SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 27, 1998
------------
TELEPAD CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-21934 52-1680936
- --------------- ------------ --------------
(State or other (Commission (IRS Employer
jurisdiction of File Identification
incorporation) Number) Number)
380 HERNDON PARKWAY, SUITE 1900, HERNDON, VIRGINIA 20170
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 834-9000
--------------
The undersigned Registrant hereby reports the following items related
to Registrant's acquisition on May 27, 1998 of L&E Mobile Computer Mounts, Inc.
in a transaction accounted for as a purchase. The Registrant filed on June 11,
1998 a Current Report on Form 8-K, which disclosed that the acquisition had been
completed. The Registrant indicated in that report its intention to submit the
financial statements and pro forma financial information prescribed by Rule 3-05
of Regulation S-X and Article 11 of Regulation S-X, respectively, not later than
August 10, 1998, in accordance with Subsection (a)(4) of Item 7 of the General
Instructions for the Current Report on Form 8-K. This Amendment to the Current
Report is being filed to (i) amend Item 2 of the Filing, (ii) report further
developments in connection with the acquisition, and (iii) provide the financial
information required by Item 7.
Item 2. Acquisition or Disposition of Assets
On May 27, 1998, TelePad Corporation ("TelePad"), 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, TelePad 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"). TelePad 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 TelePad and certain other extraordinary events regarding TelePad or
L&E); and (iii) at TelePad'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 interest, taxes, depreciation and amortization and
certain other expenses (as described in the Purchase Agreement) from the Closing
to the Additional Consideration Payment Date, or (b) at TelePad'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,
TelePad concurrently issued a a non-recourse $333,000 note payable to L&E,
initially bearing interest at a rate of 6% per annum through maturity, which was
July 27, 1998, and thereafter at the lesser of (i) the rate of 12 percent (12%)
per annum or (ii) the highest interest rate permitted by applicable law (the
"Note"). TelePad, 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 TelePad. There is no assurance that the
above-mentioned negotiations will result in an agreement to amend
<PAGE>
the Purchase Agreement. If no such agreement of amendment is reached, TelePad
would intend to repay the Note.
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. 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).
Subject to TelePad's right to redeem or purchase such shares, failure of the
Preferred Shares to convert into Common Stock on or prior to the 210th day
following the Closing would constitute an event of default under the pledge
agreements between TelePad and the L&E Shareholders as discussed below (the
"Pledge Agreements"), and, as a result, the L&E Shareholders would have a right
to foreclose upon the L&E capital stock acquired by TelePad from the L&E
Shareholders (the "L&E Stock") commencing on the 271st day following the
Closing. The L&E Shareholders and the Investors (defined below) have agreed to
vote all Common Stock held by such persons in favor of the Conversion Proposal.
Dividends, payable annually in cash will begin to accrue on the
Preferred Shares commencing on the earlier of January 1, 2000 and the date on
which the Second Meeting is held if at such meeting shareholder approval of the
Conversion Proposal is not obtained. At any time before, on or after the
dividend commencement date, TelePad may at its option redeem, in whole or in
part, the Preferred Shares at a redemption price equal to their liquidation
preference plus, if the redemption date occurs after the dividend commencement
date, accrued and unpaid dividends thereon to the redemption date.
The Common Stock Consideration and the Preferred Shares are subject to
certain purchase and sale obligations pursuant to the Purchase Agreement.
Specifically, commencing 90 days following the Closing, each L&E Shareholder
shall have the right to cause TelePad to purchase any part, or all, of the
Common Stock Consideration and the Preferred Shares (including all Common Stock
into which such shares may be converted), at a purchase price of $0.38 per share
(the "Put Rights"). The earliest date on which the Put Rights shall terminate is
the 300th day from the Closing, and the latest date is the first anniversary of
the Closing. However, if the Common Stock comprising the Common Stock
Consideration and, if the Conversion Proposal is approved, Common Stock issued
upon conversion of the Preferred Shares are subject to a registration statement
effective under the Securities Act of 1933 as amended (the "Securities Act"),
the Put Right shall terminate on the later to occur of the 300th day after the
Closing and the date such registration statement first becomes effective. If
TelePad fails to file such a registration statement on or before the 210th day
following the Closing an event of default will occur under the Pledge
Agreements, entitling the L&E Shareholders to foreclose upon the L&E Stock as
discussed above.
In addition to its rights to redeem the Preferred Shares under the
Certificate of Designations, TelePad has certain repurchase rights under the
Purchase Agreement (the "Call Rights"). The Call Rights entitle TelePad, from
time to time, following notice to the L&E Shareholders or either L&E
Shareholder, (a) commencing on the Closing Date, and expiring on the 210th day
following the Closing, to repurchase up to 450,000 Preferred Shares (or Common
Stock if such L&E Shareholder or L&E Shareholders, as the case may be, no longer
owns any Preferred Shares) at a purchase price of $0.50 per share; and (b) if
the Conversion Proposal is not approved on or prior to the 210th day following
the Closing, commencing on such 210th day, and expiring 60 days thereafter, to
repurchase up to an additional 500,000 Preferred Shares at a purchase price of
$1.00 per share.
The L&E Shareholders will continue to comprise the senior management of
L&E pursuant to employment agreements with L&E executed at the Closing. Pursuant
to the Purchase Agreement, until the Additional Consideration is paid, (a) the
L&E Shareholders will have the right to nominate three of the five L&E
directors, which three nominees TelePad is obligated to elect, and (b) the
TelePad board of directors is obligated to appoint one of the L&E Shareholders
to the existing vacant seat on TelePad's board of directors, and to nominate
such person as a director.
Until the Additional Consideration has been paid, no dividend or
distribution in respect of the L&E Stock shall be paid or made to TelePad,
except L&E is obligated to pay a dividend at the end of each fiscal quarter, in
respect of the L&E Stock in an aggregate amount equal to the Estimated Tax
Payment. Estimated Tax Payment means (a) 25% of L&E's estimated "stand alone"
tax liability for the then current tax year, less (b) with respect to the
initial tax year in which a change in L&E's method of
2
<PAGE>
accounting from "cash basis" to "accrual basis" occurs, the increase in L&E's
estimated "stand alone" tax liability, if any, incurred solely as a result of
such change in accounting method, to the fullest extent that funds are legally
available for declaration of such dividends.
Pursuant to separate Pledge Agreements, TelePad granted security
interests in the L&E Stock to L&E and the L&E Shareholders to secure TelePad's
obligations (a) to pay the Note; (b) to pay the Additional Consideration; (c) to
pay the above-discussed additional capital contributions to L&E; (d) to register
the Common Stock of the L&E Shareholders under the Securities Act; (e) to
satisfy the Put Rights, and (f) to nominate as a TelePad director a designee of
the L&E Shareholders "Secured Obligations"). TelePad's liability in respect of
the Secured Obligations is limited to the right of each L&E Shareholder to
foreclose upon the L&E Stock which such L&E Shareholder sold to TelePad pursuant
to the Purchase Agreement. However, as a condition to each L&E Shareholder's
right to foreclose upon L&E Stock prior to the first anniversary of the Closing,
he or she must transfer to TelePad 475,000 Preferred Shares; provided, however,
if such L&E Shareholder owns fewer than 475,000 Preferred Shares, including as a
result of the exercise of Put or Call Rights or redemption rights, then any
shortfall shall be satisfied by such L&E Shareholder by transferring an equal
number of shares of Common Stock.
Under the Purchase Agreement, regardless of whether a default under the
Pledge Agreements has occurred, TelePad is entitled at any time to assign and
transfer 50% of the L&E Stock to one L&E Shareholder and the 50% balance of the
L&E Stock to the other L&E Shareholder, in complete satisfaction of all of the
Secured Obligations and in such event TelePad shall not have any personal or
direct obligation or liability for payment, satisfaction or otherwise in respect
of the Secured Obligations. Also, TelePad does not have any personal or direct
obligation or liability in respect of the Secured Obligations except in respect
of foreclosure against the L&E Stock as provided in the Pledge Agreements.
TelePad 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"), to the following private investors: Ellis Enterprises LTD, Beeston
Investments LTD, The Hewlett Fund, Inc., Investcor LLC, Austrot Anstalt Schaan,
Balmore Funds S.A., and The Gross Foundation, Inc. (collectively, the
"Investors"). TelePad 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 the first anniversary of the Closing, 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.
TelePad 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
TelePad 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 TelePad'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. TelePad has granted the Investors, a security
interest in all of TelePad's assets, other than the L&E Stock, to secure the
Investor Notes. The Investors have agreed to subordinate their security interest
in TelePad's assets in favor of liens in connection with non-convertible debt
financing on reasonable commercial terms by TelePad 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.
Pursuant to its obligations under the subscription agreement by which
the Investors purchased the Investor Notes (the "Subscription Agreement"),
TelePad filed with the Securities and Exchange Commission ("SEC") Registration
Statement (No. 333-57795) on Form S-3 (the "Registration Statement") covering
all of the Common Stock issuable upon exercise of the Warrants, and 20,000
shares of Common Stock for each $10,000 of aggregate principal amount of the
Investor Notes (the "Investor Shares"), and the Common Stock issuable upon
conversion of the Put Notes (described below). Such Registration Statement
became effective on July 10, 1998, resulting in $300,000 of the $1,500,000
purchase price of the Investor Notes being released to TelePad, which funds had
been held in escrow pursuant to agreement between TelePad and the Investors.
3
<PAGE>
Pursuant to the Subscription Agreement, if certain conditions
precedent had been satisfied, as described below, the Investors would have been
obligated to purchase from TelePad convertible notes (the "Put Notes") in the
aggregate principal amount of $1,000,000, if TelePad had exercised such right
during the 45-day period commencing 30 days after the effective date of a
registration statement covering the Investor Shares ("Put Period"). The
Investors' obligation to purchase the Put Notes was contingent on, among other
things, the timely obtainment of the exemption from NASDAQ's corporate
governance rules or the approval of its shareholders of the issuance of the
Investor Shares upon conversion of the Investor Notes, the Put Notes, and
exercise of the Warrants. TelePad did not satisfy this condition precedent and
the Investors are no longer obligated to purchase the Put Notes.
Upon the occurrence of certain events ("Investor Acceleration Events"),
(i) the interest rate under the Investor Notes is subject to increase from 8%
per annum to 16% per annum, and (ii) all sums of principal and interest then
remaining unpaid under the Investor Notes and all other amounts payable
thereunder, shall be immediately due and payable, at the holders option, all
without demand, presentment or notice, or grace period. Investor Acceleration
Events include, among other things, the failure of TelePad to obtain, within 60
days of Closing, the approval of its shareholders required pursuant to NASDAQ's
corporate governance rules to allow conversion of the Investor Notes and
exercise of all the Warrants and conversion of the Put Notes, but only to the
extent of the Investor Notes that may not be converted due to TelePad's failure
to obtain such shareholder approval. As of the 75th day following Closing,
TelePad has not obtained such shareholder approval, and the Investors have not
indicated to TelePad their intention to convert, or not to convert, the Investor
Notes or the Warrants (no Put Notes have been issued as of such date).
The above summary of certain terms and provisions of the Purchase
Agreement, Certificate of Designations, Pledge Agreements, and certain documents
executed in connection with such foregoing mentioned agreements does not purport
to be complete and is subject to, and is qualified in its entirety by reference
to, all of the provisions of such documents which were previously filed with
TelePad's Current Report on Form 8-K on June 11, 1998 as Exhibits 4.1 and 10.1
through 10.6 inclusive.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
Page Number
Report of Ernst & Young LLP, Independent Auditors F-1
L&E Mobile Computer Mounts, Inc. Balance Sheets as of
December 31, 1996 and 1997 and March 31, 1998 (unaudited). F-2
L&E Mobile Computer Mounts, Inc. Statements of Operations for
the Period from April 22, 1996 (inception) through December 31, 1996,
the Year Ended December 31, 1997 and for the three month
Periods Ended March 31, 1997 and 1998 (unaudited). F-3
L&E Mobile Computer Mounts, Inc. Statement of Shareholders' Equity
(Deficit) for the Period from April 22, 1996 (inception) through
December 31, 1996, the Year Ended December 31, 1997 and for
the three month Periods Ended March 31, 1997 and 1998 (unaudited). F-4
L&E Mobile Computer Mounts, Inc. Statements of Cash Flows for the
Period from April 22, 1996 (inception) through December 31, 1996,
the Year Ended December 31, 1997 and for the three month
Periods Ended March 31, 1997 and 1998 (unaudited). F-5
Notes to Financial Statements F-6
4
<PAGE>
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Condensed Balance Sheet as of
March 31, 1998. F-12
Unaudited Pro Forma Combined Condensed Statement of Operations
for the Year Ended December 31, 1997 F-13
Unaudited Pro Forma Combined Condensed Statement of Operations
for the Three Month Period Ended March 31, 1998. F-14
Notes to the Unaudited Pro Forma Combined Condensed Balance Sheet
and Statements of Operations. F-15
INDEX TO EXHIBITS
================================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- --------------------------------------------------------------------------------
23.1* Consent of Ernst & Young LLP, independent
auditors.
================================================================================
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 10, 1998
TELEPAD CORPORATION
By: /s/ Donald W. Barrett
_______________________________
Donald W. Barrett
Chairman and Chief Executive Officer
5
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
L&E Mobile Computer Mounts, Inc.
We have audited the accompanying balance sheets of L&E Mobile Computer Mounts,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit), and cash flows for the period from April 22,
1996 (inception) through December 31, 1996 and the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of L&E Mobile Computer Mounts,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from April 22, 1996 (inception) through December 31,
1996 and the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
June 19, 1998
F-1
<PAGE>
L&E Mobile Computer Mounts, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997 1998
---- ---- ---------
(UNAUDITED)
<S><C>
ASSETS
Current assets:
Cash $ 677 $ 4,955 $ 53,146
Accounts receivable, less allowance of $0, $10,000 and $10,000,
respectively 33,166 1,063,596 1,512,722
Inventory - - 154,619
Due from related parties 198 770 770
Other current assets - 38,296 18,295
-------- ---------- ----------
Total current assets 34,041 1,107,617 1,739,552
Property and equipment:
Computer equipment 5,791 5,791 5,791
Leasehold improvements - 3,471 3,471
-------- ---------- ----------
5,791 9,262 9,262
Less accumulated depreciation - (2,027) (2,717)
-------- ---------- ----------
Net property and equipment 5,791 7,235 6,545
-------- ---------- ----------
Total assets $ 39,832 $1,114,852 $1,746,097
======== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 38,362 $ 558,303 $1,452,302
Line of credit - 72,000 130,000
Notes payable 10,000 10,000 -
Due to related parties 21,523 330,603 10,603
Other current liabilities 500 1,220 10,038
-------- ---------- ----------
Total current liabilities 70,385 972,126 1,602,943
Shareholders' equity (deficit):
Common stock, no par value, 1,000 shares authorized, 198 shares
issued and outstanding 198 198 198
Retained earnings (deficit) (30,751) 142,528 142,956
-------- ---------- ----------
Total shareholders' equity (deficit) (30,553) 142,726 143,154
-------- ---------- ----------
Total liabilities and shareholders' equity (deficit) $ 39,832 $1,114,852 $1,746,097
======== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
L&E Mobile Computer Mounts, Inc.
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1996
(INCEPTION)
THROUGH YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S><C>
Revenues $145,543 $3,713,043 $70,787 $1,891,653
Cost of revenues 126,226 2,886,479 9,818 1,673,715
-------- ---------- ------- ----------
Gross profit 19,317 826,564 60,969 217,938
Selling, general and administrative 49,568 604,137 3,404 214,171
-------- ---------- ------- ----------
Income (loss) from operations (30,251) 222,427 57,565 3,767
Interest expense 500 7,870 - 3,339
-------- ---------- ------- ----------
Net income (loss) $(30,751) $ 214,557 $57,565 $ 428
======== ========== ======= ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
L&E Mobile Computer Mounts, Inc.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
STOCK (DEFICIT) TOTAL
------ --------- -----
<S><C>
Initial issuance of common stock $198 $ - $ 198
Net loss - (30,751) (30,751)
---- -------- --------
Balance at December 31, 1996 198 (30,751) (30,553)
Distributions to shareholders - (41,278) (41,278)
Net income - 214,557 214,557
---- -------- --------
Balance at December 31, 1997 198 142,528 142,726
Net income (unaudited) - 428 428
---- -------- --------
Balance at March 31, 1998 (unaudited) $198 $142,956 $143,154
==== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
L&E Mobile Computer Mounts, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1996
(INCEPTION) THREE MONTHS THREE MONTHS
THROUGH YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------- ----------------- -------------- --------------
(UNAUDITED)
<S><C>
OPERATING ACTIVITIES
Net income (loss) $(30,751) $ 214,557 $ 57,565 $ 428
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation - 2,027 - 690
Changes in operating assets and liabilities:
Accounts receivable (33,166) (1,030,430) (29,112) (449,126)
Inventory - - - (154,619)
Due to/from related parties 21,325 308,508 - (320,000)
Other assets - (38,296) - 20,001
Accounts payable 38,362 519,941 (21,311) 893,999
Other current liabilities 500 720 - 8,818
-------- ----------- -------- ---------
Net cash (used in) provided by operating activities (3,730) (22,973) 7,142 191
INVESTING ACTIVITIES
Purchases of property and equipment (5,791) (3,471) - -
-------- ----------- -------- ---------
Net cash used in investing activities (5,791) (3,471) - -
FINANCING ACTIVITIES
Proceeds from line of credit - 482,000 - 58,000
Payments on line of credit - (410,000) - -
Proceeds from notes payable 10,000 50,000 - -
Payments on notes payable - (50,000) - (10,000)
Issuance of common stock 198 - - -
Distributions to shareholders - (41,278) - -
-------- ----------- -------- ---------
Net cash provided by financing activities 10,198 30,722 - 48,000
-------- ----------- -------- ---------
Increase in cash 677 4,278 7,142 48,191
Cash at beginning of period - 677 677 4,955
-------- ----------- -------- ---------
Cash at end of period $ 677 $ 4,955 $ 7,819 $ 53,146
======== =========== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ - $ 7,370 $ - $ 3,339
======== =========== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
L&E Mobile Computer Mounts, Inc.
Notes to Financial Statements
December 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICES
ORGANIZATION
L&E Mobile Computer Mounts, Inc. (the "Company"), was incorporated on April 22,
1996 in the Commonwealth of Pennsylvania. The Company is a distributor and
installer of mobile computers and mounting products, as well as related parts
and supplies and conducts its operations from its office in Conshohocken,
Pennsylvania. The Company operates in principally one business segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
include cash on deposit with financial institutions and accounts receivable. The
Company believes that no significant credit risk exists with respect to cash
deposits. Concentrations of credit risk with respect to accounts receivable are
limited since they are primarily related to state and local government agencies.
REVENUE RECOGNITION
Product sales are recognized when products are shipped to customers. Revenue on
service and development contracts is recognized as the services are performed
and as contract objectives are achieved. The Company's two largest customers
accounted for approximately 88% of total revenue for the period from April 22,
1996 (inception) through December 31, 1996 and approximately 28% of total
revenue for the year ended December 31, 1997.
INVENTORY
Inventory is stated at actual cost. The Company provides for inventory reserves
or write-offs as inventory is identified as being obsolete, slow-moving or
unsaleable.
F-6
<PAGE>
L&E Mobile Computer Mounts, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
PROPERTY & EQUIPMENT
Computer equipment and leasehold improvements are recorded at cost and
depreciated using the straight-line method over the shorter of the asset's
estimated useful life or the lease term. Computer equipment and leasehold
improvements are depreciated over three years.
SIGNIFICANT VENDOR
One vendor accounted for approximately 59% and 18% of the Company's inventory
purchases for the period from April 22, 1996 (inception) through December 31,
1996 and the year ended December 31, 1997, respectively.
ADVERTISING
Advertising costs are expensed when incurred and were approximately $100 and
$3,000 for the period from April 22, 1996 (inception) through December 31, 1996
and the year ended December 31, 1997, respectively.
INCOME TAXES
The Company has elected to be taxed, for federal and state income tax purposes,
as an S- Corporation under applicable provisions of the Internal Revenue Code.
Accordingly, income, losses and credits are passed through directly to the
shareholders, rather than being taxed at the corporate level.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, REPORTING COMPREHENSIVE INCOME,
("SFAS No. 130"). SFAS No. 130 establishes rules for reporting and displaying
comprehensive income and is effective for the Company for 1998. The adoption of
SFAS No. 130 did not have an impact on the Company's financial position, results
of operations or cash flows.
In June 1997, the FASB issued Statement No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, ("SFAS No. 131"). SFAS 131 is effective for
the fiscal year ended December 31, 1998 and establishes standards for
disclosures about products, geographies and major customers. The Company expects
that implementation of this standard will not have a material effect on its
financial statement disclosures.
The Accounting Standards Executive Committee (AcSEC) recently issued SOP 98-5,
REPORTING ON THE COSTS OF START-UP ACTIVITIES. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998 and requires the costs of start-up
activities, including organization costs, to be expensed as incurred. The
Company's adoption of SOP 98-5 did not have an effect on the Company's financial
position or results from operations as the Company's policy has always been to
expense start-up costs as incurred.
F-7
<PAGE>
L&E Mobile Computer Mounts, Inc.
Notes to Financial Statements (continued)
2. LINE OF CREDIT AND NOTES PAYABLE
In September 1997, the Company obtained a $200,000 line of credit which provides
for available credit to the Company through September 10, 1998 and is payable on
demand. The Company is required to make monthly payments of accrued interest on
any unpaid balances at the bank's Prime rate plus 2% (10 1/2% at December 31,
1997). The line of credit is renewable annually and is secured by all of the
assets of the Company, as well as personal guarantees by the Company's
shareholders. At December 31, 1997 the Company had an outstanding balance of
$72,000 on this line of credit.
In 1996 the Company received a $10,000 loan from an individual. The amount was
repaid in January 1998 with accrued interest at 5%. In June 1997, the Company
received a $50,000 loan from an individual which was repaid in December 1997
with accrued interest of approximately $4,000.
3. LEASE COMMITMENTS
The Company leases its office facility under an operating lease that expires in
September 2000. The Company also leases two vehicles and various office
equipment under operating leases. For the period from April 22, 1996 through
December 31, 1996 and the year ended December 31, 1997 operating lease expense
was approximately $6,000 and $20,000, respectively. Minimum future lease
payments on these leases at December 31, 1997 are as follows:
YEAR ENDED DECEMBER 31
----------------------
1998 $ 34,164
1999 36,528
2000 29,607
2001 6,208
2002 1,236
--------
Total $107,743
========
4. RELATED PARTY TRANSACTIONS
The two shareholders of the Company are also the sole shareholders of another
company, L&E Emergency Equipment and Supply, Inc. ("L&E Emergency") which
operated out of the same facility and shared employees with L&E Mobile in 1996
and 1997. For the period from April 22, 1996 (inception) through December 31,
1996, allocations for salary expense and operating lease expense for the Company
were approximately $16,000 and $5,000, respectively. At December 31, 1996, the
Company had a payable balance of approximately $22,000 to L&E Emergency. For the
year ended December 31, 1997, the Company recorded $90,000 of salary expense for
services provided by L&E Emergency's employees and approximately $13,000 for
operating lease expense. The Company had a receivable balance of approximately
$800 from L&E Emergency at December 31, 1997. The salary and lease allocations
were based on the operations of the two companies for each of the periods.
At December 31, 1996, notes receivable of $198 were due from the two
shareholders for their purchase of shares of common stock. In 1997, the notes
receivable from the stockholders were repaid through a non-cash distribution to
the shareholders. At December 31, 1997, the Company accrued liabilities of
approximately $10,600 to one of its shareholders for a distribution, and
$320,000 to the two shareholders for bonuses. Each shareholder received a
$160,000 bonus for 1997 which was paid in January 1998.
F-8
<PAGE>
L&E Mobile Computer Mounts, Inc.
Notes to Financial Statements (continued)
5. SIMPLE RETIREMENT ACCOUNT PLAN
The Company began a Simple Retirement Account Plan in 1997 for all employees
meeting certain minimum requirements. Contributions are made through voluntary
employee salary reductions. The Company matches 3% of employee contributions up
to $6,000 per individual.
6. SUBSEQUENT EVENTS
On May 27, 1998, the Company entered into a Share Purchase Agreement with
TelePad Corporation ("TelePad"). TelePad acquired all of the outstanding capital
stock of the Company in exchange for $1.3 million in cash, 900,000 shares of
TelePad's Common Stock, 950,000 shares of TelePad's Series C 7% Cumulative
Redeemable Convertible Preferred Stock to the shareholders of the Company and a
$333,000 note receivable and various other commitments to the Company.
7. IMPACT OF THE YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is in the initial phase of studying the implications of the Year
2000 on its information systems. Management believes that the risk associated
with its information systems is not significant and accordingly, management does
not anticipate that the Year 2000 will have a significant impact on its
information systems or result in a significant commitment of resources to
resolve the potential problems associated with this event.
The Company believes that the purchasing patterns of clients and potential
clients may be affected by Year 2000 issues in a variety of ways. Many companies
are expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase services such as those offered by the Company.
Furthermore, payments for deliveries of components of supplies to the Company
may be delayed, incomplete, or otherwise unavailable as a consequence of Year
2000 problems affecting clients or suppliers. Any of the foregoing could result
in a material adverse effect on the Company's business, financial condition and
results of operations.
F-9
<PAGE>
L&E Mobile Computer Mounts, Inc.
Notes to Financial Statements (continued)
8. UNAUDITED PRO FORMA NET INCOME
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standard No. 109 as if the
Company had been a C Corporation subject to federal and state income taxes for
the year ended December 31, 1997 and the three month period ended March 31,
1998.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
<S><C>
Net income before pro forma adjustments, per statement of
operations $214,557 $ 428
Pro forma provision for income taxes at an estimated
effective rate of 40% (85,823) (171)
======== =====
Pro forma net income $128,734 $ 257
======== =====
</TABLE>
F-10
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
The unaudited pro forma combined condensed balance sheet 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 on March 31,
1998.
The unaudited pro forma combined condensed statement of operations for the year
ended December 31, 1997 gives effect to the acquisition of L&E as if it had
occurred on January 1, 1997. The unaudited pro forma combined condensed
statement of operations for the three months ended March 31, 1998 gives effect
to the acquisition of L&E as if it had occurred on January 1, 1998.
The unaudited pro forma combined condensed balance sheet and statements of
operations are based on available information and on certain assumptions and
adjustments described in the accompanying notes which the Company believes are
reasonable. The unaudited pro forma combined condensed statements of operations
are provided for informational purposes only and do not purport to present the
results of operations of the Company had the transaction assumed therein
occurred on or as of the date indicated, nor is it necessarily indicative of the
results of operations which may be achieved in the future. The unaudited pro
forma combined condensed balance sheet, statements of operations and related
notes should be read in conjunction with the financial statements of the Company
filed on its Form 10-K and the financial statements of L&E including the notes
thereto (included herein).
F-11
<PAGE>
TelePad Corporation
Unaudited Pro Forma Combined Condensed Balance Sheet
As of March 31, 1998
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
TelePad L&E Adjustments Combined
(a) (b) (c)
<S><C>
Assets
Current assets:
Cash and short term investments $ 724,260 $ 53,146 (d) $ 24,907 $ 802,313
Accounts receivable 1,128,757 1,512,722 2,641,479
Inventory 2,288,510 154,619 2,443,129
Other current assets 207,839 19,065 226,904
------------ ---------- ---------- ------------
Total current assets 4,349,366 1,739,552 24,907 6,113,825
Property and equipment, net 363,316 6,545 369,861
Investment in Intellibit Corporation 200,000 - 200,000
Deposits and other assets 23,730 - 23,730
Goodwill, net - - (e) 3,123,395 3,123,395
============ ========== ========== ============
Total assets $ 4,936,412 $1,746,097 $3,148,302 $ 9,830,811
============ ========== ========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,831,731 $1,472,942 $ 3,304,673
Line of credit - 130,000 130,000
Convertible notes payable - - (f) 1,500,000 1,500,000
Deferred revenue 13,601 - 13,601
------------ ---------- ---------- ------------
Total current liabilities 1,845,332 1,602,942 1,500,000 4,948,274
Series C redeemable convertible preferred
stock (g) 1,009,850 1,009,850
Stockholders' equity
Common stock 120,656 198 (h) 8,802 129,656
Additional paid-in capital 39,435,513 - (i) 947,700 40,383,213
Retained earnings (accumulated deficit) (36,465,089) 142,957 (j) (318,050) (36,640,182)
------------ ---------- ---------- ------------
Total stockholders' equity 3,091,080 143,155 638,452 3,872,687
============ ========== ========== ============
Total liabilities and stockholders' equity $ 4,936,412 $1,746,097 $3,148,302 $ 9,830,811
============ ========== ========== ============
</TABLE>
F-12
<PAGE>
TelePad Corporation
Unaudited Pro Forma Combined Condensed Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
TelePad L&E Adjustments Combined
(k) (l) (c)
<S><C>
Revenues $ 3,592,577 $3,713,043 (m) $ (23,469) $ 7,282,151
Cost of revenues 4,445,256 2,886,479 (m) (22,203) 7,309,532
Loss on inventory purchase commitment 654,468 - 654,468
----------- ---------- --------- -----------
(1,507,147) 826,564 (1,266) (681,849)
Costs and expenses:
Research and development 942,793 - 942,793
Selling, general and administrative 4,406,679 604,137 (n) 672,782 5,683,598
----------- ---------- --------- -----------
5,349,472 604,137 672,782 6,626,391
----------- ---------- --------- -----------
Income (loss) from operations (6,856,619) 222,427 (674,048) (7,308,240)
Interest income (expense) and other 298,906 (7,870) (o) (120,000) 171,036
----------- ---------- --------- -----------
Net income (loss) available for common
stockholders
$(6,557,713) $214,557 $(794,048) $(7,137,204)
=========== ======== ========= ===========
Basic and diluted loss per share (s) $ (0.56) $ (0.56)
=========== ===========
Weighted average shares outstanding (s) 11,745,551 12,645,551
=========== ===========
</TABLE>
F-13
<PAGE>
TelePad Corporation
Unaudited Pro Forma Combined Condensed Statement of Operations
Three months ended March 31, 1998
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
TelePad L&E Adjustments Combined
(p) (q) (c)
<S><C>
Revenues $ 673,161 $ 1,891,653 $ 2,564,814
Cost of revenues 514,687 1,673,715 2,188,402
----------- ----------- --------- -----------
158,474 217,938 376,412
Costs and expenses:
Research and development 143,248 - 143,248
Selling, general and administrative 1,026,518 214,171 (r) 73,012 1,313,701
----------- ----------- --------- -----------
1,169,766 214,171 73,012 1,456,949
----------- ----------- --------- -----------
Income (loss) from operations (1,011,292) 3,767 (73,012) (1,080,537)
Interest income and (expense) and other 12,494 (3,339) (o) (30,000) (20,845)
----------- ----------- --------- -----------
Net income (loss) available for common
stockholders $ (998,798) $ 428 $(103,012) $(1,101,382)
=========== =========== ========= ===========
Basic and diluted loss per share (s) (0.08) (0.09)
=========== ===========
Weighted average shares outstanding (s) 12,044,513 12,944,513
=========== ===========
</TABLE>
F-14
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AND STATEMENTS OF OPERATION
(a) Condensed Balance Sheet of TelePad Corporation as of March 31, 1998.
(b) Condensed Balance Sheet of L&E Mobile Computer Mounts, Inc. as of March 31,
1998.
(c) Represents adjustments related to the L&E acquisition based on a purchase
price of approximately $1,300,000 in cash and an aggregate of 900,000
shares of the Company's Common Stock and 950,000 shares of a new series of
preferred stock designated Series C 7% Cumulative Redeemable Convertible
Preferred Stock. The 1,850,000 shares of the Company's Common and Preferred
Stock were recorded at $1.063 per share, which represents the closing
market price of the Company's Common Stock on May 27, 1998. The purchase
price has been allocated on a preliminary basis to the assets and
liabilities acquired based on the estimated fair values of the assets
acquired and liabilities assumed.
(d) Represents the net amount of a $300,000 cash payment to the stockholders of
L&E as part of the purchase price and the receipt of $324,907 from the
proceeds of the $1,500,000 convertible notes.
(e) Represents the intangible asset goodwill related to the purchase of L&E in
the amount of $3,123,395. The goodwill will be amortized on a straight-line
basis over ten years.
(f) Represents convertible notes in the aggregate principal amount of
$1,500,000 entered into to partially finance the L&E acquisition.
(g) Represents $0.01 per share par value and additional paid-in capital for
950,000 shares of the Series C 7% Cumulative Redeemable Convertible
Preferred Stock issued to the stockholders of L&E as part of the purchase
price.
(h) Represents $0.01 per share par value of 900,000 shares of Common Stock
issued to the stockholders of L&E as part of the purchase price. Also
represents the elimination L&E's Capital Stock in the amount of $198 at
March 31, 1998.
(i) Represents additional paid-in capital on 900,000 shares of Common Stock
issued to the stockholders of L&E as part of the purchase price.
(j) Represents expense of $175,093 in financing and legal fees related to the
$1,500,000 convertible note. Also represents the elimination of L&E's
accumulated earnings in the amount of $142,957 at March 31, 1998.
(k) Condensed Statement of Operations for TelePad Corporation for the year
ended December 31, 1997.
(l) Condensed Statement of Operations for L&E Mobile Computer Mounts, Inc. for
the year ended December 31, 1997.
(m) Represents the elimination of $23,469 of intercompany transactions, of
which $22,203 was eliminated from cost of revenues and $1,266 was
eliminated from selling, general and administrative expense.
(n) Represents $232,000 in estimated legal and accounting expenses, $150,000 in
financing fees related to the convertible note, amortization expense of
$292,048 related to the intangible assets acquired in the L&E acquisition,
and the elimination of $1,266 in intercompany transactions.
(o) Represents interest expense, at the annual rate of 8%, on the convertible
note in the principal amount of $1,500,000.
(p) Condensed Statement of Operations for TelePad Corporation for the three
months ended March 31, 1998.
(q) Condensed Statement of Operations for L&E Mobile Computer Mounts, Inc. for
the three months ended March 31, 1998.
(r) Represents amortization expense of $73,012 related to the intangible assets
acquired in the L&E acquisition.
(s) For the pro forma combined net loss per share (basic and diluted) and the
weighted average shares outstanding calculation, 900,000 shares of Class A
Common Stock have been included as if the acquisition occurred on the
beginning of the periods presented.
F-15
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated June 19, 1998 with respect to the
financial statements of L&E Mobile Computer Mounts, Inc. included in the
Amendment to the Current Report (Form 8-K/A) of TelePad Corporation to be filed
on August 10, 1998 with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Vienna, Virginia
August 7, 1998
