in L&E receivables. In the prior
period revenue exceeded collections resulting in a $282,000 use of cash.
Inventory increased $634,000 on a net basis in the current quarter due primarily
to the delivery of nearly completed TelePad 3 computer kits from Sanmina
Corporation ("Sanmina"), the Company's contract manufacturer. The increase in
inventory due to the addition of computer kits was partially offset by a
decrease in L&E's inventory. The increase in inventory was financed by the
$1,286,000 draw down of advances by Sanmina, which advances had been made in
1997 against open purchase orders for inventory. Other current assets increased
by $209,000 in the six-month period ended June 30, 1998 due primarily to
$300,000 in proceeds from a notes payable issued in connection with the purchase
of L&E being held in escrow. This portion of the proceeds from the notes payable
was held in escrow until the satisfaction of certain requirements specified in
the financing agreements.
In the six-month period ended June 30, 1998, cash used in operating
activities was partially funded by the proceeds from the issuance of notes
payable issued in connection with the L&E purchase transaction whereas in the
prior period cash used in operating activities was primarily funded by a
reduction in short-term investments.
On May 27, 1998, the Company, pursuant to a Share Purchase Agreement
dated as of May 27, 1998 (the "Purchase Agreement"), acquired from Christine
LeMaire and Dean N. Eisenberger (collectively the "L&E Shareholders"), all of
the outstanding capital stock of L&E Mobile Computer Mounts, Inc. ("L&E"). L&E
is a distributor, installer and integrator of vehicle mounted mobile computers,
and a distributor and manufacturer of mobile mounting products. At closing,
among other things, the Company paid a total of $1,300,000 in cash to the L&E
Shareholders ("Cash Consideration") and issued to them a total of (a) 900,000
shares of its Class A Common Stock, par value $.01 per share (the "Common Stock
Consideration"), and (b) 950,000 shares, having a liquidation preference of
$1.00 per share, of a new series of preferred stock designated Series C 7%
Cumulative Redeemable Convertible Preferred Stock ("Preferred Shares"). The
Company is obligated to pay an additional sum (the "Additional Consideration")
to the L&E Shareholders, within a specified number of days after the earlier of:
(i) the third anniversary of the closing under the Purchase Agreement (the
"Closing"); (ii) the date on which any event included in the definition of
"Acceleration Event" occurs (including specified changes in control of the
Company and certain other extraordinary events regarding the Company or L&E);
and (iii) at the Company's option, on an earlier date (the "Additional
Consideration Payment Date"). The amount of the Additional Consideration will be
based on either (a) a formula using a multiple of L&E's average annual
"stand-alone" earnings before income taxes, depreciation and amortization (as
defined in the Purchase Agreement) from the Closing to the Additional
Consideration Payment Date, or (b) at the Company's option, the present value on
the Additional Consideration Payment Date, of $20,000,000 discounted from the
third anniversary of the Closing, assuming a discount rate of 8.5% per annum. As
a condition to the Closing, as a capital contribution, the Company concurrently
issued a non-recourse $333,000 note payable to L&E, which bears interest at a
rate of 6% per annum, and which matures 60 days following the Closing (the
"Note"). The Company is obligated to make additional capital contributions to
L&E of $333,000 on May 27, 1999 and $334,000 on May 27, 2000. The Company, L&E
and the L&E shareholders have entered into a series of negotiations
11
<PAGE>
concerning the possible termination of the Note and amendment of the provisions
of the Purchase Agreement relating to additional capital investments in L&E to
be made by the Company.
The Company obtained $1,000,000 of the Cash Consideration through a
portion of the proceeds realized on May 27, 1998 from TelePad's private sale of
convertible notes in the aggregate principal amount of $1,500,000 (the "Investor
Notes"). The Company also issued to certain placement agents warrants to
purchase 200,000 shares of Common Stock, at an exercise price of $0.98 per
share, subject to certain anti-dilution and other adjustment provisions
contained therein. Each Investor Note bears interest at a rate of 8% per annum,
matures on the first anniversary of the issue date, and is convertible, in
$25,000 increments, at the discretion of the holder into Common Stock from time
to time until the principal balance and all unpaid interest on such Investor
Note is paid in full at a specified per share conversion price subject to
certain anti-dilution and other adjustments.
On February 27, 1998, the Company was notified by The Nasdaq Stock
Market, Inc. that the market price for Class A Common Stock does not meet the
quantitative maintenance requirements for minimum bid price and the Company is
therefore subject to being delisted from the NASDAQ SmallCap Market if this
situation is not remedied by May 28, 1998, which time may be extended through
the review process. On June 1, 1998 the Company was notified by The Nasdaq Stock
Market, Inc. that the market price for Class A Common Stock was again in
compliance with closing bid requirement for continued listing on The Nasdaq
Stock Market. On July 30, 1998 Company was again notified by The Nasdaq Stock
Market, Inc. that the market price for Class A Common Stock does not meet the
quantitative maintenance requirements for minimum bid price and the Company is
therefore subject to being delisted from the NASDAQ SmallCap Market if this
situation is not remedied by October 30, 1998, which time may be extended
through the review process.
The Company's existing capital resources, consisting primarily of cash,
short-term investments have been eroded by the continued use of funds in
operations. Future operations are heavily dependent upon the TelePad 3 computer
being competitive in the market and the Company's ability to sell the existing
TelePad 3 inventory, failure of which could have a material adverse effect on
the financial condition of the Company. In the event that the Company's internal
estimates relating to its anticipated expenditures and funds from operations
prove materially inaccurate, the Company may be required to reallocate funds
among its planned activities and curtail or eliminate certain expenditures. In
any event, the Company anticipates that it may require substantial additional
financing at such time. The Company's established banking relationships and line
of credit is restricted to use within L&E and is not otherwise available as a
source of liquidity. The Company may seek to leverage its working capital
requirements through borrowings, collaborative arrangements and strategic
alliances, volume discounts for mass purchases of TelePad computers and other
products, and additional public offerings. There can be no assurance as to the
availability or terms of any required additional financing, when and if needed.
"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. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable at this time, it can
give no assurances that such expectations will prove to have been correct.
12
<PAGE>
Actual results could differ materially based on a number of factors including,
but not limited to the facts set forth above.
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 4,
1998 for the purpose of (i) electing a director of the Company to serve as a
Class II director of the Company's Board of Directors for a term expiring at the
third succeeding annual meeting after election, and until a successor shall be
duly elected and qualified, (ii) approving an amendment to the Corporation's
Second Restated Certificate of Incorporation to effect a one-for-ten reverse
stock split (the "Reverse Split") of the Corporation's issued shares of Common
Stock and to provide for the payment of cash in lieu of fractional shares
otherwise issuable in connection therewith, and (iii) ratifying the appointment
of the Registrant's independent public accountants for the year ending December
31, 1998. 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 director was elected by the following vote:
Votes
-----
Class For Withheld
----- --- --------
Alan B. Salisbury II 10,303,837 125,960
The proposal to approve an amendment to the Corporation's Second
Restated Certificate of Incorporation to effect the Reverse Split of the
Corporation's issued shares of Common Stock and to provide for the payment of
cash in lieu of fractional shares otherwise issuable in connection therewith was
approved by the following vote:
For Against Abstain
--- ------- -------
9,136,339 939,437 277,211
The proposal to ratify the appointment of the independent public
accountants for the year ending December 31, 1998 was approved by the following
vote:
For Against Abstain
--- ------- -------
10,353,777 65,645 10,375
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27.1 Financial Data Schedule
(b) Reports on Form 8-K
On June 11, 1998, the Company filed a Form 8-K that reported under item
2 the acquisition of L&E Mobile Computer Mounts, Inc. on May 27, 1998.
13
<PAGE>
On August 10, 1998, the Company filed a Form 8-K/A that updated the
information reported under item 2 relating to the acquisition of L&E Mobile
Computer Mounts, Inc. on May 27, 1998 and also provided the financial
information required by item 7.
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 13, 1998 /s/ DONALD W. BARRETT
------------------------ -----------------------
Donald W. Barrett
Chairman of the Board and
Chief Executive Officer
Date: August 13, 1998 /s/ ROBERT D. RUSSELL
--------------------------- -----------------------
Robert D. Russell
Vice President, Secretary and
Treasurer Principal Financial
and Accounting Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ---------- ------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 163,302
<SECURITIES> 173,475
<RECEIVABLES> 1,688,140
<ALLOWANCES> 108,000
<INVENTORY> 2,478,476
<CURRENT-ASSETS> 4,905,366
<PP&E> 922,344
<DEPRECIATION> (581,026)
<TOTAL-ASSETS> 8,867,151
<CURRENT-LIABILITIES> 5,231,652
<BONDS> 0
1,009,850
0
<COMMON> 130,219
<OTHER-SE> 2,495,578
<TOTAL-LIABILITY-AND-EQUITY> 8,867,151
<SALES> 1,990,008
<TOTAL-REVENUES> 2,271,578
<CGS> 1,759,522
<TOTAL-COSTS> 1,986,153
<OTHER-EXPENSES> 259,712
<LOSS-PROVISION> 9,468
<INTEREST-EXPENSE> (17,291)
<INCOME-PRETAX> (2,439,492)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,439,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,439,492)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
